Layne Christensen's CEO Discusses Q4 2011 Results - Earnings Call Transcript

| About: Layne Christensen (LAYN)

Layne Christensen (NASDAQ:LAYN)

Q4 2011 Earnings Call

April 05, 2011 11:00 am ET

Executives

Andrew Schmitt - Chief Executive Officer, President and Director

Jerry Fanska - Principal Financial Officer, Senior Vice President of Finance and Treasurer

Analysts

Ryan Connors - Janney Montgomery Scott LLC

John Rogers - D.A. Davidson & Co.

Dan Stolper

Operator

Good day, ladies and gentlemen, and welcome to the Layne Christensen Company's Fourth Quarter and Year End Earnings Conference Call. [Operator Instructions] I would now like to introduce your host for today's conference, Andrew Schmitt, President and CEO of Layne Christensen Company.

Andrew Schmitt

Thanks, Evan. Good morning, everyone. It's good to be here. I'm with Jerry Fanska, our Chief Financial Officer, and we thank you for joining us on our fourth quarter and year end fiscal conference call. Early today, we issued a press release outlining the results for the fourth quarter and fiscal year ended January 31, 2011.

Before we discuss the financial results, I'd like to remind the participants that the call may contain forward-looking statements that are subject to the Safe Harbor statements found in today's press release. Jerry will take you through the financial results, and I'll give you an overview of division operating performance for the quarter, how we see things going forward.

Okay, Jerry?

Jerry Fanska

Thank you, Andy. Good morning, everyone. Revenues in the fourth quarter increased 19.7% to $271.8 million from $227.2 million in the prior year. Water Infrastructure revenues increased 16.3% for the quarter to $211 million, reflecting increases from acquisitions, additional activity in sewer rehabilitation and from our specialty drilling projects.

Mineral Exploration revenues increased 59.2% to $51.6 million in the quarter, with increased activity being reported across all locations. Layne energy division revenues decreased for the quarter 54% to $5.4 million, primarily due to less gas volumes sold and substantially lower gas prices. Cost of revenues for the quarter were slightly lower as a percentage of revenues than last year resulting primarily from improved margins in Mineral Exploration and from our work in Afghanistan.

Selling, general and administrative expenses increased to $39.7 million in the quarter from $34.7 million in the prior year. The increase was primarily a result of higher incentive costs coming from additional profitability and added expenses from acquired businesses and system implementation costs.

Depreciation, depletion and amortization decreased to $14.4 million in the quarter compared to $14.8 million in the prior year as a result of decreased depletion in our energy division. Equity and earnings of affiliates in Latin America increased to $5.4 million in the quarter from $2.7 million in the prior year reflecting the stronger Mineral Exploration market.

Interest expense decreased to $214,000 for the quarter, primarily a result of scheduled debt reductions. The effective tax rate for the quarter was 32.6% compared to 60% last year. The effective rate is lower this quarter due to the impact of nondeductible expenses and the tax treatment of certain foreign operations.

As earnings go up, nondeductible expenses have less impact on the effective tax rate of the company. The fourth quarter net income was $0.45 per share in earnings compared to $0.12 last year.

For the year, revenues hit an all-time company record of $1.025 billion, up 18.4% from the prior year. Revenues were up 12.9% in Water Infrastructure, 69.2% in Mineral Exploration, but down 43.9% in Energy. Cost of revenues for the year was 76.8% of revenues compared to 76.3% last year, resulting primarily from pressure on margins and heavy civil construction and energy.

Operating expenses, including SG&A, depreciation, amortization and depletion were up about $10.4 million or 5.6% from the prior year mainly reflecting increased incentive cost as earnings went up, added SG&A from acquisitions, consulting cost related to systems implementation, offset by lower depletion in the energy division due to adjusted reserve rates. Equity in earnings of affiliates increased this year to $13.2 million compared to $8.2 million last year, reflecting increased demand again for exploration in Latin America.

For the year, the company earned $30 million or $1.53 per share compared to $1.4 million or $0.07 per share last year. At January 31, the company's balance sheet reflected total assets of $810.2 million, stockholders equity of $501.7 million. Excluding current maturities, there was no debt and cash and cash equivalents of $45 million. Net cash from operating activities for the quarter and the year were $29.5 million and $68.2 million, respectively.

Investing activities totaled $24.6 million for the quarter and $93.2 million for the year. These activities included $1.1 million and $2.9 million in the quarter and year, respectively, for unconventional gas activities and $33.5 million for the year on M&A activity, with the remainder spent on property, plant and equipment.

