Layne Christensen Company F4Q08 (Qtr End 01/31/08) Earnings Call Transcript

Apr. 8.08 | About: Layne Christensen (LAYN)

Layne Christensen Company (NASDAQ:LAYN)

F4Q08 Earnings Call

April 8, 2008 11:00 am ET

Executives

Andy Schmitt – President, CEO

Jerry Fanska – SVP Finance, Treasurer

Analysts

Richard Paget – Morgan Joseph & Co.

Steve [Brisani] – Sidoti & Co.

Ryan Connors – Boenning & Scattergood

John Rogers – D.A. Davidson & Co.

Jonathan Ellis – Merrill Lynch

Steven Fisher – UBS

John Hood – Blackmont Capital

Jeff Chavez – AmeriMex Water

Operator

Ladies and gentlemen, thank you for standing by and welcome to the fourth quarter and year end fiscal 2008 conference call. (Operator instructions). I would now like to turn he conference over to your host, Jerry Fanska, please go ahead.

Andy Schmitt

Good morning, this is Andy Schmitt. Jerry is with me, I’m President and Chief Executive Officer of Layne Christensen Company. Sorry about the delay, we had some technical difficulties on this line. But we’d like to welcome you to Layne Christensen’s fourth quarter and fiscal year end call. Earlier today we issued a press release outlining the results for the fiscal year and fourth quarter.

Before we discuss the financial results I’d like to remind the participants that this call may contain forward looking statements that are subject to the Safe Harbor statement found in today’s press release. Jerry will take you through the financial results and I will give you a brief overview of division operating performance and how we see things going forward. So, Jerry do you want to get started here?

Jerry Fanska

Thank you Andy. Good morning everyone. Revenues for the fourth quarter were up 15.8% to $223.6 million from $193.1 million in the prior year reflecting 16 consecutive quarters of favorable year over year comparisons. Water infrastructure revenues increased $19.7 million or 13.6% for the quarter to $164 million driven mainly by a full year’s impact from acquisitions that closed in fiscal 2007, an increase in sewer rehabilitation services and on the geo-construction side, several dam repair projects in the eastern US.

Mineral exploration revenues increased for the quarter $10.3 million or 27.6% to $47.6 million reflecting continued strength in worldwide exploration activity. Main energy revenues increased for the quarter $1.5 million or 15.8% to $10.7 million reflecting increased production from the company’s unconventional gas properties. Selling, general and administrative expenses increased to $30 million in the quarter, up $2.7 million from the prior year reflecting increases including increases from acquisitions and wage and benefit costs of $1.6 million and increased professional fees of $951,000 due to several strategic consulting projects that we have going.

As a percentage, SG&A was 13.3% of revenues compared to 14.1% last year. Depreciation, depletion and amortization increased to $11.6 million in the quarter, up $1.9 million from the prior year resulting from increased depletion of $509,000 in the energy division with the remainder coming primarily from higher levels of capital expenditures in the other divisions. Equity and earnings of affiliates increased $489,000 to $2 million in the quarter compared to $1.6 million last year reflecting increased mineral exploration activity in Latin America, again in response to continued high minerals pricing.

Interest expense decreased to $986,000 in the quarter compared to $2.6 million in the prior year as the company’s revolving debt was paid off with the proceeds of our stock offering in October of last year. Our net result for the quarter was $0.50 per share in earnings compared to $0.42 per share last year. For the year, revenues increased $145.5 million or 20.1% to $868.3 million reflecting increases in each division with water and infrastructure up 20%, mineral exploration up 19.9% and energy up 46.8%. Operating expenses including SG&A, depreciation and amortization and depletion were up $28 million or 20.7% from the prior year, mainly reflecting additional costs associated with the acquisitions, higher levels of capital expenditures resulting in higher depreciation, additional depletion in the energy division and incentive related expenses from overall improved results.

Equity earnings in affiliates increased this year to $8.1 million compared to $4.5 million last year, again reflecting strong exploration markets. For the year the company earned $37.3 million or $2.20 per share compared to $26.3 million or $1.68 per share last year. At January 31st, 2008, the company’s balance sheet reflected total assets of $697 million, stockholder’s equity of $423.4 million, long term debt of $46.7 million and cash and cash equivalents of $73.1 million. Net cash from operating activities for the quarter and the year were $34.3 million and $84.8 million respectively. Investing activities totaled $43.3 million for the quarter and $99.5 million for the year.

These activities included $8.2 million and $29.2 million in the quarter and year respectively and unconventional gas activities and $21.1 million and $24.5 million for the quarter and year in acquisition activity with the remainder spent on property, plant and equipment. The energy division reported proved reserves as of February 1st, 2008 of 50.3 BCF of natural gas and an estimated future net cash flows discounted at 10% before income taxes of $121 million. With that, I’ll turn it back over to Andy to talk about the operations.

Andy Schmitt

Thanks Jerry. From an operating standpoint it was a good year with all three business units moving the needle on revenue and division EBIT. Clearly the runaway winner in the earnings growth category was mineral exploration. Both our wholly owned business and our Latin American affiliates had outstanding years and continued to deliver impressive results in the fourth quarter.

In the prior quarter’s conference call Q&A, we discussed some operating issues in East Africa that compressed margins. We feel the majority of those problems are behind us now and our first quarter looks pretty strong as February division EBIT results were more than double last year’s February. As we got out of the gate quickly after the year end shutdown at the mines which turned out to be shorter than we expected. The other piece of our commodity exposure, Layne Energy had a good year as well.

Year over year revenue growth was up almost 50% which was to be expected as we entered fiscal 2008 against the backdrop of completing 153 wells in the prior year. Our pace of drilling slowed considerably during fiscal 2008 and the majority of this year’s 96 wells were not brought online until the latter third of the year. Some of you may recall our original plans had been to do our work early in the Cherokee Basin and then focus on our coring program in Chile. However, Mother Nature had different ideas. As most people in this part of the country know, it has been an extremely difficult year to get work down in Southern Kansas.

We experienced just about every unpleasant weather event over the course of the fiscal year and really are still looking for a break. Layne Energy’s cost of operating our Cherokee properties really was adversely affected. But still for the year division earnings were up 31.3% when you exclude expenses from our coring program in the Aruaco Basin in Chile which we eventually did get started. Recent spikes in prices for natural gas have helped to offset higher operating expenses and despite the weather, February’s results were better than the prior year, even when we include the Chilean associated expenses. The third largest leg on our business stool is our water infrastructure group. They also turned in a good year.

