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Executives

Andrew Schmitt – President and CEO

Jerry Fanska – SVP of Finance and Treasurer

Analysts

John Rogers – D A. Davidson & Co

Debra Coy – Janney Montgomery Scott, LLC

Jonathan Ellis – Merrill Lynch

Michael Roomberg – Boenning & Scattergood

Layne Christensen Company (LAYN) F4Q09 (Qtr End 01/31/2009) Earnings Call March 30, 2009 11:00 AM ET

Operator

Ladies and gentlemen We’d like to thank you for standing by. And welcome to the Fiscal 2009 Fourth Quarter and Year-End Earnings Results Teleconference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time. (Operator instructions)

As a reminder, today’s call will be recorded. I would now like to turn the conference over to your host, Mr. Andrew Schmitt. Please go ahead sir.

Andrew Schmitt

Thanks Steve. Good morning everyone. My name is Andrew Schmitt, President and Chief Executive Officer of Layne Christensen & Company. I’m here with Jerry Fanska, our Chief Financial Officer. And we would like to welcome you to Layne Christensen’s fourth quarter and fiscal year end conference call. Earlier today, we issued a press release outlining the results for the fourth quarter and fiscal year ended January 31, 2009.

Before we discuss those financial results, I would 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’ll give you an overview of the division operating performance and how we see things going forward. Okay, Jerry?

Jerry Fanska

Thank you, Andy. Good morning everyone. Revenues set another quarterly record in the fourth quarter, up 2.6% to $229.4 million from $223.6 million in the prior year this is the 28 consecutive quarter-over-quarter improvement for the company.

Water Infrastructure revenues increased 16.9% for the quarter to $191.8 million, driven mainly by previously announced acquisitions and increases in treatment plant construction and increases in specialty geo construction products and services. Mineral Exploration revenues decreased 47.3% to $25.1 million, for the quarter primarily due to mining companies extended holiday mine shutdowns and delayed and reduced spending programs in response to tightening credit markets and lower base metal prices.

The Energy division revenues increase for the quarter 7.3% to $11.5 million reflecting increased productions in the company’s unconventional gas properties. In the fourth quarter, the energy division recorded a major year-end adjustment as a result of a lower natural gas price at year-end and its effect on the evaluation of the oil and gas reserves. Under SEC guidelines the value of our oil and gas reserves must be determined based on the present value of future gas sales using other than for the forward sales contracts that we have the price of natural gas at the company’s year-end. In this case, the year-end gas price was $3.29 per MCF compared to $7.53 per MCF last year.

The non-cash charge for this write-down was $16.1 million after taxes or $0.83 of share, SEC has revised these regulations for future years including a change in this point in time pricing model and had we applied the new rules as of January 31 the price would have been 668 per MCF and would have resulted and really no charges to earnings from this test.

Selling, general and administrative expenses increased to $31.4 million in the quarter from $30 million in the prior year primarily reflecting increases $1.9 million from acquisitions and startup operations.

Depreciation depletion and amortization increased $2.2 million in the quarter to $13.9 million from the prior year resulting from an increased depletion and the Energy Division and appreciation from property additions in the other divisions.

Equity in earnings of affiliates in our Latin America. And Latin America increased to $3 million in the quarter from $2.1 million in the prior year. As a commodities market in Latin America remained relatively strong through the end of the quarter.

Interest expense decreased to $816,000 for the quarter on decreased borrowings from the prior year. The income tax rate for quarter was a benefit of 30.6% compared to an expense of 46.6% in the prior year primarily impacted by the fourth quarter in non-cash charges.

The net result for the quarter was a loss of $0.59 per share, compared to $0.50 earnings last year, excluding the write-off the company earned $0.24 per share, compared to $0.50 per share last year. For the year, revenues increased to $139.8 million or 16.1% reaching the $1 billion mark for the first time in the company’s history both revenues and Water Infrastructure were up 19.9%, Mineral Exploration up 5.8% and Energy up 16.6%.

Operating expenses for the year excluding SG&A depreciation and amortization and depletion were up $26 million or 15.9% from the prior year mainly reflecting additional cost associative with the acquisitions and higher level of the capital expenditures resulting in higher depreciation and additional depletion in the Energy Division.

Equity in earnings of affiliates increased this year to $14.1 million compared to $8.1 million last year, reflecting the strong mineral exploration market in Latin America for most of the year. For the year the company earned $26.5 million or $0.37 per diluted share compared to $37.3 million or 220 per diluted share last year excluding in the fourth quarter charge earnings per share were flat with the prior year a January 31 2009 the company’s balance sheet reflected total assets of $719.4 million stockholders equity of $456 million long-term debt of $26.7 million and cash and cash equivalents of $67.2 million net cash from operating activities for the quarter end and the year were $40.8 million and $92 million respectively investing activities totaled $16.7 million for the quarter and $87 million for the year end.

These activities included $6.8 million and $29.6 million in the quarter and year respectively on unconventional gas activities and $7.1 for the year on acquisitions with the reminders spent on property, plant and equipment the Energy division reported improved reserves as of January 31 of 16.6 bcf of natural gas and estimated future net cash flows discounted at 10% after taxes of $40.3 million, both of those impacted obviously by the lower gas price of January 31 with that I will turn it back over to Andy to talk about the operations. Andy?

