Layne Christensen's (LAYN) CEO, Michael Caliel on Q 2016 Results - Earnings Call Transcript

| About: Layne Christensen (LAYN)

Layne Christensen Company (NASDAQ:LAYN)

Q 2016 Earnings Conference Call

April 13, 2016 9:00 am ET

Executives

Michael Caliel - President, Chief Executive Officer

Michael Anderson - Senior Vice President, Chief Financial Officer

Jack Lascar - Dennard Lascar Associates

Analysts

William Bremer - Maxim Group

Jon Braatz - Kansas City Capital

John Rogers - DA Davidson

Gentry Klein - Cetus Capital

Operator

Good morning and welcome to Layne Christensen Company’s Fourth Quarter 2016 Earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star, zero on your telephone keypad. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Jack Lascar. Please go ahead, sir.

Jack Lascar

Thank you, Kevin, and good morning everyone. We appreciate you joining us for Layne Christensen’s fiscal year ’16 fourth quarter and financial operating results conference call. Our speakers today will be Mike Caliel, President and Chief Executive Officer, and Michael Anderson, Chief Financial Officer.

Before we get started, I would like to remind everyone that remarks or responses to questions concerning future expectations, events, objectives, strategies, trends or results constitute forward-looking statements. These statements are identified by such words as intend, believe, expect, anticipate, or other comparable terms. Like any statement about the future, these are subject to a number of factors which can cause actual results or events to differ materially from those which we anticipate due to a number of risks and uncertainties. The company does not intend to update these forward-looking statements and undertakes no obligation to update or revise these statements except to the extent required by law. For a summary of these risk factors and additional information, please refer to yesterday’s press release and the section in our Form 10-K entitled Risk Factors and Forward-Looking Statements, and other documents as filed with the Securities and Exchange Commission.

With that said, I would now like to turn the call over to Mike Caliel. Mike?

Michael Caliel

Great, thanks Jack, and good morning everyone. Thanks for joining us this morning. Today I’ll be focusing on three areas. First, I’ll begin by briefly summarizing our annual and quarterly performance, and then I’ll update you on the progress that we’ve made improving the business, and finally I’ll provide some color on our outlook and of course Michael will provide a more detailed review of our financial results.

Before I get started, let me reflect a bit on the work that the management team has been doing over the past year. Fiscal 2016 was a transformational one for Layne, and I believe that’s evidenced by the key decisions we’ve taken and the progress that we’ve made to better position the company for improved performance. As part of our efforts, we have launched a comprehensive business improvement initiative with a focus on identifying and implementing initiatives to reduce our cost structure, to enhance our efficiencies, and to strengthen our financial position all with a goal of improving our overall profitability. We’ve flattened the leadership structure and we recruited new key talent. We made significant strides in strengthening our balance sheet, reshaping the portfolio, focusing our strategy on our historical strengths and improving our financial performance, all of which are critical to our plan to improve profitability. You should expect to see some benefit from these improvement programs in our fiscal year ’17 results with the full impact in fiscal year ’18.

We made measurable progress during fiscal year 2016, and some of the key highlights include our water resources and Inliner divisions, where we continued to show strong top line growth and EBITDA improvement; in our heavy civil division, where the operating performance improved as we enhanced our risk management and bidding processes, and as a result our losses in this segment have steadily narrowed. During the year, we generated a $17 million operating profit improvement and nearly broke even on a cash flow basis. In the mineral services division, we reduced the cost structure by completing a strategic realignment to reshape operations, and notably we took action to exit our operations in Africa and Australia.

As part of our work to reshape our portfolio and concentrate in our core businesses, we sold the geoconstruction division last summer for approximately $48 million. Our Inliner division continued to benefit from the aging U.S. infrastructure, and the significant improvements in revenues for this division reflect an increase in work orders and the addition of new crews over the course of the year. Importantly, as part of our overall strategic realignment, we integrated our energy services division into our water resources division. Now, this did create some drag on that division’s revenues and margins, which Michael will discuss in more detail during his remarks, but going forward the combined operations allow us to simplify our business model, reduce our cost structure, and strengthen our overall water platform, and we continue to believe that we have significant opportunities to profitably provide water-related services to energy clients.

