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Edited Transcript of LAYN earnings conference call or presentation 11-Apr-17 1:00pm GMT

Thomson Reuters StreetEvents

Q4 2017 Layne Christensen Co Earnings Call

MISSION WOODS Apr 11, 2017 (Thomson StreetEvents) -- Edited Transcript of Layne Christensen Co earnings conference call or presentation Tuesday, April 11, 2017 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* J. Michael Anderson

Layne Christensen Company - CFO and SVP

* Jack Lascar

Dennard Lascar Associates, LLC - President and Managing Partner

* Michael J. Caliel

Layne Christensen Company - CEO, President and Director

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Presentation

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Operator [1]

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Greetings, and welcome to the Layne Christensen Company Fourth Quarter Fiscal 2017 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Jack Lascar. Thank you, Mr. Lascar. You may now begin.

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Jack Lascar, Dennard Lascar Associates, LLC - President and Managing Partner [2]

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Thank you, Rob, and good morning, everyone. We appreciate you joining us for our Fiscal Year 2017 Fourth Quarter Earnings Conference Call. Our speakers today will be Mike Caliel, President and Chief Executive Officer; and Michael Anderson, Chief Financial Officer.

Before we get started, I would like to remind everyone that our remarks today will include forward-looking statements. Like any statement about the future, these are subject to several factors, which can cause actual results or events to differ materially from those which we anticipate due to a number of risks and uncertainties. For a summary of risk factors and additional information, please refer to yesterday's press release and the section on the Form 10-K entitled Risk Factors and Forward-Looking Statements, in addition to other documents as filed with the Securities and Exchange Commission. The company does not intend to update these forward-looking statement, and undertakes no obligation to update or revise these statements, except to the extent required by law.

During the call today, we will present both GAAP and non-GAAP financial measures. These non-GAAP measures are not intended to be considered in isolation from or substitute for our GAAP results. And we encourage you to consider all measures when analyzing the company's performance.

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

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Michael J. Caliel, Layne Christensen Company - CEO, President and Director [3]

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Jack, thank you, and good morning, everyone. Thank you all for joining us this morning.

We spoke to you exactly 3 weeks ago and not much has changed since March 21. With that in mind -- pardon me, today, I'll be focusing on 3 areas. First, I'll begin by briefly highlighting a few items regarding our quarterly and annual performance; and then I'll update you on our markets and the progress that we've made in moving the company forward. And finally, I'll provide some color on our outlook. And of course, Michael will provide a more detailed review of our financial results and position.

Our fiscal 2017 fourth quarter results for revenues, adjusted EBITDA and net loss from continuing operations are all in line with the preliminary numbers we provided on our March 21 call. We reported fourth quarter revenues of $130 million and adjusted EBITDA of negative $7.7 million. The year-over-year decline in revenues was mainly due to continued weakness in the California agricultural drilling market in our Water Resources division, lower levels of subcontracted work at Inliner and Heavy Civil's continuing shift towards more selective opportunities. And as I've mentioned previously, the adjusted EBITDA performance was well below our internal forecast. And the variance was primarily due to significant job write-downs at both Water Resources and Heavy Civil.

Overall, net results for the quarter were impacted by $14.2 million in restructuring cost, most of which was a noncash adjustment associated with the closure of our Mineral Services operations in Africa and Australia. And Michael will cover that in more detail in just a few minutes.

Beyond the numbers though, we made progress on a number of fronts during the quarter. First, we delivered another solid quarter at Inliner, where we continue to benefit from the aging U.S. infrastructure. The significant improvements in profitability for this division over the recent years reflect an increase in activity, improvements in execution and efficiency and the addition of new crews.

Second, Mineral Services had an improved quarter as commodity prices remained firm. And we saw increased utilization of our rig fleet. And we remain optimistic on the outlook for Mineral Services as we continue to see green shoots of opportunity emerge in the market.

Third, in February, we announced the sale of our Heavy Civil division and we expect this to close by early May. The sale of this business positions the company to focus on growing our core Water Infrastructure businesses and reducing our exposure to large construction projects.

Fourth, we continue to reduce our unallocated corporate SG&A expenses. And certainly, the biggest disappointment during this past fiscal quarter was the underperformance of Water Resources.

I won't repeat everything I said 3 weeks ago, but I will reiterate the 2 primary issues that we encountered during our fourth quarter at Water Resources. First, we didn't execute well on 6 large jobs. Margins were well below our bid estimates due to operational issues and worse-than-anticipated site conditions. And secondly, we continue to see reduced volumes and margins because of reduced water well drilling and repair activity in the West, mainly in California. And this was further compounded during the fourth quarter as the rain in the West prevented us from even getting to certain sites to perform some of our work.

