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Layne Christensen Company (NASDAQ:LAYN)

F3Q09 Earnings Call

December 4, 2008 11:00 am ET

Executives

Andrew B. Schmitt – President, Chief Executive Officer & Director

Jerry W. Fanska – Senior Vice President Finance & Treasurer

Analysts

Steven Fisher – UBS

Steve [Ferazini] – Sidoti & Company

Richard Paget – Morgan Joseph & Co., Inc.

Jonathan Ellis – Merrill Lynch

Analyst for John Rogers - D.A. Davidson & Co.

Michael Huffman - Rock Point Advisors

Operator

Welcome to the Layne Christensen third quarter fiscal 2009 earnings call. At this time, all participants are in listen only mode and later we will conduct a question and answer session with instructions being given at that time. (Operator Instructions) As a reminder, today’s conference is being recorded and I would now like to turn the conference over to your host, President and CEO of Layne Christensen Mr. Andrew Schmitt.

Andrew B. Schmitt

I’m here with Jerry Fanska, our Chief Financial Officer and we’d like to welcome you to Layne Christensen’s third quarter conference call. Earlier today we issued a press release outlining our results for the third quarter ended October 31, 2008. Before we discuss the financial results I’d like to remind the participants that the call may contain forward-looking statements that are subject to the Safe Harbor statement found in today’s press release.

Jerry will take you through the financial results and I will give you an overview of division operating performance and how we see things going forward. Jerry, you want to give us the numbers?

Jerry W. Fanska

Revenues set another quarterly record in the third quarter, up 17.4% to $264.5 million from $225.2 million in the prior year reflecting increases in all the company’s primary divisions. This is the 19th consecutive quarter-over-quarter improvement for the company. Water infrastructure revenues increased 22.4% to $198.6 million driven mainly by previously announced acquisitions, increases in treatment plant construction and increases in specialty geo construction products and services.

Mineral exploration revenues increased 12.2% to $53.2 million reflecting strong demand in the metals market primarily in the first two months of the quarter. Layne Energy revenues increased 8% to $10.9 million reflecting increases in production from the company’s unconventional gas properties. Selling, general and administrative expenses increased to $35.7 million in the quarter from $31.5 million in the prior year reflecting increases of $2 million from acquisitions and startup operations with the remainder spread across various categories.

Depreciation, depletion and amortization increased $2.3 million in the quarter to $15.6 million from the prior year resulting from increased depletion in the energy division and depreciation from [inaudible] from the other divisions. Equity and earnings of affiliates in Latin America increased to $4.8 million in the quarter from $2.2 million in the prior year as the commodity markets in Latin America remain strong through the end of the quarter.

Interest expenses decreased to $838,000 for the quarter on decreased borrowings from the prior year mainly due to the retirement of the debt from the proceeds of our stock offering in October, 2007. Included in other income net for the quarter are two items which deserve a mention. We recorded an impairment of our all in gas properties of $2 million related to the company’s exploration project in Chile.

Following our initial core testing and further evaluation of infrastructure requirements we concluded that except for certain equipment costs, recovery of our investment is not likely without finding a joint venture partner going forward. We also record in the quarter settlement income of $2.2 million net of attorney fees related to litigation initiated in the current year against former officers of a subsidiary and associated energy production companies.

On the income statement for the quarter these two items together have only a minor impact on the company’s results of operations. The income tax rate for the quarter was 41.9% compared to 43.8% in the prior year. The reduction in the effective rate is the results of favorable resolution of certain tax audits this year.

Net income from the quarter was $12.2 million, it was up $2.3 million or 23.1% from the prior year. Earnings per share for the quarter were $0.63, another quarter-over-quarter record compared to $0.59 last year. The company’s balance sheet at October 31, 2008 reflects total assets of $760.5 million, stockholders’ equity of $467.1 million, total long term debt of $26.7 million excluding current maturities and cash and cash equivalents of $43 million.

The company provided $51.4 million in cash from operating activities in the quarter, approximately half from earnings and about half from working capital changes. Investment activities totaled $22.9 million for the quarter net of proceeds from equipment sales. The investment activities for the quarter primarily included $9.2 million in unconventional gas activities, $14.1 million in net additions to PP&E and $6.4 million in previously announced acquisitions offset by returned escrow deposits of $6.8 million made in previous quarters supporting forward sales contracts of natural gas.

With that, I’ll turn it back over to Andy to talk about the operations.

Andrew B. Schmitt

A couple of brief comments about the quarter and then we’ll cover our current operating situation. Overall, our operating divisions got about as much mileage out of this quarter as possible. It took several good months by all the businesses and good months of our Latin American affiliates plus lower effective tax rate to continue that year-over-year quarterly improvement which, as Jerry pointed out is 19 consecutive quarters now.

