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Layne Christensen Company (NASDAQ:LAYN)

F4Q 2014 Earnings Conference Call

May 1, 2014 11:00 AM ET

Executives

Devin Sullivan – Senior Vice President of The Equity Group

Rene J. Robichaud – President and Chief Executive Officer

James R. Easter – Senior Vice President & Chief Financial Officer

Analysts

Luke Folta – Jefferies LLC

Steven M. Fisher – UBS Securities LLC

John B. Rogers – D.A. Davidson & Co.

Jonathan P. Braatz – Kansas City Capital Associates

Operator

Good day, ladies and gentlemen, and welcome to the Layne Christensen Company’s Fourth Quarter and Fiscal Year 2014 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session; instructions will be given at that time. (Operator Instructions) As a reminder, this call is being recorded.

I would now like to hand the conference over to your host for today to Devin Sullivan Senior Vice President of The Equity Group. Sir, you may begin.

Devin Sullivan

Thank you Ben. Good morning, everyone, and thank you for joining us for Layne Christensen's fiscal 2014 fourth quarter and full year conference call. Our speakers for today will be Rene Robichaud, President and Chief Executive Officer of Layne Christensen; and Jim Easter, the company's Chief Financial Officer.

Before we get started, I would like to remind everyone that statements made during today's call may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act of 1934. Such statements may include, but are not limited to, statements of plans and objectives; statements of future economic performance; and statements of assumptions underlying such statements; and statements of management's intentions, hopes, beliefs, expectations or predictions of the future.

Forward-looking statements can often be identified by use of forward-looking terminology, such as should, intended, continue, believe, may, hope, anticipate, goal, forecast, plan, estimate and similar words or phrases. Such statements are based on current expectations and are subject to risks, uncertainties and assumptions, including, but not limited to, the outcome of the ongoing internal investigation into, among other things, the legality under the FCPA and local laws of certain payments to agents and other fourth parties interacting with government officials in certain countries in Africa relating to the payment of taxes; the importing of equipment; and the employment of expatriates, including any government enforcement action, which could arise out of the matters under review or that the matters under review may have resulted in a higher dollar amount of payments or may have a greater financial or business impact than management currently anticipates; prevailing prices for various commodities; unanticipated slowdowns in the company's major markets; the availability of credit; the risks and uncertainties normally incident to the construction industry; the impact of competition; the effectiveness of operational changes expected to increase efficiency and productivity; worldwide economic and political conditions and foreign currency fluctuations that may affect worldwide results of operations. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary materially and adversely from those anticipated, estimated or projected.

These forward-looking statements are made as of the date of this filing, and the Company assumes no obligation to update such forward-looking statements or to update the reasons why actual results could differ materially from those anticipated in such forward-looking statements.

With that said, I would now like to turn the call over to Rene Robichaud. Rene, please go ahead.

Rene J. Robichaud

Thanks, Devin, and good morning, everyone. Thank you, all, for joining us today. As we were prepared for this call, I took to look back at my remarks from last year’s fourth quarter call. With respect to the challenges we then faced and how we planned to address them and the outcome we’re targeting. To be certain, challenges were made. Some have persisted, as is the case with our mineral services division. Others are more recent and includes the worse demand weakness that Geoconstruction for most of fiscal year 2014.

And the impact of some of the most difficult winter weather we seen in decade, especially in the Midwest, Northeast, Gulf Coast and Mid-Atlantic regions. Projects and project awards that has been delayed or expected come online in the second quarter and as the year progresses.

From a broader perspective, we’re cautiously optimistic that municipal and commercial water infrastructure spending begin to recover during fiscal year 2015, and the outlook for fiscal 2016 and 2017 is very good. Despite of difficult fourth quarter and full year. I’m happy that we’ve made progress along a number of fronts and in doing have created a foundation upon which each of our division are expected to improve their financial performance in fiscal 2015.

I would like to start today’s call with a review of the items we discussed just 12 months ago along with an operating update and our decisions. First, we discussed clearing legacy contract and operating issues at Heavy Civil. And after a promising second and third quarter, our results of Heavy Civil in fourth quarter was disappointing as a combination of bad weather and the weight of unprofitable contracts combined to create a loss in the fourth quarter.

For the quarter however, our loss is narrowed by over $4 million. Over 70% of the loss stems from projects Heavy Civil adopted in the year 2012 from our now defunct water treatment division. Unfortunately, some of this clean ups will still into Q1. The rest of the loss stems from a year-end accounting adjustment.