And again, let me frame the nature of our work in Water Resources. We typically complete 2,000 to 2,500 repair and pump installation jobs over the course of the year with the typical job averaging around $30,000 in revenue. And this component of our business comprises about 40% of our Water Resources revenues. And much of the work we do in repair involves some form of time and material work. And as a result, we rarely see significant negative variances. And I want to point out that none of the problem jobs in the past several quarters are repair jobs.

On the drilling side, we typically complete 300 to 400 water well drilling jobs a year. And the average size is between $200,000 and $300,000 in revenue. And for well over 90% of these jobs, we complete them at margins that are very much in line with our bid margins. And it's also important to understand that unlike the projects we execute in Heavy Civil, the majority of these projects have relatively short project cycle times, typically on the order of 3 to 6 months. And we believe the typical risk profile of the Water Resources jobs is inherently more favorable than those jobs that we execute in Heavy Civil.

The Water Resources jobs that caused the majority of the problems during the last 3 quarters were much larger and much more complex than our average projects, with these jobs averaging between $5 million and $6 million in revenue. Now these types of jobs clearly contain more risks than our typical job due to their overall complexity, the length of time that we're on the drilling site, the drilling depth and the uncertainty of subsurface conditions. And identifying and mitigating these types of risks is critical to successfully executing this type of work. And again, I'm not going to dwell on these issues, However, let me again point out, we've made a number of vital enhancements to our risk management processes so we're successful on this type of work in the future.

And to that end, we're focused on addressing 3 critical areas within Water Resources: first, our project to risk evaluation and contracting process; second, our project execution process; and third, our injection well business. And our objectives are very clear here: to simplify our operating structure, to leverage our national water platform and to build a stronger culture of performance and accountability.

And as part of our work to revamp our entire risk management process, starting with how we bid and contract for work, we've implemented strict measures to tighten bid approval requirements. We've also increased oversight on work in order to ensure that risks are identified and quantified at the bid stage and better managed throughout the execution process. And I recommend you refer to what I described during our March 21 call for more details on these issues.

And despite the challenges that we've encountered in Water Resources, the fact remains that we did make progress in restructuring and reshaping Layne during fiscal year 2017.

Inliner had another record year in terms of improved EBITDA and margins, growing EBITDA by 15% year-over-year. And we expanded our manufacturing capacity. We added new crews to better position ourselves to benefit from the increasing activity levels that we're seeing.

Mineral Services experienced a major turnaround, generating over $6 million of additional adjusted EBITDA and improved margins. And we reduced losses at Heavy Civil and we announced the sale of this division. And again, the sale should allow us to enhance our overall risk profile. And we're pleased that this transaction is expected to close within the next few weeks.

And we improved our liquidity by about $10 million from a year ago. And we reduced our unallocated corporate SG&A expenses below $25 million for the year. That puts us ahead of our goal that we cited last April during Investor Day.

And with that, I'll turn the call over to Michael to review our fourth quarter results in more detail. And I'll come back after Michael and make a few more comments about our markets and our outlook for fiscal 2018.

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J. Michael Anderson, Layne Christensen Company - CFO and SVP [4]

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Thanks, Mike, and thanks to everybody for participating on the call this morning. Before I begin, please note that we did file our earnings press release and our 10-K with the SEC last night, so they are available to you today for the call. And please refer to those documents for additional details.

Consolidated revenues declined about 19% in Q4 compared to the fourth quarter a year ago, primarily driven by a weaker market in the West in our Water Resources division. Adjusted EBITDA during the quarter was a negative $7.7 million compared to a positive $3.5 million a year ago due primarily to higher job cost in Water Resources and in Heavy Civil, as we described during our call a few weeks ago.

We continue to make progress in cutting cost and improving efficiencies. Our unallocated corporate SG&A expenses, again, declined on a year-over-year basis to $5.6 million for the quarter. For the full year, corporate SG&A declined to under $24 million, reaching our fiscal year '18 goal a year ahead of time. These reductions have been the result of cost cuts across virtually all cost centers and categories, including reduced corporate headcount. For fiscal 2018, we expect corporate expenses will be even lower than fiscal '17.

Depreciation and amortization expense for the fourth quarter declined 14% compared to last year's fourth quarter due to reduced capital spending. We reported a net loss from continuing operations of $33 million, that's a loss of $1.67 per share in the fiscal 2017 fourth quarter compared to a net loss of $13.8 million or $0.70 per share a year ago.