Our goals in Layne Christensen have always been to try and improve earnings and other key financial metrics when compared to the prior year and this quarter was one of the toughest we’ve experienced for prior year comparative purposes in a long time. Naturally, I’d like nothing better than to be able to tell all of you that we would achieve that 20th consecutive quarterly comparison and complete a five year run which has been pretty remarkable however, today’s economy is just not going to allow us a decent shot in my opinion at that achievement.

Let me give you a view of our current operating situation by segment. First, and the one where you have to deal with on a very rapid basis is mineral exploration and as of December 1st we had stacked about 20% of the rigs that we were working around say the first week of September. We’ve also reduced our global headcount by about 20% as well. It’s reasonable to expect certainly that the mining companies, all of them, are going to have an early and extended year in shutdown as opposed to the prior two years which many of you will recall we virtually had no shutdown at all, very unusual.

As such, our fourth quarter activity levels at this point are really hard to predict. In fact, we may be in to the mid first quarter or even the early part of the second quarter next year before we really get a clear view of what that sort of sustainable level of mineral exploration is going to be globally and with our Latin American partners as well.

In general, on the junior companies, small junior companies have basically just shutdown exploration. They’ve either run out of money or they’ve just stopped to save the money they have. When you move in to midsize mining companies, they’ve either suspended or drastically cut back on their exploration spending. The major mining companies now represent the bulk of ongoing exploration activity but even in their case their activity is limited to their best low cost properties or areas where they have the most promising reserve potential.

Now, about 80% of our rigs are on the mind site or in close proximities so our exposure to junior miners and Greenfield development is and always has been limited. That’s also true for our Latin America affiliates. So, both of us will weather this storm far better than most. Naturally, from a competitive standpoint, very sharp, steep difficult decline in exploration spending occurring during a period which we’re seeing now where there is just an absence, near absence of bank financing clearly competitively favors a company in a position line Layne Christensen.

An extended decline, sharp decline like we’re seeing is going to create some tremendous market share opportunities for the industry leaders in mineral exploration and lower capital expenditures for equipment for years to come because there will be lots of equipment available, it will be in auctions, prices will come down for equipment that is out there so it will go a long way towards taking one of our more capital intensive businesses and reducing that capital.

So, while we regret having to go through another commodity downturn, as many of you know with our strategy we’ve been preparing for this for quite a long time. When you move to the water side we’re still holding up reasonably well. The Layne legacy business, part of our base foundation business in the company, that backlog is 96 days. As a comparison it was 97 days a year ago. As we pointed out last time, the mix has changed with less new water well drilling as you’d expect for new developments, new housing developments, things like that but, more water treatment product services have been booked.

This part of our water business generally lags in the beginning of a recession about12 to 15 months so if history is a good barometer and the pundits are correct when they name the time frame for the recession, we should begin to see some backlog deterioration in that business fairly soon. During the last two recessions a peak to trough revenue drop in that business was about 10%. This current recession obviously appears a lot more severe than the last two but in our legacy business we didn’t have the water treatment product line last two times so we’ll have to see if that helps buffer what I think most people are clearly expecting a bigger decline in the overall economy.

When you look at the other part of the water business, the rentals product line which are more infrastructure intense, that backlog is about $295 million which is above that backlog at this time a year ago. Given the full year affect of our Tierdael and recently the acquisition of Meadors Construction Company rentals could still see a flat revenue year next year. They have a longer view, bigger projects, the backlog is bigger and so they’re going to churn and they’re going to churn through that backlog a little bit slower than say the legacy business.

I’d say that the biggest exposure at this time when you look at the various products line that are in the rentals business is the cured-in-place pipe business, the CIPP product line. That business has weakened quite a bit in the last quarterly, fairly recently bid prices for new work are extremely competitive, somewhat reminiscent of what we saw a year ago. So, next year if the rentals business revenues is close to flat, we could still see some division EBIT margins overall shrink maybe a percent or two from this year due to the CIPP impact and more likely a generally more competitive market.

When you go to Layne Energy, it’s likely our most stable business and easiest to forecast. At this point it’s close to 100% of current production is forward sold next year at approximately $8.50 per million cubic feet. By comparison the spot price on Southern Star line this morning that our gas is carried on was $4.93 per mcf so we find ourselves in that business in a little cat bird speed so to speak in Layne Energy as so many of our small CBM competitors are in difficult financial straits.

We’re seeing a number of transactions as deal flow increases and valuations are certainly coming down compared to prior levels. As one would expect, we’re also experiencing much less competition policing in the Kansas Cherokee basin and better turns. In addition, we have hired a new division president, [Philip S. Winter], a very experienced senior executive came on board last month, he took over the reins from me for Layne Energy as well as our colog and vibration technology businesses.