Revenues for both the Layne legacy and rentals businesses were at record levels for the year and also in the fourth quarter. When you look at rentals today, excluding any acquisition, they’ve added almost $70 million in organic revenue since we acquired them in late 2005. Layne legacy has also continued to experience double digit organic growth, up again approximately 10% year over year. And also the water infrastructure group total backlogs is today at $408 million which is at record levels.

Operating problems in the group have been really at minimal levels, execution of projects has gone fairly well and we look at the year about two-thirds of the group’s revenue this year came from the municipal sector. This particular area has got a lot of recent financial press concerning the slowing US economy, it’s the impact on future spending and difficulty in the municipal bond market. Historically both rentals and Layne will trail a recession and don’t typically suffer deep painful cycles.

As spending for water related projects given the pressing infrastructure needs can be hard to reduce or postpone. The longer term and bigger challenge I feel for us is the thinner margins in the water business on the municipal side and the need despite the revenue growth we’ve enjoyed to improve our incremental earnings. In summary we’re awfully proud of employees who have put together four years of improving quarterly earnings comparison. It’s a long time in our type of business. There is no doubt the multiple industry business model we have was a big factor in achieving that result and none of our businesses on a standalone basis would have done that.

And as we look ahead in fiscal 2009 the water infrastructure backlog as I said is very encouraging. And if we see any slowdown it should manifest itself most likely in the old Layne legacy business first. In fact one could logically have expected to see some deterioration already in our base water well drilling and pump backlog as that would be the area where we have worked on large housing developments through the years. But when you analyze our backlog and those segments, it’s sitting exactly where it was a year ago.

In fact it’s higher than it was in the prior five years, so sort of go figure. Mineral exploration is not likely to see much slowdown for drilling work this year and our focus with such a good level of activity has to be on execution to make sure we maximize this opportunity for as long as this current cycle lasts. Layne energy will eventually get a break on the weather and production should continue to steadily move up as we get wells online. We will also start a five year test program in the New Albany Shale in midsummer. We have about 47,000 acres approximately now.

And we’ll make a decision on the test wells in Chile as whether we move forward or not as we’re in the late stage on the core hole evaluation now. No matter how you cut it, it’s going to be a busy year for us and we’ll have to see if we can successfully manage our way through whatever this US economy brings us. So with that I think we’ll stop and try to address and answer any of the questions that you have. Cynthia you want to come in here so we can take these questions?

Question-and-Answer Session

Operator

Thank you sir. (Operator instructions). Our first question will come from the line of Richard Paget with Morgan Joseph, please go ahead.

Richard Paget – Morgan Joseph & Co.

Good morning everyone. I wondered if you could maybe expand on how we should think about the Min Ex segment going into next year. I mean is there a lot of room for improvement or is this kind of you know peak margins here with maybe some incremental growth? You know I realize last quarter you had some operational issues but I mean is this from now on kind of a 23-24% margin business?

Andy Schmitt

The run rate that you would have seen us at in the fourth quarter probably reflects pretty much current pricing wouldn’t you think?

Jerry Fanska

I think so, yeah.

Andy Schmitt

Jerry there’s going to be an odd contract here and there.

Jerry Fanska

Yeah.

Andy Schmitt

If you look at the sort of the run rate that they were at, we actually do have February’s numbers without a great degree of specificity but I have some of the operations piece. You know they were running at a rate in February, this is just our wholly owned business, revenue about 16.5 okay. That’s up from 11.4 in the prior year. So you know that’s a pretty good jump there. So some volume, some price.

You know if they can, that’s a pretty good month if they could continue that for the quarter you know you could sort of, if you could run that out for three months that would be a pretty good quarter. I think they’re going to be at a pretty good rate, they’ll bring whatever pricing they’ve got and we’ll see this year if we can avoid some of the problems we had in East Africa. We had a startup, we had some operational issues that we discussed in Tanzania that affected us, particularly in the third but probably more in the fourth quarter. We think we’ve dealt with those. So you may see some upside Richard on the execution side.

Richard Paget – Morgan Joseph & Co.

Okay so the benefits that you’ve been getting year over year with the contract mix and newer contracts rolling over at better pricing as well as maybe some geographic mix I think you talked about North America having some good margin profiles, I mean that jump in margins we’ve seen, so it’s all down to execution at this point?

Andy Schmitt

Yeah I think so. I mean I think we could maintain those levels of margins and improve on them if our execution is a little bit better. We don’t see a slowdown at this point, not this year as I’ve said.

Richard Paget – Morgan Joseph & Co.

And then on the water side, I mean you talked about how the backlog is still growing and you haven’t necessarily seen a slowdown yet but you mentioned margins. I mean what are you seeing with new contracts, I mean is it getting more competitive, do you think you’ll improve margins year over year or we might see a little bit of erosion there?

Andy Schmitt

Right now in terms of bidding related activity, it’s pretty flat to this point. If things get soft, you’ll see it in more aggressive bids. We’ll probably be a little late responding to that. So that will be, if there’s any weakness, it will probably manifest itself in that way. Prices will go down, we’ll be reluctant to respond is typically our case, we’ll test to make sure that there’s really been an overall deterioration in activity and not just one of those you know leads and lags or you know the rate, the hit rate that you have in terms of these bid jobs.

And at some point we’d have to respond if clearly it was a change in the market. It’s pretty much what we did, do you remember in the [Curitan] Place business, you know we just basically were reluctant to do anything there and then it would come patently clear that pricing had changed, dynamics had changed relative to competitive business and we sort of reluctantly worked our way in. But so we’ll tend to hold back. We don’t see that right now and there is, particularly on the rental side there’s quite a bit to bid on which you know projects run out, they’re pretty long, so that surprises me.

The Layne backlog turns so much faster that you can get caught a little bit short there. In other words, it’s not going to be but a few months business anyway so it’s harder to pick up those changes in that business, a little bit easier in the rentals business because you know the backlog just takes longer to execute. It always gives them a little bit more of a better view of the world than we do on the legacy side. But at this point, we’re not hearing or seeing competitive pricing and we seem to have, work seems to be, bid, in terms of number of bids, seems to be pretty much flowing as normal. It’s nothing we can pick out at this point to tell you.

Richard Paget – Morgan Joseph & Co.