Throughout the year, we managed the cost structure, worked through lower margin legacy backlogs and pursued higher margin negotiated work while moving away from the lower margin hard-bid municipal projects, while this shift to higher margin contracts may generate lower revenues these projects should enhance profitability beginning in the second quarter. Nearly one third of Heavy Civil’s fiscal year 2014 revenues was what we call reduced competition work the highest-ever percentage by volume at Heavy Civil.

We’re very focused on expanding this work to 50% of our overall work load. Heavy Civil is leading the discussion on nine one-lane opportunity valued at al most $200 million for projects with expected start date in the next 12 months. We expect result in the first quarter will be negatively impacted by the effect of the bad weather and substantial completion of those water treatment projects. We do however see improving results beginning the second quarter.

Also a year ago, we started talking about the adjusting to the global slow down affecting our mineral services division. A number of factors during the year impacted our results, including commodity price fluctuations, regulatory actions, the imposition of additional taxes on mining companies almost virtually throughout the world and labor issues.

For fiscal 2014 we’ll ask roughly $9.5 million despite our proactive cost containment initiatives in the phases of declining demand for our services. Included in this loss is $6.7 million accrual for FCPA issues, which we expect to, settle this year.

Rig utilization in the fourth quarter 34% and 42% for all of fiscal 2014. Again our definition of utilization is a rigorous one. A relatively low price of copper and gold has caused some clients especially in Africa to delay work and in Tanzania they were negatively affected by heavy rains. The longer-term fundamentals for mining remain positive especially for gold and industrial metals such as copper and iron ore, which account for the majority of Mineral Services revenues. When exploration expenditures resume, much of it will be in hard-to-reach complex geographies that require the experience and expertise offered by Lane's professionals.

With respect to One Layne, our Mineral Services divisions continued to pursue water management and Geoconstruction related projects for their mining clients. These are important initiatives even in this lower spending environment. We expect that fiscal 2015 will see continuing challenges at mineral services. We will continue to align our cost structure to market conditions and maximize rig utilization.

Nonetheless, we expect our wholly-owned and affiliated Mineral Services business will improve their profitability in fiscal year 2015. Relative to what we have just seen. Also a year ago we’ve talked about building our energy services division. Energy services revenue for fiscal 2014 was modest. Although, it did rise by about 8% over fiscal 2013.

Our losses before taxes and impairments also narrowed. Although the process to enter this market has taken longer than we anticipated, we enter fiscal 2015 with increased confident and are currently pursuing over $35 million versus worth of water management opportunities in the West Texas area.

We have branded our suite of closed loop water management solutions All Clear because we believe all water regardless of how it's categorized, is precious and must be managed in a way that delivers value, reduces cost and minimizes environmental impact. All Clear is ideal for the hydraulic fracturing market, and our initial focus involves sourcing and transfer in the water stressed Permian basin of West Texas.

Water treatment projects are scheduled to commence this year along with expansion into the Eagle Ford shale. We are also looking at possible expansion into Oklahoma and Louisiana. I would like to advise that after an extensive pilot program a major E&P company recommended lanes all clear system for recycling at its project in the Permian basin over several well-known competitors. This is an important vote of confidence in our new mobile treatment technology.

The reason given for why they are going to recycle was really quite simple. They have to start recycling water because there isn’t not expected to supply to meet their needs in West Texas. We now have 11 master service agreements with large E&P companies during fiscal 2014 and intent to sign anymore this year. We are targeting at $20 million annual revenue run rate beginning in the third or fourth quarter and it looks like we will have positive EBITDA for the first time ever in the second quarter.

We've talked about fostering our ongoing development of our one Layne operating paradigm a year ago. And this initiatives began two years ago has evolved and allowed us to offer full solutions to our mining, our oil and gas, or industrial and municipal class. We continue to pursue $1.1 billion worth of online projects with about $230 million of such projects having an expected start date in the next 12 months. We expect when 10% to 20% of such projects over time.

Generating approximately $20 million of asset sales in the next year was part of our plan; we continually review our asset portfolio to identify assets that are redundant or underutilized. In this regard we expect to realize roughly $20 million from the liquidation of such assets.

And before turning things over to Jim, I'll provide a brief overview of our remaining businesses. Water resources reported a small loss for the fourth quarter but operated profitably for the year. The loss for the quarter was due in large parts to municipal budget constraints and project delays. Mirroring efforts that any civil. Water resource is pursuing and winning project that generate higher-margin revenues.

In fiscal 2014, water resources revenue included $69 million of industrial projects and $90 million in repair and installation work, exceeding its respective goals of $50 million and $85 million.

Our well drilling business which has struggled in recent years was rejuvenated in California in response to severe drought conditions. This market has become quite strong recently and our rigs are booked well into the summer with about half about through the year. We haven't seen this sort of activity since the year 2008. There was very little activity in the injection well business in fiscal 2014, but this group one the only projected did a $7 million injection and monitoring well assignment for Broward County, Florida that commenced late in the first quarter of fiscal 2015.