Phil brings a far greater knowledge of the oil and gas business than I have so I feel all those companies will continue to make good progress under his leadership. In summary, we will have our typical tough fourth quarter made even more so in today’s economy. We’re also unlikely to get a real clear view of 2010 until, as I said, first or maybe early second quarter next year. I mean the recession obviously for everyone looks like a very wicked one. But, from our point of view I think we are well prepared.

The main reason is we followed our, we’ll call it strategic motto if you will, very closely over the past five years. That was in time of peace, prepare for war. As a result Layne Christensen is positioned exactly where we need to be in today’s economic environment. We’re debt free, net of cash with $200 million in untapped credit available at attractive rates. Our bank agreement has three more years to run. We added a big piece of infrastructure to our water business with rentals and all the bolt on acquisitions, that’s something that was a big part of our strategy.

We followed an add a rig strategy and many were critical of that through the years as opposed to add a company during the booming minerals market, as did our Latin America partner. Our natural gas production is all forward sold in Layne Energy. Most importantly, we have a management team and employees in place that know what to do in these difficult times. We have the same team with us that went through the Asian financial crisis, the same team that went through the 2001 recession so we’ve got a pretty good group of folks that understand what has to be done.

No one looks forward to having to deal with these painful economic times but as we all know, for those who prepare the rewards are ultimately oversized and that’s where we think we’re positioned today. Now, if anybody has any questions, we’ll try to answer them.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Steven Fisher – UBS.

Steven Fisher – UBS

Wondering what you’ve heard regarding the proposed economic stimulus packages as it relates to water and how you might expect to benefit?

Andrew B. Schmitt

Our view on the infrastructure related packages, we think water will get its share Steven. I can’t tell you that we have any better information than anyone else relative to how that will come out, over what time frame or how much will be there. We all know the water and particularly waste water infrastructure, certainly if you’re going to spend money, that’s an area that needs addressing. We think the Corp of Engineers has pointed that out pretty emphatically to Congress through the years.

I would think that piece would be prominent and given the municipal market is as tough a place to raise money as all markets are, it seems to be a good time for the government to step in and do more in that area and hopefully won’t put caveats on those funds given the matching funds that’s going to restrict the state’s municipalities from being able to participate to the extent that they would like to. It is clearly and area where we expect to benefit.

Now, when we pull back and realistically look at the time frame for a new administration to get in place, for the process to go through Congress, we would not look to see that type of infrastructure spending benefit us for a year. I just don’t think it gets out there quick enough, gets in projects, municipalities line up their money, they bid the projects. You know the process Steve. I mean it’s not something that happens instantly.

It could be a nice bridge for us given the backlog in these water businesses that would give us a nice buffer because in the absence of that you would expect the rental related products and infrastructure to hold up, stand up better next year. But then the bigger question would be the following year. If that type of timing worked out where we saw more government sponsored spending which we really haven’t seen as much through the years in water or waste water. A lot of regulatory driven spending but not a lot in terms of just government infrastructure spending, that could turn out to be pretty fortuitous for us timing wise.

Steven Fisher – UBS

You think the benefit could be more on the pipeline and the treatment construction side?

Andrew B. Schmitt

I would think so. I don’t think you’re going to see – about the legacy treatment business is still regulatory driven, radon, radium, arsenic nitrates. They can push off that regulatory compliance if they want and I think intuitively it tells me you’re better off putting it in to the hard infrastructure. We’re not going to need new wells, if there’s some for well replacement we’re certainly seeing some of that spending in Mississippi today, that’s good on the well replacement side.

The rest I would say would have to go in to the treatment either retro fitting, I don’t know about new building, getting them in to compliance, pipes for sure. Water main sewer line whether you replace them which we do or reline them which we do, rental sort of has all that covered whether it’s new – unlike in [inaudible] we don’t care if it’s relined or replaced since we do them both. That’s a job Tierdael started today, a $55 million job in Colorado, it’s all pipeline.

So, in our case either way, whether they put new in or they want to reline it, we cover that space particularly good and whether they design and build new or retrofit water or waste water treatment, we cover that space. If there’s more push on the regulatory side, or funds available for small municipalities then the Layne legacy would cover that. We’ve got that pie pretty well surrounded if they’ll push the funds out there.

But, I would say it would be calendar year 2010 if we see something in that area but there’s no reason not to get our piece I mean waste water infrastructure people can relate to broken pipes sometimes better than they can bumpy roads. Hopefully that will occur and be a nice boost.

Steven Fisher – UBS

Can you talk about how this downturn might affect your plans to move more in to the industrial water treatment side? Does it accelerate at all or maybe M&A multiples coming down?

Andrew B. Schmitt

I would tell you that that is a big focus of ours because the industrial business is still in our belief more attractive from a profitability standpoint and we still see it as less volatile than we do the bidding of municipal business. It’s open the envelope and the winner is as opposed to sit down and build a relationship with a customer be that on the industrial, agricultural or power side and get in there in a differentiated way and add value.