Do you have a sense of the jobs that are coming to market right now? If financing was let’s say lined up this summer and now they’re coming to fruition so we might have some concern going forward? Or?

Andy Schmitt

I think most of what we’re bidding on, we pretty much assume given the award dates, you know by the time you get a bid we’re generally scrambling to get the bid in and you know so typically the financing is not a problem on the work that we see currently bid.

It would have to be a future event, you know and we could talk to you about it and say boy you know we’re just not seeing the number of bids because financing is so difficult to obtain. See we’re not seeing that yet and the jobs that we’re bidding, you know they’re financed, they’ve been planned for in some cases a long time. So you know it’s a, that’s sort of the best window we can give you. If there are problems further out there, we might not have a window where we can see that at this point, okay.

Richard Paget – Morgan Joseph & Co.

Okay, thanks, I’ll get back in queue.

Operator

Thank you and our next question will come from the line of Steve [Brisani] with Sidoti & Co., please go ahead.

Steve [Brisani] – Sidoti & Co.

Good morning. Just a couple questions on the energy side, can you give a sense of given the growth in the natural gas prices, are you hedging at higher levels here and do you have any idea, percentage of production and what level you’ll be hedged in 08?

Andy Schmitt

Yeah I think Jerry can take you through that Steve.

Jerry Fanska

Yes we have, we have been taking advantage of the price spikes when possible. You know our strategy is to hedge somewhere between 60-70% of our gas if we can get good hedges. I think as we sit today through say March of 09, we’ve got about 12 million a day hedged right around $7.93-$8.00 on MCF. And then we have another 7 million hedged for the next year after that around $7.75.

Steve [Brisani] – Sidoti & Co.

Okay. Given the spikes and hopefully some increased production, can you give a sense of what you’re looking at with the energy side, I mean how much increased production can you get at this point or are you mainly you know replacing production?

Andy Schmitt

We finished the year I believe Steve right at around 17 maybe gross. We’re running at 18.5 right now. We hedge with the idea that July 1st will be at a gross 20, okay. We have to anticipate a little bit in terms of looking out. At that point, we’ve only completed the first three months of this year and have hooked up about 21 wells and it was a struggle to get them online and we did as much work as we could from about October through the end of the year, weather and all to try to get what we did brought online.

So if you were to look at our stacked production, it pretty much moves up at the beginning of each year and runs the same pattern. This year we just finished classically different from that. You know there’s a big lag at the beginning of the year, we had a flood in July, we had 70 wells underwater and we just rolled into a continual struggle, delayed our coring program down in Chile which stretched everybody. So everybody did a good job responding but we need a little bit of a break on this weather.

It’s raining today in Tulsa, flooding down there. You look at that northern Oklahoma southern Kansas weather map for quite some time now, it’s been a real challenge. So it’s, we got done what we got done if we could dry out a little bit we’ll do as much as we can. But we’re still hedging with the idea we’d be at July 1st, 20 million gross which would have been up from 17 probably at year end.

Steve [Brisani] – Sidoti & Co.

Okay.

Andy Schmitt

So that’s sort of where we are.

Steve [Brisani] – Sidoti & Co.

Great, thanks guys.

Operator

Thank you our next question will come from the line of Ryan Connors with Boenning & Scattergood, please go ahead.

Ryan Connors – Boenning & Scattergood

Good morning, I had a couple questions with regard to the water business. First off you know you touched on the cured in place pipe business and the pricing issues there and so forth, I wondered if you could just update us on the status of that market right now, whether things have gotten better, worse, whether they’re the same and just what kind of, just your latest thinking there.

Andy Schmitt

If I look at the, and maybe this is a best comparison to look at it from a management point of view, if I look at the cured in place gross profit for the fourth quarter it was 14.5%. If I look at it a year ago in the fourth quarter, it’s 14.5%. Alright, if I look at the revenue for the fourth quarter it was $3.5 million, okay I mean excuse me, total margin, and I look at revenue for the quarter it was $24.1 and I look at it last year its $18. So you can see with those numbers we’re picking up volume but we’re not seeing any change in the gross profit which I think is primarily due to price because nothing jumps to mind in terms of problems on jobs or things like that will tell you that.

So I think the scenario is we see some growth in that business but it’s at the old margins or the old pricing and that’s not that unusual when you talk that, take that downward spiral in pricing when you go back and until that volume becomes sufficient enough to allow for some movement where everybody gets tight on capacity, it’s not unusual to go back and even pick up volume in a business.

I think we know infrastructure has volume behind it. And then all the sudden see your prices stuck where they were. It takes a while to move it, that’s one of the things why I say we’re very slow to react to any pricing changes and there’s a good reason for that, because it is dag-gum hard to get it back even when you get the volume, there’s not an immediate reaction from the market. So I think our fourth quarter to me is somewhat insightful there relative to how you look at you know [overlay], yeah the IPP pricing.

Ryan Connors – Boenning & Scattergood

Okay that’s.

Andy Schmitt

That volume continues up this year then we should see some improvement in that, provided that volume is spread throughout the industry and everybody gets a bite of the volume apple. You know you think crews would get busier, there’d be an opportunity to move it up, but it takes a while, it’s a, you pay a tough price when that happens to you.

Ryan Connors – Boenning & Scattergood

Great, that’s very helpful. And then secondarily just wanted to revisit, you know in the past you’ve mentioned that in the water business you’d like, you have a strategy to move toward industrial and energy type end markets and kind of you know I guess away from a little bit, some of the municipal markets. If you could just update us as to where you are in that process and what your thoughts are there, that would be helpful as well.

Andy Schmitt

Well that to us is the key to improving these margins. We don’t know that we can move the needle too much in the municipal sector, it’s been a very tough market to get a lot of price in for quite some time now and as I say, two-thirds of our business is there, so our strategy has been and part of that strategy you saw when we bought SolmeteX late last year is to move into our focus push it more towards treatment and that treatment opportunity both on the rentals side and the Layne legacy side you know push the industrial and power side of that equation.

The any increase in power related business will be good for us whether we have penetrated the treatment side to the extent we’d like to or not, it’s sort of a rising tide that lifts all boats. It did back in calendar 2001 you know 2000 when we had quite a bit of increased spending there. Hopefully that’s going to happen again, it appears it will. Probably more gas initially and then coal and that will give us our entre to push our way into those markets.