We also significantly enhanced our liquidity with a year-end cash balance of $66 million and no borrowings against our $100 million revolving credit facility. During the year, we strengthened our cash collections and our cash management disciplines across the entire organization, and we decreased our cash invested in working capital by $17 million during the year and improved our available liquidity position from $77 million a year ago to $132 million at year-end of the fiscal fourth quarter.

Most notably, we completed a $100 million secured second lien convertible notes offering in March. The offering provided us with a stable financial foundation to continue our ongoing strategic restructuring efforts and positioned us to fund long-term growth initiatives within our core segments.

With that, let’s take a look at our fourth quarter performance. We generated a year-over-year improvement of more than $9 million in achieving adjusted EBITDA of $3.6 million in Q4. That compared to negative $5.8 million in last year’s fourth quarter. Overall results for the quarter continue to be impacted by costs associated with the restructuring of our mineral services operations in Africa and Australia, where we incurred nearly $2.9 million in restructuring costs and we lost approximately $1.5 million on an operating basis. We expect these costs to decline going forward as we’ve now completed our remaining drilling work in Africa and Australia.

Now looking at the divisions in more detail, very simply, Inliner continues its strong performance and had a great quarter. We cautioned last quarter that Inliner may not be able to repeat last year’s outstanding fourth quarter, but they did so, growing by nearly 3% year-over-year in revenues. Inliner’s performance continues to benefit from opportunities to rehabilitate or replace the country’s aging infrastructure in addition to providing solutions to new and existing customer segments. Inliner’s backlog decreased to $114 million at January 31 compared to $123 million at October 31; however, given that our longer term renewable contracts are expected to provide meaningful work that is not reflected in our current backlog, the visibility for continued strong performance and growth is clear. We plan to continue to invest in additional crews this year and are also in the process of expanding our liner manufacturing capacity at our Indiana facility. That being said, the outlook for Inliner remains strong. It has the technology, the capacity and the market presence to meet the growing needs of the aging water infrastructure.

In water resources, revenues were essentially flat over the same period last year, although the overall number was influenced by a $6 million year-over-year decline in energy business. Excluding the energy sector, water resources revenue grew 12% year-over-year, driven primarily by projects in the western U.S. We had slightly reduced profitability during the quarter due to weaker performance in energy and our midwest region, but core profitability remains strong in water resources.

Now, California has mandated that counties have a water management plan in place by 2020, and we expect this market to be strong for the foreseeable future. California is clearly a growth driver of our water drilling operations, and we continue to benefit from the increasing need for water management services, especially in the agribusiness market. With the wet winter in northern California, we saw fewer new drilling jobs booked in recent months and a resulting decline in our backlog. However, we saw a similar trend last year and see this slowdown as more of a temporary timing issue than a shift in the fundamentals for water drilling. While additional surface water will help in the short term, it will take decades of increased rain and snow melt to replenish declining aquifer levels. Further, drought conditions in southern California continue to linger.

Also during the quarter, we continued to make progress in reshaping our heavy civil business. For the fourth consecutive quarter, we reduced our operating losses on a year-over-year basis. During the fourth quarter, heavy civil revenues declined by about 25% from last year’s fourth quarter but profitability improved substantially. As part of our heavy civil strategic shift, we continue to focus on improved project execution as we reshape our portfolio of contracted work towards more negotiated and alternative delivery projects. At the end of the fourth quarter, only 6% of our backlog in heavy civil was tied to our lingering problem projects.

Now with respect to our mineral segment, the mining industry remains challenged and not much has changed from the last quarter, although we are starting to see some slight improvement in commodity pricing. This has not yet translated into new business as we typically see about a six-month lag from commodity price improvement to a change in mining company behavior. Revenues in our mineral services business declined about 35% during the quarter compared to the same period last year. Pricing and competition continues to be tough; however, our activity in the U.S. has benefited from a change in product mix with the growth of our mine water management services. As I mentioned earlier, our ongoing restructuring efforts of our mining business in Africa and Australia resulted in the recognition of $2.9 million in pre-tax charges during the quarter primarily related to severance and asset write-downs.