Our outlook notwithstanding some temporary headwinds in the first quarter, our positive bidding opportunities lead us to believe that water resources is poised for a much better fiscal 2015, second only to our Inliner business. And speaking of Inliner it’s produced its seventh consecutive year of record profits, due in large part to an improved mix of the medium and large diameter work and outstanding execution across its geographies.

Inliner has begun selling its new environmentally friendly fiberglass product from its recently completed warehouse facility in Indiana. This is a widely used product throughout Europe and allows Inliner to offers clients another attractive CIPP product alternative. We expect this new facility to reach maximum operating capacity later this year. Our outlook we believe that Inliner is poised to have another record year in fiscal 2015.

For Geoconstruction, it produced the single largest turnaround in backlog among our divisions in fiscal 2014. While steadily narrowing it losses during the year. Geoconstruction returned to profitability in the fourth quarter, the first-quarter of operating profits since the third quarter of fiscal year 2013.

This combination has set the stage for a significant operating improvement in fiscal 2015, although I will caution that certain markets notably Brazil, remain soft and project delays can occur and shift revenues and associated profits to the right Q1 could likely be the softest quarter of the year for GA. Year-end backlog at Geoconstruction rose $118 million up nearly $77 million from the year-end fiscal 2013.

We won a contracts related to the construction sales force tower formerly made the Transbay Tower in San Francisco. Designed to be the tallest building West of Chicago. The San Francisco central subway station, two jobs related to a combined cycle power station at Punta del Tigre in Uruguay.

In the first quarter of 2015 Geoconstruction announced an additional $50 million of new projects. Involving a sewer tunnel project in Hawaii, a mass transit project in Seattle, and a Wastewater Treatment plant in Washington, D.C., I want to mention a very significant award with Geoconstruction shared in earlier this year.

To a $25 million subcontract our Geo team was involved in the largest civil works design-build project in U.S. Army core of engineer’s history. The $1.35 billion Inner Harbor Navigation Canal Surge Barrier was main the winner of the 2014 outstanding civil engineering achievement award.

At this years outstanding projects and leaders out held March 20 in Arlington, Virginia. The OCEA award, which recognizes a project that makes u significant contribution to both the civil engineering profession and society as the whole is the highest and most prestigious honor ASPE can be still on any infrastructure project.

At two miles long and 26 feet high, the state-of-the-art barriers design to defend against the effect of the future storm surge event in Southeast Louisiana vulnerable areas from late boring to the Gulf of Mexico. This was the first project was Geo utilized its multiple head jet grouting technology. Congratulations to our Geo team for a job very well done.

As you can see we continued to advance towards the goals we established as part of our five-year plan, it has not been easy, but when we work together and address the challenges we have more often then not and covered opportunities to improve our business, direct our focus and more sharply defined our future. This process is becoming grained in our daily business activity and we’re confident that it will continue to produce enhanced result in fiscal 2015 and beyond.

I'll now turn the call over to Jim Easter, who will review our fourth quarter results. Jim?

James R. Easter

Thanks, Rene, and thanks to each of you for participating in today's call. We filed our 10-K yesterday with the SEC.

We reported a net loss from continued operations for the fourth quarter of $14.3 million or $0.73 per share, compared to a net loss from continuing ops of $22.6 million or $0.16 per share in last year’s fourth quarter. Our net loss from continued operations in the fourth quarter of last year included non-cash, pre-tax impairment charges of $8.4 million.

Our revenues decline by $43.7 million or 19.2%, $184.4 million in the fourth quarter of fiscal 2014, from $228.1 million in the fourth quarter of fiscal 2013. We experienced lower revenue with each our divisions with the exception of and Inliner. Some of these declines were weather-related and should start to reverse as the year progresses. Others primarily related to Mineral Services on indicative of a longer-term trend, which we monitoring in the grids that we manage.

Cost of revenues in the fourth quarter decline to $153.2 million or 83.1% of revenue from $200.5 million or 87.9% of revenue for the same of period last year. The decrease in the cost as percentage revenue for fiscal 2014 fourth quarter as result of are shift in contract selection and bidding strategy.

SG&A expenses decreased to $27.9 million and $42.7 million in last year’s fourth quarter as a result of the completion of our move from Kansas City to the Woodlands. Depreciation and amortization declined from $15.4 million in the current fourth quarter, from $15.7 million in last year’s fourth quarter as a result of non-core asset sales.