That’s the way we penetrated the municipal treatment business, SolmeteX is key to having products to penetrate that business and you’ll probably see again small acquisition where we’re picking up people with more of a hydrological PHD more sophisticated water modeling type of backgrounds as we continue to try to pick up some talent in that area we don’t have which is necessary. You’ve got to have the talent then we’ve got to have the products. I think we have the distribution, we have the relationships, not much different than we’ve penetrated the municipal water treatment market where the customers knew us, they just didn’t know that we were involved in these product lines and it took a while to get qualified.

So it’s a long term strategy, but that’s the key to moving these margins up is to shift that mix back and then you look out five years if we could have half of our business in the powered industrial sector, that’d be a huge improvement. Over a third of it now being not much power today, mostly ag and industrial. And not much on the treatment side in ag or industrial or power at all. So that’s a long term strategy the guys are working on it, we’re making good progress and but it’s a process, it’s a process.

Municipal side, clearly just tied to our ability to execute these projects better. The treatment business is a higher return on capital, it’s not as capital or as people intensive as our drilling and work over type businesses. So there will be a shift that improves the return on capital on the municipal side as well, don’t necessarily know it will move the margins but overall return on invested capital has been a challenge for us as well when you look at the metrics. So that basically in a nut shell is how we hope to achieve that.

Ryan Connors – Boenning & Scattergood

Okay, great, thanks for the time this morning gentlemen much appreciated.

Operator

Thank you, the next question will come from John Rogers with D.A. Davidson, please go ahead.

John Rogers – D.A. Davidson & Co.

Hi, good morning. A couple of things, first of all Jerry I’m not sure if you said this, what was your gas volume in the quarter? And what was the average price on that?

Andy Schmitt

Let’s see, you know I actually have it here. You know what John, I actually have it for, unfortunately I’ve got it for the year and it was for the year it was 8.42.

John Rogers – D.A. Davidson & Co.

8.42?

Andy Schmitt

Sorry about that.

John Rogers – D.A. Davidson & Co.

That’s okay. And then average price on that?

Andy Schmitt

The average was 8.42 for the year in terms of the price.

John Rogers – D.A. Davidson & Co.

Okay.

Andy Schmitt

That’s hedges, spot price, everything. And I know the spot today on Southern Star was 8.585.

John Rogers – D.A. Davidson & Co.

Okay, that helps.

Andy Schmitt

I’m sorry about that I normally have that but I don’t have that.

John Rogers – D.A. Davidson & Co.

I can back in, do you have price for the quarter?

Andy Schmitt

No that was the gas price.

John Rogers – D.A. Davidson & Co.

I’m sorry, that was the full year.

Andy Schmitt

Yeah that was the full year, I had that number in front of me and I’d have to go into advanced math to calculate the others, since I don’t have it here. The production gross was for the quarter was 1 million 620 in MCF. I just don’t have the price there, I’m sorry.

John Rogers – D.A. Davidson & Co.

Okay and then on the minerals drilling side, if you were to look at your capacity right now in terms of rigs or crews or however you measure it, how does it compare to where you were a year ago and what’s the plan for this year, are you going to add rigs, I mean can you find rigs to add?

Andy Schmitt

We can find rigs and we have added rigs. We’ve recently opened up a startup operation in Canada. But we’re looking for a place to move to in the Sudbury area and I think we’ve moved what Jerry three to four rigs or we have four rigs headed that way, I don’t know if they’ve all gotten there. One is equipment we transferred, three I believe are new rigs.

So yes, we’re adding rigs, we stayed out of Canada for a long time, forever, big market, we felt like we had a unique opportunity to move up there and the business was strong enough to support it, so there’s a startup in that area that nobody has ever seen or seen since the beginning, since I’ve been here, so it goes, but I don’t think we’ve ever been there in terms of really mineral exploration. We did some bulk sampling of diamonds for DeBeers years ago.

So but we have, we will add rigs, the question is do we drop off the low end of those rigs, stack some junk, it’s always been our strategy is let’s pickup capacity that way. And we’ll probably stay on that plain, we’ll stack the least productive rigs, add the new ones, crews are hard to train so I’d say just from adding crews and we should get a more efficient operation going forward. We’ll be back looking to buy companies when the mineral cycle heads down.

We’d rather buy whenever the cycle ends and I know there are a lot of people who think it’ll never end. So you know we might stay on this strategy for quite some time. We think that people that are narrowly focused like [Bored Longhair] and Major Drilling, you know since that’s really their primary business, they don’t run the multiple industry model like we do, they continue to buy companies. I think they recently [Bored Longhair] bought two.

Our view is those guys have to compete with the same customers at the same level or performance, safety, quality so you know when they pick up competitors, our view is it helps consolidate the industry. They’ll pick em up at the top and they’ll also pick em up at the bottom. We’d rather pick em up at the bottom. And our, you know as the cycle comes down. We’re doing the same thing in the general contracting area in the rentals business as [overlay] stretch the rentals footprint. It works a little bit better to give you a lower entry point.

And we’re not as concerned with the multiple businesses we have, we don’t get as concerned or impacted as adversely as people that are more narrowly focused. CIPP is a good example. You know it been a tough year in that market for some time and you know we can’t say that we haven’t felt it but clearly hadn’t kept the company from record earnings. So I think that makes a little bit more sense for us. We view the world a little bit differently if we were more narrowly focused, might give you a little bit more of a spike on the upside, give you more risk on the downside.

John Rogers – D.A. Davidson & Co.

But just back on the minerals for a second Andy, if you think about capacity and pricing as sort of the two components of revenue, I guess I’m trying to understand how much capacity growth do you expect this year?

Andy Schmitt

I would say that it would all come from efficiency. Although if you look at our growth this year let’s say as half priced and half efficiency coming from that, we’ll call it at a rig strategy. With the exception of Canada which is a new market to us, so we may have four rigs up there, startups you know typically don’t start making money so I don’t expect this one to struggle much, the market’s too strong, it’s a good time to do something like that.

John Rogers – D.A. Davidson & Co.

Okay and in terms of negotiating prices on your long term drilling contracts, are you pretty well through that process for calendar 2008 or?

Andy Schmitt

Yeah we’re through. Where we’re pulling in what you see we’ll try to give you how much is efficiency and how much is price next quarter, that would be a good question to ask next quarter and Jerry and I will try to break that out, sometime with the mix and all the activity it can be a little difficult but we’ll take a stab at it. Say here’s how much was price that carried over on new contracts and here’s how much is hopefully we’ll have some efficiency to talk about as well.

