Layne Christensen Company F1Q09 (Qtr End 02/23/08) Earnings Call Transcript

Jun. 3.08 | About: Layne Christensen (LAYN)

Layne Christensen Company (NASDAQ:LAYN)

F1Q09 Earnings Call

June 3, 2008 11:00 am ET

Executives

Andrew B. Schmitt – President, Chief Executive Officer & Director

Jerry W. Fanska – Senior Vice President Finance & Treasurer

Analysts

Keith [Ferazini] – Sidoti & Company

Richard Paget – Morgan Joseph & Co., Inc.

Ryan Connors – Boenning & Scattergood, Inc.

Steven Gambuzza – Longbow Capital

John Rogers – D.A. Davidson & Co.

Jonathan Ellis – Merrill Lynch

Steven Fisher – UBS

Operator

Ladies and gentlemen thank you for standing by. Welcome to the first quarter fiscal 2009 earnings call. At this time all participants are on a listen only mode. Later, we will conduct a question and answer session; instructions will be given at that time. (Operator Instructions) I would now like to turn the conference over to Andrew Schmitt.

Andrew

Good morning everyone. I’m Andrew Schmitt, President and Chief Executive Officer of Layne Christensen Company. I’m here with Jerry Fanska, our Chief Financial Officer and we would like to welcome you to Layne Christensen’s first quarter conference call. Earlier today we issued a press release outlining the results for the first quarter ended April 30, 2008. Before we discuss the financial results I would 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’ll give you an overview of division operating performance and how we see things going forward.

Jerry W. Fanska

Good morning everyone. Revenues set another first quarter record up 21.3% to $244.5 million from $201.6 million in the prior year reflecting increases in all the company’s primary divisions. Water infrastructure revenues increased 17.6% for the quarter to $180.6 million driven mainly by previously announced acquisitions of Tierdael and SolmeteX and also an increase in our sewer rehabilitation revenues. Mineral exploration revenues increased 37.7% to $51.5 million reflecting continued strong demand in the metals market. Lean energy revenues increased 24.4% to $11.9 million reflecting increased production from the company's unconventional gas properties and higher gas prices.

Selling, general and administrative expenses increased to $33 million in the quarter from $29.4 million in the prior year primarily reflecting increases of $1.7 million from acquisitions and wage and benefit increases of $2.2 million. Equity and earnings of our affiliates in Latin America increased to $2.5 million in the quarter from $1.5 million in the prior year due mainly to the strong commodities markets. Depreciation, depletion and amortization increased $2.1 million in the quarter to $12.4 million resulting from increase depletion in the energy division and depreciation from property additions in other divisions. Interest expense decreased to $941,000 for the quarter on decreased borrowings from the prior year mainly due to the pay down of debt from the proceeds of the company’s October, 2007 public offering.

The income tax rate for the quarter was 43% compared to 41% in the prior year. The difference in the effective rate is the result of a resolution of certain non-recurring tax contingencies last year that reduced the rate last year to the 41%. Net income for the quarter of $10.6 million was up $2.4 million or 29.5% from the prior year. Earnings per share for the quarter was $0.55, another record compared to $0.52 last year. The company’s balance sheet at April 30th reflects total assets of $720.7 million, stockholders’ equity of $435.8 million, total long term debt of $46.7 million excluding current maturities and cash and cash equivalents of $65.5 million. The company provided $8.6 million in cash from operating activities in the quarter and investing activities totaled $16.2 million in the quarter net from proceeds of equipment sales. The investing activities for the quarter included $6.8 million in unconventional gas activities and the remainder for property, plant and equipment additions in the other divisions.

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

Andrew B. Schmitt

Operationally we had good results in those locations where we were not adversely impacted by the weather. Inside the water infrastructure group, the Layne legacy well drilling pump repair and water treatment business had revenue growth of 4% and incremental EBIT of 13% excluding a non-recurring item in the prior year. A fairly impressive showing that this was achieved despite the western US and our Illinois operations being slowed compared to prior year. These are normally two of the most profitable regions in the legacy water business. The improvement in revenue and earnings for the quarter was driven by continued strong markets in the northeastern part of the US and in our legacy water treatment product line.

In our Reynolds product lines, things are looking better in the cured in place, CIPP business with revenue up 29% and EBIT up 112%. However, we’re still only about half way back to the margins in fiscal 2006 but pricing has improved from the irrationally low level we saw much of last year. The largest contributing factor for division EBIT in the water infrastructure group being below the first quarter last year was weather related issues effecting our plant, utility design build and pipeline group. This is where we typically have some of our larger construction related projects which would be more adversely impacted this quarter by heavier rain to the Midwest and heavy snows in parts of the west. We incurred significant productivity losses on several jobs and these business lines have some of our tightest margins so there’s not a lot of room for any problems. There are also our longer lasting construction jobs and they are more vulnerable to pricing increases that can’t be passed along due to the fixed price nature of the contracts. So, steel and fuel, as you might imagine are big issues for any contracts that were bid months ago and now are just being started or executed.

Despite the productivity issues, the revenues were up for the segment, over 25% of which about 8% was due to the acquisition of Tierdael and the balance all organic. So, the silver linings is that the work is still there for us. This is really evident in the backlog of the water structure group, as it remains a very strong. Backlog at the end of April totaled $371 million, that’s an increase of about $34 million from the prior year. In addition, we received notification of over $150 million in new awards including a $55 million contract for Tierdael, our most recent acquisition; a $38 million contract for Kentucky American; and a $26 million contract in North Carolina. We’ve also booked three new collector wells for power plants totaling over $10 million.