Equity and earnings of affiliates declined to $1.1 million in the fourth quarter from $1.5 million in the same period last year, primarily due to the global mining slow down. Interest expense increased to $4 million for the fourth quarter of fiscal 2014, from $1.3 million in the first quarter of fiscal 2013. This increase was due to the inclusion of the amortization of the discount on the convertible notes issued in November. For Q4 2014, that’s figure was $800,000.

Long-term debt, less current maturities, at the end of the fourth quarter was $108.3 million, up slightly from $102.7 million in the third quarter. We recorded an income tax expense of $900,000 million in the fourth quarter of fiscal 2014, compared to an income tax benefit of $14.7 million for the same period last year. Our cash position at January 31, 2014 was $35 million, up from $29 million at the end of the third quarter fiscal 2014.

We had working capital of $121.3 million and equity of $289.5 million or $14.53 per share. Last year, we completed $125 million convertible notes offering including the full exercise of $15 million overallotment option. During Q1 of 2015, we signed a new five year $135 million senior secured asset-backed revolving credit facility P&V and wells this new facility lowers our borrowing costs and provides the flexibility and structure appropriate for the project oriented nature of our business. We no longer have ongoing maintenance covenants would have been difficult for us to manage given the lumpiness of our cash flows and project nature of our business.

These financings provide a stable capital base will allow us to purse opportunities both here and abroad. We are very pleased that this the last piece of our capital structure that now in place and the path we started on in the early fall is now at its end.

I'd like to turn the call back to Rene wrap up.

Rene J. Robichaud

Thanks, Jim. And thank all of you for joining us today. We remain confident and the outlook that one Layne solution strategy and I thank you for your continued interest in Layne.

With that, I'll turn the call over to Ben for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Luke Folta of Jefferies. Your line is open. Please go ahead.

Luke Folta – Jefferies LLC

Good morning, guys.

Rene J. Robichaud

Good morning Luke.

Luke Folta – Jefferies LLC

I guess the first question it seems like hearing your outlook there is a number of new things happening in terms of new opportunities for you most of that looks like it will start to translate into improved results in the second fiscal quarter in the 2015? Can you I guess talk about in terms of the projects that you expect will kind of drive that inflection and earnings, how much of that's in the bag at this point versus things you are expecting could be awarded between now and then?

Rene J. Robichaud

Well the Geoconstruction backlog is the most robust we've probably ever seen. And it happens very rapidly and we still have based outstanding on other projects and we expect to we got more than projects coming in so that the biggest single swing from fiscal 2014 to 2015 in terms of cash flow and earnings will be Geoconstruction and that’s booked.

Second water resources is surprisingly coming on pretty strong. And that's a driven by good healthy growth in [R&I] (ph) but remarkably growth in water sourcing in California. Also our Jim's pointing at injection well business which was dormant in fiscal 2014 we had one project to bid on, we wanted it I think it was beginning in the fourth quarter the people who lost it you know took the municipality to court and we finally got through that process and we will start off on a very important project I think we've already started up at the end of the first quarter.

Luke Folta – Jefferies LLC

Okay and then when we think about just the magnitude of obviously a lot of size set for our Geo, is there enough there to where we should think about positive operating profit number in totality as something that could be, excuse me probable for the second quarter?

Rene J. Robichaud

Geoconstruction should have positive income before taxes for the year, which is a huge swing from the negative $27 million we just booked, excuse me, I have allergies.

Luke Folta – Jefferies LLC

Okay, in terms like….

Rene J. Robichaud

Go ahead. It’s not going to be widely profitable, but from a widely unprofitable to a modest profit, I think that's a great one year swing.

Luke Folta – Jefferies LLC

Agreed, but I guess I was thinking in terms of further, is it enough to drive the company as a whole into a positive operating profit position you think in 2Q

Rene J. Robichaud

No, I do not.

Luke Folta – Jefferies LLC

Okay. Okay, and then I guess secondly with activity starting to pick up in some areas throughout your business, are you seeing any potential improvements in the pricing environment on some of these new bids.

Rene J. Robichaud

There is modest improvement on some of the new bids. Just we are intentionally you know walking away from opportunities that we believe will have a very low margin. just – we are going to shrink our business in the hard-bid municipal marketplace until it become healthier. We see the finances for municipalities improving a lot. Those finances that the outlooks improve because their pension obligations have been lower because their pension asset, performance has been so good. And also because taxes are coming in at a more robust weight and then had been budgeted a many municipalities. So what we hear, we feel is that people want to start digging away at the backlog of major water infrastructure project that had built up over many years

Luke Folta – Jefferies LLC

Okay, and I guess shifting over to metals and mining, you said you are looking for some improved results there year-over-year. I guess are you the asset sales you talked about are those predominantly in the metals and mining segment or is there any opportunity to just I guess continue to sort of downsized or controlled cost more in that business sequentially to where we can start to see a more meaningful step up?

