Layne Christensen (LAYN) Q4 2018 Earnings Conference Call Transcript

Layne Christensen (NASDAQ: LAYN)
Q4 2018 Earnings Conference Call
April 11, 2018 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings and welcome to the Layne Christensen Company Fourth-Quarter Earnings Conference Call. [Operator instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce Jack Lascar.

Thank you, Mr. Lascar. You may now begin.

Jack Lascar -- Dennard Lascar Investor Relations

Thank you, Rob, and good morning, everyone. We appreciate you joining us today for our the fiscal year 2018 fourth-quarter and year-end 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 that 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 of Layne's fiscal year 2018 Form 10-K entitled Risk Factors and Forward-Looking Statements in addition to other documents as filed with the Securities and Exchange Commission. We do not intend to update these forward-looking statements and undertake 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.

You can find definitions of our non-GAAP measures and reconciliations to their nearest GAAP measures in yesterday's earnings release and on our website. Before I turn the call to Mike, please be aware that Layne and Granite Construction have filed a registration statement relating to our proposed merger and are in the process of finalizing that document with an eye toward a timely closing of the transaction during the second quarter of this year. Given that we remain in SEC review, we will not take questions on the transaction at this time, although we will refer you to the preliminary filing, which can be found on Granite's website as well as the SEC site. With that said, I would like now to turn the call over to Mike.

Michael J. Caliel -- President and Chief Executive Officer

Great. Thanks, Jack. And good morning, everyone, and thank you for joining us this morning. Today, my comments will center around two primary areas.

First, I'll provide the key highlights for our annual and fourth-quarter performance. And then I'll review the progress that we've made in moving the company forward. And of course, Michael will provide a more detailed review of our financial results.So starting with our the fiscal year 2018, revenues increased by just over 2%, led by improvements in mineral services and Inliner, offsetting declines in water resources. And we also started up our new water midstream operation during the year and continue to reduce our unallocated corporate expenses, which declined by about $3.5 million year over year.

For the year, we reported $35 million of adjusted EBITDA, compared to $14.4 million in the fiscal year 2017. The adjusted EBITDA improvement did not quite result in net income for the year, and the shortfall was largely related to lower-than-anticipated performance in water resources. For the full year, the net loss from continuing operations was $4.9 million.Our overall financial performance in the fourth quarter of the fiscal year 2018 reflected a 10% increase in revenues, driven by Inliner and water resources, including the water midstream business, as well as lower unallocated corporate expenses. Adjusted EBITDA was $5.5 million, compared to an adjusted EBITDA loss of $4.2 million a year ago, and this was led mainly by improved performance in water resources.

Inliner revenues increased 9% and adjusted EBITDA increased 4.5% despite the impact of severe winter weather that delayed some jobs. Mineral services revenues were up 16.7% during the fourth quarter compared to the prior-year period, and that was due to increased drilling activity, primarily in the western U.S. Our performance was, however, below our expectations, with adjusted EBITDA for the fourth quarter essentially flat with the prior-year period. That was due to some unexpected delays on two customer jobs in Mexico, and these customer delays have continued into the first quarter but we currently expect a resolution and resumption of activity during the second quarter.In water resources, we saw an improvement versus the prior-year period, both at the top line and at the adjusted EBITDA level, and this is despite the ongoing softness in the water well-drilling market in the West.

Water resources also continues to face headwinds from heavy precipitation and weather events in the Midwest, along with the ongoing softness in the water well-drilling market in the West. For water resources, revenues were up modestly year over year. And adjusted EBITDA was also up due to reduced job losses versus the prior-year period, primarily in our injection-well business. During the quarter, we benefited from the performance of the water midstream business that was not operational in the fourth quarter of fiscal 2017.

With respect to the water midstream business, in January, we completed the 6-mile northward extension of the Hermosa pipeline, serving producers further north in Reeves County, and we sold some water during January through the extension.Now with respect to market highlights for the quarter. We're seeing relatively stable market conditions in most of our business lines despite typical seasonal slowdowns in the winter months. As it relates to water resources, we continue to experience weakness in the California agricultural drilling market, although the lower precipitation levels that we've seen thus far this winter may reduce surface-water allocations this spring, which could result in increased activity in that market. Again, balancing that, we've also been experiencing lower agricultural drilling activity in the Midwest portion of the country related to higher-than-normal precipitation levels.Inliner continues to see good industry growth opportunities.

Backlog was up sequentially year over year at $131 million as the two new jobs we mentioned in December were booked during the fourth quarter. The minerals market continues to reflect encouraging signs, with an increased workforce in the western U.S. driven by improved copper and gold pricing. Gold was up about 6% year over year, and copper is up about 16% year over year.In mineral services, fleet utilization remained flat at around 50% and at these utilization rates, we continue to see limited opportunities for any meaningful improvement in pricing.