Moving to Layne Energy, they had a very solid quarter despite incurring some expenses, about $200,000 in our Chilean Power Program. Division earnings were up 17% over the prior year. Production increased 19% to 1833 MM cubic feet for the quarter and average delivery gas price including our transportation revenues was $9.58 per MCF versus $8.36 per MCF a year ago. Last week we had a little over 500 wells, 502 wells on line and daily production was bounced around 19 million cubic feet per day. The weather we spoke of in last quarter’s call has continued to be just outright miserable in southern Kansas as many of you know, you look at the weather and see the problems we’ve had in Northern Oklahoma and Southern Kansas. It’s definitely slowed us down and caused numerous problems in the field operations and taken our cost up. We actually has several wells under water last week from flooding, something that happened to us last summer and we certainly didn’t expect to see again. But, the Layne Energy team has just done a remarkable job continuing to make progress over these last two quarters.

We still plan to start a power program in the New Albany Shale in July. We have about 50,000 acres under lease and test well locations have been staked. Reynolds is actually going to do the road work for us, they’re moving on that now. On the Chilean project, we’ve met our commitment to hold acres through fiscal of 2010. Gas content analysis from our coring program came in about 50% higher than Cherokee on a similar total feet of coal. We’re going to consider several options including additional partners and new investors if we decide to move on the test well program later this year but, in the short term, continued development of Cherokee and starting that New Albany Shale pilot will be our top priorities.

Needless to say our mineral exploration division continues to drive Layne Christensen’s earnings growth. Revenue and earnings were just outstanding, up 38% and 102% respectively. EBITDA including our share of Latin American affiliate net income was 29% as a percentage of revenue versus 22% in the prior year. In North America, Australia and West Africa were especially strong and we got up to speed very early in this first quarter after the year end shutdowns. The execution in those field operations was very, very good. The division results were even more impressive given the extended wet season we had in East Africa’s Tanzania, the Democratic Republic of Congo and Zambia, all had much of their equipment staked, required very low levels of production throughout the quarter. I was in East Africa in late April and things were finally beginning to dry out so I feel their contribution in the second quarter should improve from the first.

Our Latin America affiliates also had an excellent quarter as their earnings were up 67%. Business continues to improve in Latin America as new contracts are in placed with improved pricing and a greater number of drills working. We just opened a brand new state of the art facility in Antofagasta Chile in May which has significant space dedicated for training facilities and we anticipate having 250 new employees in training programs in that facility later this year.

So, in summary, I’m pleased with the quarter. It was certainly not easy. As the National Weather Service pointed out recently, February, March and April period in the Midwestern part of the country was the wettest on record. But, there’s no question our company, multi-industry business balance combined to give us our 17th consecutive improvement and year-over-year quarterly comparisons. I think looking forward all the businesses seem to be on solid ground. The water infrastructure backlog as we said is very strong and mineral exploration is really probably booked for the year. In fact, I would expect that we’ll be discussing next year’s requirements fairly soon with the major mining plants as they like to line up rigs fairly early. Layne Energy is benefiting from higher natural gas pricing and will be moving on a new gas play in the shale shortly. I think finally the weather has to get better and clearly that should improve everyone’s attitude on our side of the table.

Now, we’ve got a few minutes if you have any questions.

Question-and-Answer

Operator

(Operator Instructions) Your first question is from Keith [Ferazini] – Sidoti & Company.

Keith [Ferazini] – Sidoti & Company

On the energy segment can you give an idea where you are daily production beginning of quarter versus end of quarter? Then, any idea where you’ll be at the end of Q2?

Andrew B. Schmitt

We are, I believe, about 17 million cubic feet I think at the end of last quarter and we’re pushing, bouncing around 19 million. It just depends on what compressor is down at any given time. We had originally looked at the middle of this year with a gross number, when we looked at hedging to estimate what we had, we had hoped July 1st to be at 20 million cubic feet so that was sort of our number that we use when we looked at the room as far as the amount we wanted to hedge. So, I guess that’s still a good number. Weather will make a big difference. If we can get some more wells online. We didn’t bring a lot on, I think we’ve only got 29 to 30 wells, do we Jerry hooked up?

Jerry W. Fanska

Right.

Andrew B. Schmitt

So, it’s been rough.

Keith [Ferazini] – Sidoti & Company

Any change in the hedging position?

Andrew B. Schmitt

Jerry, he can recap where we stand. I would say that before we do we use to say we’re $1 off NYMEX but if you look at the differential between Southern Star and NYMEX it’s really increased quite a bit. I can’t tell you I’ve got a good explanation for that other than maybe Southern Star’s storage is a little bit fuller but I know that the differential yesterday was $2 but we’ve seen it as high as three. So, when Jerry gives you the hedge amount we normally say add $1 but that has not been the case in the last few months, it’s spread to at least $2.

Jerry W. Fanska

It has. We’ve got about two thirds of the gross right now hedged and the hedged amounts range from $7.51 to $8.35 for the next year and $7.51 and $8.75 for the year after.

Andrew B. Schmitt

Of the net, two thirds of the net not gross. Yes, we don’t hedge the royalty owner’s gas, they just float.

Keith [Ferazini] – Sidoti & Company

Just briefly on the water infrastructure side, I guess the margin there would be a bit of concern. I know there’s weather related issues but what are you seeing in the contract bidding process? Are things tightening up? Are you getting more competition there?