The Africa wind-down is proceeding as planned, and excluding our African and Australian operations and the restructuring charges, earnings before depreciation and amortization expense for the minerals division would have been essentially breakeven for the quarter. We continue to aggressively manage costs and overhead, and we are actively targeting water management challenges in the mining operations where we see opportunities for growth in the face of continuing declining exploration activities.


Let me step back and say a few words about the full year. I believe by almost any measure we have made significant progress in reshaping the company, both financially and operationally. Our fiscal 2016 adjusted EBITDA improved by nearly $22 million. Both Inliner and water resources delivered top line growth, with water resources’ strong performance being somewhat masked by the weakness in the energy portion of the business. Heavy civil delivered a $17 million improvement in operating profit, driven by improving performance on alternative delivery projects and reduced costs, while mineral services continued to be negatively impacted by difficult market conditions. Today, we have the liquidity and the improved capital structure to pursue other operational and strategic objectives.

Now before I turn the call over to Michael, let me share our current view of fiscal year 2017. We expect water resource and Inliner to grow year-over-year in fiscal 2017; however, we do have more work to do to reduce the cost structure in water resources, which should improve its margin. We anticipate that the recent winter rains, which have increased water allocations in the State of California, may result in temporary deferral of some drilling projects, and needless to say the water crisis in the west in general, California in particular, is far from being resolved and we are extremely well positioned to continue to take advantage of that opportunity. Heavy civil is expected to generate positive EBITDA in fiscal 2017 and mineral services is expected to be cash flow breakeven or better during fiscal 2017.

On the mineral services side, we continue to work with our Latin American affiliate on best practices and on cost reductions in order to leverage our combined strengths to navigate this current market cycle. Although our strategic review isn’t fully complete, I can assure you that we’re actively engaged and making significant progress in driving this transformation. While we expect the strategic transformation and performance improvement will yield improved results for the company, I think we all appreciate that these initiatives take time. Still, we expect to see many of the improvements take hold in our upcoming fiscal year, recognizing that we have a lot of work to do. Overall, I’m encouraged with the progress that we’ve made so far.

So with that, let me turn the call over to Michael to cover the financial results in a bit more detail.

Michael Anderson

All right, thanks a lot, Mike, and thanks to everyone for joining us this morning. I’m sure that you’ve all noted that we filed our press release and our 10-K last night, and of course they’re available to you today for the call.

During our third quarter call when we last spoke with you, we highlighted that the fourth quarter is seasonally our slowest quarter of the year in terms of both revenues and earnings, and while we saw the results decline sequentially from Q3 to Q4 with the winter season, overall results were in line with our expectations in Q4. You’ll also note that beginning this quarter, we will calculate and focus on adjusted EBITDA as a performance metric for our investors. You can see the reconciliation of adjusted EBITDA at the end of our press release.

During the fourth quarter, adjusted EBITDA improved to $3.6 million compared to negative $5.8 million in last year’s fourth quarter, and of course this is a year-over-year improvement of a little bit more than $9 million. Consolidated revenues fell about 11% when compared to the fourth quarter a year ago with the decline stemming largely from our strategic redirection in heavy civil and the industry headwind effects in mineral services. Inliner posted 3% growth in revenues compared to a very strong fourth quarter a year ago, and the core water resources business also grew nicely. Mike pointed out that we added four new Inliner crews during the year to keep up with the market growth and also additional work at Inliner, and we expect this positive growth trend to continue.

Now, while overall results in revenue in our water resources division were basically flat, we saw a $6 million year-over-year revenue decline within the energy space, so if you look at the remaining portion of the core water resources business, it increased year-over-year by a very nice 12% growth rate.

You’ll note that we continue to make significant progress in our cost reduction efforts. Cost of revenues were about 14% lower than the fourth quarter last year. That resulted in gross profit margins improving during Q4 from 13% a year ago to nearly 17% in the current quarter, and much of the improvement relates to better heavy civil job margins.