John Rogers – D.A. Davidson & Co.

Okay, great, thank you.

Operator

Our next question will come from Jonathan Ellis with Merrill Lynch, please go ahead.

Jonathan Ellis – Merrill Lynch

Thanks, good morning guys. Just wanted to talk a little bit first of all about the water business and specifically it seems like the mix of municipal revenues increased a little bit from last year if my numbers are correct here I think in fiscal 07 municipal customers accounted for about 58% of total water revenues and this year I think you said two-thirds, just trying to figure out why somewhat of a mix shift there, are you seeing less growth in other end markets or a little bit more incremental [overlay].

Andy Schmitt

No I think Jonathan it would be the fact that rentals are such a bigger part of the total water resource group because they have, you know we’ve had good growth in the legacy business, it’s all been organic. But when you look at the rentals business it’s really as I said since we’ve bought them added a lot of organic growth. But keep in mind too we picked up UIG on that cured in place and that’s municipal.

We picked up Collector Wells International, those big capacity collector wells tend to be more municipal at this point, they can be power as well, so we’ll say it’s 50/50 for and I don’t know that but I’m just guessing. But I mean it’s probably that mix shift as you seen in the inclusion of rentals that has a higher component I think of municipal probably than our legacy business.

Jonathan Ellis – Merrill Lynch

Okay great, that’s helpful. And do you have the, I don’t know if you have this at your fingertips or not but for both the legacy and the rentals business the revenue growth and EBIT growth year over year for the fourth quarter, I know you’ve given those numbers out in the past.

Andy Schmitt

For the fourth quarter?

Jonathan Ellis – Merrill Lynch

M’hm.

Andy Schmitt

I’m going to let Jerry do it before I misspeak.

Jerry Fanska

Yeah for the fourth quarter on the legacy side of the business it was $73.6 million in total revenue versus $68.8 last year. And for the rentals group it was basically $79.8 million and $67.9 the year before.

Jonathan Ellis – Merrill Lynch

Okay great. And do you have any numbers on EBIT?

Jerry Fanska

Yes. The total legacy business was down $5.1 million versus $5.7 last year and the rentals business was up in total $3 million versus $2.1 last year.

Jonathan Ellis – Merrill Lynch

Okay great and just on a regional basis, I know you talked last quarter about particularly around Chicago and also southern California being somewhat more challenging because of the roll off of some contracts and you did note that backlog was healthy in those areas but there was some other timing issue. Just wondering if you could talk regionally about the water business this quarter and specifically what you saw around Chicago and southern California.

Andy Schmitt

Sure, give you sort of a view of what I was explaining the last time. When you look at the Chicago area and this is outside of Chicago because they’d be surface water. You’re looking at revenue a quarter of about 5.1 last year it was 7.7. When you look at say strictly southern California it was 17.8 last year it was 17.2. So you know those type you can pick out the odd ones. Then you go down to the northeast region it’s 8.7 last year it was 5.8, so you know with all of the locations we have you know you get some balancing around.

Southeast was 14.4 last year it was 13.1. So you know you get sort of a mixed bag there and when you add it all up you know for the business that’s flat in southern California, here we are in our New Jersey area up you know almost double last year. So you know it’s a mixed bag in this water business and it moved around a lot. The business in Florida is flat in Lakeland, Pensacola is up you know from the 2.1 from 1.5.

And a lot of that’s well replacement because clearly you know there’s not a lot of development going on right now in the many parts of the Gulf Coast in the areas that are feeling a lot of stress. Louisiana is flat, Stuttgart Arkansas area, that’s Mississippi Ark Miss area is flat as a pancake, Baton Rouge, New Orleans is up. You know it just sort of moves all over the place. When you look at it, it’s hard to discern that 300 we said in my script comments, opening comments, it’s a tough one to sort of pull out, even when you get down into the segments, you know pump repair, water well drilling, equipment sales, oil and gas, construction, you know it gets harder to pull that out.

Jonathan Ellis – Merrill Lynch

Okay so I guess the net of it is is that on a regional basis it’s fairly mixed, there’s some areas that are doing better, other areas that are more challenging but obviously the aggregate is showing a still healthy trend.

Andy Schmitt

And that’s typically even in good times, Jonathan. You know you always get good regions having a good year, ones that are slower. You know we do more oil and gas work out of Denver and we do more uranium work out of Denver and if you look at Denver right now for the quarter, they were at 6.2, last year they were 6.0. We’ve seen some flattening in the oil patch, some of our deeper rigs will occasionally go out and drill a few uranium holes, we’ll go out and drill a few shallow gas or coal bed methane wells and if you ever see that activity, it’s typically going to be out of Denver because they’ve got big deep rigs.

We’ve seen that part of the business sort of cool off, the backlog cool off. As the oil patch in the US has slowed a bit, but on the other hand you know their water business, there’s enough to keep them flat. So it’s a mixed bag, that breadth gives us, you know that diversity, breadth all over the country gives us pretty good, our odds are better than most people that are more narrowly focused, that’s for sure, regionally.

Jonathan Ellis – Merrill Lynch

Okay, that’s helpful, thank you. And just on the backlog, curious is there any shift in the mix, are you seeing more of that backlog in the rentals part of the business versus legacy or is it pretty, proportionately is it pretty consistent with last quarter?

Andy Schmitt

I don’t know Jerry, have you got the break on Layne legacy and rentals somewhere?

Jerry Fanska

Basically the legacy business was flat year over year at the end of January but it’s $103 million. Rentals business is up from $244 to $286.

Andy Schmitt

I guess the answer is it was taking more shift in the rentals business.

Jerry Fanska

And we’re seeing a little more shift in the rentals end market.

Jonathan Ellis – Merrill Lynch

Okay, alright great. And then just finally on the water business, you know Andy in your experience when you looked at previous cycles which part of the water supply chain tends to lead, do you see the equipment companies impacted first by any slowdown in municipal spending or just general economic weakness, more so in the service, where would you say the initial pressure point usually is in the water supply chain when you see a economic slowdown?

Andy Schmitt

We’re not too big in the equipment side of the business but I would expect to see it there just in equipment sales. And I’d see it slower in the service side. I’d see it drilling first, then the repair and installation and work over business last. Treatment business for us you know we’ve picked up so much share it’s hard to recognize that I’ll give you an example, March a year ago, backlog in water treatment for Layne legacy was $32 million, today it’s $49 million.