It will be a lot of focus on savings, it will be a lot of focus on being able to clean up these waste streams. It will do nothing but accelerate that process for us and we are making the end roads in that area. It’s a gradual process but wish we were further along when this hit but if anything it puts our focus a lot more back on water, on clean water, ultra pure water and in those areas plus that’s definitely a place you want to be in.

There’s plenty of that business in the United States for a company taking market share like Layne where we’ve not had that really to any great degree before. That works for us still. It’s still a better place for us to be in. If anything, we’d try to accelerate that strategy irrespective of where the infrastructure has been and gone. That will not distract us at all.

Steven Fisher – UBS

Lastly and then I’ll turn it over, are you putting new hedges on the energy business now or with lower prices you’re just kind of waiting to see what happens?

Andrew B. Schmitt

No, we just backed off. We had sold 15 million cubic feet a day which is roughly our current production. We might mitt, we might be at 16, we might be slightly over that through March of 2010 at $8.50 average. So, really we’ll just sit back and wait and see where it goes. The [Rex] pipeline coming out of the Rocky Mountains appears to have increased our basis differential in the midcontinent on the Southern Star line that we run on.

We had normally use to say $1 off of NYMEX, we’ve seen that move to more like $1.50 off NYMEX. You see the price is $4.93 today so we’ve seen that basis differential increase so we’ll just pull back and look at lowering our costs. We’ll just maintain the production and make sure we can meet the gas we’ve forward sold and we’ll just bide our time. We’ll get a little bit antsy next October, sitting here now I’m starting to get a little bit antsy but you’ve got to remember we were pretty patient, we didn’t put these hedges in to what April/May this year so we’re pretty good focal players.

Jerry W. Fanska

But, we’re watching it every day Steven. Obviously, if we had an opportunity we’d definitely lock in.

Andrew B. Schmitt

Yes, I’m not expecting it unless we get a brutally cold winter which almost in this case given the economy I hope the winter is mild. That’s about it Steven.

Operator

Our next question comes from Steve [Ferazini] – Sidoti & Company.

Steve [Ferazini] – Sidoti & Company

I know this is usually the time of year you start negotiating the rig rates for ’09. Any idea or any way to quantify what kind of impact you’re going to see in to ’09?

Andrew B. Schmitt

Not at this point. I think that the first step of that negotiation has just been really these customers big and small have all really struggled to try and determine, you can imagine whatever budget they put together earlier and they would have approached us and we would expect to get that feedback, you can imagine how much readdress there’s been with these customers. So, we’ve been back and forth, back and forth and the primary purposes is to figure out what rigs they’re actually going to need or going to work.

That has really been a moving target for all of these customers. We fully expect that they’re going to come back on us on pricing. We think the first will be here’s what we need, here’s where we need it and we are getting that information bit-by-bit. Then, it’s going to be, “Oh by the way, we can’t pay that rate per meter or we’re going to have to keep somebody around to keep you guys honest unless you can help us out on price.” So, all those discussions I will assure you are beginning to take place now and as soon as they lock in what they actually need we will get that and it will be a second call. It will be, “Oh by the way guys.”

Under the circumstances and we have some big major customers that have been very, very supportive of us where we have a preponderance of the rigs that are running either our sales or [inaudible] are major so we know we’re going to get that call. It would just be a guess, I’ll be in much better shape next quarter to say, “Well here’s the number of rigs we’re running, hopefully we can hold to it and oh by the way, here is the price overall decline,” because it’s going to vary by size, shape, whether it’s diamond or reversal or whatever. But here is sort of where we settled out given today’s activity levels and mineral prices.

It’s interesting I heard on one of the programs this morning that Freeport McMoRan’s CEO and he was talking about copper particularly in his case and he said, “We’re still selling all the copper we’re mining, we’re just selling it at quite a bit lower prices.” If they need coring to maintain that level of activity that’s good, we’ll get some utilization. But, it doesn’t go unnoticed where he says, “We’re selling it at a much lower price.” We obviously know that. We just have to see where that settles out.

It will be give and take and like I said we’re working on far so many majors being on the mind site or in close proximity helps us much better than small we’ll call them mom and pop, even some big mom and pop drillers that are really depending on these junior mining companies. That’s where its turned out to be a waste land.

Steve [Ferazini] – Sidoti & Company

You’ve obviously been through these types of downturns before, you’re saying 20% of rigs stacked now, any sense at this point what’s worst case scenario?

Andrew B. Schmitt

You know I’ve not seen customers react as quickly even going back to my oil and gas days with Baker Hughes. I mean these mining companies and these oil companies more on the mining side, I mean they are really reacting quickly. They’re going to take slowdown, take a tremendous amount of supply off this market in a hurry. Nobody really found that much as opposed to prior to the Asian financial crisis, some of the discoveries were quite substantially in gold and base metals.