James R. Easter

I wouldn’t say it’s unique to the mining group. We are looking at every asset that we have in the company if there really is not being utilized or if there's not a very high likelihood that is going to be utilized in the immediate future any like 90 days. We are starting to look at and say is this something we really need in our asset portfolio. So a lot of things are starting to get viewed pretty stringently and that gave us that $20 million target of things that we want to go ahead in Q4 to raise as just additional capital for the business in course of the fiscal year.

Luke Folta – Jefferies LLC

Okay, just last one, I turn it over on SG&A nice step down sequentially in 4Q, how should we think about that in that 2015. Thanks.

Rene J. Robichaud

Yes, sure the cost of our relocation from KCD to Houston it certainly something is now behind us all that's done this book it’s completed. We have had some increases and some system and things like that some upgrades that hit the income statement at the corporate level, but we expect to get that number push it down more into the low of mid-30s overtime.

Luke Folta – Jefferies LLC

Thanks a lot gentlemen.

Rene J. Robichaud

Thank you.

Operator

Thank you. Our next question comes from the line of (indiscernible). Your line is open. Please go ahead.

Unidentified Analyst

Good morning, guys.

Rene J. Robichaud

Hi, Jerry.

Unidentified Analyst

I want to start up on Geoconstruction and a little bit a follow up so I was under the impression at Geoconstruction is to had some operating margins I would say in the mid-teens and I think previously said these larger projects had lower margins just because of the size in the competitive nature of them. So I want to see what your – the margins are in your backlog now and then or maybe versus some of the projects that were awarded earlier this year and then I also want to talk about a little bit. Is that business going to be profitable in 1Q?

Rene J. Robichaud

Okay, well, we don’t give out margins on any given projects or even the portfolio. We give directions and we highlighted that winning so much of the business in the last six months. Required us to hit the new market prices and the new market prices are lower margins than we have historically enjoyed in the Geoconstruction business. Now the Geo business will be running flat out for most of this year and whenever it sees going forward, it will be in a position to either win higher margin for walk away from.

Unidentified Analyst

Okay. That’s helpful. All right, then shifting over to Heavy Civil, again along the same lines, I know you give direction, but as you move from this hard-bid Muni work to some of the negotiate to work. I mean, how do we look at these margin, how do they develop overtime, and to be quite honest you know the fourth quarter is surprising, I understand why there was there – I understand there was some projects from that lingering legacy projects, but on a go forward basis, how much of those lingering projects are still there, how do we progress in margins forward? What are your goals in that area, I mean historically there were higher some type of qualitative map if you would?

Rene J. Robichaud

Yes, well we – let me describe first of all that we used to have seven divisions. One of our divisions was the water treatment division. Three, four years ago getting into water treatment, everybody was excited about, so the big thing to do. It’s turned out to be a disaster for us. It just wasn't a good business. And in the year 2011, the year before we close that division, they got themselves involved into pretty significant size water treatment businesses.

Construction businesses that they were truly in over their head, and our Heavy Civil team, thankfully went into adopt those projects to change the management team, we folded the water treatment division, and we did not expect this nasty fourth quarter either, but it comes from bringing new team, new set of eyes and actually getting closer to the end of projects, when you actually see some of the things that you need to do, in order deliver on our promise for those water treatment facilities.

Some of that as I said is going to spill into the first quarter. Some of the problem in that division where because we just couldn’t work for much of January, February and March due to the weather being almost impossible. Now if I will take those project and take them out of the overall performance of the balance of what Heavy Civil has been getting into in calendar 2012 in calendar 2013, I can see the margins improving by 3% to 5% year-over-year. And that’s a big change. So, we could see Heavy Civil having profitable IBT again in the second quarter, third quarter and fourth quarter. That means all of their project has to go as we planned and that there is no major surprises and we don’t see any, but we do know that the first quarter of this year, Jerry is not likely to be good one.

Unidentified Analyst

Now, one is I mean, one of the legacy projects done on as far as you tell, is it we worked on this year or how much is left on those until we get to a point whereas new management is in there, these are all new management bid, new management eyes all that?

James R. Easter

Jerry, the term of our – is historically use as the legacy projects really are some of the advantage year 2010, 2011, jobs. And those jobs that we refer to as – that group of jobs we refer to as legacy, those are done. So we don’t want to imply in anyway that this is a continuation of those jobs that we’ve reported as being completed. These are a another set of jobs that came from this water treatment group that we believe was under control were being completed.