Total SG&A expenses during the fourth quarter also declined, in fact over $6 million year-over-year, which was 20% lower than the same period last year. Within the total SG&A number, our unallocated corporate expenses declined by nearly $4.5 million, and that’s a decline of 36% on a year-over-year basis. That number moved down to $8 million for the unallocated corporate SG&A.

So we are clearly aggressively tackling the expense categories at Layne and we expect to continue to see lower expenses from reduced staffing and declining third party costs, which include things like consulting, auditing, and other items. We are clearly focused on streamlining our business and enhancing efficiencies, and as we look forward to fiscal ’17, we expect that our unallocated corporate SG&A number, where the Q4 number implies a $32 million run rate, we expect this number to be under $30 million during fiscal 2017.

Depreciation and amortization expense for the fourth quarter declined 20% compared to last year’s fourth quarter - the number was $7.8 million, and the continued disciplined focus on capital spending was the main driver of the lower expense. Interest expense in the fourth quarter was $4.7 million. I’ll note that similar to last quarter, we had about a $400,000 unusual item within interest, and while that interest number is higher than a year ago due to our convertible notes offering that we had last March, this adjusted amount, which I would say is $4.7 million less $400,000, or about $4.3 million, should be relatively static as we go forward. About $3.3 million of that $4.3 million is cash interest expense.

So you total all these up, and these cost savings translated to improvements in our bottom line, the net loss from continuing operations of $13.8 million this quarter compared to a net loss of $21 million a year ago. As we mentioned, the fiscal ’16 fourth quarter results were negatively impacted by about $3 million in restructuring charges, and that’s primarily related to exiting Australia during the quarter. With the exits of both Australia and Africa, the mineral services business is now focused exclusively on the Americas. We feel that we have managed our cost base aggressively and believe that we are well positioned for the eventual mining industry recovery.

Let me take a minute now to look a little bit more in depth at divisional performance. Inliner showed revenue growth over a very strong fourth quarter a year ago, and we’re pleased with the Inliner performance. Year-over-year, Inliner had strong 11% revenue growth and 7% operating profit growth. Water resources, especially in the non-energy business, continues to do very well. While the profits for the division were down year-over-year in the fourth quarter, the entirety of that variance was actually due to higher losses within energy; so if you take that out, again water resources had revenue increase on a year-over-year basis for Q4 of 12%, operating profit increase was 6%, and when you look at it on a full-year basis, again we had strong results in the non-energy portion of the business. So if you exclude energy, full-year revenues for water up 11%, operating profit up 9% over fiscal year ’15 results. Still means that--and by the way, we put a lot of this detailed information in the press release for you to read there about water and the energy impact.

And of course, related to the energy business, want to emphasize that we are in the process of completing further cost reduction efforts to get this business to at least breakeven, and while we expect to accomplish this further right-sizing in the short term, we still are optimistic about the longer term opportunities in energy-related water services. We just have to make sure our cost structure is correct now to kind of meet current conditions.

Shifting over to heavy civil, it narrowed its operating losses by nearly $5 million for the fourth quarter compared to the prior year, and narrowed by nearly $17 million for fiscal ’16 versus ’15. Of course, the strategic repositioning towards alternative delivery and more selective work is really the driver that’s paying off now. While backlog is down modestly, this is part of the overall strategy, and we believe the quality of our current backlog will lead to improved future profitability.

Lastly on the division front, mineral services continues facing a tough market. In fact, it’s tougher than it was a year ago, but we showed reduced losses during Q4 versus a year ago. When you add back both the restructuring costs and the losses from the geographies that we are now exiting - that’s Australia and Africa, mineral services, as Mike mentioned, was about breakeven EBITDA for the fourth quarter and it was positive for the full year. The backlog number was $346 million at the end of January. That compares to $386 million at the end of October, so about a $40 million decline primarily driven by reductions at heavy civil. We had about a $13 million backlog decline in water resources from October to January, but as Mike mentioned, this was a very similar number to the decline we saw last year during the same winter period. Overall when we look at water resources and Inliner especially on the backlog front, we think it’s strong and gives us good visibility as we look forward into fiscal ’17.