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

Andrew Schmitt

Thanks, Jerry. From an operating standpoint in the fourth quarter, we had some real fine performance turned in within the various business units. In the Water, Drilling and Treatment side division, EBIT was $2,795,000 this quarter versus a loss of $1,235,000 last year on a revenue increase of 4.8%.

Our Specialty Drilling category, which includes both the Afghanistan water supply project and the deep wastewater injection well at Florida were a key factor in improving growth profit in the quarter. It was up to 25% versus about 18% a year ago. And that had the big positive impact on earnings.

In addition, our Midwest and Northeast regions also contribute with higher results than a year ago. This regional-based Water Well Drilling Pump Repair business improvement was very encouraging to me. As you know, we haven't seen much positive activity in the U.S. municipal sector, cities, local towns, et cetera for quite a while now. These improvements were partially offset by Layne Water Treatment businesses as we continue to underwrite their efforts to expand our presence in ultrapure water, establish a new advanced arsenic treatment product and penetrate energy-related frac flowback and product water treatment opportunities in the various shale plays.

Our Medical Waste Treatment business, which is focused primarily on the dental industry continues to produce excellent results, was just not large enough to offset the rest of the technology development marketing cost in this treatment area.

In the Reynolds infrastructure side of the Water segment, we continue to be faced by our cured in place pipe, CIPP division, had revenue and earnings of 27% and 31% respectively, quarter-over-quarter.

In our Reynolds Heavy Civil business, quarterly revenue was up 10% from a year ago's quarter. But we're having a much tougher time on the profit side. And division of EBIT was down about 50% versus this fourth quarter a year ago.

We had some problems on a number of jobs, and we have such competitive margins today in this business that there is a little room for recovery when you get behind from a performance and execution standpoint.

The business, which has the most impact on the Water and Infrastructure segment results for the quarter was far and away, our GeoConstruction division. With the recent Bencor acquisition, revenue was up 74%, division EBIT was up 49% from the year-ago quarter. This favorable comparison was to a quarter in which we set an all-time quarterly record for GeoConstruction last year, as we finished up the Katrina work in New Orleans. And so, these results represent quite an achievement in beating that quarter. Adding to the results were our new joint venture in Brazil, Costa Fortuna and a positive earnings contribution from our Italian-based manufacturing operations, Tecniwell.

Turning to Mineral Exploration. They discontinued their toured recovery from the sharp collapse we saw in the calendar year 2009. As you can see from the quarterly and full year results in the press release, we're back to the prior peak in both revenue, and we're very close in the earnings side as well that we reached in calendar year 2008.

Our wholly-owned Minerals business revenue was up 59% versus a year-ago quarter and division EBIT up 214%. Our share of Latin American affiliate net income was up 84% in that same quarterly comparison. You know, if we were to add our wholly-owned Mineral Exploration business and you took rather than just our share of about 100% of the Latin American affiliate joint venture companies, that combined result would be a business of $530 million in revenue, about $59 million in EBIT and $86 million in EBITDA for the fiscal year 2011. That combination in the company would rank as the second largest Mineral Exploration company worldwide. When you look at Layne Christensen's weighted ownership of this combination, with 100% of what we run ourselves and about half of what are -- we own with our partners, it's about 70% weighted. And then clearly, it's not likely to reflect it in the market valuation in Layne due to the equity method of our reporting.

Finally, Layne Energy, well they can hardly shake off the effects of the economic downturn with natural gas prices now over 50% lower than in our fiscal 2010. Clearly, that was reflected in the quarterly results of revenue down 54% from a year ago and division EBIT down about 90%. And despite the tough pricing environment, the division quarterly EBITDA was still 39% of revenue, which exceeds all the other divisions in Layne Christensen. So the rest of the divisions are not quite ready, classify them as being in the poorhouse yet. Their total growth production, about 1,634 million cubic feet, was really essentially flat with a year ago, but proved reserves at year end totaled 18.5 Bcf versus 16.6 a year ago. This resulted from a slight improvement in the SEC average price calculation. The addition of some oil reserves that we have been doing a little drilling for oil and lowering even further the lease operating expense. So in effect, the -- increased about 7.8 million in PV10 calculation versus the prior year. Not a bad return, given the minimal amount of capital what we spent in Layne Energy this past year.