Unfortunately, when we got late at the year, we started having weather problems; we started to having some PLC issues. We got some new management team in there and looked at these jobs, we have fresh set of eyes, sometimes it just help to have new team come in. And we looked at these jobs a lot of harder then we are not as far along PLC wise as we though we were. So, these are not the legacy projects that we’ve referred to, this is unfortunately, a group that has only recently come under scrutiny. And we are looking and working very hard to get that under controlling get them completed into the finish line and deliver to the customers quickly as we possibly can.

Unidentified Analyst

Okay. I appreciate that. One final question on Inliner. Obviously, that division is doing extremely well, very good margins. For my understanding the business, a lot of those higher end margins were driven by the mix of our medium to large diameter. again as much as you can talk about it, how much of that mix stays positive in your in the next in your current backlog, is it still trending towards the medium and larger diameter work.

Rene J. Robichaud

Yes. We don’t see a change and in that mix, great bulk of the work is done in the United States of 8-inch in diameter…

Unidentified Analyst

Yes.

Rene J. Robichaud

And that’s good work and we like that work, but we love our work that’s bigger, this easier to do and we put it more product our installation teams are expert added we are write first time a very high proportion of the time and because of that, the inline our team has improve themselves to be the best in the business by far.

Unidentified Analyst

Okay. Got it. That’s all I have. I appreciate you have taken my questions.

Rene J. Robichaud

You bet. I am pleasure.

Operator

Thank you. (Operator Instructions) Our next question comes from the line of Steven M. Fisher of UBS. Your line is open. Please go ahead.

Steven M. Fisher – UBS Securities LLC

Hi. Good morning.

Rene J. Robichaud

Hi. Steven.

Steven M. Fisher – UBS Securities LLC

Just starting on the – the minerals business can you character – I mean, I know that the business been moderating obviously those capital disappointed your customers, but can you just characterize in the way you are doing work and getting new business, what kind of work is that maybe the profile of projects whether its be customers versus smaller customers some other regions where you most active.

Rene J. Robichaud

Yes. The small customers had no money and have that money for a year and so, the great bulk of our business well over 80% of our revenues comes from a large and intermediate mining companies it’s a mix of copper and gold, both copper and gold represents, roughly 75% of our revenues the outlook for both copper and gold is – is modest this year, we don’t expect to see that change this year.

So we expect everybody and including ourselves should have realistic expectations of what our mining plans are going to ask for this year which will much different than last year, but the different this year we feel is the last year we took a lot of our costs to downsizing and this year we won’t have to take those costs, we feel and we can pair or compare our outlook for our profitability in minerals and our Latin American affiliates that we should have superior financial performance then the last 12 month. Even at these low operating levels.

Steven M. Fisher – UBS Securities LLC

That’s – that’s helpful and I guess in that regard can you talk about maybe what level of utilization you thinking you could achieve in that business fiscal 2015 and how much your capacity has changed.

Rene J. Robichaud

Well we still have – haven’t destroyed a lot of rigs. We will sell the rates I mean we’ll destroy them before we sell them and create new competitors at the bottom, so our capacity hasn’t changed that. We still probably have in the areas of 190 rigs worldwide – a lot of them are stacked. I mean having an expectation of the utilization in the next 12 months in the 40% range, that's realistic this year.

Steven M. Fisher – UBS Securities LLC

Okay, and then I guess one last one on the minerals business; I mean do you have any visibility as to when you could actually see the bottoming quarter in that business?

Rene J. Robichaud

Even if we had booked new projects, if the client calls – at headquarters for many of our clients calls are local in the local operations let says we changed our minds, send everybody home, and that's what happens. We don't have a contract that is so strong that weeds were client over it. So, it’s just completely up to the headquarters of the world major mining companies as to whether or not they're going to spend more this year or not. And they've indicated that this is another year where they’re going to keep their expenditures modest.

Now, you look at a mining company and it has in ore body. And that ore body represents a 10-years worth of life at current production levels. And those, mining companies almost always tell their investors that their production is going up next year, not down, not sideways.

And so, as production goes up in the ore body same size the reserve life comes plummeting down. Well they're looking at two years back-to-back of that sort of change and at one point – some point in the future and this could be one year out, it could be two years out, all of that will be saying oh my gosh our reserve life for many of our mines its come down too low. We have to get back to work, and explore to make sure that we have the resources to keep our company growing.

Steven M. Fisher – UBS Securities LLC

Thanks, that’s perfect sense. I just one quick one on the Water business, how many loss projects, you have in backlog in the moment?

James R. Easter

Let me answer this way, we have a very large number of contracts and we look ahead it on a statistical basis. We have some small contracts that are in a loss position and offset by a whole lot others that are in a positive position, but I think what the question you are really asking is, are there a group of contracts that are big ugly out there? and answer to that is no. We have identified everything that we believe is a problem, we are addressing it, we are about this people and we feel that we have a good handle on what’s in our backlog. And it has been highly scrubbed in connection with this 10-K, and (indiscernible) that everything in our reserves are adequate for our current operating level.