Just a couple of quick notes then on the full-year 2016 results and highlights. Again, we feel we saw significant improvements. Adjusted EBITDA was $20.4 million compared to negative $1.5 million in fiscal ’15. While consolidated revenues fell 5%, it again reflected weakness in mineral services and our changing strategy in heavy civil, the revenues in Inliner and water rose 11% and 5% respectively. Our cost of revenues declined. Gross margin improved from 15.2% in fiscal ’15 to 16.5% in fiscal ’16, and when you look at the cost side of the equation, again a similar story - total SG&A was 8% lower from a year ago, unallocated corporate SG&A expense declined by $12 million, down 24% from fiscal ’15. The reported net loss from continuing operations, that improved by about $10 million - it was a loss of $53 million for the current year compared to $62 million a year ago, but we had $22 million of impairment and restructuring charges in fiscal ’16. That compared to $3 million of those kind of charges that we had in fiscal ’15.

Before I give the call back to Mike, just wanted to again emphasize the improvements we’ve made to the balance sheet and to liquidity. We ended the year with a cash position of $66 million. That compares to $22 million at the end of last year. The debt balance at January 31, which on a funded basis consists only of our convertible debt, was $159 million, nothing drawn on the $100 million revolver, ended the year with $132 million of available liquidity compared to $77 million a year ago, and we made some progress on working capital. We pushed those core accounts down over the course of the year by $17 million on a year-over-year basis. So these improvements in liquidity, they certainly help create greater financial flexibility that will allow us to make selected growth capital investments.

Capex when you look back at fiscal ’16 was $26 million. The biggest portion of that was $12 million that we spent in water resources, primarily on new drilling and repair equipment, and we also spent about $9 million in Inliner that was largely for additional equipment for the four additional work crews.

We continue to be very focused on cash flow generation for the business. We intend to continue to focus on cost reductions, working capital management, and also prudent capital investment. When we look at capex for fiscal ’17, we expect to spend $15 million to $20 million of capital, with most of that being growth capital going into water resources and Inliner, where we believe we have continuing solid investment opportunities and good returns that can enhance growth and profitability going forward.

So in conclusion for my portion, over the past year we certainly believe that the management team has taken Layne on a good strategic path, keenly focused on overall profitability, operating cash flow, and improved financial position. We will be continuing our business improvement initiative which is aimed at further reducing our cost structure. We expect to grow cash flow and bottom line performance looking forward.

Tomorrow at our investor day, which I hope many of you will be able to attend, we’ll explain further about what some of these things mean and give you some more detail about the business and our outlook.

With that, I’ll turn it back over to Mike for his closing remarks.

Michael Caliel

All right, great. Thanks Michael. Let me just wrap up by saying that as we continue our transformation towards a water-focused managed services and solutions company, we are committed to reshape our portfolio of businesses. Our primary objective is to optimize our operating structure in a way that exploits our strength and delivers attractive returns for our shareholders.

As Michael noted, we are hosting an investor day tomorrow at the New York Palace Hotel, and we’ll provide you with a much closer look at Layne’s transformation, our go-forward strategy and our future make-up. I hope that you’ll be able to join us either in person of via the webcast. If you would like to, please call Jack Lascar. He heads our IR team at Dennard Lascar. His number is 713-703-1186 if you’d like to join.

Again, thank you for your participation on today’s call, and as always, thank you for your continuing interest in Layne. With that, I’ll turn the call back over to the operator for questions.

Question-and-Answer Session

Operator

[Operator instructions]

Our first question today is coming from William Bremer from Maxim Group. Please proceed with your question.

William Bremer

Good morning gentlemen.

Michael Caliel

Morning, Bill.

William Bremer

It has been a transformational year for sure. Valuation is based on the future, and we’re looking forward to seeing some nice progress. First question I had for you, based on the Inliner and the addition of the four crews, how much more capacity does that provide you guys in ’17? Is that going to be--is that ready to go at this point, or is this something that’s going to take a little more time to develop? That’s my first question.

Second question I have is on the mineral side. Given the restructuring there and the announcements today in Australia, what is the capacity there going forward?

Michael Caliel

The capacity in Australia specifically?