Looking forward on the, towards the new year, fiscal 2012, I see a couple of major hurdles. The first and most difficult will be trying to replace the Afghan water well drilling project. It will essentially be finished in the first quarter of this year, and we'll get a little bit of benefit from that, but it will create about almost $0.40 per share hole, if you will, hurdle that we've got to overcome and try to replace just to be at even with the year we finished.

The second hurdle is, continue that we see more continued weakening in our Reynolds, more infrastructure intensive businesses. The backlog in the fourth quarter for that group was down 4% from a year ago. Not a huge difference, but since late 2005, we've been a little bit spoiled since we purchased Reynolds. We've, however, experienced a decline from prior period reporting. There are a number of positive signs being reported though for improvement, municipal spending and the following of projects that have been on hold. So perhaps, this is just a yellow flag not a red one at this point.

But as I look at this first quarter, with February being such a lousy weather month and part of March was much better, I do see our Water and Infrastructure businesses being below the first quarter we had a year ago. On the other hand, some year-over-year potential earning improvements, certainly should be found in our GeoConstruction part of that Water Infrastructure segment. The base business appears pretty solid, and last year's acquisition of Bencor and joint venture of Costa Fortuna will be helpful. This year, certainly it was demonstrated pretty significantly. Without them, we wouldn't have produced these fourth quarter results you see.

We also look for improvement at our Layne Water Technology Group, that will be later in the year. This division possesses an impressive array of sophisticated treatment products, and this breaking even at some point would be a nice boost for fiscal '12 result.

Our Mineral Exploration business is on track for another good year. We and our Latin American affiliates will both have better prices working for us. If there is a caution note, potential holdback is personnel issues. I think you've heard that from competitors as well, the combination of poaching of trained personnel by smaller competitors that are now getting in the market and upstart and then the cost of training new people in order to add capacity -- those are typically the headwind when we reached this level of utilization in the industry. My view-- is just my view of the current Mineral Exploration spending that we're going to see this new year is probably going to be the peak. But any decline we see in calendar years, 2012 and '13 should be manageable, barring any major pullback in China, India, Brazil or the emerging and developed markets.

On the other hand, natural gas supplies appear clinical to us even with the improving U.S. demand, although we have seen, certainly improvements in pricing recently. But as a result, we're going to continue to work on adding oil to our production mix, and we'll likely do that using the drill bit as opposed to our pocketbook. The reason is the M&A market, to us, seems awfully overpriced on the oil side. If we were to make an acquisition, it might be natural gas properties. They are not a lot to look at, but they probably represent a much better opportunity longer-term than what we see in the oil side right now. But you know, as it stands, we have plenty of natural gas locations to drill in the Cherokee, if prices improve and we decide to do that.

So I think in summary, anytime the company can more than double the earnings from a prior year, it has to be a good year. In our case, we can throw in, find new water supplies for our military troops in Afghanistan and helping save the Chilean miners for good measure. So it was truly a year unlike any other for Layne and Christensen. Our founders, Mahlon Layne and Page and Elmore Boyles must be mighty proud. I know all our employees are.

So if you have any questions now, we'll try to answer them. Evan, you want to check and see if there are any questions?

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from John Rogers with D.A. Davidson.

John Rogers - D.A. Davidson & Co.

Andy and Jerry, I know you guys have typically been pretty conservative in your outlook, but I am curious, Andy, in your comment just relative to Minerals Exploration peaking in 2012. Is that just your sense of the market or I mean, are you really seeing something there?