Andrew B. Schmitt

I’d say that probably you’re looking at probably a pull back of I’d say one to two percentage points on the bigger contracts. You know, if you just look at where the bidding activity seems to be centering out. And, our backlog is getting pretty full, we’re staying competitive in that area so we may have room to move up a little bit in the second half of the year. I think everybody anticipated things be slower but if you look at the amount of awards that we picked up recently, you’d have a hard time saying at this point Keith, there’s a slowdown. We continue to say we haven’t seen it in our backlog but the recent notification we talked about is a pretty substantial amount of work. In the Layne legacy business I’d say it’s probably not changed too much. It’s just a question of where the mix of work comes from. Normally we see it in Illinois and as I said, the western US is pretty strong for us. Lately, it’s shifted to the Northeast. The Southeast has been wet and flat and we were sort of glad that in the legacy we were sort of flat given some of the same water problems down there. Overall, Layne legacy is sort of a mixed bag. We saw some early pressure on the larger projects and more the infrastructure side. But, with the amount of work we’re picking up it probably tells us we’ve got a little bit more room to move then we think.

Operator

Your next question is from the line of Richard Paget – Morgan Joseph & Co., Inc.

Richard Paget – Morgan Joseph & Co., Inc.

I wonder if you can talk about the acquisition market a little bit. You still seem to be having a decent amount of cash on the balance sheet and I wonder if there’s any changes with expectations of buyer/sellers given the credit market, as that issue has continued to evolve.

Andrew B. Schmitt

I think the thing that we’ve seen on the infrastructure side is we look at a lot of the private companies. It is clear that expectations from a year ago have come down and what they feel their business is worth and the possibility of a cycle in many cases actually probably helps our situation a little bit Richard in terms of the smaller companies that fit nicely in what we’ll call our bolt on strategy. They’re not necessarily of the mind to sort of whether any cycle no matter how modest it may be. I mean, they’ve made pretty good money in many cases so actually from what we see, we see more opportunities and more realistic expectations than a year ago, a year and a half ago clearly on the more construction side. There’s not a lot of size on the water size but I would say since the big name acquisitions were picked up early in the US by ITT, [Pintera], GE, Seimens, you find more modest expectations for the smaller companies than we’ve seen in the past. I just think without the headlines and big multiple shot out there for big strategic acquisitions that are platforms for some of the bigger companies, I think we’re in a better environment than I’ve seen. Wouldn’t you say Jerry?

Jerry W. Fanska

You know there’s [inaudible] being bought for 12 or 15 times EBITDA.

Andrew B. Schmitt

So, I’d say overall for us, particularly on the bolt on, private companies, smaller companies that dovetail nicely with where we’re focused, I’d say the environment is much better and it continues to get better.

Richard Paget – Morgan Joseph & Co., Inc.

Would you say that you see less competition to buy, less buyers out there?

Andrew B. Schmitt

Yes. We’ve actually seen an absence of buyers because we’ve seen prospects that have come up and it’s even surprised us that there’s not been more interested parties. We’ve seen that in legacy water as well. Everything from water well drilling companies to we’ll say general contracting companies like Tierdael. I think the price we paid for Tierdael is fairly representative of buying a real good value, getting equipment at good value. If you look at Tierdael, the project contract award we just discussed mentioned $55 million is over two times their annual revenue. That is not a job they bid on their own without the Reynolds guys backing them up. That’s a big advantage because you would not take that kind of contract for Tierdael on a standalone basis. It might not qualify without Reynolds and you probably wouldn’t take the risk so that’s one of the advantages for us when we can fold these in as they get exposed to projects they wouldn’t ordinarily bid. And, they’re going to do 100% of that work. It’s not like Reynolds is going to go out and execute that project for them, they’re quite capable of doing that project but it is two times their annual revenue, I think, last year.

Richard Paget – Morgan Joseph & Co., Inc.

So it’s just Reynolds bonding that got them in?

Andrew B. Schmitt

Reynolds' bonding, Reynolds’ pre-qualifying, Reynolds’ experience, project side, etc. They can bring a lot of muscle to the table given the size projects they work on.

Richard Paget – Morgan Joseph & Co., Inc.

Then on the CIPP market, you mentioned pricing is getting better. I wonder if you could expand upon that. Is that a function of other people getting out of the market? Is it the big guy on the block getting more responsible with pricing? What’s driving that?

Andrew B. Schmitt

I don’t know about people getting out of the market, that’s possible but I can’t say that I’m aware of anyone. I think what you’re basically seeing is just a little bit more responsible pricing out of the market leader there as we went through some really, really unusually low pricing. I do think last year backlog softened a bit. You heard us say it probably a couple of times last year, we just thought it was happenstance. We didn’t think you’d see a general deterioration in demand for relining sewer pipes, we thought it was more timing and sometimes there’s an ebb and flow in these backlogs and sometimes you have a rash of work to bid and sometimes it can just get pretty thin for a while. That was clearly and overreaction. I think the overall activity picked up a little bit, that eased the pressure but clearly when you’ve got a market player that dominates the market like that, they can have a big impact if they decide to get overly aggressive in that type of business where it’s a lot of small people. My view is just they’ve eased back on the throttle a bit and market picked up a little bit. As I said, we’re about half way back to where we were when we looked at the trialing margins in that business in September 05 when we bought Reynolds and picked up the [inaudible] in place product line. So, we still have a ways to go. It’s double what it was at the low point last year in terms of our overall profitability.

Richard Paget – Morgan Joseph & Co., Inc.

Then finally Jerry, with the tax rate, should we still be expecting around 45% for the balance of the year.

Jerry W. Fanska

Yes. Maybe a tad bit less, maybe a point or so. But 44% to 45% is probably right.

Operator

Your next question is from Ryan Connors – Boenning & Scattergood, Inc.