William Bremer

No, overall in the segment of mineral services.

Michael Caliel

Got you, okay. Let’s start with Inliner. The addition of the crews, four crews last year, on a full-year basis once those crews are fully up to speed and operating at what we consider to be normalized levels of productivity, you can use probably a rule of thumb of maybe $2 million to $3 million a year per crew.

William Bremer

Okay, great.

Michael Caliel

Then with respect to the mineral segment--

Michael Anderson

I think one way to look at that is if you just look at our utilization of our equipment, it’s probably about 35% utilized. You can also go back and you look at what this business did a few years ago at the peak. I mean, you’re talking about--I think the number was north of $300 million, or right around that neighborhood.

Michael Caliel

About 280.

Michael Anderson

Yeah, so clearly we have significant opportunity to ramp up as the market recovers. We are focused in terms of Australia and Africa, trying to monetize some of those assets, but from a book value perspective, I think both of those in total is probably about $7 million of book value of assets, including some real estate that we have in Australia. So that’s not a real significant part of kind of the remaining assets that we have in the mineral space.

William Bremer

Michael, if I look over mineral services now as I project out for ’17, can you provide some granularity of how I should be looking at that? I mean, I understand where the market is, but do you see ’17 being maybe down an additional 15% versus ’16?

Michael Anderson

You know, that’s a really hard question to answer, and as a result I’m not going to give you an answer. I will tell you that a year ago when Mike got here, I think everybody felt that we were kind of at the trough for minerals, and I think ’16 turned out to be a worse year than we had anticipated. I think generally we probably feel about the same here. We feel like we’re rocking along on the bottom of the trough. You’ve seen a little bit of glimmer of hope with regard to gold prices moving up a little bit, but I think I speak for our minerals management team, this is really hard to forecast where this market is going to go. When it does recover, it recovers pretty nicely; but trying to figure out exactly where that inflection point is, I think is really tough so I think as a result, I think it’s really hard for us to see where the revenue line is going to go.

We have mentioned that we’re going to be very effective at managing costs. We’re going to get this business to be breakeven or better as we go forward, and the team is very used to bringing down cost and turning this into a positive EBITDA business, even in a really, really depressed market.

William Bremer

Okay gentlemen, thank you. I’ll hop back in queue.

Operator

Thank you. As a reminder, if you’d like to be placed in the question queue, please press star, one on your telephone keypad. Once again, that’s star, one to be placed in the question queue. Our next question is coming from Jon Braatz from Kansas City Capital. Please proceed with your question.

Jon Braatz

Morning Michael and Michael.

Michael Caliel

Morning Jon.

Jon Braatz

Turning to the water resources business, you had mentioned that you had a little softness in California but similar to softness that you saw last year after the winter season. When do you know if the business returns? Does it return this spring or this summer? When would you get a fair indication that this was just a seasonal weakness and that more normalcy will return?

Michael Caliel

Yes, I think, Jon, that as we go through the next quarter, next couple of quarters as we approach kind of the peak harvest growing season in California, we’ll have a good sense for how that business is going to emerge. Again as I’ve pointed out, we think the long-term dynamics are not affected materially and that this was really both seasonal and the impact of some more normal weather conditions, but it’s going to take several years of these more normalized weather conditions to see any long-term changes in behavior. So I think as we go through the next couple of quarters, we’ll certainly have a good sense for how the situation is sorting out, out there.

Jon Braatz

Okay. Turning to min ex, are the operations in Australia and Africa shut down, such that we won’t see operating losses in 2017?

Michael Caliel

Yes, we’ve completed drilling activity in those areas, and those operating losses are by and large behind us.

Michael Anderson

I’ll mention we’ve just got a few kind of administrative clean-up items and some accounting and tax work that we’ve still got left to do in those places, but it should be pretty small.

Jon Braatz

Okay, and then the affiliate, the equity in affiliate operations, I think it was $1.5 million, a positive $1.5 million. We had been seeing some losses there. Was there anything unusual in that $1.5 million, or are they just doing extremely well managing their business?