Andrew Schmitt

Thanks Jerry. I will spend just a few minutes on the fourth quarter operating performance and they will discuss what we are seeing as we said today all the business is in the lower infrastructure group and had a solid quarter our rentals business, our Layne legacy and our geoconstruction businesses were pretty much on effective in the fourth quarter despite the weak in it business activity beginning late last year backlogs are in good shape at the end of the third quarter coming in and overall fourth quarter execution progress pretty much as expected Last time we spoke in early December on the third quarter call in the minerals exploration division we discussed we laid off about 20% of our employees in our wholly owned businesses globally. That number had grown to about 50% by the end of this fourth quarter.

The business is really grown to a hop as we expected year-end slowdown became just about a shutdown, with little incentive for clients to start rigs up quickly in the New Year. Add backs on earnings was dramatic as revenues plummeted and the additional cost associated with this type of downsizing came rolling through. Unfortunately our Latin American affiliates did not experienced this kind of downturn in the quarter as there are larger contracts held firm through this period. And Layne Energy notwithstanding the non-cash ceiling the impairment test actually had a fairly normal quarter two, although yet to work a bit in the financials to get the actual operating performance, division gross gas production was up about 21.4% from this quarter a year ago.

So against that brief overview let me shift gears and give you a status of sort of where we sit today and what we see as best we can going forward. In our water infrastructure group our legacy water division is currently experiencing quite a bit of weakness. It’s not that the backlog has fallen so precipitously but rather it’s just frozen as notices to proceed or measurably slower.

The stretching out of the work has the same effect as decline and we see Layne legacy’s revenues stepping down about 20% in the first quarter and as we move to address such the cost will be disproportionately higher than normal. We also have a job, which has had some trouble, and of course that never helped when you’re having a difficult quarter, and we’ll have to work on getting that squared away.

We have previously communicated that legacy would likely be more impacted in this recession than Reynolds this new water supply volumes demand will be lower with U.S. population not increasing and sprawling into the suburban areas as we've seen in the past. So this segment, this new groundwater supply, is probably not going to grow again until we see municipal water demand increase. In the interim the replacement of aged water wells, maintenance, repair, groundwater treatment will sustain the legacy business and in addition, drought conditions as always will periodically drive increases in demand of this business.

In the legacy business, we've been expecting revenue declines for quite sometime now. We've talked about on couple of calls, but even when you look at the year we have just completed, they just really didn’t show up or they were offset by more work on the treatment side. So legacy’s revenue if you break into that infrastructure group was actually up 3.8%. Division operating EBIT was up 3.9%. So they’ve done a good job thinking of this economic decline to this point and really actually better than I would have thought for sometime now given the housing market peaked way back in June of 2006. Reynolds the more infrastructures related part of the Watergroup still has a large backlog of work and bidding remains fairly active. Given the size and duration of these projects, we may still see revenues on the Reynolds business flat in fiscal 2010.

However, when you look at that backlog and the mix, it’s clearly shifted toward lower margin, pipeline work and in general prices have gotten more competitive. So, as such when we look at the New Year coming up, the top line may look okay, but the bottom line is going to suffer, a combination of price and the mix shift is definitely going to cause some deterioration at bottom line. We continue to see many more bidders for municipal, general contracting type projects than in past years, a number of general contractors that would normally do residential or construction type work are actively bidding municipal contracts. It's clear when you look at some of the bids and not all of them know what they are getting into, and so, I’d say a silver lining down the road is we’ll probably do more work than normal in the next couple of years on projects where these contractors failed to complete the project.

The soil stabilization part of the Water group sometimes gets overlooked. It's a smaller part of the Water Infrastructure group that had really had a great year, their revenue was up almost 60%, division EBIT increased seven fold. We may experience some slowdown early in this year in that activity, but our feeling is, it’s probably going to increase again in the second half and it's not unusual to see this business counter cyclical to the economy. A lot of the skill set in that group is very conducive to dam and levy work, roadwork. So, there you pick up the benefit of both Katrina-related repair spending and new government stimulus funds in terms of where they are to be focused. As we look at the government stimulus plan, no question it will positively impact the entire Water Infrastructure group,

The timing of the impact is difficult to say, but I guess if we try to expect to take our best guess it would be in the fiscal 2011.The rental’s work tied to water and waste water transmission and distribution would more likely benefit to a greater extent from that stimulus spending given where it’s to be directed then may be our legacy water business. But very importantly the reauthorization of the state revolving funds that are currently in process in process I think passed the house, if I'm not mistaken, will also have a very positive long-term impact on the whole group. When we switched to the mineral exploration this downturn has really been extraordinary in the speed and depth. In the aftermath of the Asian financial that would be calendar year as 1998 through 2002, we saw total world wide explorations spending by mining companies fall from the peak in 97 to a trough to 2002 volume of 16%. So really only 40% of market size reminded, but it took five years to travel that distance.

When we look at first quarter spending levels in drilling rig utilization, the mining industry may have traveled at distance in about 3 miles, which I think, would clearly without historical precedent. The number of rigs we were operating beginning, the first quarter in our wholly owned business. I'm talking about this first quarter that we are now, was only about 45% of the level of the third quarter last year. Activity picked up a little bit later this month. In fact, only recently, we’ve actually had recent people back mainly due to Gold-related work and that moved it up to about 16% of say third quarter a year-ago levels but not in a manner that brought a lot of relief. As you would expect, pricing has also dropped 10 to 20% so, this combination with very low rig utilization is pretty toxic for earnings. We’ve been determined to stay ahead of this downward spiral it’s not been easy and it’s forced us to move very aggressively to reduce headcount and expenses.