So you know that continues to buffet overall backlog. When I look at segments by category, some of what you’d expect, construction was 6.6, its 2.4, environmental was 1, it’s doubled to 2, exploration, any type of work for the mining industry is flat. Oil and gas you know a little bit of what we do was million last year and was point 700,000 this year, that was the weakness I referred to. So I think it’s pretty much what you would expect. Equipment sales first, service next, drilling the first piece to experience it and then the repair and installation business.

Jonathan Ellis – Merrill Lynch

Okay, great, that’s helpful and then just very quickly I just have a couple of questions on the mining business, just to be clear what you mentioned earlier about contract revisions, are you referring to the contracts in Latin America, have all those for the most part been addressed at this point and revised with new terms at the end of the year?

Andy Schmitt

They have, what you’ll probably see in the fourth quarter mix may vary between country whether it’s in Chile, Peru or Argentina but or Mexico. It’s pretty much in place. I don’t think we have any contracts we’re working on at this point. Whether they have any rigs that are working on a non-contract basis, you know number of meters, number of feet that you know it’s up to the customer to push forward, we’d have more of that than our wholly owned business than typically they would.

So we have a little bit more flex if things get tight, they typically with bigger mines and just seemed that South America that’s more of the standard. I mean the big mines want longer contracts, they’ll agree to certain escalation factors and the volume is such it makes sense for you to do it. Our wholly owned business will always be more volatile, Latin American affiliates will be more predictable, steady, reliable. That’s the nature of the beast.

Jonathan Ellis – Merrill Lynch

Okay, great and then just on pricing, we’ve been hearing anecdotally that it may be getting a little bit harder to push through price increases on contracts, have you seen that at all on a scattered basis on the minerals?

Andy Schmitt

Yes we have. No question about it. I mean we’ve come a long way in the minerals business. There’s been a lot of flow through on price increasing and I’d say at this point in time when you’re dealing with the junior mining companies, it’s much easier to get price. When you’re dealing with the majors, many of them that are just absolutely have their lunch eating, eaten with their product being priced in US dollars, they are really, really difficult to accept anything other that looks like more standard inflationary and yeah we need the rigs but you know type of negotiation.

They are also looking which is sort of interesting, several of the very large ones are interested in national global [agreeing] where we come to you first for all of the rigs and what is that worth to you? And in my discussions with our division people I said look, I like that but I don’t like those termination for convenience clauses. I mean if you really want to offer something like that up, then tell me how many meters you’re going to drill and you’re going to pay be whether you drill them or not.

And so that’s tough to swallow, so when they say well we’re going to give you all of our work in a certain part in the country and we want to lock this up for a number of years and know we have the people, the equipment because we’re concerned about having that. We’re saying well fine, if you want to get off this annual negotiation and push things out longer, then I want the meters. I’m not going to be stuck because your drilling program comes down and now I’ve tied up 20 rigs in a certain part of the world with you and we don’t have the volume and I don’t want to go on standby at lower rates.

So you know and that’s sort of the push and shove, it’s the right thing for our major customers to do and it’s right for them to come to us and I presumably they’re coming to [Bored Longhair] and Major Drilling with the same approach as we’ve got to know we have this equipment. That’s good in the sense that they must feel that supply is going to be an issue on minerals down the road.

And that’s what I take away from that. So they know we’re going to want some guarantees on volume and I’m not going to be sitting there with 20 rigs we were supposed to be working and I’ve got 10 of them on standby or they come back and say well you know what guys we got word from the headquarters that we’re only going to do this, that and the other and now I’m scrambling trying to put those people and rigs to work which will negatively affect the market if I have to go out and price my rigs to get them put them somewhere. So we’re hitting that stage.

It’s a stage you’d expect for major service companies talking to major customers. It also gives you a view that many of these majors think this is a long term cycle, they want to make sure they have the equipment, people that can run them safely and perform and be environmentally conscious. So I basically just had that discussion over the last couple of weeks, I’ll leave for Africa on Saturday, East Africa and we’ll continue those discussions with some of those customers over there.

Jonathan Ellis – Merrill Lynch

Great, that’s very helpful and just the very last question from me on the gas side is, you mentioned the coring as being completed in Chile and you’re going to be putting in some test wells, can you just give a sense of the timing of that and then ultimately when you’re going to have a better sense of the mineral concentration there and the potential opportunity?

Andy Schmitt

Yeah we’re waiting on two more tests, some tests on the water that will characterize the water for us which with the porosity down there and all the fractures and faults becomes a real big issue as to whether you’ll be able to de-water that play in Chile because you know there’s lots of porosity. So you might open up the ocean when you open it up. And the other one is total absorption capability of these coals.

We’ve got readings on gas in place, we want to make sure we know the total capacity of the coals, the first coring program ever done in Chile so it gives us some indication of the overall capacity of the coals, gives us a little bit of read on how much gas we might have lost in our coring program, it also gives us some idea how much these coals are capable of holding, but with the fractures and faults, we don’t necessarily know that the gas wouldn’t have gone some other place.

So we’re really waiting for those two pieces of data. And at that point we’ll have enough to sit there and say do we geologically have a project we want to do the test wells on at the same time we’ve had people working for us down there looking at the cost. Because infrastructure, costs to drill the well, they’re deeper than Cherokee and more difficult to drill, completions will probably be somewhat similar but we’re having to perform all those services ourselves, so with that we’ll overlay the costs, run our financial models, probably be in a position to determine could you really economically make this play work and what kind of gas pricing will you need to make it work.

You know one thing too is the US dollars come down a long way since we first looked at Chile and so it’s amazing when you look at local expenses too, just how much they’ve moved up with I’ll call it the US dollar but is looking, it clearly come a long way even to get some of the Latin American currency, so it’s a dynamic we didn’t have before, we’ll have to factor in those models as well. So probably in the second quarter we’ll have a overall view of the financial models, might be late second quarter. We’ll also have a view on the test holes. You know if the projects worth taking to stage two which is the test wells.

Jonathan Ellis – Merrill Lynch

Great, thanks guys.

Operator

Thank you and our next question will come from the line of Steven Fisher with UBS, please go ahead.