However, we are seeing a pickup in activity in Brazil and with our affiliates in Chile and Peru.So with that, let me turn the call over to Michael to review our fourth-quarter results in a bit more detail.

J. Michael Anderson -- Senior Vice President and Chief Financial Officer

All right. Thanks, Mike, and thanks, everybody, for joining the call this morning. I'm sure that you've noted that we filed the earnings press release, along with the Form 10-K with the SEC yesterday. So, of course, those are available to you for the call and for additional details.

First of all, I'll go through the fourth-quarter information, and then move on to the full year. Please keep in mind that the fourth quarter is seasonally our slowest quarter of the year in terms of revenues and earnings. For the quarter, consolidated revenues were up 10% to $110 million in Q4 compared to a year ago, although it was down about 13% sequentially compared to the third quarter, with our normal seasonality in the winter months.Adjusted EBITDA for the quarter was $5.5 million. That compares to an EBITDA loss of $4.2 million a year ago.

Actually, the improvement was driven primarily by the improvement in water resources that, a year ago, had produced negative EBITDA. During this year's fourth quarter, water resources generated $1.3 million of adjusted EBITDA, and we also benefited from improved profitability on a year-over-year basis in both of our Inliner and our mineral services businesses. We did record positive net income from continuing operations in the fourth quarter of $2.7 million, and that's $0.14 a share, compared to a net loss from continuing ops of $29.2 million, or $1.47 per share, in the same period last year. Net income was positively impacted during this quarter by about $10 million in tax benefits primarily related to the reversal of accrued foreign taxes that we had recorded in prior years.Unallocated corporate SG&A expense during the quarter was $5.2 million, and that compares to $5.6 million in last year's fourth quarter.

D&A, depreciation and amortization, expense for the fourth quarter increased slightly to $7 million, compared to $6.3 million a year ago.Now moving on to the fiscal year '18 full-year results, revenues for the company rose 2% to $476 million. Adjusted EBITDA increased to $35 million from $14.4 million a year ago. The unallocated corporate SG&A expense for fiscal '18 was down by $3.5 million. That's about 15%, and that was led by lower legal and professional fees, partially offset by increased incentive compensation related to the improved performance during this year.Looking at the divisional performance, let's first of all start with Inliner.

Fourth-quarter revenues there were up 9% year over year to nearly $50 million. That reflects an increase in activity levels, some higher levels of subcontracted work, and also some larger-diameter pipe jobs. Inliner generated $7.4 million in adjusted EBITDA for the fourth quarter. That compares to $7.1 million a year ago.

EBITDA margins were steady at 15% of revenues. The adverse weather conditions, which were mainly the significant storms in the Midwest and the Northeast, where a lot of our work is, impacted Inliner late in the fourth quarter and also continued into the early part of the first quarter. And we anticipate that they will likely impact Q1 results modestly. For the full year, Inliner's revenues increased by nearly 5% and were primarily driven by increased large-diameter work and more work in the Midwest.

EBITDA for the year increased 2% to $32.7 million in fiscal year '18, compares to $32 million a year ago. And EBITDA margin of 16% was flat between the fiscal year '18 and the fiscal year '17. The backlog had a nice little increase; it reached $131 million on January 31, 2018, based upon the addition of the two significant new jobs that we placed into backlog during the quarter.If we move over to mineral services now. Fourth-quarter revenues increased 17% to $21 million from last year's fourth quarter, and that was led by continued activity in the Western U.S., Mexico, and also in Brazil.

Adjusted EBITDA for minerals in the fourth quarter was $1.9 million, and that compares to $1.8 million a year ago. The modest increase was driven by increased dividends from the Latin American affiliates. Our affiliate dividend contributed $2.1 million during the quarter. So our wholly owned mineral services business generated slightly negative EBITDA during the quarter due to underperformance in Mexico as well as the typical seasonal slowness that we get from the holiday shutdown of some of the mines that we work at.

For the full year, revenues in mineral services increased to over $97 million, and adjusted EBITDA more than doubled year over year to $17 million. By comparison, in the fiscal year '17, revenues were $64 million and EBITDA was $8.6 million. We currently anticipate that the project delays in Mexico will continue in the first quarter but we do expect the activity in Mexico to recover in the second quarter.Let's move over to water resources now. Fourth-quarter revenues there, up 9% to $39 million in the quarter, compared to $36 million a year ago.

And that increase was primarily due to an increase in the injection-well-drilling and also water-treatment business and, of course, the incremental benefit from our new water midstream business. The increase in revenues was partially offset by decreased revenues in agricultural drilling projects in the western and also the Midwestern United States. Fourth-quarter adjusted EBITDA for water resources was $1.3 million, and that's up from last year's EBITDA loss. The division benefited from $1.3 million of EBITDA from the Hermosa pipeline, and that was partially offset by our midstream SG&A business-development expenses, which were about $600,000 for the quarter.