Ryan Connors – Boenning & Scattergood, Inc.

I just kind of had a more strategic type of question. I just wanted to kind of play devil’s advocate for a minute and kind of throw out a kind of open ended comment really and just get your reaction to it. From our perspective, I think one of the big concerns on the minds of investors is that the water resource, or the water infrastructure segment accounts for almost three quarters of revenue now but it generates just over half of operating income so clearly it’s the least profitable business line at least in this point in the cycle. I think some investors are a little bit uneasy about the fact that remains the focus of your acquisition program and that’s the part of the portfolio you are sort of actively expanding. So, to the extent that is what may be on the market’s mind and maybe the weak margins in water this quarter might have something to do with why the stock is down today despite an EPS number that nominally was above consensus. I’d just be very interested to get your reaction to that kind of thinking.

Andrew B. Schmitt

Well, we have no question, if you look at the investments that we’re making on the minerals and energy side, it has clearly been add a well and add a rig. We’ve elected to expand capacity by adding new equipment, adding new logistics support equipment, investing in a our new facility in Antofagasta and we’ve just sort of taken and ratcheted up that capital investment and used that as a means as opposed to paying the higher multiples that you pay today in the MINEX business. Recently I think the higher multiples, certainly given the gas prices because M&A will catch up with gas pricing if it stays at this level which is a bit higher than we would have expected as well and we’ve sort of taken the position on the legacy and infrastructure side just to bolt on acquisitions that look attractive and can be bought at a good price because we look at the long term trends in water and the secular trend looks stable, reliable, predictable and looks like they’ll be there for a long time given the issues that we face in the water side.

On the mineral side we said we’d probably be more active if and when that commodity cycle ever turns down, we think we’ll find better values there. And, as long as we have – typically, you look at most of the acquisitions that have been made, it’s been [inaudible] in nature. When you look at companies including our Latin American affiliates, the three of us are typically judge, gage, work for a lot of the same customers. It’s a very similar profile for us and so when you see consolidation by those guys, the effect for us is it sort of elevates the whole market. So, if you’ve got consolidation of smaller companies that are competing with us by [Borlong & Major], it elevates that whole market. Expectations for environmental, noise abatement in terms of safety, everything moves up and that’s not a situation that we find that situation is very comfortable. So, I guess really it’s more rhythm of a view there in terms of when we buy. We’re not adverse if the right deal came around for minerals or certainly energy, we wouldn’t have any compunction to buy in that area and we have been a bridesmaid in both a couple of times. They just didn’t get out there because we were the bridesmaid.

But, right now, the bolt on, the water has been a strategy we’ve talked about sometime but we’ve also looked at the higher end water treatment area and the power industry. We’ve picked up three projects for power plants in the collector well side which is some of the better margins we enjoy in the infrastructure business period. So, it sort of all dovetails together. I don’t think it’s as hard and fast as you might think but if you look at what’s available out there and what sort of fills in for us, and we tend to be patient. There’s no question about it, we can be very patient investors when it comes to looking at transactions and filling in from a strategy perspective where we think make sense.

Ryan Connors – Boenning & Scattergood, Inc.

Just following up with that, more on the water side, one of the things that we’re trying to figure out is what is the timeline for margins to improve? Because obviously now that it is such a large proportion of revenue, in theory the leverage on any margin improvement in terms of the bottom line can be substantial. But again, it appears that’s moving along, that process has been slower and more painful than at least we had been expecting in terms of moving that margin up.

Andrew B. Schmitt

It is. It’s sort of plotted along. It’s been steady, work has been there and we continue to grow the backlog and we don’t seem to expand the margins. Some of that is mix and when you sort through the various products it becomes quite an analysis to look at the mix that comes in and it does vary quite a bit between the various product lines when you look at it. Some of that, definitely CIPP last year definitely held us back. We had no sooner bought UIG than we ran in to some super, super low pricing. But, overall you’re right, when you add it all up in total it’s not been the kind of margins that you’d like to see with a product line that has grown organically and is being grown on an acquisition basis that way. I think it might be a little bit too aggressive if we see any type of stress on the municipal sector to say that we felt like we could raise prices. But, if our backlog continues to grow, at sometime we’ll get a little more frisky there in our bidding and happenstance will be that you’ll pick up maybe not as much as you were before but you’ll pick up some contracts that surprise that you.

I don’t think the guys are aggressively pushing that right now, they’d like to get loaded up for the year and they’re moving in that direction. I think the Western US, Illinois, Houston, some markets like that need to pick up a little bit for us too in that mix in terms of the overall profitability so we’ll see. Second quarter will be a good test. If we get better weather, that helps us a lot too. Clearly, our own inefficiencies – it’s sort of strange Ryan but for being in the water business since 1882, the absolute worst thing that can happen to us is water. And, it’s true for minerals, and its true for energy, and its true for our water business. For our type of company that is the absolutely worse thing we can see is lots of rain and lots of heavy wet snow because it really, really puts a dent in us.

But, I agree with you, if the business is going to continue to represent that much revenue and we’re all well aware of it, the overall margins have got to go and some of that higher value added treatment business, we’re going to have to win some contracts there too. And, as we said, the industrial sector and our ability to penetrate that will probably really be the determining factor if we can move those margins up several percentage points.

Operator

Your next question is from Steven Gambuzza – Longbow Capital.

Steven Gambuzza – Longbow Capital

I was just wondering if you could tell me what the kind of total CIPP revenues in the quarter were?

Andrew B. Schmitt

I think we can. Jerry probably has it somewhere.