Our view in the early stage in the downturn, as we would rather trade market share for operating stability, know that can sound a little counterintuitive but what we really mean is we may overreact to reach a stable bottom to avoid that yo-yoing effect on operation that occurs in these geographically dispersed businesses in commodity downturn because that type of operating situation will only lead to bigger problems more safety issues and bigger losses given Layne Christensen's. multiple product line and strong balance sheet. We recognize we can afford to take that position better than lot of people, but once we find a sustainable bottom our focus will be trying to operate as effectively as possible at that level, and not to seed any ground - any more ground on pricing.

Our Latin American affiliates are better protect due to their larger contracts. As they operate on some of the world’s largest and richest mine. but what distinguishes this downturn from the last one is we had renegotiate those contracts resulting in lower prices in addition to expectation of the lower number of meters that will be required to be drilled this year. So, although our Latin American affiliates historically have better more stable situation then our wholly owned business they earnings are going to get quite haircut to this re-negotiation naturally given this speed in depth of this pipe cutback on expiration we will see more competitor sale sooner than in the last downturn which was more forgiven as its stair step down, also was a banking industry the last downturn at least the much better shape to keep people evolving.

We are probably see more consolidation on mining on, which in the past as worked Layne criticism and its Latin American affiliates advantage given our focus allow the major and midsize mining companies. So as we look at it our expectation for the best long-term prospects and oversized earnings growth in the longer term maybe on the mineral expiration segment more than any of our business.

We talked about that, through this last year so, with all that might be the case we kept a lot graph Powder available with our conservative approach to acquisitions during the boom part of this past cycle. The once this economic mess gets sorted out the falls maybe better than I would have imagine, but in the end we got the deal which what brought in center today and fortunately we know how to do that as well, Layne Energy Spot Natural Gas Jerry said it been very low of moved even lower since the January 31 period as a result of our decision on operating our Cherokee Basin property will be just to maintain production the sale of the volume, which we have forward sold contract. Of course as the byproduct of that capital spending will be reduced we are focusing on driving down the lease operating expenses as well, but we all probably actually looked increase leasing of land in our adjacent areas that so much the competition for land that we have seen in last couple of years

As virtually disappeared. The bigger issue for Layne Energy is out in April 2010, when the forward sales contracts spared. Our expectation is we will have better opportunities over the next year to forward sale and production then we currently stay today and of course if the market improves in the short-term we would step-up our pace of drilling of new wells. Until Layne we really don’t want to waste our reserves at the low prices. The majority of E&P natural gas operators will do exactly what we are doing which tells us the inevitable hockey stick in natural gas demand is in our future when the economy recovers.

The plan the minimize argue is the prolific shale plays to get somewhat discussion today. Our guess is that the decline curves and take away capacity and water related issues will bring a heavy dose of economic reality to a lot of this projected potential. So the large plays may flatten the hockey sticks somewhat but probably won’t eliminate the shad from repeating as we have seen in the past in the natural gas business in this country.

We are naturally seen a lot more transaction opportunities in oil and gas sector then we could possibly even look at much less due. At this point, Layne Minerals are focusing in stead and just don’t find tuning what we have in front of us here and now, our believe is the M&A opportunities, commodities and general will not go away for a while so we are not in a hurry there. I apologize for the long and narrative but clearly recent events wanted such and we still have time for some of your questions Steve if you want to see if there any questions out there.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of John Rogers of D.A. Davidson. Please go ahead.

Andrew Schmitt

John can you hear me.

Jerry Fanska

Hi John. you fine

John Rogers – D.A. Davidson & Co

Hi just follow-up and I appreciate all the comments on the natural gas how much of your, how much production is actually hedged toward what sort of the drop off or we looking at?

Jerry Fanska

All right now we have got about $12 million hedged that will move up to $15 million on April 1st.

John Rogers – D A. Davidson & Co

That’s right.

Jerry Fanska

It will be at about $8 I think is the number John and, and I was going try to find you if I had it that the spot prices and that pipeline that it all trades on.

John Rogers – D.A. Davidson & Co

Right.

Jerry Fanska

Today’s spot prices $2.61 fairly so you can see it is above $6 and downturn above the current, current spot prices.

John Rogers – D.A. Davidson & Co

Yeah.

Jerry Fanska

But we are actually because we have got about that much production give or take. We actually have, we actually selling about $3 million of that production as that 261 so, and the hedges step up that will pick up all of that gas will start moving forward at a higher price. And we won’t have that pull on us that we have seen and pretty big impact February, March and even April and till that happens in the first quarter plus one thing they pay attention to as you got higher depletion as a result of the SEC mandated ceiling test so even thought the reserves are reduced quite a bit the depletion of what remains is accelerated with the theory that the economic life for the wells determine by that January 31 so even if you were to look at Lanye Energy make sure and you will these Lanye Energy is flat mix here it will make much difference on an EBITDA basis, but on an EBIT basis with that hard depletion you might see those earnings drop around 25% from our pretax EBIT basis I don’t know exactly what the depletion number is starting out in a new quarter but that’s something that remember when you go through and work your models is the pricing is fine the revenue is fine the EBITDA is fine, but you’ve got a lingering effects from those SEC mandated test and that’s a depletion get adjusted is it that light going forward. And of course the economic life on the remodel is shortened. Even though the productive life is probably 10 to 12 years that economic life just gets shortened in those reservoir models because it’s seems well, is terminated and that you wouldn’t spending on more capital, if it becomes unprofitable.

John Rogers – D.A. Davidson & Co

Right, Okay

Unidentified Company Representative

The best way, you typically look, but just to carryout on that depletion going forward keep that mind that’s easy to – it’s easy to overlook sometimes.

John Rogers – D.A. Davidson & Co

Okay thank you, but and the, but the $12 to $ 15 million cubic feet you’ve got hedged what level of how much lower is production going to be, if its just meeting your hedges versus...