And those development expenses are largely related to activity around our Texas General Land Office acreage and also other business-development opportunities. For the year, water resources revenues were down about 16%. That's from $205 million a year ago to $172 million in the fiscal year '18. That was primarily due to a decrease in agricultural drilling projects as well as the effect of the closure or consolidation of nearly one-third of our water resources offices over the past two years and our cost-cutting and restructuring efforts.

The decreased water-well drilling work during the year contributed about $20 million of that year-over-year revenue decline. EBITDA in water resources was $5.3 million for the year, and that compares to a negative $2.4 million in 2017 with reduced job losses at some of our troubled fiscal year '17 projects. Total backlog in water resources was $48 million at the end of the year, and that compares to $49 million at the end of the year a year ago.Now turning over to water midstream. During the last earnings call that we had in early December, we noted that we had just signed the Texas General Land Office agreement.

Thus far, we have focused most of our development efforts on one of the key GLO contiguous acreage positions in western Reeves County that's particularly active. There, we have drilled six water wells on the acreage, and we're in the process of completing construction for two water ponds with 1 million barrels of storage capacity. Total capex for this acreage, thus far, is under $5 million. And while we've not signed any term contracts with producers near this acreage and aren't officially producing water until we have the storage complete, we are having a very meaningful dialogue with producers who need completions water in the area, and we do expect to generate water sales from this acreage in Q2.Over the full course of our the fiscal year '19 period, we are looking to spend a total of $15 million to $20 million of capital on GLO development.

And while we remain very optimistic about the prospects of the water midstream business, midstream will require additional capital over time, and as such our capital structure and availability could impact the [Inaudible] business. We do believe that there will be opportunities for significant capital investment in midstream over the next two to three years.Let's look at our liquidity. For the year, we ended the year with a cash balance of $32 million. That gives us liquidity of $107 million, compared to $102 million, which was at the end of the third quarter.

We still have nothing drawn against our $100 million revolving credit facility. During the quarter, we spent about $9 million in capex, about half of which was related to our midstream business and the extension of the Hermosa pipeline. For the full year, capex totaled $50 million, versus $22 million a year ago. The biggest part of that increase was related to the midstream business.

Interest expense was $4.4 million, compared to $4.2 million in last year's fourth quarter.Let me also cover the capital structure just in a little bit more detail. In late March, we obtained a loan commitment that is designed to refinance our $70 million of 4 1/4% notes that mature in November of this year. We needed to secure this financing commitment in order to exhibit Layne's ability to handle all of our debt maturities over the next 12 months and avoid any going-concern issues that we might have with our auditor. We obviously have accomplished that goal and have a clean audit opinion reflected within our 10-K.Now I'm sure that many of you have read our S-4 related to the merger and seen some of the high-level forecasts for the Layne business.

While we have not historically provided and are not currently providing with these comments any guidance, we thought it would still be helpful to provide some color on our expectations for the fiscal year, much like we did last year.So going division by division, first of all, in Inliner. We expect continued, albeit relatively modest, improvement in the Inliner division during fiscal year '19. We expect modest but continuing improvement in the mining market. That's related to better commodity prices and also more mining activity.

We've seen mineral services improving financial performance in fiscal year '19 over their fiscal year '18 results despite the recent weakness we've had in the Mexican operations. And we see modestly improving asset utilization but little or no pricing improvements in the market. We expect improvement in our water resources division, led by cost reductions and the restructuring programs that we've implemented over the course of the last year and a half. Also reduced impact from problem jobs that we saw in fiscal year '17 and trailed a little bit into fiscal year '18.

And thirdly, potentially modest improved market conditions in key locations such as California and the West, where, if we have less precipitation, we could see a pickup in some water-well-drilling activity. We expect to step up in the water midstream business, and that is related to both having a full year of operations on our Hermosa system and also benefits from our forecasted $15 million to $20 million of capital spend related to the Texas General Land Office. Most of the GLO earnings will be in the back half of the year or even stretching into the fiscal year '20, as we're still early in the capital investment phase. From a total perspective, we expect capex for Layne during the fiscal year '19 to be between $40 million and $50 million for the year.So with all those comments, I think, operator, we'll just go straight to questions and take questions on our fourth-quarter and full-year results.

So with that, operator, please, we are ready for questions.

Questions and Answers:

Operator

[Operator instructions]. Our first question is from the line of Martin Englert with Jefferies.

Martin Englert -- Jefferies -- Vice President

I believe you touched on this briefly. I just want to see if you could go over the details again. Within water resources during the fourth quarter, could you go over the energy EBITDA contribution and the development costs that were associated with the profitability for the quarter?