Jerry W. Fanska

Total CIPP was about $29.5 million up from about $22.5 last year and the profitability is up from about $700,000 to about $1.5 million, so they’ve doubled profitability as we mentioned.

Steven Gambuzza – Longbow Capital

Now, that’s kind of on the operating profits?

Jerry W. Fanska

Yes. That’s what we call an EBIT line.

Andrew B. Schmitt

It’s a division EBIT number.

Steven Gambuzza – Longbow Capital

$700 to what?

Jerry W. Fanska

To $1.5 million.

Steven Gambuzza – Longbow Capital

On like a gross margin basis though, what would you say it would be?

Jerry W. Fanska

About the same.

Steven Gambuzza – Longbow Capital

So nothing changed right, in terms of order of magnitude on doubling of gross margins?

Andrew B. Schmitt

We’ll have to subtract numbers real quick, the way our quarterly numbers lay out.

Jerry W. Fanska

We don’t obviously show our gross profit line. It’s probably up, if we did have a gross profit line which would be prior to selling expenses, it would be up about 14%.

Steven Gambuzza – Longbow Capital

It would be up 14%?

Jerry W. Fanska

Yes. Year-over-year improvement.

Steven Gambuzza – Longbow Capital

How was the trends in backlog and bidding activity in this particular part of the business during the quarter? Did backlog grow sequentially or year-over-year?

Andrew B. Schmitt

I believe it did. I don’t know, Jerry have you got the numbers? The bidding activity seemed to pick up looking at the number of bids that we saw come across our desk.

Steven Gambuzza – Longbow Capital

And was there any regional kind of concentration of the improvement in this division?

Andrew B. Schmitt

That I don’t know. I really wouldn’t know that.

Jerry W. Fanska

Yes, we’d have to check with the guys on that.

Steven Gambuzza – Longbow Capital

Do you get the sense, it seems like it’s pretty healthy, certainly a healthy top line growth rate for the quarter. Do you get the sense that this reflects kind of overall market strength or do you just think you were executing well and picking up share during the quarter?

Andrew B. Schmitt

I just get a sense from talking to our people in the field that we’re just seeing more work than we’ve seen in the past because remember our deal a year ago was Steve, as I said, the backlog just got soft for everybody but there just wasn’t any big events that you could point to. It was more just that ebb and flow and that created a fair amount of stress for everybody. But, my view is probably this year might be a little better, might be a little stronger.

Steven Gambuzza – Longbow Capital

Is it fair to say that some of the weather issues impacted the profitability of the work you did in the quarter to in this business?

Andrew B. Schmitt

I’m sure it was if it was in certain parts of the southeast probably effected work in the Atlanta area, places like that. But, I didn’t get as much complaining as we did on the big construction jobs.

Operator

Your next question is from the line of John Rogers – D.A. Davidson & Co.

John Rogers – D.A. Davidson & Co.

Andy, you mentioned $150 million in additional water related projects. Those are projects where you have letters of intent or that you signed since the end of the quarter?

Andrew B. Schmitt

No. They will go in the backlog once a contract is inked.

John Rogers – D.A. Davidson & Co.

Okay.

Andrew B. Schmitt

We’ve just been given notifications and when we went back and looked at the $371 million in backlog, and talked to our folks and to Jeff Reynolds, Jeff Reynolds told us, “Here’s what we’ve got notification of in new awards,” and those were some of them that I raddled out there. But he had said about $150 million. We don’t put them in the backlog and give you an official number until the contract is actually inked but the track record there is pretty good. We rarely, it’s really an oddity if we get some kind of reversal. Now, we’ll eat in to that backlog this second quarter, the $371.

John Rogers – D.A. Davidson & Co.

Right.

Jerry W. Fanska

About $100 million of that is already signed contracts, they’re just not in the backlog yet. Back in May, they were signed in May so at least $100 of it.

John Rogers – D.A. Davidson & Co.

I guess I’m just trying to understand how does that $150 number compare to what it would have been at the end of the year or a year ago? Is that a high rate or a low rate?

Andrew B. Schmitt

That’s a pretty high rate there. Because, it catches our attention because normally we just see the bids of size that are out there when they come in for approval to bid. And so, when you see a rash of notifications, we normally would just see it in the backlog, but it’s been quite a bit. A little certainly higher than we normally see.

John Rogers – D.A. Davidson & Co.

Then secondly, just in terms of the minerals business, where you are at this point in the year, are you at full utilization there? And, what are you looking at in terms of negotiations now in terms of price increases? Are we going to get another big round of price increases at this point?

Andrew B. Schmitt

When we start that process talking about next year’s rigs it will really be a function of how much work, I’d say primarily the majors, because we use the small independents and juniors more as a fill out of the equipment, it will depend on what time of exploration programs that they have for next year. They should begin in late summer, if it goes sort of the way it typically has the last several years, when they’ll sit down and they’ll want to talk about rig availability and we’ll start the tugging back and forth on pricing and they’ll be telling us what type of program they have on the various big projects that we’re on. Then, after that you’ll get a fair amount of junior companies that are looking for rigs that will raise money typically on the Toronto, Australian Stock Exchanges are some of the juniors that we know are going to work hard through the years and they are not as formal as the major companies are relative to the programs. And that’s a function of the cash they have and what they’re seeing because they do most of the Greenfield exploration and then they will start to give us indications and we’ll use that to fill out the rigs. By certainly early fall we’ll start to be getting an idea of what kind of year next year is compared to this year.