Unidentified Company Representative

Well we’d like to meet just that numbers so we are sort of running as our division president says Jerry and I asking it run like a gas storage field.

John Rogers – D.A. Davidson & Co

Yeah.

Unidentified Company Representative

Then always work fairly so, we got the challenge this day in range, with that producing too much of our reserves that we don’t want to sell and so and we obviously can do that and how should be careful full with these coalbed methane wells because we are not like convention of gas where you just flip the switch on them.

John Rogers – D.A. Davidson & Co

Yeah

Unidentified Company Representative

It pretty sensitive So he has a real challenge. We've known that we’ll be given him a real challenge taking that position, but that what we are going try to stay as right with that 15 we have to drill little bit production of do that cost of drilling down quite a bit. As the lease operating expenses coming down as the service companies pull back with the lower rig activity as well and of course we see prices coming down on steel and pumps, motors, casings et cetera. So, but we’ve given in quite a balancing act there with the recognition that we’ll give them a little better guidance if we have period of time in the next 12 months where we forward sell more production.

John Rogers – D.A. Davidson & Co

Okay but does it looks now you’d be, production would be about flat this year?

Unidentified Company Representative

We are not trying to hold it there.

John Rogers – D.A. Davidson & Co

Okay, okay great. And then one other quick question on the water side, right now the water well drilling versus the rents they are about 50-50 in terms of your total revenues?

Unidentified Company Representative

Rentals would be about $400 million on a trailing – if you look in the trailing 12 months, and if you were to look at the legacy part of that business, it was about $308 million. So it’s smaller than the rental business when you look at it.

John Rogers – D.A. Davidson & Co

Okay.

Unidentified Company Representative

So none of these act with the right numbers Jerry would know best but it’s in that right.

John Rogers – D.A. Davidson & Co

Okay.

Unidentified Company Representative

It’s $400 million or $300 million basically.

Unidentified Company Representative

400 is okay.

John Rogers – D.A. Davidson & Co

Okay, okay.

Unidentified Company Representative

Or it’s 300.

John Rogers – D.A. Davidson & Co

Okay great. Thank you I’ll get back in queue.

Operator

Our next question in queue comes from the line of Debra Coy of Janney please go ahead. Ms Coy your line is open.

Debra Coy – Janney Montgomery Scott, LLC

Thank you. Good morning Andy, good morning Jerry.

Unidentified Company Representative

Hi Deborah.

Unidentified Company Representative

Good morning Deborah.

Debra Coy – Janney Montgomery Scott, LLC

On the water business, you mentioned that even though backlog is pretty good, pricing is tough the margin in the water segment was actually pretty good in the quarter. Is, was that related to the large Tierdael project. You mentioned that most of the revenue increase came from acquisition kind of how is the mix looking within the rentals part of the business in terms of types of projects you mentioned, do you expected to see some mix shift going forward you mentioned transmission line projects for instance which I am also hearing are going to be a focus of the stimulus spending. How are you thinking about or how should we think about margins relative to types of projects over the course of the year?

Andrew Schmitt

I think only Reynolds business when you look at the overall margin in the business, on $400 million of revenue you don’t have to pull down too much --- to see, a deterioration from a prior years results. So, I think when you look at that mix shift in the Reynolds in the more competitive pricing, if you were look at their operating Jerry you can give you the better number but you probably looking at, for send the half when you look at just the Reynolds piece of business.

Debra Coy – Janney Montgomery Scott, LLC

Relative to legacy.

Andrew Schmitt

No just relative to where they were on that $400 million going forward. So if you were to see some pull down in say in the segment income of Reynolds then you might see that shift in the percent and a half range what do you think? Jerry.

Jerry Fanska

Yeah I agree. I think the overall you are going to see at least a percent decline because of competition.

Andrew Schmitt

No

Jerry Fanska

In the margins.

Andrew Schmitt

And then you got a mix shift that’s going forward down a bit.

Jerry Fanska

Yeah.

Andrew Schmitt

So, I think if you just break out that $400 million piece and said okay. We are going to see about a percent and a half decline in gross profit. Profit on the Reynolds piece, I think the more difficult one to estimate is the legacy piece, because that backlog is shorter. The one like Reynolds we can almost price out the Reynolds backlog. So we can give you what fairly good comforts that a this backlog margin we executed looks like this compared to what it look 12 months ago. Legacy with only a matter of 90 days of backlog I guess extremely difficult to predict how that is going to decline. I would say in your first quarter just as a -- my reference point it would not surprise me to see that legacy revenue decline 20% because when I say stair step down that’s what we look like because we had that backlog really more paralysis but it has the same impact on you as the work not being done and we have that comments that from customers that they actually were waiting on the stimulus which did not surprise any others.

Debra Coy – Janney Montgomery Scott, LLC

Yeah

Andrew Schmitt

Because we probably disappointing for me philosophically to deal with waiting for a handout but that we actually referred that comment.

Debra Coy – Janney Montgomery

Yeah.

Andrew Schmitt

And more so from the legacy guys because their backlog turns so quickly so much quickly than rentals. So that has a meaningful impact on them if it’s a two-week delay then rentals has project going to take a year or 15 months to do two weeks is not an issue but when you have Layne legacy two weeks can be a big issue a month can be a big issue so I think that’s going to be tougher to engage I think overall looking for the year if we combine those businesses although the revenue might not move down as much it would not surprised me to see that operating income come down at a 25% range think

Jerry Fanska

No I think right.