J. Michael Anderson -- Senior Vice President and Chief Financial Officer

Yes, Martin. Sure. The Hermosa project, which we provided specific guidance on our kind of returns on capital there, we did $1.3 million of EBITDA from that project. Additionally, we had $600,000 of SG&A business-development expense.

All that BD expense is not related to Hermosa. It's related to the Texas GLO and other projects we're working on.

Martin Englert -- Jefferies -- Vice President

OK, got it. And you were expecting GLO contribution in the second half of this fiscal year?

J. Michael Anderson -- Senior Vice President and Chief Financial Officer

Yes, we plan to sell water and have revenues on GLO lands actually in Q2 of this year.

Martin Englert -- Jefferies -- Vice President

OK, got it. And one other, if I could. Within mineral services, can you provide some more detail regarding the two project delays in Mexico and why you would expect this to improve going forward?

Michael J. Caliel -- President and Chief Executive Officer

Yes, Martin. The two project delays, as you pointed out, were in Mexico. One related to labor issues at a mine site in Mexico. The other related to a postponement of some water-management work that was ongoing.

The labor issues were protracted for about four months. We're returning to work in the second quarter. The deferral of the project ended up being a cancellation. And those assets, which were one of our largest revenue-producing rigs that we have in our fleet, have been redeployed.

And, again, we expect in the second quarter that we'll be seeing revenue again from that asset.

Operator

Our next question comes from the line of Jon Braatz with Kansas City Capital.

Jonathan Braatz -- Kansas City Capital -- Analyst

Going back to the water resources. Drilling activity, obviously, in the Permian and Delaware Basin is pretty active, and the demand for water continues to be strong. Are you seeing any changes in the pricing of water in those markets?

J. Michael Anderson -- Senior Vice President and Chief Financial Officer

No. No material changes. There's still a wide variety of kind of subregions as you kind of go around the Delaware Basin. Water, as we know and as we base some of our models on, is not easily transported, and so you can find some areas that have relatively low-priced water and areas, especially as you're going north and west of our Hermosa pipeline, where water is more expensive.

That's kind of the theme that we had whenever we built the Hermosa pipeline. But we really haven't seen much in the way of changing water prices. We have seen continued, I think, modest increases with a number of operating rigs from oil and gas producers, so that's a good sign. And the other trend that we've talked about before is that right now, a lot of the acreage that is getting drilled up is being done to retain the acreage for the producers so they're kind of moving and doing single- or double-well pads.

We think that potentially, in the relatively near future, they come back and do more in-depth multiwell pads and in certain locations, have bigger needs for water as opposed to moving the rigs around a lot, which is what's happening today.

Jonathan Braatz -- Kansas City Capital -- Analyst

OK, OK. Originally, in regional development, you talked about the Hermosa pipeline. I think you were suggesting that the EBITDA margins were 50%, something like that. So could we conclude that Hermosa revenues in the quarter were around $3 million, $2.6 million or something like that?

J. Michael Anderson -- Senior Vice President and Chief Financial Officer

Yes. So what we have said is it's a very high EBITDA margin business just because we put capital into the ground. We own the water, we own the land, and so there's not a lot of marginal cost. What we've also said is that we're really reluctant to provide data that kind of backs into volume and prices and revenues even for midstream just from a competitive standpoint.

There are a lot of competitors out there selling water, and none of them are, for the most part, public. So for competitive reasons, we'd rather not get into those detail.

Jonathan Braatz -- Kansas City Capital -- Analyst

OK, OK. One last question. Are you getting any requests or interest from the drillers to develop sort of an integrated water-management program, recycling some of the produced water and so on?

J. Michael Anderson -- Senior Vice President and Chief Financial Officer

Yes. One of the nice things about being at the front end of when producers need water, which is for the fracking and completion operations, is we get to know them and work with them, and I think we've done a great job so far. Once they've completed wells, what you're finding, especially in the Permian Basin, is water cuts are pretty high. And their next problem is, what do you do with the disposal of that? And so that is the thing that everybody in the Permian is talking about.

How do you handle produced water? And our strategy is to have basically a full-cycle water system that has both completion source water as well as handling produced water. And we think kind of the Holy Grail is to be able to provide solutions for producers to be able to take that produced water, recycle it, and be able to use it back into the completion stream.

Operator

At this time, I would like to turn the floor back over to management for closing comments.

Michael J. Caliel -- President and Chief Executive Officer

Great. Thank you very much. Thank you all for joining us this morning. We certainly appreciate your ongoing interest, and we look forward to speaking with you again soon.

Have a great day.

Operator

[Operator signoff]

Duration: 28 minutes

Call Participants:

Jack Lascar -- Dennard Lascar Investor Relations

Michael J. Caliel -- President and Chief Executive Officer

J. Michael Anderson -- Senior Vice President and Chief Financial Officer

Martin Englert -- Jefferies -- Vice President

Jonathan Braatz -- Kansas City Capital -- Analyst

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