Included in the fiscal 2017 fourth quarter results were $14.2 million in restructuring charges, primarily noncash currency translation adjustments related to the closure of our Australian and African entities. These currency translation adjustments were associated with the strengthening of the U.S. dollar over the time period that we owned the African and Australian assets. Last year's fourth quarter was negatively impacted by $3.2 million in restructuring charges, which were also related to Mineral Services' exit from these locations.

Looking more in-depth at divisional performance. We are seeing good momentum in both Inliner and Mineral Services. Inliner's fourth quarter revenues were down a bit compared to prior year, reflecting lower levels of subcontracted work. Adjusted EBITDA of $7.1 million in the fourth quarter compared to $8.6 million in the same period last year, which was an especially good quarter. EBITDA this quarter was negatively impacted by about $1 million of accounting-related margin suppression that we expect should reverse in the first half of fiscal '18. Inliner overall had a superb year in fiscal '17 with nearly $200 million in revenues and $32 million in EBITDA. And that was an increase of 15% over the prior year fiscal '16. The Inliner business continues to capitalize on good market conditions. And we're looking to add 1 or 2 more crews over the course of this fiscal year.

Fourth quarter revenues for Mineral Services increased by 29% over the year earlier period. And we're seeing increased activity in Brazil, the Western U.S. and also Mexico. Adjusted EBITDA for the segment during the quarter was $1.8 million compared to a negative $1.9 million for last year's fourth quarter. As a reminder, Q4 is typically a slow quarter, especially in Mineral Services. We've seen overall rig utilization increased from around 30% a year ago to almost 50% in Q4. So we're encouraged by the recent pickup in activity, the modest improvements in commodity prices and also growing equipment utilization.

Revenues at Heavy Civil fell 15% in the fourth quarter compared to the same period last year, mostly due to our strategic repositioning and more selective approach towards pursuit of new contracts. As we discussed in the third quarter earnings call back in December, we had been notified as being the winning bidder on about $100 million worth of jobs at Heavy Civil that were not yet reflected in backlog at October 31. Those jobs have now been officially contracted and backlog in Heavy Civil increased by more than $120 million during Q4 to $193 million compared to $72 million at the end of the third quarter. Adjusted EBITDA in Heavy Civil for the fourth quarter was negative $3.5 million. That was primarily due to lower margins on 3 jobs, all of which are nearly completed. For the full year, Heavy Civil EBITDA was negative $3.2 million, which was an improvement of $0.8 million versus fiscal year '16. And while we're pleased to see the modest improvement in Heavy Civil performance, we recognize that division has produced negative EBITDA for each of the past 5 years. And this certainly highlights an important reason behind our decision to divest the business. With the sale of the business, we will move this division to discontinued operations in our future financial reports.

Looking at the Water Resources division. Revenues declined 38%, or about $22 million in the fourth quarter. For the year, Water Resources revenues declined 15% or $35 million for the year. When you look at that $35 million, the West comprised about $23 million of the $35 million decline. And virtually, all of that was within the water drilling product line. In addition to lower revenues in the West and higher cost on the projects that we've already discussed, the division's performance was negatively impacted by reduced equipment sales and also lower energy-related temporary water transfer services. Adjusted EBITDA in Water Resources was negative $7.5 million for the quarter. Weakness in the West impacted Q4 EBITDA by about $2.5 million. And 5 of the problem jobs that we talked about contributed $5 million to the reduced EBITDA in the quarter. Backlog in Water Resources fell to $49 million from $60 million at the end of October due to less drilling work in the West, although we have seen backlog increased a bit since the end of the fiscal year over these past couple of months. Backlog on a consolidated basis was $360 million at the end of January. That compares to $244 million as of October 31. And of course, the increase during the quarter was primarily driven by those new jobs that we signed up at Heavy Civil.

We ended the year with cash of $69 million compared to $66 million at the end of fiscal 2016. We reduced our working capital levels, exclusive of cash and a currency translation liability that's reflected in current liabilities. The total reduction for working capital was about $17 million year-over-year. And we also realized $10 million from the sale of assets that we disposed of during the year. We have nothing drawn against our $100 million revolving credit facility. And we ended the year with $141 million of available liquidity to fund as cash and availability under our revolver. We have no cash flow or EBITDA maintenance covenants under any of our credit facilities.

These ongoing improvements in liquidity and the cash generation create greater financial flexibility that are expected to allow us to make selected growth investments over the course of the year. Going forward, we remain focused on improving our overall profitability with the specific focus on Water Resources, enhancing our cash flow and further reducing overhead cost.