But, when you look at the overall discoveries and the net adds be it oil and gas or on the base metals, even gold side, we really didn’t see that much. So, it may be sharp and deep and then we readdress sort of like a bee but the first leg is straight down and then you get part of the way back coming back and come back a little bit on that leg up about half way and just sort of settle down so we may settle out. As much capacity they’re dropping this quick and from a competitive standpoint we’re just going to lose a tremendous amount of competitors.

A lot has come in to the market over the last five years, a lot of small competitors but so much of that growth was driven by junior mining companies. It was almost 50% of worldwide exploration. I mean, sharp, steep with no money available for financing, it will take a lot of competition out of this market in a hurry. Last time, through that Asian financial crisis that process stair stepped as you know for five years. It was really just torture, just stair stepped its way down.

Of course, the Asian financial crisis, most of these rigs, people, small guys were being financed in Australia and Canada, the banks didn’t have these kinds of problems. The equity markets weren’t as good but they were able to get bank financing during this recovery. This is going to be interesting to watch because it’s happening so quick that we may lose a lot of competition before this is over between [inaudible] major and ourselves, about half of the exploration spending in the world when you include our Latin American affiliates. It will be interesting to see where we come back.

It’s going to be different. That stair stepping kept a lot of people alive, banks kept a lot of people alive. It doesn’t seem like that is possible in this go around and these mining companies big or small they’re reaction is much quicker than I would have ever imagined which is ultimately very painful but good for us. So, the strategic side of my brain kicks in and says, “Okay, we know how to add a lift, we’ve been waiting for it for a long time. We didn’t over capitalize like we did prior to the Asian financial crisis. It very well could be payback time for us.”

Steve [Ferazini] – Sidoti & Company

That sort of leads to my last question which is you have cut the headcount 20% so you’re aggressive there. Does that mean we aren’t going to see the kind of margin compression we saw during the Asian financial crisis? Can you maintain obviously not this level but at least remain profitable in that segment?

Andrew B. Schmitt

I would hope so. I mean, we’ve been debating back and forth in the short, very, very short run you’ve got to have a tremendous amount of costs that turn fixed and we’ll just have to grind our way through that. But, if we go from point A to point Z in a hurry it allows us to get our arms around it a lot quicker. The last time every time we thought we were there, it dropped again. It just dropped progressively by the time that it had finished we had gone from $5 billion worldwide in total explorations spending to $2.

Unfortunately, we didn’t go from $5 to $2 in 18 months. It took five years. That really tended to take away the competitive advantage we would have had as an industry leader but we also had a fair amount of debt so we couldn’t take advantage of it. We were determined this go around we couldn’t call the top but whenever it occurred we were very determined and so were our partners not to get caught flat footed like we did last time and just deal with it.

We’ll see but in terms of the rate of decline, we’ve laid off hundreds of people in Africa it took us 10 years to train. Those were very, very painful layoffs. People in villages and what not support multiple families so you know what you’re doing in the economy so that part we absolutely just deeply regret and hate to have to make the cuts we’re making but my view is if we can get down to that bottom quicker that works a lot better for us and we’ll pick up Major Drilling will as well, a lot market share.

The Boart’s got a different situation, they’ve got a fair amount of debt to deal with this go around. Last time they were part of Anglo-America so their situation clearly as a public company is a different set of issues they have to deal with. We and Major dealt with them last time and we’re pretty determined we weren’t going to do it again so if you look at the balance sheet of the companies it’s not coincidental that both of us are in pretty good shape and we shed our products business along the way in the last downturn so all we have to deal with is drilling.

Hopefully, our results will be better than they were in that Asian financial crisis because the circumstances are certainly different with the caveat that this might be steeper, quicker. It will be interesting, it’s not quite the downturn we saw over the last couple.

Operator

Our next question comes from Richard Paget – Morgan Joseph & Co., Inc.

Richard Paget – Morgan Joseph & Co., Inc.

I wonder maybe if we could talk about the quarter in NYMEX. You said that it definitely trailed off towards the end. Was October just a big drop off and September had been okay or was it kind of a steady decline?

Andrew B. Schmitt

Let me look here and see rather than try to guess, see if I’ve even got it in front of me. I’ve got to take out – the Latin America affiliates they had the longer contracts, the bigger mine so if anything you couldn’t see any impact on their business it would be our wholly owned business wouldn’t it Jerry?

Jerry W. Fanska

I kind of looked at that yesterday. Basically, the first two months of the quarter our wholly owned business did not as well as they had been doing in previous months. October tailed off fairly significantly although they still made money as we said in the press release. The Latin America affiliates stayed strong throughout the full quarter so their August, September, October was pretty much the same.