Debra Coy – Janney Montgomery Scott, LLC

No I think it could be.

Andrew Schmitt

Overall plan in the infrastructure group is going to be at least down 1%

Debra Coy – Janney Montgomery Scott, LLC

Probably,

Andrew Schmitt

Say a percent and a half. So right in there. Debra again we're trying to stay a snapshot of what we see today and can arguably say that this quarter end of the year, is where at this whole great recession or having is really crunching through some company and everybody is trying to suggest to it. So maybe we’re just maybe we are just the glass is too half lengthy, but our view is we got to react to what's front and center as opposed to wish and hope and speculate going forward.

Debra Coy – Janney Montgomery Scott, LLC

That’s right it is hard to know, but it does it seems like your still fair amount of uncertainty about how the spring summer construction season shaped up?

Unidentified Company Representative

Yeah and you think about the fact we're doing work on Katrina right now in Layne Legacy and biting on work as looking final award stage in geoconstruction related to levy – related work, that’s taken four years to get to as our guys say the shovel ready project to actually get to the guys with the shovels and so, we’ve got that backdrop and although we know the administration is determined and is given strong guidance that these projects had to start soon are you loosing the money, which is clearly different in the Katrina related funding

Debra Coy – Janney Montgomery Scott, LLC

You believe…

Unidentified Company Representative

But sale I mean we have to be a little bit take little bit of the John this view that might not see the project for us to start big, if you will, for year is earlier so that may also be clouding our view a little bit, but we know these things take longer to get that the engineering firms E and C firms will have a good charted and first and it takes a far amount administrative work to get that moving and then the lot these agencies are not equate to deal with some of these higher levels of spending, but not the state revolving funds would be a big help too. That would be a big help as well. So, I think once we do start seeing that flow we sort of have a double benefit, the higher spending and that clean water state water, SRF funds shaking loose would be helpful because they can leverage those up with bonding just like they did in 1987, it was authorized in 1988 spending through to date is 65 million, it’s been leveled up on a $25 million in fund. We have about -- I mean billion. You’ve got about 14 billion in working its way through Congress in addition to the stimulus. So that’s helpful.

Debra Coy – Janney Montgomery Scott, LLC

All right. Yes.

Unidentified Company Representative

That will be helpful.

Debra Coy – Janney Montgomery Scott, LLC

Okay that's helpful. So, we'll have to wait and see. On – on NYMEX, you said that you were down as much as the 40% of third quarter level, now close to the 60, how is your crystal ball looking for the next - for the next couple of quarters, are you seeing some stabilization there, are the customers starting to make plans, is everybody still

Unidentified Company Representative

The little bit of pickup we saw from the very low levels coming out of the shutdown was really gold related and it was money freeing it up or some of the smaller gold mining companies, more I’d say from private placements, not from their access to the debt or equity market had improved, Debra. So, I’ve got to say that move up to the 60% level actually, actually forced us to bring people back in some cases because we had just decided to react and get down and hunker down as quick as we can and ask questions later. It may be that a little bit out of a thawing, but that's where we saw most of the pickup, that moved us up a bit those market that is literally shutdown moving up a little bit and getting some information from our smaller junior or small mining companies that they actually were getting some interest from private investors with the Gold prices staying higher, but a word of caution if you look at our mix of business, in the last boom going back to 96, 97 if you look at the bottom in 2002, if you look at this last boom that ended in last year 2008, that mix of business do not change. So when I look at current situation we’re in I expect overtime that half the drilling would be Gold and half the drilling would be base metals even though one would intuitively think that the Gold prices are holding up a whole lot better than base metals, and on that base issue would be right, but just a word of historical caution there.

Debra Coy – Janney Montgomery Scott, LLC

So, the point being that you may or may not hold onto the 60% going forward?

Unidentified Company Representative

Yeah. My view is it will settle down where it is. I think if you look at our earnings in the mineral exploration wholly owned businesses we have we’d be lucky to make money at the levels we are at now. And Latin American affiliates would hold up better, but if I just had to make a cut right now, I’d cut the earnings in half and assume the wholly owned business will bounce around at the bottom and at that level its tough to make money. So if it was me quite [ph] since the numbers that would be marked, grow something on mineral wall up on the wall right now is that fair, and if it’s that’s brighten then obviously we’ll again see that communicated accordingly but starting out that would be remark – cuts of change.

Debra Coy – Janney Montgomery Scott, LLC

So, that you – so that you kind of get down at the bottom you're not actually losing money and then actually not making money but you’re still getting some cash flow

Debra Coy – Janney Montgomery Scott, LLC

Sort of trying to break even is that – with that.

Andrew Schmitt

Yeah I would say wholly owned we try to break even in Latin America and currently its trying to hang on to half what they had and, our share being a half what you say in the equity earnings that’s a way I had model its starting to go out if I see changes in the resource sector then I might modify that accordingly as you get it by changes I mean, prices recovering stimulus starting the work, we get away from the some of the more difficult headlines we keep dealing with that we, were the general level of optimism improves. Its gone to take a little bit of that I think as well but I will start from ground there were that’s were I would start, life pass a wholly owned earnings that had half of the Latin American affiliates from last year and pull it back and see were these markets how they recover. I guarantee there will be the operating mode there will be an.

Debra Coy – Janney Montgomery Scott, LLC

A meanwhile you would in that scenario you can still build cash throughout the year.

Andrew Schmitt

Yeah capital spending is obviously going to drop rather significantly from the levels that we operated at in fact even the cash that Jerry talked about on the balance sheet last night that was $80 million in cash is known about…

Jeffrey Reynolds

I think into grow.