Steven M. Fisher – UBS Securities LLC

Okay, thanks a lot guys.

James R. Easter

Thank you.

Operator

Thank you. Our next question comes from the line of John Rogers of Davidson. Your line is open. Please go ahead.

John B. Rogers – D.A. Davidson & Co.

Hi, good morning.

James R. Easter

Good morning, John.

John B. Rogers – D.A. Davidson & Co.

Couple of things, first of all, in terms of your interest costs this year, fiscal 2015 should be in that $16 million range that right?

James R. Easter

No, it is kind of confusing, what you saw in Q4 were some unique accounting, when you think about what we did, we canceled our JPMorgan credit facility, so what we had to do is was book everything that has been a crude in terms of the issuance cost, so that is the income statement. We also had the cost in connection with the convertible notes.

John B. Rogers – D.A. Davidson & Co.

Okay.

James R. Easter

That was in Q4. And then you had the new cost that came on relative to the ADL facility. So there were really three pieces of debt that kind of hit the income statement. And so yeah you look at the number, you go wow that’s a big number, but that’s really not what you are going to see going forward. As far as the accretion of the discount on the convertible notes, that’s about $800,000 per quarter, when the cash interest expense at 4.25, and then we will have our regular working capital interest expense as we use our ADL revolver going forward. So I admit, when you look at it, it does jump off page.

John B. Rogers – D.A. Davidson & Co.

Okay, all right. So that will come down and beginning in this quarter, backed down sort of that $2 million, probably on a last range in the quarter.

James R. Easter

That’s correct.

John B. Rogers – D.A. Davidson & Co.

Got it, okay. And then just so I’m clear on the project charges and reserves that you have taken in Heavy Civil and I guess a little bit of Geoconstruction. How much were those in the fourth quarter, it sort of true ups or margin adjustments on the projects.

Rene J. Robichaud

How much were those true ups on our call.

John B. Rogers – D.A. Davidson & Co.

Yes, I mean did you take reserves on any projects or I think there was a reversal out of income but...

Rene J. Robichaud

What – as we have a job loss reverse and that is calculated based on our historical loss history and then that is we’ll either add to or reserve out of the job loss reserve and that is how we historically calculate our reserves it’s a number that its been running around $5 million to $6 million but its on an overall portfolio basis.

John B. Rogers – D.A. Davidson & Co.

And I am sorry $5 million to $ 6 million per quarter.

Rene J. Robichaud

No, no in total fee…

John B. Rogers – D.A. Davidson & Co.

Okay.

Rene J. Robichaud

That’s what reserve is

John B. Rogers – D.A. Davidson & Co.

Yes.

Rene J. Robichaud

And then just statistically each quarter and just like when we go through and calculate vacation accruals intense.

John B. Rogers – D.A. Davidson & Co.

Sure.

Rene J. Robichaud

That’s when you look at it we go back we feel what we done statistically what our historically losses has been this is reviewed by the Lloyd and that’s the mechanism reviews and establishing our reserves.

John B. Rogers – D.A. Davidson & Co.

And where their significant adjustments to that in the fourth quarter.

Rene J. Robichaud

No not significant.

John B. Rogers – D.A. Davidson & Co.

Okay. So I guess have been – so looking into 2015 to complete some of these projects but they have been problematic is there any significant cash rate that will impact your cash flows this year.

Rene J. Robichaud

As we continue to incur cost to complete above our billings we’ll charge that to the job until we get flow through the income statement we don’t have we changing the number right now I forecasted loss we did we felt that we needed additional reserves we would book it. Right now we thinking we should be able to complete everything within our job loss accrual.

John B. Rogers – D.A. Davidson & Co.

Okay on a cash basis I guess what I was I will make sure

Rene J. Robichaud

There will be some cash expense involved in this, but right now honestly we could not review a number at this point because New York in the process again this job analyzed right now, and if we do feel that it’s going to be a material number than we would advise people.

John B. Rogers – D.A. Davidson & Co.

Okay. And given that we’re almost to the end of the quarter I mean your cash balance is now significantly different than year-end.

James R. Easter

That right now.

John B. Rogers – D.A. Davidson & Co.

Yes.

James R. Easter

Well, I mean our cash balance is – no I wouldn’t its changed materially.

John B. Rogers – D.A. Davidson & Co.

Okay. Great. Thank you very much. Appreciate the help.

James R. Easter

You bet.

Rene J. Robichaud

Thanks, John.

Operator

Thank you. Our next question comes from the line of Jon Braatz of Kansas City Capital. Your line is open. Please go ahead.