This year was going to be strong because we started that process early, we were turning down people in the fall of last year and then we had virtually very little slowdown at all at the yearend which obviously helped the fourth quarter and that’s why you saw us get up to speed so quick in the first quarter because we just didn’t have equipment stacked everywhere. In terms of our utilization I’d say we are pretty fully utilized at this point with the exception of East Africa and that was because of the weather. Because, it was just an extended wet season, it probably went a good month, maybe four to six weeks longer than we would expect. You never know what to expect but normal, and so that whole East Africa, Tanzania, Democratic Republic, Zambia in that area, just most of the equipment we had on site you just couldn’t work it. You could see it in our safety numbers right away. It’s just very difficult to work when it rains over there, it really rains. That would be I’d say the upside if there is on utilization, would be things drying out in East Africa and the guys being able to drill more meters.

John Rogers – D.A. Davidson & Co.

But seasonally we should see at least a modest uptick but not to what we saw a year ago just because you had a fuller utilization rate?

Andrew B. Schmitt

Yes, because we came in to the first quarter so much stronger. That’s a good assessment.

John Rogers – D.A. Davidson & Co.

Then the last thing is just on the energy side of the business, the $958 that you realized on selling prices in the quarter, with you being hedged at $7.50 to $8.35 I think you said, and then with what you’re seeing in the spot market now, does that imply you’ll be somewhere around the $9 range in the second quarter if nothing changed?

Andrew B. Schmitt

I really hadn’t worked it out but it could be close. It could be close in that range. Transportation makes a difference too because we typically carry all our own gas and all of our royalty owners gas too so transportation price will get in there as well. But, I mean just looking at it – that would be [inaudible].

John Rogers – D.A. Davidson & Co.

I’m just trying to get to in order of magnitude?

Andrew B. Schmitt

Yes, that would be, that’s not unreasonable because we’ve got about a third is floating and two thirds is hedged and then you layer over whatever transportation that you actually get through the pipeline and gets invoiced out. Then of course – I’d say that’s pretty good, I don’t know, it’d be in that range.

Jerry W. Fanska

We didn’t have quite as much hedged in the first quarter as we will in the second because we’ve hedged up another probably $3 million a day for the next quarter so it may drag it down some for sure.

Andrew B. Schmitt

That is to say that most people would tell you prices are much stronger than we thought coming in to this time of year. Typically April and October, if you go back historically where you are going to see your peak pricing and we’ve seen it all through May and June. We were concerned about the Rocky Mountain Express pipeline and what that would do to our bases and how much gas that was going to bring in to the market but this natural gas market has been surprisingly strong.

John Rogers – D.A. Davidson & Co.

One other question, if you don’t mind. In terms of South America, any update there?

Andrew B. Schmitt

In terms of?

John Rogers – D.A. Davidson & Co.

Just kind of where you are with the program down there and any decisions yet on brining in a partner? Or anything?

Andrew B. Schmitt

The gas contents, like I said, look pretty respectable. But, when you get in to the drilling cost, the cost to drill the wells are going to be more expensive and when you get in to infrastructure you’ve really got some expensive infrastructure. There’s just none in place. That pulls us back a little bit where we say, we’ve got to have somebody with a fairly long term view and we did say we thought we had to have, going back as recently as a month ago, higher gas prices. But now, the price has moved up not just in the US but everywhere and the alternative in Southern Chile is to burn Number Six Diesel which has jumped through the roof. So, it’s sort of time for us to pull back a little bit. We pushed it on the back burner, we’re having man power issues as well, difficult for me to start test wells in Chile and test wells in New Albany, I just can’t do it.

So, we’ve made our commitment through April of next year and we’ve told our partners to look around for a partner or new investors, gone through infrastructure and well drilling with them and said, “We need to bring in some new money, new partners because the infrastructure part of this is a definite long term issue.” I would have liked to off load that infrastructure actually on someone since there’s not a lot of production in Chile on the oil and gas side, you just don’t have the infrastructure companies, third party gas gathers option like you have here in the states so it sort of nudge New Albany up to number two position behind expanding Cherokee relative to where we should allocate our capital and our people really.

Operator

Your next question comes from Jonathan Ellis – Merrill Lynch.

Jonathan Ellis – Merrill Lynch

Just circling back, I know you’ve gave some detail upfront about revenue growth in the legacy and Reynolds businesses but could you just quantify for us the year-over-year change in EBIT in the legacy and Reynolds businesses? I think you kind of spoke to it in qualitative terms but if you have that available?

Andrew B. Schmitt

You’re talking about quarter-to-quarter?

Jonathan Ellis – Merrill Lynch

Year-over-year. So, in the first quarter year-over-year change in EBIT for the legacy business, year-over-year change for the Reynolds business.

Jerry W. Fanska

For just the legacy business last year we were excluding the one-time item for right about $6.3 million, this year we’re $6.7. Then on the Reynolds consolidated obviously is down because of the design build issue that we had, they were down in the quarter from about four to two.

Jonathan Ellis – Merrill Lynch

So you said EBIT went from $4 million a year ago to $2 million this year?

Andrew B. Schmitt

And the CIPP piece went up.

Jerry W. Fanska

And the CIPP piece went from like I said a while ago $700,000 to $1.5 million so you can kind of see the impact of what those weather related issues did to us in the south and the Midwest.

Jonathan Ellis – Merrill Lynch

So that CIPP piece is backed in to the sequential $4 and the $2?

Andrew B. Schmitt

Yes, it’s in the $4 and the $2.

Jerry W. Fanska

Yes, it’s in those numbers.

Andrew B. Schmitt

We don’t complain about weather without good reason Jon.