Michael Caliel

I think they’ve got a great business in place down there. They have certainly navigated through these cycles in the past, and I think it’s reflective of just a solid leadership team. Remember, the other point is that they’re out of cycle with our seasonality as well, so they’re kind of moving through the core months for their business.

Michael Anderson

Yeah, the other thing I’d add on that, Jon, is that over the course of the past 12 months, they’ve been reducing their staff as well. They have severance costs that have been running through, and that obviously flows directly to our equity interest, and that’s why you’ve seen some losses. We don’t do any add-backs for anything like that for restructuring for them.

Jon Braatz

Right, okay. So looking forward, would you anticipate that to be a positive number for the full year?

Michael Anderson

Well, we try to avoid looking forward--

Jon Braatz

Okay.

Michael Anderson

[Indiscernible] strategy we all know.

Jon Braatz

I understand. All right, thanks.

Michael Caliel

You bet. Thank you, Jon.

Operator

Thank you. Our next question today is coming from John Rogers from DA Davidson. Please proceed with your question.

John Rogers

Hi, good morning.

Michael Caliel

Morning John.

John Rogers

Michael, you commented on the capex outlook of $15 million to $20 million. Is that sort of a base level sustaining rate of capital expenditure? Is that how you think about the business? And I guess, Mike, given your comments on outlook, does this get you to positive cash flow in ’17?

Michael Anderson

So the first part, when we look at our capex, and we’ve been doing a lot of work on that since I’ve arrived, we’ll talk more at our investor day about our capex profile, but somewhere in the $6 million to $8 million is what I think our maintenance capital level is on average, on an annual basis. So you look at our $15 million to $20 million, so we’re spending somewhere in the order of $10 million to almost $15 million of growth capital. That growth capital is coming from water resources and Inliner.

Your second question - it’s a great question. It’s one that we’re really, really focused on, and I think I will give you--I’m not going to give you the specific answer, but we are very mindful about generating positive cash flow in this business. We have limited our capex in the past. We’ve tried to put it in growth projects that are going to get us really good returns, and I think water and Inliner are just that, while also moderating it to stay within our cash flow generation capabilities. I hope that two years from now, $15 million to $20 million is not going to really be a question for us with regard to is that positive cash flow, because it will be; but when you look at ’17, I think it’s tough and we’re not going to opine right now whether that’s going to be positive, but we certainly should be pretty close.

John Rogers

Okay. Then just on the heavy civil projects, the business, you’ve shifted it over to more cost-plus work. As you look at your backlog there now, is that all or predominantly now all cost-plus work in there, and how far are we from just finishing off the problem projects?

Michael Caliel

Yeah, the alternative delivery work that we’re doing, John, I wouldn’t characterize it as cost-plus. It does have a much more favorable risk profile than kind of the hard bid work that made up a good portion of these problem projects that we’ve been wrestling with. I think we noted in the call that about 6% of our go-forward backlog, it’s about $8.5 million of problem projects that we’re continuing to work through, and again the team has made some very, very good progress in progressing through those projects.

So I think if you were to look at the backlog right now, about half of it is this alternative delivery work with a much better risk profile.

John Rogers

Okay. Is that predominantly wastewater work?

Michael Caliel

There is wastewater work in there, there is transmission line work in there, there is biogas work in there. There’s a good mix.

John Rogers

Okay. All right, thank you.

Operator

Thank you. As a reminder, if you’d like to be placed in the question queue, please press star, one at this time. Our next question is coming from Gentry Klein from Cetus Capital. Please proceed with your question.

Gentry Klein

Hi Mike and Michael. Good morning.

Michael Caliel

Good morning, Gentry.

Gentry Klein

I have a few questions. On water resources, can you talk a little bit about the business outside of California in terms of the trends you’re seeing in the rest of the U.S.?

Michael Caliel

Well, I think if you look at water resources, some of the trends that we see in California really extend to some of the rest of the water-challenged regions, which represent a good portion of our footprint across the country. So we continue to see good opportunities across the major regions that we operate. In fact, we were encouraged by the movement in our backlog in those regions, in the regions outside of California during the quarter, so we’re competing very effectively and we see very good opportunity for our services, both in terms of our sourcing and drilling services in water resources but also our repair and aftermarket services.