Andrew Schmitt

But don’t include all the various bank accounts around the world of these operating divisions its just what basically Jerry had in the treasury so to speak or available to him so clearly that’s the combination of movements as quickly as we did on capital working capital coming down that got collated some of that will go out as we move into the first quarter, because we got a incentive comp bonuses we’re paid on the prior years performance, we had higher fully federal state everything moves up we’ve got income tax payments but there is no question that Meador was lined on capital pretty quick and everybody did a good job collecting their receivables. There weren’t any mess-ups there so that’s obviously have a big impact, it could be with the decline in revenue this year or decline in working capital you may pay a good chunk of the prudential payments that’s due to this year and Jerry $20 million you might pay that with the working capital development and as they continued to pick these receivables collections up as quick as they so yeah I don’t think cash will be the issue. I think growth will be and when it starts well.

Debra Coy – Janney Montgomery Scott, LLC

All right thanks guys that’s helpful.

Operator

And our next question in queue comes from the line of Jonathan Ellis of Merrill Lynch. Please go ahead.

Jonathan Ellis – Merrill Lynch

Thanks and good morning guys.

Andrew Schmitt

Hi Jonathan.

Jonathan Ellis – Merrill Lynch

Just on the Energy Division and to make sure I’m clear on this because of the reduced economic life of the wells that you know have to recognize that from a deprecation standpoint more than offset the decline in the valuation of the reserves?

Jerry Fanska

That’s right.

Andrew Schmitt

Okay. In words really the only basis we have deplete the properties going forward is now based on that $16.1 million in reserves versus lot of last at 50 now if billion excuse me as we go down go down the road and the prices improve than obviously that starts to reverse itself.

Jonathan Ellis – Merrill Lynch

Did it work as such that when prices go up again that you adjust the valuation or reserves such that you actually can recognize a gain on?.

Andrew Schmitt

I will go back now

Jonathan Ellis – Merrill Lynch

So, you told So you can't mark up the value. You can only mark them down

Andrew Schmitt

No just one way.

Jonathan Ellis – Merrill Lynch

Okay.

Andrew Schmitt

All right.

Jonathan Ellis – Merrill Lynch

Do you have a count handy in terms of number of wells as of the end of the quarter?

Unidentified Company Representative

Well, we didn’t say -- I probably can tell you the number. I’ll tell you the number of wells as of March 15.

Unidentified Company Representative

Okay, that’s enough.

Jonathan Ellis – Merrill Lynch

I've got the end of the year too. Producing wells is 573.

Unidentified Company Representative

573.

Jonathan Ellis – Merrill Lynch

Okay.

Unidentified Company Representative

And to I just to be clear at first for 2010 I think it’s currently stand, your are not planning to drill any additional wells, because obviously one-one strategy, if you just wanted to do the net production steady as to quicken the wells and because obviously it seems like costs or services company to come down but then just produce less gas prevail and we are going to same net production and total field?

Unidentified Company Representative

And the wells are beyond either as a decline occurring.

Jonathan Ellis – Merrill Lynch

So what wells we drill, we off spend that decline occur within the predictability we had on the property. So where will be the capital if you see all hit their lease commitments?

Unidentified Company Representative

Where the landowner says, I wanted to make that lease commitment. As supposed to our profit would be to extend that lease, paid the landowner some additional funds and say them to extend lease, because you don’t want burden up your reserves at the spot price. Though, but again if we have commitment we have to –we have to live up to them—we have to live and so we will think well on those properties, but it be more dictated by the required incurring trend to make sure that we have the forward sold gas. But not a molecule more in theory recognizing that’s much impossible to do with best we can.

Jonathan Ellis – Merrill Lynch

Sure. Do you have a rough sense of how many new well that would until to keep your net production steady?

Unidentified Company Representative

Think right now, we’ve got those well pressured up a little bit we can probably move some of that pressure and move up in to the $16 million cubic feet range on a gross basis so we have little bit of accretion there anyway so probably in the second half I am not sure exactly how much we will drop so we got that tell you but,

Jonathan Ellis – Merrill Lynch

Aren’t

Unidentified Company Representative

Yeah it wouldn’t be a lot of well,

Jonathan Ellis – Merrill Lynch

Okay

Unidentified Company Representative

We drilled 100 last year.

Jonathan Ellis – Merrill Lynch

Right

Unidentified Company Representative

You know would be, maybe 10% to 15% of that

Jonathan Ellis – Merrill Lynch

Okay.

Unidentified Company Representative

I think it’s always well performing and, assume they are going to continue to form where they have in the past…

Jonathan Ellis – Merrill Lynch

Okay that’s helpful. And just to be clear in terms of your lease agreements its from a contractual standpoint if this April ’10 comes around you haven’t been able to put any new hedges in place you are not allowed to simply stop production, right there is going to be a minimum amount of gas…

Unidentified Company Representative

Yeah it would normally as wells, and anyway Jonathan because you’ve got at these coalbed methane wells are very finicky.

Jonathan Ellis – Merrill Lynch

Okay

Unidentified Company Representative

So, you pullback or pulled up too much on the pressure stressed is back on the well you might that the well when you went open it might not be there. – They’ll going that so mother nature is going to dictate your hand as opposed to convictional production where we could might be more what we could easily if it was convictional natural gas just turn this pick it all. With some comfort then when you turn it back own those over pressure reservoirs will give the gas these coals are definitely different the sales are different too, so, you’ve got – you’ve got to be a lot more careful. Prudent with that so that productions going to come out whether we like to spot price or not in there we clearly effect our judgment relative to the pricing that we would take that we do in our cash cost and we do in our EBIT cost if you well historically what it is been and so we know what the investments been return down to so we factored all in, Jerry and I might not be so proud or quite to have the poker hand that we played last year, when we didn’t expect natural gas prices to go up precise they did. They got to remember July of 3 of last year, when we went to $11.30 on the spot for southern star. I think by August or September was a book 87 and our last stage was $10.40 was it okay.