Steven Fisher – UBS

Hi, on the Min Ex business, how do you expect the margin profile of that Canadian business to compare to your other geographic regions?

Andy Schmitt

I’d say pretty similarly. You know you’ve got basically the same competition up there. It’s been a very active market, Canada is one of the leading expenditures in the world, it might be number one as a standalone country in the world in terms of total mineral exploration which always surprises people. You think it’d get mature but it, amazing resiliency. You know we’ll probably elbow our way in between [Bored Longhair] and Major, but typically we’d try to do it with people in quality and service so we’re not one to necessarily lead with pricing.

So it’s just a question of elbowing our way in and market being large enough to absorb the equipment we’re putting up there. It’s taking a long time for us to get up there, but it’s always been sort of a missing link, we don’t have to be huge up there, but it’s sort of like Australia, you know it’s, we’re not the biggest but we’ve got a good presence and mainly look to work with the main customers up there like BHP, we’ll look to do the same thing in Canada. But at this point our entry point won’t be a way to reduce pricing for the, in Canada, it’s going to be pretty much where it is today. Where the market is, that’s where we’ll try to enter.

Steven Fisher – UBS

And is it a familiar commodity mix?

Andy Schmitt

I would say for us it probably would unless we moved up into the area where they do more of the nickel. Yeah, for us it would primarily probably go base metals. I don’t know that there would be a big shift and I don’t know that it would matter, you know we’ll, I don’t know exactly Jonathan but and our rigs don’t know what they’re drilling for, so it doesn’t matter too much to us as long as we can get them working.

Steven Fisher – UBS

Sure. And then on the rentals business it sounds like you said the backlog went from $244 to up $286, was that sequential?

Andy Schmitt

Yeah that was year over year.

Steven Fisher – UBS

That was year over year, okay. In terms of the sequential growth in backlog, I mean was there any big projects that kind of came in this quarter?

Jerry Fanska

I’d say it’s been pretty much a gradual build over the year. Nothing major comes to mind.

Andy Schmitt

We finished up the two big jobs in Atlanta, we had some concern that we could replace those, those were the two largest jobs they’d ever done. But you know just steady moved up. I thought we’d see some turn down, we probably did a bit but it’s just steadily worked its way back up. Nothing really big in there though.

Jerry Fanska

Nothing major comes to mind [overlay].

Andy Schmitt

We’ve got some bids out for a couple big jobs Steve but I don’t, they haven’t been awarded yet.

Steven Fisher – UBS

Okay.

Andy Schmitt

I know we have one out for a $55 million job and you know there’s one out for $40 some odd million but we don’t have any confirmation on award yet but, most of its just bid activities, been pretty steady.

Steven Fisher – UBS

And you mentioned no real concerns over the financing for the projects that have come in I guess on the rentals side, what is the source of funding for the new projects you’ve put in your backlog over the last quarter or so?

Andy Schmitt

I don’t know that I can say that specifically, my gut feelings is in the rentals business it’s mainly municipals so whatever sources those clients have used. I doubt they would vary much, whether they’ve gone out to the bond market, whether they’ve raised rates, you know I’m not sure I could really opine on that, Jerry I don’t know if you have a view. You know we get so used to these customers and this activity through the years that only when something like things jump up in the bond market that we hadn’t seen before does it sort of pique our interest, but probably something we should pay more attention to relative to understanding that funding.

You know it’s not really been an issue for us but it’s a good point. Probably an area we need to circle back and learn a little bit. We all talk about it, we send the guys articles in the paper, we tell them about MBIA and AMBAC and people that previously they’ve never heard of before and really no reason to or to totally understand that bond insurance market, but it’s a good question, we’re probably a little bit remised in that area for not focusing on it as well as we should. It’s a good education and a good point and we’ll have a better answer for you next quarter.

Steven Fisher – UBS

Okay, sounds fine and then just lastly a housekeeping. The unallocated corporate expense line item, it was about $4.5 million in the quarter, is that a reasonable run rate going forward or does it, what’s in there and [overlay].

Jerry Fanska

I guess probably reasonable.

Steven Fisher – UBS

What’s in that line item?

Jerry Fanska

It’s mainly the corporate office and all the support functions here. And the health and safety is in that line as well. So it’s pretty much the corporate overhead that we don’t allocate to the division.

Steven Fisher – UBS

Okay, it looked like it was down over $1 million sequentially, I didn’t know if it was going to bounce back up as the year goes on or if that’s kind of a good run rate to go with?

Jerry Fanska

I think it’s pretty consistent.

Steven Fisher – UBS

Okay, great, thanks a lot.

Operator

Thank you our next question will come from John Hood with Blackmont Capital, please go ahead.

John Hood – Blackmont Capital

Good afternoon gentlemen. Also I’d like to thank you for an extraordinary quarter, it’s quite remarkable and I agree with you, your divisions are balancing one against the other. I am a Canadian, welcome, I can promise you you’re going to have great success, we’re just drilling all over the place. And I think you’re going to find it easy to work with us. Bringing to that, what is your overall foreign exchange exposure?

Jerry Fanska

Not really that much. Obviously as you know most of our contracts in the mining business would be what we’d be most exposed to and those are all US dollar based. Our philosophy is to maintain US dollar banking accounts around the world so we don’t try to play the foreign currency at all.

John Hood – Blackmont Capital

So when you do a project in Chile you open a US bank and they pay you in US dollars?

Jerry Fanska

Most of the time in Chile would be probably through our Latin American affiliates and they manage that.

John Hood – Blackmont Capital

Okay. Are you looking to enter other countries at this point, it seems like you’ve got a nice little list here, Canada, Chile, South America, Africa, Australia.

Andy Schmitt

John really Canada was probably the biggest area that we stayed out of through the years and I think our view was you know I mean in the view of perfect hindsight, we probably should have been in Canada during the downturn. That’s where we should have entered. It saw a late stage, we had an opportunity vis-à-vis really some key employees that are well established in Canada that you know were interested in working with us. If we didn’t have the people that type of entry point and they’re all Canadians, we wouldn’t have done it.

John Hood – Blackmont Capital

The other advantage, just to touch on them and I only have a couple more questions is a lot of Canadian companies also have exposure around the world. They drill in Canada but they have you know operations in four or five other countries and that would give you some access to that possibly.

Andy Schmitt

Yes, no question about it, they’re big and you see a lot of the Canadian operations we see the management of like parts of Africa and Australia and South America are all Canadians. Canadians are a huge factor in industry, no doubt about it.