Andrew B. Schmitt

If you think about it Richard, the last time we had the downturn our Latin America affiliates never lost money. They had longer contracts in place. Now, those contracts became a bit of a burden when things turned around and our wholly owned business really took off and the first three years of this up cycle outperformed our Latin America affiliates and then it sort of went neck and neck and then they’ll outperform this year and they will outperform next year I daresay because those contracts are in place.

We expect to sort of see the same thing. You’re right when we look at the individual profit in October, about two thirds came from the Latin America affiliates and about a third from our wholly owned business and typically that’s been more 50/50. So, the drop was clearly as Jerry said, clearly on the wholly owned side and that’s where you’ve got the African business, that’s where you’ve got some businesses because of the difficult logistics or what not the mining costs are higher and so that’s where you’d expect to see it. Not at Escondida and [Chuquecomada] and [inaudible] and places like that.

So, it’s pretty much as you’d expect. That will be the battle for us, will be our wholly owned business and keeping that profitable and then our Latin America affiliates seeing how much of their business is not contracted but about 80% is. Now, they’re going to have to renegotiate some contracts. It’s very possible in this kind of downturn that they’ll be sitting down and talking to those major customers again.

Richard Paget – Morgan Joseph & Co., Inc.

That’s actually what I was going to ask you next.

Andrew B. Schmitt

That’s not entirely out of the question at all so bigger longer contracts but no reason they can’t come back and sit down and say, “Hey.” And, of course, the activity levels too. The mines are under no obligation to run a specific number of rigs it’s just those are larger mines and lower costs and everything else.

Richard Paget – Morgan Joseph & Co., Inc.

Getting back to the water business, you mentioned that you did definitely see weakness in the CIPP market. Now, is that reflective of the big guy on the block all of a sudden trying to keep his utilization up and cutting price or is it just the market in general everyone is scrambling for business a little bit?

Andrew B. Schmitt

I think from what we’ve seen it looked to be a lot of parallels last time where backlog weakened, diameter went from larger to smaller and then all of a sudden you sort of see a proactive grab for the increased backlog. As we’ve talked before, given the diversity in Layne’s product lines we have the luxury of not having to react that way but if you’re narrowly focused in these markets, it sometimes can be a plus. It’s easier for you guys to cover and we understand that as well that Layne’s not the easiest company to cover but our reaction would be hesitant to match or to react that way.

We’d look at more the ebb and flow. But, I think what you described is definitely happening. There is an attempt to solidify that backlog maybe with the view that you’ve got to put something on there now and have a foundation where we would naturally be reticent to do that in any of our business. We’d just pull back and say, “Look we’ve got enough diversity we’ll weather the storm. We don’t want to be proactive and add to the problem.” Because, we’re a big factor too I mean, we are the second largest in the country. But, I think you’re right in what you described, at least from what we’ve seen particularly late this quarter.

Richard Paget – Morgan Joseph & Co., Inc.

Now when you say lay off was this a factor of things happening in October again? I guess if I look at the numbers in the press release and just comparing the nine month increase versus the six month it seems like in the quarter year-over-year that CIPP was down about $1.1 million, is that safe to say?

Jerry W. Fanska

You mean quarter-over-quarter?

Richard Paget – Morgan Joseph & Co., Inc.

Yes.

Jerry W. Fanska

Yes.

Richard Paget – Morgan Joseph & Co., Inc.

Were things still up in August, September and then October dropped off or it has been weakening for a little while?

Jerry W. Fanska

I’ll have to look at October. I don’t know, I may or may not give you an answer. The bigger drop off was definitely in October, pretty much the full decrease.

Andrew B. Schmitt

And we’re obviously bidding those jobs as they come up and there’s quite a bit of bidding activity so that’s where we’re seeing the very, very surprisingly low prices. Like I said almost reminiscent of the prices we had a year ago.

Jerry W. Fanska

In fact, if you look at the first two months it was actually up year-over-year so last month was really offsetting the increases in the first two months.

Andrew B. Schmitt

I think our backlog is about half of what it normally would be if I’m not mistaken at this point in time. So clearly, we sit back and wait, sort of shake our heads a bit and see where it shakes out.

Richard Paget – Morgan Joseph & Co., Inc.

Then, do you have the typical energy stats that you give out?

Andrew B. Schmitt

I do and let me give these to you. The average net production was 14,229,000 at an average price of $7.69. Last quarter that production was 13.3 so we’re up a little bit in production and the average price was $8.38.

Richard Paget – Morgan Joseph & Co., Inc.

Then, what about the well count?

Andrew B. Schmitt

The well count that is about 540 I’m guessing, 546, something like that. We’re just going to flatten that out, make sure we’ve got the gas we forward sold. Just flatten it out next year and focus on trying to drive down the cost. We’ll probably look – there are some people that come up in and around the basin both land or small companies than we might substitute that for the capital spending if we could come up with the right attractive transactions. A lot of stress right now in these CBM basins.