Andrew Schmitt

No, it's just my sense. Right now, what we're seeing is out of rigs, out of people and prices going up. We're seeing a lot more competitions from small people. We're seeing even startups again, people coming back in. We see some pretty lofty valuations for companies in the mining side, and we see China raising rates, we see India raising rates. We don't see a big recovery in U.S. more metals-intensive industries. Gold seems to be at a price that's had about every disaster we can think of in a short period of time. So it's just that, John, just being general, sort of pulling back from a macro view and looking at budgets. We're probably reaching a peak, so it might roll over next couple of years a little bit. I don't necessarily see it collapsing unless we've got these unforeseen events like we had in late 2008. Typically, it takes some type of financial crisis, but it's just a gut feel. We've been in these businesses a long time. We do a good job at calling the bottom. We do a pretty good job at calling the top. So it's more just sort of taking all of that and thought of absorbing it all and say, it feels a little bit frothy to me. It's not like it was in the middle of 2008. And interesting enough, if you add our Latin American affiliates and Layne's wholly-owned businesses together and you compare them back to that 2008 year, we have actually together above the revenue number, we're about $6 million behind the profit. So there's still price to be had, and I think we both get that this year. And when your utilization starts to stall, the cost people start going up, keeping people becomes a problem and most of your improvements coming on price. You know that's another sign. It doesn't mean you can't step up again, but then you got to look out, say okay, where is this coming from? Is this dramatic turnaround in the U.S. and Western Europe? You really start to struggle a bit. Is emerging going to continue to emerge even more? There's going to be waiting on the economy where these oil prices are. There are also a pretty good barometer, sometimes of real economic slowdown. Hopefully that will be the case this time, they're awfully high. So it's just dialing those in and saying, we'll probably leg this out one more year and after that, we'll just sort of see where it goes. And we're adding rigs and retiring old ones, so we're not in a net increase, adding a lot of capacity. We thought we were halfway through this run. We'd be -- instead of on an add rig, we'd add two rigs, but we're not. So we had quite a bit of capital this past year, and we hadn't spent any of the year before we just literally stopped except for stuff that we had to take that had been all backlog. So it's probably just playing that cycle and trying to maximize, get as much as you can out of it without leaving yourself overextended.

John Rogers - D.A. Davidson & Co.

What about -- on the water side, when you mentioned the Water in Infrastructure, I mean, outside of Afghanistan would be down year-over-year. Reynolds backlog had come in a little bit, but then you also mentioned that GeoConstruction acquisitions and WaterTech, I mean the delta would swing positive there. So those factors, if you exclude Afghanistan, allow you to maintain income levels in the Water business next year?

Andrew Schmitt

Yes, they do. It would be those two events. It will be the GeoConstruction. We had said that Bencor would add $0.20 to $0.25 a share, the next 12 months. So we certainly got more than that in the quarter we just reported. So you can say that okay, Bencor will add about $0.20 a share. Unfortunately, that will offset part of the $0.40 we're going to have to make up for in Afghanistan and half of it. The Wildcat acquisition in CIPP will add about $0.04 or $0.05. So we've got about a $0.15 hurdle, if you will. And I would tell you $0.10 of that's probably going to be in the first quarter because we got such a slow start with a lousy weather. And it was lousier than last year, which wasn't great. So I'm looking at February results and I can see they're already several cents below February a year ago and March won't be as good and Afghanistan sort of disappears. So you can sort of just take in an educated guess and say, boy, we could be down in that Water and Infrastructure group about $0.10. That's assuming Bencor performs and the rest come in, in that particular group. So we're going to have to make that up with the Minerals side of the business. And Layne Energy won't be able to help as you think well geez, the comparison should not be as bad for Layne Energy. Well February and March of last year, we had the two highest hedges in place. They were priced about ordinarily about 10 30. So that was the one well way back in July of 2008. So if you look at Layne Energy, say no, they won't help you. Then you look at the infrastructure group and say, well the weather sure stopped that for just about everybody for a while. So my view is if you look at those all together, minerals can make up part of it, but they can't make up all of it. So I had to throw a number out there I'd say, if we were $0.34, $0.35 last year, then it'll be $0.07 to $0.10 below that this year. Now pick up in the second, third, fourth quarter, that's where we'll look for the pickup. Minerals will have higher pricing. GeoConstruction will be kicking in on new projects, they're headed back to New Orleans. The Water Technology Group had better start getting some return on their technology. We don't see a problem there, it's just penetration issue. And then we might see and then there's several people talk about improved spending in the municipal sector at a local level, which has really been where we've been hurt. And then I think Reynolds' execution, where it's a bad job, that's pretty rare. We haven't seen to many bad jobs and bad jobs go sour on us like we have this past year, that's a rarity. That hasn't happened with our group very often, particularly in the Heavy Civil area. So it's all of a mixed bag. But I think we start off down and then see if we can make it up and catch it in the second half.

Operator

[Operator Instructions] And our next question comes from Ryan Connors with Janney Montgomery.

Ryan Connors - Janney Montgomery Scott LLC

I had a question for you, Andy, on also on the Mineral Exploration business. It looks like to me that the margins there in the wholly-owned piece of the business, excluding the affiliates were somewhat below, at least, our expectation. Can you talk about the margin dynamics there on the wholly-owned side and whether or not that was the case? And then what drove that and what the outlook would be there?

Andrew Schmitt

I can. You're talking about in the quarter?