Jonathan Ellis – Merrill Lynch

Yes.

Andrew Schmitt

It was up there. So, it was just be a little bit different estimate for us I am not sure we should have positive call and its my fault I should have a just doesn’t think of its so right now, we could have guide your growth on Southern Star out there before a year from now as we sit today and even the following year. My guess is it probably would have still but in the five plus range which wouldn’t be attractive does today with this much time to go but, it does sort of give you a little bit of a.

Jerry Fanska

It wasn’t in the 5.5 to 6 last time we check which is been a while but.

Andrew Schmitt

Yeah so the forward price is not could come down as quick when you look in out years and now or did they go up as quick on the spot when the prices ran up. So if there is more stability there often able to forward strip is five year strip but it tend to look at all at $78 oil that 5 year strips probably 750 gas if you are out five years from that. So we will more stability there then you think.

Jonathan Ellis – Merrill Lynch

Okay. Okay that’s helpful. On the mining business, you would mentioned that 10 to 20% price declines in the wholly owned business and you talked about contract revision in the last hand business, but should we assume that the price revisions in the Layne ten business are comparable to what you are seeing in the wholly owned business. I will take so the advantage of those business just have as when you look at the (inaudible) you got volume in that situation all those mines is very similar to which you see in the oil and gas business when you could hear a BP or a Shell – will talk about – talk about their production so if you still going to if your service all though you still we’ll have long session - got volume if you doing their in shell work in Northsea so it’s a little bit more or like that were they might see the price decline but their volume will decline to the extend that we have seen in wholly owned business and that historically is always been the case we expect that we plan that in the last downturn we had very lower renegotiation even of the contract and I think the reason was activity stair step down over five years as apposed to just – so we were able to further deal very lower with price volume – to down but their business held up a lot of better and we expect that this year dynamic – I think it’s a safe assumption to that range is probably true for them is well. I think our average wholly owned it was – one of the exact numbers 16% decline from peak to lets hold drop at this point. And just took us some leverage in pricing around the world I don’t have that specific number for our partners but I think it’s going to be reasonable.

Unidentified Company Representative

Yeah.

Unidentified Company Representative

Close.

Jonathan Ellis – Merrill Lynch

Okay that’s great and then just on the cost savings and you talked about the 50% headcount reduction I guess is there a level and kind of a which you don’t want to reduce further headcount because it concerns of – damage to kind of your positioning competitive positioning and then also any other real pocket of cost that you could focus on further protecting margins

Andrew Schmitt

Well, to answer the first question. I think we probably hit that level this certainly in February, where we really don’t want to do much more than that because we’re looking at the maintaining the businesses in the ore body which is ore body driven, so you don’t necessarily want to lose your presence where you were located. In the last crisis up to the in the Asian financial crisis we never left a market. Okay? We had a presence it was at low levels and they continue to weaken. I would say that we got there so quick there were sort of looking at where we are on the gold or copper or nickel sectors. And we thought we would like to maintain that presence. I’d said we intend to give up share if you have two to get stability and – and that is true. We did move in a hurry and that’s reason we’ve been add that people back when we got a little bit of goal the activity the recently we had really come down as a hurry over 800 employees out of the population of 1600 in a matter of two months, two and a half months. So, I think we’ve pretty much moved our operating level and but we are about there at that 40%, 45% utilization level also we will get a little breathing room I will move up from there only time we would change that operating level would probably be if we decided just a cost of remaining these ore bodies in the new parodyne we see in the economy today could make any sense. So we would be more of the mining cost the mine the ore bodies and they are relative liability we will drive that from this point. So we would like to thought hanging there were we are and hopefully that’s were we are I think day to day expenses for everything that we are dealing with. the labor cost, the commodities we bought the overall the diesel fuel, the overall capital cost we are not going to spend this much capital what we do will be reduce as of suppliers that reacted with competitive pricing the, so everything sort of ships down and hopefully after we deal with our price and volume that will at least maintain it and it won't take much impact, particularly if we start seeing competitors fall by the wayside in this downturn is so dramatic and without the banks the prop people up just about anywhere and we could see a series reduction at these levels of activity in lot of the smaller of mineral expiration companies would have had the opportunity to expanding growth given that the strong spending last couple of years so, that will also take that will be a equipment about that option that won’t have a lot of hours on it so that would probably further reduce the capital cost going forward. I mean depending on your point of view from the strategic standpoint we would be hard pressed to find a better opportunity let's say if we have a the next five years and years four and five in mineral expiration are not that many competitors to begin with of any stature. Major drilling and our sales have almost identical balance sheets so we are clearly in a best position to address that opportunity and, it, we just prepared well and it’s a good thing we did

Jonathan Ellis – Merrill Lynch

One just one final question from me I appreciate all the – all the color just on the water business you have given – given strength of your balance sheet I know that you had a pipeline of Tierdael acquisitions both on the contractor side but also some companies that offer with the more intellectual property that’s relates to equipment and filtration systems and I just wondering where – outstanding are you thinking that perhaps valuations will come down and so you, you may actually be – some of those transactions or just given the environment and they have been really walked from the – from the bargaining table right now