Jonathan Ellis – Merrill Lynch

Then just on the backlog again, I know you spoke to it in qualitative terms but do you have just during the quarter the year-over-year change in the legacy and Reynolds backlog?

Jerry W. Fanska

We don’t really have a breakdown.

Andrew B. Schmitt

Quarter-to-quarter is probably what we have.

Jonathan Ellis – Merrill Lynch

Whatever you have available, if it’s quarter-to-quarter that would be fine. I’m just trying to get a sense of how much deviation has been since last quarter.

Andrew B. Schmitt

I don’t have it here, Jerry unless you do?

Jonathan Ellis – Merrill Lynch

I can circle back with you offline.

Andrew B. Schmitt

I don’t have it. I have all the quarterly breakdowns but that’s not one of them.

Jerry W. Fanska

I definitely don’t have Reynolds. I’ve got Reynolds maybe in total if I can find it here.

Jonathan Ellis – Merrill Lynch

Just following along on the backlog I’m wondering if you talk about the new contracts, what type of pricing are you seeing on those new contracts? The $150 million you spoke about, pricing on those contracts versus over the past few quarters? Are you seeing more competition on bids? Less competition, or really no change at all?

Andrew B. Schmitt

I think we’re seeing more competition on bids. As we had talked earlier, if you go back to a year ago where we have jobs that we bid Jonathan, where you have general contractor types that generally do smaller work related to the residential housing, we’ll see more of those guys show up to bid municipal projects than we would have a year ago, certainly compared to two years ago. So, we definitely see more bidders there and where you’d see four or five, six people bid on a job now you might see 12 and you won’t know half of the other six that are bidding because they’re typically from other types of contracting where they would do normally smaller work whether it’s sewer line, water main work, you know road work, whatever, it would be on a smaller scale.

I think when we move up in to the larger projects, it just gets too risky. I would suggest that when you’ve got smaller people involved in those types, working for developers, these municipal jobs have a far amount of risk and you’re probably not going to carry your heels by inadvertently underbidding work. I think that keeps that situation a little bit more in balance because you can imagine if the small general contractors ran in to the kind of problems we did on some of the larger jobs and not having the depth, size and adversity we have. That clearly wouldn’t be, we talk about everybody jumping out of the housing market in to the big design build municipal market that’s got pretty tight margins anyway, that’s a bit of a heart attack. I think although we see more, they’re sufficient intimidated by the size of the projects we typically look at. I’d say on the smaller projects I’m sure our guys would say that’s where you see most of your competition.

Jonathan Ellis – Merrill Lynch

And just to be clear, you did, I thought mention earlier, I noted a pull back in 1% to 2% in larger contracts. Is that more unit based meaning that there are fewer larger contracts coming up for bid now?

Andrew B. Schmitt

They’re typically tighter anyway but you’re probably seeing a little contraction. It’s sort of hard for us to tell exactly when I say 1%, 2% at the most. I’m looking at the bids as they go in. I’m not actually adding things up, I’m just looking at when the bids get over a certain level I have to approve so it just sort of catches your attention. Some of it could be mixed pipeline versus design build but it just seems to me we pulled back a little bit in the last couple of quarters. But, like I said, the problems we had weather wise we’ll have to wait until we get a good quarter, second quarter, maybe that will give us a much better indication when you get in because the efficiencies have been so – productivity is gone so there’s no way to sort it out when you look at margins.

Jonathan Ellis – Merrill Lynch

Are you seeing, in terms of the slowdown, are you seeing equally challenging conditions in the municipal market and the private sector side, industrial and other end markets? Or, are you seeing more weakness in one versus the other?

Andrew B. Schmitt

I would tell you I don’t think on the industrial side we can detect any weakness. As far as the industrial for us, you know, contains a big of ag and the ag markets have been good because the food prices and basic staples have gone up so much so we certainly can’t see it in that side. Then, the manufacturing related industrial side, there’s nothing that has come to my attention so I would say if we’ve seen any tightening it would be on the municipal side not the industrial side.

Jonathan Ellis – Merrill Lynch

And have you come across instances where you’re starting to see some cancellation of projects that were previously in your backlog? Either some of the shorter term projects or even some of the longer term projects?

Andrew B. Schmitt

No, no. Like I said it doesn’t rarely happen, when it goes in that backlog it stays. It’s not impossible that you could get something cancelled but it’s an odd ball situation. Typically those projects are funded. What you will see that will catch you off guard is a delay. It’s in the backlog, you expect it to turn along the normal course of time and it gets delayed. It’s rare that we get cancelations, it clearly can happen but more likely the thing that will catch us off guard will be the delay on project and notice to proceed because there’s some ancillary issue that’s got the project held up.

Jonathan Ellis – Merrill Lynch

Have you seen any extending out of project timeframes?

Andrew B. Schmitt

Not yet. We’ll have the odd one that couldn’t go because they couldn’t get the permits, this, that and the other but it’s more the [inaudible] than it is any slowdown because they’re out of funds or something.

Jonathan Ellis – Merrill Lynch

Just on your contract structures and you talked about the pressures being faced because of rising fuel and materials prices and the fixed price nature of many of your agreements. On the water side are all or the majority of your contracts fixed price? Or, do you have some contracts where there is some provision in there to either impose a surcharge or restructure pricing to address inflationary pressures?