Jonathan P. Braatz – Kansas City Capital Associates

Good morning, Rene and Jim.

Rene J. Robichaud

Hey Jonathan.

Jonathan P. Braatz – Kansas City Capital Associates

In the fourth quarter it looked like your equity any mineral affiliates turn positive, like $1.5 million for the quarter, was there anything unusual in that and has it had something that we might be able to sustain on the positive side going forward?

James R. Easter

We sure hope so, it’s certainly down from where it’s been historically, just reflective of the overall decline in the minerals business globally, they’re struggling with the same issues that we’re in a wholly owned.

Rene J. Robichaud

I need to add that the things that are positive for our affiliates in Latin America are they’re sitting on the world’s premier deposits of copper and in many cases gold in Chile and Peru, and so the that we’re world’s largest mining company is are in Chile and they’ve contracted with our affiliates for the next several years and some of the larger mines that’s going to be there in (indiscernible) come to mine and those contracts truly do go for a long period of time, and so those contracts are something that almost non-other world’s other mineral exploration companies get to enjoy.

Jonathan P. Braatz – Kansas City Capital Associates

Right, right Okay. Rene also in the energy area of All Clear, you had mentioned that you won an award recently and is there anything, also that’s sort of eminent that you’ve been working with some other energy company that you may over the very near-term win some more business and gain a little bit more attraction.

Rene J. Robichaud

Well, there is a lot, so lot to say on this, and yet we want to make sure that we’re conservative before it happen, what we talked about was winning a pilot study for an oil and gas company, this oil and gas company, this oil and gas company has a market cap above $100 billion. Pretty sophisticated player and they invited in a handful of players to treat their produced water, which they have historically dumped into four very large injection wells. And they realized that this is not sustainable going forward, they need to start recycling their water.

We went into a head on competition, we were the newest bunch, remember our lab results from our water treatment system only came out in January. So, we were brought on at the last minute to compete for this. Our system eliminated 97% of the iron ore, 98% of the total suspended solids, 98% of the oils and grease and 100% of the bacteria and delivered a very clean brine back versus what looked like a key that our competition was get back. And that, won the day for the local operators. It still has to be awarded a headquarters…

Jonathan P. Braatz – Kansas City Capital Associates

Okay.

Rene J. Robichaud

Were told that’s got to happen. Well that’s our first foray into the critical water treatment part of water management solutions if you will. Our transfer business is now running flat out, that's just happened in the last two months. All of last year we had this beautiful 15 miles of flat-hose thermal polyurethane flat-hose all coiled up on wheels, they look pretty but the problem is they were all in our yard for a year.

We have lost a major job in January to a larger more established competitor and within weeks, that competitor was using the flat-hose like ours, it's a vague we are using a rubber hose. And the rubber hose failed. And they spilled just huge volumes of produced water all over the surface. And we were called immediately and said can you be here in a week, because we are firing these people.

And that’s what started our quick acceptance into water transfer. So, half of our hose is now working for this large independent and the other half because of this have all been put to use. And so now we are doubling our capacity in transfer in the coming month. And we expect that to continue to be busy and busy and busy, which is why we’re now starting to be pulled, not pushing our sales into the Eagle Ford, Louisiana and Oklahoma.

It doesn't rain but it pours, all of this is so new though we want to continue to prove it out, before we start talking about where we could go, but this is exactly what we had hoped to see, in the last six months and it’s finally just happening.

Jonathan P. Braatz – Kansas City Capital Associates

Rene, I know you've got a lot of investments in that area and so on. In more lets say a more mature lets say it $20 million, $25 million business, somewhere down the road hopefully. What kind of margins can you earn on that business?

Rene J. Robichaud

20% -- 2 5% operating income margin, once we become a certain start.

Jonathan P. Braatz – Kansas City Capital Associates

Right.

Rene J. Robichaud

We are still investing in this business from a fixed cost standpoint. You know people are coming to ask and we know what you are doing, we like what you are doing. We are working for the competition, we would like to work for you. while we can’t take that many people yet, but we've got some good quality people coming allowing us to actually start thinking about carefully expanding our business in new geographies.

Jonathan P. Braatz – Kansas City Capital Associates

Okay. All right. Rene, thank you very much.

Rene J. Robichaud

Thank you, John.

Operator

Thank you. And with no further question in queue. I would like to turn the conference back over to Mr. Robichaud for any closing remarks.

Rene J. Robichaud

We appreciate you all coming on and listening to our update for the fourth quarter and our outlook for fiscal 2015. We look forward to speaking with you about the first quarter in about six and half, seven weeks. Take care, everyone. Bye, bye.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program and you may all disconnect. Have a great rest of your day.

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