Richard Paget – Morgan Joseph & Co., Inc.

Where do you think gas would have to come back up before you started committing capital again?

Andrew B. Schmitt

As opposed to just staying ahead of the decline curve?

Richard Paget – Morgan Joseph & Co., Inc.

Yes.

Andrew B. Schmitt

We’d like to see Southern Star north of about $7.00 or $7.50 so you put $2 differential on that, we want to see $9, $9.50 and above as far as the NYMEX comparative number versus what you’re looking at on the NYMEX today.

Operator

Our next question comes from Jonathan Ellis – Merrill Lynch.

Jonathan Ellis – Merrill Lynch

I want to talk first of all just some basic numbers here, Jerry do you have both the legacy and the rentals business year-over-year change in revenue and EBIT?

Jerry W. Fanska

I do. For the quarter?

Jonathan Ellis – Merrill Lynch

Yes.

Jerry W. Fanska

Do you want the legacy first?

Jonathan Ellis – Merrill Lynch

Sure.

Jerry W. Fanska

It was $80 million in revenue versus $76 in the prior year and EBIT of 7.7 versus 6.3.

Jonathan Ellis – Merrill Lynch

Then the rentals business?

Jerry W. Fanska

The rentals business would be $104.9 versus $78.4 last year in revenue and 5.2 versus 4.6.

Jonathan Ellis – Merrill Lynch

On CIPP I know you spoke about in qualitative terms but if you have that handy, the revenue and EBIT change year-over-year either in percentage terms or dollars.

Jerry W. Fanska

Basically 31.3 versus 32.4 in revenue and $1.6 in profit and $2 million last year.

Jonathan Ellis – Merrill Lynch

The backlog, you talked about both legacy and the rentals business how it’s faired year-over-year but obviously the backlog I know did come down on a sequential basis. Which part of the business is that really attributable to? Is it all the legacy business or did you see any kind of incremental weakness sequentially in the rentals side?

Andrew B. Schmitt

When I look at October versus what are you looking at an point –

Jerry W. Fanska

October versus July.

Andrew B. Schmitt

Versus July?

Jerry W. Fanska

Yes.

Andrew B. Schmitt

Legacy came down from about $120 to $108 when you look at it sequentially. And when you look at rentals sequentially -

Jonathan Ellis - Merrill Lynch

The rounds would just be the difference then.

Andrew B. Schmitt

Yes. There’s probably geos in there a little bit but rentals is $339 versus $295 today sequentially.

Jonathan Ellis - Merrill Lynch

The money business just very quickly, given that it seems that copper prices have come down much more than gold prices, are you seeing any mix shift in the types of projects to the extent that you are doing Israel work still? Are you seeing a mix shift more towards gold versus copper or is the historic proportion still - ?

Andrew B. Schmitt

No. We’re really not. If you look at it through the years, I don’t know why, logically you would expect that there would be more of a buffer in gold. We’ll just have to see but we’re not seeing much. You can’t say it’s all the copper people cutting back because we’ve seen some cuts in the gold mines particularly Africa that have surprised us for both midsize and major companies. So we’ve not seen that. Now that shift may occur over time. It’s been pretty much 50/50 and it maintained that amazingly close correlation even during the Asian financial crisis. Copper got to $0.62 a pound then as I recall selling gold at $2.50. So we’re not seeing that yet.

Mexico’s a big market on the gold and silver side. We expect some pretty severe declines in the amount of Mexican gold work. Tanzania’s a big gold market. We’ve seen pretty good declines there. We’ve sort of got our fingers crossed on West Africa which is the gold market. So I can’t tell you how many more are focused. Some of these bigger copper mines could be more stable than these smaller gold mines.

It’s not anything that I think I can give you any direction on at this point. We may see it relative to the delta in those prices but nothing we’ve seen yet. I have to say some of my biggest concerns are on the gold side because the copper guys are bigger and the mines are bigger.

Jonathan Ellis - Merrill Lynch

In Latin America just to make sure I understand, you talk about longer-term contracts but is it the same contract structure meaning that you have a certain agreed upon rate per meter drilled and to the extent that there’s no less exploratory taking place obviously you’re drilling to your meters and therefore less revenue generation? Is the contract structure similar to your wholly-owned business?

Andrew B. Schmitt

Yes, it is. It’s a rate per meter. It’s typically a fixed rate with escalation factors where the mining company’s responsible for certain things like maybe the cost of fuel and those types of terms may vary. The cost of the camp. That’s typically what you see. They’ll come back in and probably won’t alter the terms particularly. Not as much pressing need on the energy side which they would have liked to have unloaded on us but not as much pressing need.

My guess is they’ll come back and look at, “We’re going to maintain a certain level of activity but we’d like to talk about this rate per meter.” But because they’re three to five year contracts it’s not like you just throw the contract out and start over. We have very few contracts that aren’t three to five year contracts in South America. So these are not things easily cast aside when you start talking about where things are going to be because they don’t want to be in year three going the other way. A lot more stability there.