Gentry Klein

Right, and on that note - I’m glad you brought that up, what is generally the mix of aftermarket repair versus drilling in the business overall? Is it 50/50? What’s the mix there?

Michael Caliel

Yeah, the drilling and aftermarket are about equal, and the smaller portion relate to our water treatment technologies and water treatment services.

Gentry Klein

Okay. If I look at water resources, if I try to come up with EBITDA of water resources - I know you don’t break it out specifically, but if you look at water resources’ EBITDA excluding energy, I’m getting to about $27 million, $28 million for the year. Is that about right?

Michael Anderson

Yeah, it’s about right.

Gentry Klein

Okay. On the mineral side, in min ex, I know the K talks about the rigs at the affiliates of about 196. How many rigs do we have outside the affiliates related to min ex?

Michael Anderson

About 140.

Gentry Klein

Okay. Has there been any thought - and maybe we’ll get to it tomorrow - in terms of consolidating with the foreign affiliates, maybe leading to an eventual listing? It just seems on a per-rig basis, a lot of the publicly traded companies, majors of the world on a per-rig value would render this business having significant value above and beyond where I think the market is ascribing it.

Michael Caliel

Sure, great point. We continue to work very, very closely with our affiliate partners in Latin America. Our focus has been predominantly around how we navigate through this current cycle as cost effectively as we can collectively, and how we can leverage the combined strengths of these two operations. So I would just leave it at we have a very, very good relationship with the affiliates and I think these are very good business leaders who appreciate the combined capabilities that we have.

Gentry Klein

Got it, okay. That’s helpful. Thanks very much. That’s it for me.

Operator

Thank you. Our next question is a follow-up from Jon Braatz from Kansas City Capital. Please proceed with your question.

Jon Braatz

Michael, looking at the heavy civil piece of your business, once you are out of these problem contracts and you look at the business going forward, can that business earn its cost of capital? Can you earn a fair return on that, on those assets?

Michael Anderson

So the answer is yes, but it is a tough business. We’re not doing that right now. The other thing that I will mention with regard to that is that depending upon the data that you look at for us, you may or may not have the right perspective on the invested capital. I think we’ve got some data in--I know we have some data in the K about total assets. I think that number for heavy civil is in the ballpark of $80 million, but that’s total assets. That doesn’t include what we have in the working capital liabilities. So when you have that, basically as you’re kind of working with other people’s money on your working capital, kind of the net investment that we have in heavy civil is probably closer to $30 million or $35 million.

So when you look at it that way and what this business has historically done in the past in terms of revenues and profitability, the answer is yes, it can return its cost of capital.

Jon Braatz

Okay. Are those conditions attainable--those past conditions, when you look at it in the past, are those past conditions attainable in the current environment?

Michael Caliel

We think they are, Jon. The business has over time been a solid business. It’s operated well. It’s provided good returns, certainly in line with the sector that it operates within. We think it’s gone through a rough patch and the team is doing some good work in getting the business stabilized and putting in place a platform that we think will put it on a better path, so we do think so.

Jon Braatz

Okay. One other question - the energy services business, is there any opportunity with oil prices at these levels for you to see sort of a rebound and, let’s say, an improvement in the top line of that segment, or is the focus this year going to continue to be on right-sizing the business?

Michael Caliel

Well, the primary focus is on right-sizing the business right now, but we certainly are not going into a prevent defense with respect to our go-to-market strategy. We think that even with oil where it is, that there are significant opportunities in the upstream sector for water-related services. We want to make sure that we have a model in place that is a viable model and then we’ll scale that once we’re comfortable with that, but we’re not standing back and sort of disengaging from the market.

Jon Braatz

Okay. All right, thanks Michael.

Operator

Thank you. We have reached the end of our question and answer session. I’d like to turn the floor back over to management for any further or closing comments.

Michael Caliel

Great. We thank everyone for joining us today, and as always, we appreciate your support. We look forward to seeing many of you tomorrow. Thanks very much.

Operator

Thank you. That does conclude today’s teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!