John Hood – Blackmont Capital

Just a little on government issues, are you looking at any legislative changes that make you nervous as far as your extraordinary political process in the US?

Andy Schmitt

No I don’t think so, I mean I think everybody was a little bit disappointed in the Bush budget that came out that didn’t provide more for water and infrastructure, actually cut back on government funds for that, I think the market was a little bit surprised by that, that along with the municipal funding issues that came up and just the general issues in the financial sector I think added a lot of stress to the discussion. You know our view is that budget’s going to play itself out over the course of, until October of next year or October of this year, so our view is you, you know you may have a different administration and a different view if some pressure could come off government expenditures we think more of it will move back to the infrastructure area.

The governments had to step far in the past the highway bill is a good example where they just have to step it with funding, our view is on infrastructure, you know and a lot of its centered in water and waste water, they’re just going to have to do something and make those funds available. And so to cut back I would say was the biggest thing, it wasn’t you know a legislative ruling, most of those and most regulations tend to be favorable to the water side of the business. That budget was one thing that sticks out in my head as being lacking.

John Hood – Blackmont Capital

Yeah, that’s logical since there is a true need there. The last question, have you checked your short position on the stock recently? I could do it myself but there’s always a bit of a delay.

Jerry Fanska

I’ve not.

Andy Schmitt

Not in the last few days for sure. I’m not sure I know what it is.

John Hood – Blackmont Capital

I think the last number I saw was 1.35 million shares. And if you’ve got a screen in front of you, you’re up $7.50 at 20% so if I were short I guess I’d be a little nervous.

Jerry Fanska

Yeah, we’ve not been a good stock to short for any extended period of time, certainly with the earnings we’ve had the last four years. If there was more it was probably all of the concern in the water market in general and the general stress that came out of there.

John Hood – Blackmont Capital

Well I’m done, just last thing, why don’t you use all those water pumps and pump that water out of your gas fields?

Andy Schmitt

We use smaller residential pumps.

John Hood – Blackmont Capital

They’re not big enough?

Andy Schmitt

They’re pretty narrow and shallow and our pumps tend to be a lot bigger than…

John Hood – Blackmont Capital

What’s a matter, just get bigger pumps.

Andy Schmitt

Yeah we’d like to pump our gas out with those size diameter wells, that’d be a pretty nice gas play.

John Hood – Blackmont Capital

Have a nice afternoon.

Operator

Thank you our next question comes from the line of Jeff Chavez with AmeriMex Water, please go ahead.

Jeff Chavez – AmeriMex Water

Hello, I’m chief hdyro-geologist of AmeriMex Water Associates in Phoenix Arizona and we do lot of work, all of our work frankly is in Mexico and you can’t really pick up a newspaper these days without reading about either the migration of various industries into Mexico or the emerging middle class in Mexico and I’m wondering what Layne’s plans are at this point to position themselves in such as a way as to take advantage of the water needs that are going to be associated with the emerging industries in Mexico?

Andy Schmitt

We’ve been doing some work down in the tourist areas down there on the Baja Peninsula. We had a difficult experience Jeff some years ago when we entered the Mexican municipal water area. We had a very, very difficult time you know we were not pleased with the, I’ll say the bid process that went down there. We ended up losing a drilling rig that mysteriously disappeared. Now having said that, one of our bigger operations is in Mexico and we work out of [Aramecia] and we work with lots of Mexican mining companies and junior companies.

And after many, many years, but our experience in the municipal water sector in particular was not very good. In the industrial sector as we see in the Baja in that area, you know we find a much more friendly more balanced in terms of the work that we do for the development in the hotels in the areas that sprung up around that area, so it’s not that we’re not there, but we’re more inclined to look at industrial development like that as opposed to heading back into that municipal sector and trying to work our end in that area.

Jeff Chavez – AmeriMex Water

I understand and have run into similar issues with the bid process in the municipal sector but within the industrial sector itself, outside of the hospitality sector, which I’m very familiar with, we’ve had several projects working with Layne actually in Los Cabos area and have and look forward to doing more of that.

However, on the mainland side with the Coca-Colas and the Corona breweries and the Pfizers and the Ford Motor Company and more recently there’s been some press regarding the migration of the aeronautic industry into Mexico in a similar fashion in which the automotive industry has migrated to Mexico, their water resources are highly strained and the folks there in [Aramecia] are quite familiar with that and it just seems like a region and that bigger industrial sector is kind of the low hanging fruit here in the near future.

So I was just curious because from a consultant’s perspective we lack in a very serious way the high quality contractors such as Layne in order to raise the bar if you will with respect to constructing quality wells that are going to last 50-100 years and save energy as opposed to what we’re currently seeing.

Andy Schmitt

Right and we found too when we saw even in the municipal sector, Jeff we could add a lot of value in well construction, there’s no question about that. You wouldn’t have the problems that you have with the water down there if Layne had drilled those municipal wells either. Probably a good point to go back and circle back and look at you know when you’ve been as busy as we are, sometimes you know you’ve got enough right there locally not to venture out a bit and you’re right the hospitality area is the only area we’ve really pushed and we probably ought to take a good look at it and much more specificity than we have and our guys that run the western region would move to Mexico so they’ll hear your remarks I can assure you when they listen to this archived call. So good point.

Jeff Chavez – AmeriMex Water

Okay, thanks Andy.

Operator

(Operator instructions). Thank you and we have no further questions, please continue.

Andy Schmitt

Okay we appreciate everybody’s time, we’re sorry for the delay getting the call started and we’ll try to make sure that doesn’t happen again, we were a little bit caught off guard.

But we appreciate your time and attention and we’ll keep in our goals to try to do better than the prior year, prior quarter, prior month and we’ve got a good mix of business as this point and if we see anything that’s on the, that crops up that’s unexpected or what not, you can trust you will know about it from us and we’re pretty good at dealing with those things when we recognize them and see them and react to them. So let’s hope that we can continue to push the rope up the hill so to speak. And we as always appreciate your support and interest. Thank you and Cynthia thank you very much.

Operator

Thank you ladies and gentlemen this conference will be made available for replay after 1Pm today through April 15th at Midnight. You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code 916212. International participants may dial by using 1-320-365-3844. That does conclude our conference for today, thank you for your participation and for using AT&T executive teleconference, you may now disconnect.

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