But we’ll see. As I say, there are bigger cutbacks than I ever remember even the large mining companies taking immediate action. Boy, they’ve certainly learned their lesson as opposed to the stair-stepping routine.

Operator

Our next question comes from Analyst for John Rogers - D.A. Davidson & Co.

Analyst for John Rogers - D.A. Davidson & Co.

We saw cash come back up quite a bit in the quarter and I know it had come down in the July quarter as you guys paid off some debt. But is that also a function of seasonality at all or is there anything else that would relate to that as far as [inaudible] and cash balance?

Andrew B. Schmitt

I’ll talk about cap ex and you can talk about the other.

Jerry W. Fanska

Cap ex is obviously being curtailed, come down. We had some escrow deposits obviously coming back that we had made for gas deposits because our hedging price was lower than in previous quarters than the market price. That’s obviously reversed now. All that money came back in this quarter. But it was just escrow deposit.

Andrew B. Schmitt

Do you remember in July we stride to give you an idea, spot prices on Southern Star went over $11 per mcf. To give you an idea, last month or September we saw $1.89. You can imagine how that money came flying back in from that piece or what not. And you can see why we were late putting in our hedges but why those prices were attractive.

On the capital spending, just as a point we didn’t’ make, we moved pretty quickly in September. The third week in September all of our worldwide management got a memo email from me that said we have a freeze on hiring, a freeze on wages and capital is emergency only. That was the third week in September. That’s how quickly we respond and how quickly our management responds.

So what we’re seeing other than things that had already been agreed to and approved, from that point forward anything that we hadn’t already discussed or agreed to with the management, was in process on the water, etc. we just battened down the hatches and we’re still battening down till we get some firm idea what we’ve got operatingly going forward.

We’ll get together around the middle of January with our key management group and everybody’ll go through and we’ll try to see where we’re going to lock out at. And we’ll look at it obviously strategically as well. There are businesses that we will not cut back and others we will and just say, “This is where we’re going to operate for the next year.” If you can do it that way, that’s the best way to run these operations. Don’t start that seesaw up and down; up, down, up, down, yo-yoing along. That’s a lousy way to try to run a business.

Operator

Our next question comes from [Michael Huffman - Rock Point Advisors].

[Michael Huffman - Rock Point Advisors]

The Merrill gentleman asked the questions I was looking for in terms of the mix on the [MINNEX] between copper, gold and whatever. Do you pretty much expect that to stay the same going forward or is it kind of hard to say?

Andrew B. Schmitt

It’s hard to say but if history is a good barometer, for whatever reason that mix for us was the same coming in to the peak in ’95/’96/’97. It was the same ratio at the bottom in 2002. Then it stayed pretty much the same balance in this recovery. So for whatever reason mix of customers, mines, low cost, high cost, tax regimes, that has remained very, very steady for us.

[Michael Huffman - Rock Point Advisors]

The geographies probably change in terms of where the action is?

Andrew B. Schmitt

It moves a little bit. We went from Ghana in West Africa to more focus in Mali and Burkina Faso. We went more focus in East Africa as we moved down to the Democratic Republic when Freeport began aggressively mining that DRC area.

So it sort of moves within the region but we’ve always been in West Africa. We’ve always been in East Africa. We’ve always been in West Australia. We’ve always been in Chile. That hasn’t changed. We’ve always been where we’ve always been and we selected it by ore bodies when we looked at the attractiveness of that; we and our partners did. So you’ll see locations shift on a region where more focus will be less in Zambia and more in the DRC. We’ll pull out of Batswana but we don’t see it wholesale change from a region.

Operator

There are no further questions in queue at this time.

Andrew B. Schmitt

We appreciate everybody’s time and attention on the call. Sorry we can’t give you that better view but we’ll gradually begin to zero in on that and hopefully be able to give you more color relative to sustainable levels of business wherever they shake out to be. I think the biggest plus from our point of view is the experienced people we have in the company and obviously the balance sheet.

The market position within all the segments that we work is still difficult to deal with; you hate to go through these very gut-wrenching situations but we do know what to do and we do know the ultimate outcome is Layne’s position just gets more prominent in these segments particularly in this kind of very difficult economy.

Thanks. That’s it for us.

Operator

Ladies and Gentlemen, this conference will be available for replay after 1:00 p.m. Central Time today through December 11 at midnight. You may access the AT&T Executive Teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code of 970403. International participants may dial 320-365-3844. That does conclude your conference for today. Thank you for your participation and for using the AT&T Executive Teleconference service. You may now disconnect.

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Source: Layne Christensen Company F3Q09 (Quarter End 10/31/08) Earnings Call Transcript
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