Ryan Connors - Janney Montgomery Scott LLC

Correct.

Andrew Schmitt

Yes, it's probably easier just to give you the numbers, if you bear with me a second. If you take the affiliate out of the EBITDA -- if you all let me use EBITDA with that because I'm going to make sure I get that right number out.

Ryan Connors - Janney Montgomery Scott LLC

That's fine.

Andrew Schmitt

You'd have $7,000,356 for the quarter on 51, what was it, 621?

Jerry Fanska

Yes 51, 621.

Andrew Schmitt

About 14%. They were down a little bit, but now remember, all of the legal expense associated with the FCPA is going -- being charged to mineral. And so we're still in that FCPA investigation. And as you know, you do such a thorough, thorough job, but it's just a massive effort. It's certainly disruptive, but it's also expensive. And so we're right in the thick of that. So that would be coming out of that number as well. And I think, Jerry, we had pretty high tax. We got a heck of tax bill too, didn't we?

Jerry Fanska

Their incentive is up to about $1.4 million just because of profitability in the prior year. They really blew away the business plan. So you probably got $3.5 million there in total.

Ryan Connors - Janney Montgomery Scott LLC

I guess what I'm driving towards is you're talking about this year potentially into next year being peak-like conditions for that business as we look back to the prior peak and try to gauge the earnings power of that wholly-owned business this time around relative to last. I mean is there any reason to believe that profitability dynamics, i.e. the margins, can't get back to the prior peak levels -- or I mean has anything changed? It sounds like...

Andrew Schmitt

They will...

Ryan Connors - Janney Montgomery Scott LLC

There's been too many rings added that maybe things are a little better from a supply and demand perspective this time around.

Andrew Schmitt

Yes, they will be at or better than the prior peak than like you say the negative to that will be the cost of getting through this investigation. And Jerry said the higher accruals on the incentive comp, I don't think that's a factor because they would have been higher back in the prior boom years too, Jerry. I mean the only thing I see additional expense is the taxes, what we got assessed with in West Africa that are higher than normal and then the FCPA cost that are going right against the division, which is where the center of the investigation is. So those two. Absent that, it should be better and our pricing is approaching right back where we were at the peak. And we have added a lot of equipment and retired some dated equipment, so efficiency will be there. And in the prior peak, we had problems with people, cost of people, training people. So all things being equal, it should be better. And our Latin American partners will be better. I can't tell you exactly, but at the peak, we were above the revenue, but we're lagging that combined profit, if you treated these companies as independent businesses added together, about $6 million between the two of them. We'll certainly get that this year, I would think.

Ryan Connors - Janney Montgomery Scott LLC

Just can you update us on the timing there for the FCPA case? I mean is that something that should run its course?

Andrew Schmitt

I wish I could, I hope we'll finish it this year.

Operator

[Operator Instructions] And next in the line, we have Dan Stolper with Wells Fargo.

Dan Stolper

Could you comment on what's going to the equipment you have in Afghanistan when that wraps up?

Andrew Schmitt

We're bringing it back, one of the rigs that rolled, we had suggested that the military just use it for target practice rather than bring it back to the States and try to repair it. But we've been told to bring it back so we'll do that along with the other rigs, which is in good condition. We have 4 million pounds of equivalent. I don't know how much got consumed, but we'll have to be shipping that up as well. So we've got two rigs and whatever wasn't consumed that we brought over there and then we'll repair the rig in the States and send the military the bill.

Dan Stolper

That's all contract at fixed price at this point?

Andrew Schmitt

The day rates are at this point all in standby, but the only people we have over there are the ones collecting equipment, boxing it all up and preparing to move it. They'll be paying standby charges on a day-rate basis until the equipment gets back to, I think, it was Denver Colorado wasn't it, Jerry? They'll be on the standby until we get the rig repaired that was rolled in.

Operator

[Operator Instructions] Sir, I'm showing no further questions in the queue.

Andrew Schmitt

Thanks, Evan. I appreciate everybody dialing in, and it's always nice to report a good quarter and a good year and a number of the tops, what the expectations are out there. And we've got a pretty high hurdle set for ourselves coming into this new year. We'd like to get back where we were at the peak, back in calendar year 2008. So we're about 2/3 back. So I mean, the real -- we've got about a third to go, trying to take a whack at it this year and maybe make it for next year. Take care, we appreciate it all. Thank you, Evan, as well.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may all disconnect. Everyone, have a great day.

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