And with that said, I will turn things back over to Mike for his closing remarks.

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Michael J. Caliel, Layne Christensen Company - CEO, President and Director [5]

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Great. Thanks, Michael. Looking at fiscal 2018, our focus is around 4 key priorities. First, getting Water Resources back to profitability at EBITDA level. And as we address our project risk management issues, we'll work to exploit repair and installation opportunities that are driven by the large base of existing wells that require ongoing maintenance.

Second, exploiting growth opportunities at Inliner, where we just produced a record year in fiscal 2017 in terms of EBITDA. Inliner has grown EBITDA by a combined annual growth rate -- or compounded annual growth rate, I should say, of 21% over the past 11 years.

Third, in Mineral Services, we've positioned ourselves to capitalize on the recovery in the mining industry. And we're seeing a slight improvement in commodity prices, especially for copper and gold as well as a pickup in activity in Mexico, in Brazil and in the Western U.S., which has translated into improved utilization of our rig fleet.

And finally, tightly managing our cost structure and liquidity while making selective and strategic investments in our 3 core businesses: Inliner, Water Resources and Mineral Services.

So with that in mind, let me provide you with some preliminary thoughts on our outlook for fiscal year 2018. And as you've heard me point out previously, we're in the midst of a comprehensive business turnaround at Layne's, designed to reduce our cost structure, enhance our efficiencies and strengthen our financial position, all with the goal of improving our profitability and enhancing shareholder value.

Strategically, we remain committed to our water-focused strategy, and the divestiture of Heavy Civil moves us further down that path.

And we clearly have more work to do to improve profitability at Water Resources. And as I've said previously, we believe Water Resources is inherently an excellent business. We have a 135-year history, a market leadership position and outstanding opportunities for growth. And we have a clear understanding of the issues we've encountered. And more importantly, we believe we have the experience, the track record and the know-how to address and fix these issues. And as our problem jobs roll off, and we grow our repair and aftermarket work, we expect margins in Water Resources to return to more normalized levels. In addition, we're also positioning our water business to take advantage of the upturn in the energy space, where the need for water for hydraulic fracturing is growing exponentially.

The outlook for Inliner remains very good. It has the technology, the capacity and the market presence to meet the growing needs of our country's aging water infrastructure. And given our strong backlog of $117 million and the anticipated additional work under our long-term renewable contracts, the division continues to execute its well-proven growth strategy. And we believe that the recent manufacturing capacity addition at our Indiana facility and expanding the number of crews, coupled with the potential for an expanded footprint westward, will further strengthen our position in this industry and be a key profit driver this year.

With respect to Mineral Services, the outlook includes higher revenue and increased profitability in fiscal year 2018, driven by increased activity and asset utilization in the Americas. And our key objective for this fiscal year is to capitalize on this nascent recovery. And although pricing hasn't yet improved, our activity has benefited from a change in product mix with the growth of our mine water management capabilities. And in addition, we anticipate further progress in reducing unallocated corporate SG&A expenses.

The bottom line here is that this entire management team remains focused on returning Layne to profitability in fiscal '18. And clearly, that objective is now more challenging as a result for the issues we've encountered in Water Resources.

Let me also remind you the strong position we hold in all of our markets. Our Water Resources division is #1 in water well drilling. Inliner is #2 in trenchless pipe rehabilitation. And our Mineral Services business is the #3 mineral services provider in the Americas. And over the long term, the outlook for water demand is very strong, driven by several factors, including growing demand for both agriculture and industry, groundwater withdrawals that often exceed recharge rates and by the fact that population growth is occurring in some the most water-challenged regions of the country. We're extremely well positioned in the markets we serve. And we believe we have the right strategies in place to capitalize on the opportunities in these markets.

And finally, let me highlight an item that is important to us and one that we haven't necessarily highlighted previously. And that is our commitment to providing responsible and sustainable solutions to address the world's need for water and minerals. Protecting our essential resources is a continuing focus for Layne. And as we move forward, we'll continue to develop and deliver products and services that provide society with access to safe, clean and reliable sources of water.

And with that, let's open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) I will now turn the call back to management for closing remarks.

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Michael J. Caliel, Layne Christensen Company - CEO, President and Director [2]

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Very good, Rob. Thanks very much. Well, thank you, everyone for joining us this morning. We appreciate everyone joining the call. We'll be conducting another call in a few weeks. We very much appreciate your interest, and we'll speak with you in a few weeks. Thank you very much.

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Operator [3]

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Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may now disconnect your lines, and have a wonderful day.