Unidentified Company Representative

I will give you the comment on I gave more we can see – when we looked at long-term and look that a five year and did that businesses my comment on the water it look bolt on strategy and the key part of our legacy strategy and is industrial negotiated work which mean that the premium owned that the R&D and more advance (trademark) we are going just as important because once we see this stimulus coming in a lot of driven on infrastructure related products so when you look out for four to five years you see that stimulus coming out and when we look at growth we look at growth moreover in the industrial and the power sector as that stimulus comes out – in the municipal sector so when you look at the treatment side that’s still a very important part of our strategy and we will underwrite that effort on the P&L as we spend more money on R&D when you look at the rentals bow tone strategy, to us it just gets very viable, a good way to stretch that footprint and it just got a lot less expensive which is important if we think the municipal sector, you know may weaken as they withdraw the stimulus since that's where a lot of its going in. So very interesting next five years when you look at it from a macro point of view. Okay?

Jonathan Ellis – Merrill Lynch

Okay. Great thanks guys.

Andrew Schmitt

Thank you.

Operator

And the last question in queue at this time comes from the line of Michael Roomberg, of Boenning & Scattergood. Please go ahead.

Michael Roomberg – Boenning & Scattergood

Hi guys, thanks for taking my call. Most of my questions have been answered. Just wanted to touch on one thing that came up I think last call, last questioner. In terms of the businesses you talked a lot about how you prioritize operational efficiency in terms of weathering what’s going on, but I am wondering if you could, go a little bit deeper on the mineral ex segment and give us a little bit better understanding of what happens when the business cycle turns over, how quickly can that business get ramped up given some of the steps that have been taken to reduce costs, as the economy regains footing?.

Andrew B. Schmitt

I will tell you the last downturn that ended in calendar year 2002, we saw a 7% increase in revenue in 2003 we saw a 56% increase in 2004. It almost killed us to take that ramp up in volume. We saw during that period of time there virtually was not a lot of small competitors and if you looked at the rate of growth for major drilling or bored longer in ourselves it was pretty dramatic. If we had any problems Michael it was probably reacting from such a low level. Okay and I am not sure how that reverse for the sale this time given the fact that it took five years of taking mining capacity down so when there was any increase in demand, everybody was short and we were short of people and equipment, too. So, and now that you get those types hockey stick types of effect and we have going to fit earlier than most simply because the smaller competition is gone, there is not a lot of equipment available the manufactures would not prepared to ramp up, production of drill bits drill pipe, rigs et cetera. So you get sort of exaggerated pop when that happens so, if you has move on, around to see I'd almost rather see a U than a V, because if I head straight down and flatten a little bit, okay then the leg up on the U is a better leg up than the V if you follow me.

Michael Roomberg – Boenning & Scattergood

Right Okay

Unidentified Company Representative

Anyway that would be my view and cost wise I don’t think we will hunkered down and what not our biggest probably be haven’t the ramp up, but is really when it difficult to say at this point we are making the assumption that, this is going to be a very, very tough first here and separate a lot of people from a competitor standpoint because that a last year and then the question is should that we stair step down in the second year or mining production come down so drastically compared to previous efforts that any little bit of stimulates or other related economic optimism reflects the sales in pretty big pickup in this level down on our EBITDA, one down one flat to up, or is it two down one flat two up, I don’t know?

Michael Roomberg – Boenning & Scattergood

All right.

Unidentified Company Representative

But I know the U is better than the V from the higher strong competitive position. Just because of the U makes it tougher on the competition longer.

Michael Roomberg – Boenning & Scattergood

Right.

Unidentified Company Representative

And there is no doubt about how V, we eventually wind up. So given the multiple business line as well as the balance sheet, we have a lot more flexibility than anybody coming into the downturn, including major just because of the multiple pieces of the business we have and they don’t. So,

Michael Roomberg – Boenning & Scattergood

All right.

Unidentified Company Representative

Okay. Well, thank you very much. I appreciate it.

Michael Roomberg – Boenning & Scattergood

Okay, Steve.

Operator

There are no further questions in queue at this time sir.

Andrew Schmitt

Okay. Thank you, every one. I appreciate all your time and sorry with such a difficult end of the year with the energy impairment test and sorry I can’t give you a brighter outlook on this first quarter. But I think, we all know that what we’re having to deal with is certainly quite – quite challenging for everybody. I would say in our particular case, we’re very fortunate, that we are better prepared and the same management team that fortunately or unfortunately went through the Asian financial, the last financial crisis and the last couple of recessions not that we are looking forward to, we know what’s ahead of us, so we’ll deal with it better the most, but strategically in positioning wise, which is important as everybody clearly has to become more of a long-term investor and no matter what segment sector stocks you look at. That‘s a good place to be. So, as difficult it is, we appreciate your support and we’ll do the best we can. Andrew Schmitt Thanks, Steve

Jerry Fanska

Thank you, everyone

Operator

You’re welcome sir. Ladies and gentlemen that does conclude our conference call for today, which will be available for replay from today at 1:00 pm central time until April 6 midnight on that day. You may the access the conference by dialing 1-800-475-6701 and entering the access code of 991558. If you happen to be dialing in from an international location, please use the number 320-365-3844 and enter the same access code of 991558 both those dialing numbers once again are 1-800-475-6701 for the domestic participants and for the international please dial 320-365-3844 and enter the same access code of 991558. Once again that does conclude our conference call and on behalf of today’s. We would like to thank you for your participation. And thank you for using AT&T. Have a wonderful day. You may now disconnect.

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Source: Layne Christensen Company, F4Q09 (Qtr End 01/31/2009) Earnings Call Transcript
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