Andrew B. Schmitt

Of the bid work, about two thirds is fixed, about one third there’s some flexibility. On the legacy side that backlog turns pretty quick so even if you missed it on a bid, in 90 days it will be gone. The bigger exposure will be where we weren’t protected by the material supplier. In other words he couldn’t, because his margin instruction from the steel mills are when it rolls out the back door that’s your price and then there’s no way to protect yourself on diesel as you’re backing up the big vehicles and filling up. So, you went out and bid the job at $2.50 for diesel and now it’s $5. So, it takes a little bit longer for those guys to burn through them whereas the legacy business, 90 days and it’s behind them. On the design build pipeline if we weren’t protected then you might have six month lag until you work that off.

Jonathan Ellis – Merrill Lynch

And the two thirds fixed and one third variable, that’s across the legacy and Reynolds business?

Andrew B. Schmitt

Yes. And really the problems that we had the majority of it would have been weather. So if it was 80/20, 20% maybe on price that we didn’t recover because the projects were bid five or six months ago and 80% weather related. But [inaudible] boost their contingencies. We like to think that we’ve seen the peak in fuel which a lot of people think that we haven’t and we’d like to say this latest round of steel price increases is it but we’ve been fooled before on this. But, we can’t complain can we given our exposure to the commodity side either. It’s sort of an awkward situation there.

Jonathan Ellis – Merrill Lynch

Just quickly on the mining business, we’ve been seeing recently it looks like Bort Longyear has been selling off some of its equipment divisions and I’m just curious from a strategic standpoint, do you think that’s going to have any impact if they move more towards a service oriented model and are sourcing less and less of their rigs from internal sources?

Andrew B. Schmitt

Well, I’m not familiar with if they’ve sold off part of the product side of the business.

Jonathan Ellis – Merrill Lynch

So you haven’t seen any impact in the market?

Andrew B. Schmitt

We still buy from them, Atlas, [Comco] and Bort. And, primarily on the – I haven’t seen it. I think they’ll stay in the consumables and capital goods to the extent they want to be backward integrated and I would be surprised if they – unless it was just a product line that was just a low end mix that they just wanted to be out of if they didn’t have much critical mass. But, I would think the pipe, bits, core barrels, related parts, I would expect they would stay in that.

Jonathan Ellis – Merrill Lynch

Then just my final question related on the natural gas side, given your comments earlier about how you’ve been surprised about how prices have moved up recently. Do you think you would move more toward hedging? I know typically you’ve had two thirds, one third or there about in terms of the mix of hedged and non-hedged. Would you consider moving up that hedged portion more significantly over the next three to six months?

Andrew B. Schmitt

Well, we’d have to move out in to what Jerry, fiscal 11?

Jerry W. Fanska

We’re pretty secure I think for the next couple of years. But, we do have, like I say, two thirds hedged. That’s kind of been our benchmark, kind of around the two thirds level.

Jonathan Ellis – Merrill Lynch

And you don’t plan to deviate much from that despite where market prices are right now?

Andrew B. Schmitt

I don’t think so.

Jerry W. Fanska

Maybe a tad bit more but not over 75%.

Andrew B. Schmitt

We don’t have too much room to move there or we get a little bit uncomfortable.

Operator

Your next question is from the line of Steven Fisher – UBS.

Steven Fisher – UBS

Just to be clear on the last question about the fuel and fuel costs. If, given where they are today and if they hold for the rest of the quarter, do you think you might see some further pressure on those order contracts in the second quarter?

Andrew B. Schmitt

I don’t think any more pressure. We’ll work through it and clearly if we did, it would be this quarter Steven and then it would be behind us. Because, the guys can go ahead and put some cushion in those bids when they look at these diesel prices and steel costs and they are working with the suppliers to protect us when we put in a quote, what we try to do is make sure that the supplier of the materials will hold the prices he quoted us. The only time you get caught a little bit is when they have no protection from the mills on steel or something like that.

Steven Fisher – UBS

Then back in April, you had given us this February mineral revenues of about $16.5 million. It looks like the business accelerated as the quarter went on. What drove that acceleration? And, has that accelerating trend continued in May? If you have those numbers already, I’m not sure, it’s pretty close to the end of the month.

Andrew B. Schmitt

I don’t think we have them.

Jerry W. Fanska

We don’t have May yet.

Andrew B. Schmitt

I think the upside with us would probably be, like I said, in East Africa, if there’s going to be an acceleration at this point. I haven’t seen the forecast for the quarter but I mean where we actually had capacity was in the East Africa assuming it dries out. Like I said, we expect it would. So, if the run rate is any higher it would probably come from there. We were pretty much wide open in US, Mexico, West Africa, our Latin America affiliates. They would literally have to add rigs if they were going to expand anymore. So, I’d tell you the upside for us, Australia is pretty much running all their rigs, so probably just East Africa.

Steven Fisher – UBS

Lastly, the water backlogs were down sequentially but as you discussed you have at least $100 million of additional signed contracts. Was that sequential reduction or was that just a seasonal trend?

Andrew B. Schmitt

There’s no question [inaudible] in the second or third quarters typically that business. And, bidding activity should go up. I can look at our working capital, I certainly see that going up so we know we’re spending money on supply, parts, material so I’d say yeah second and third quarter typically is peak. If we make it in the water business it’s going to be those two quarters. Maybe we’ve got to hold on for the fourth and the first.

Jerry W. Fanska

That is more of a timing issue Steven than anything.

Operator

There are no further questions.

Andrew B. Schmitt

We appreciate everybody’s time and attention on the call and we’ll be back with all of you again in the second quarter.

Operator

Ladies and gentlemen this conference will be available for replay after 1:00 pm central time today through Midnight June 10th. You may access the reply service by dialing 1-800-475-6701 and entering the access code 923835. That does conclude our conference for today. Thank you for using AT&T Executive Teleconference. You may now disconnect.

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