DMC Global Inc (BOOM) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2006 Dynamic Materials Earnings Conference Call.

My name is Enrique, and I'll be your audio coordinator for today.

At this time, all participants are in a listen-only mode.

We'll be conduction and question-and-answer session towards the end of the conference. [OPERATOR INSTRUCTIONS]

I would now like to turn the presentation over to your host of today's call, Mr. Geoff High with Pfeiffer High Investor Relations.

Please proceed, sir.

Thank you, Enrique.

Good afternoon and welcome to Dynamic Materials' second quarter conference call.

Presenting on behalf of the Company will be President and CEO, Yvon Cariou, and Chief Financial Officer, Rick Santa.

I would like to remind everyone that matters discussed during this call may include forward-looking statements that are based on management's estimates, projections, and assumptions as of today's date, and are subject to risks and uncertainties that are disclosed in Dynamic Materials' filings with the Securities and Exchange Commission.

The Company's business is subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in its forward-looking statements.

Dynamic Materials assumes no obligation to update forward-looking statements that become untrue because of subsequent events.

A webcast reply of today's call will be available at dynamicmaterials.com after the call.

In addition, a telephone reply will be made available for 48 hours beginning approximately two after -- two hours after the conclusion of this call.

Details for listening to today's call or webcast are available in today's news release.

With that, I would like to turn the call over to Yvon Cariou.

Yvon, please go ahead.

Thank you, Geoff and thanks to all of you who have joined us for our fiscal 2006 second quarter conference call.

This is our first call in some time so we would like to extend a welcome to our many new investors, including those of you who joined us as part of our recent secondary stock offering.

It was another very strong quarter for DMC.

Our sales results reached an all-time quarterly high of $27.8 million, and this was achieved at the same time we [invested] our order backlog by another 24% since the close of our first quarter.

Rick will provide you with a more detailed look at our financial performance in a moment.

First, I would like to give you some color on what is driving our growth and also address a few additional highlights from the quarter.

We've been very encouraged by the continued strong demand we are seeing for our exclusive welded plates from virtually every industrial market we serve.

Capital investments within the energy market continue to drive significant order volume for our quarter.

Expansion, upgrade, and [indiscernible] making project within the U.S. refining industry have led to particularly strong demand and we believe this will continue for the foreseeable future.

From a global perspective, several new refineries are either under construction or slated for development, and we expect these projects will incorporate a significant amount of explosion-welded plates.

The $11 million order we recorded in May, which was the single largest order in DMC's history, was for clad plates that will be used in a refinery under construction in eastern New York.

Activity in the hydrometallurgy, aluminum smelting, and power generation industries also remains strong while business from the petrochemical and chemical sector has been steady.

We are pursuing a bold spectrum of both near-term and longer-range prospects within each of these sectors.

As a world-leading provider of explosion-welded plates, we believe we are well positioned to address a large number of these opportunities.

One of the best indicators of our ability to address market demand is the expanding order backlog at our explosion-welded business.

Backlog has grown consistently during the past two years and reached a record $52.4 million at the end of the second quarter.

The ramp up of business at our AMK Welding segment is taking a bit longer than expected due to the slower-than-anticipated commercialization of a customer's ground-based turbine system.

Nevertheless, we consider that this will be a major program for AMK during the next several years, and we are upgrading our AMK commercial facilities to prepare for the goal.

We have previously announced that we are making major investments in new capacity, particularly at our Mount Braddock, Pennsylvania facility.

To better meet anticipated market demand, we have added $1.6 million of specialized equipment to the Mobile expansion project, which increases the project budget to $9.6 million and our 2006 consolidated capital expenditure budget to $14.1 million.

Again, we are funding these investments entirely with cash on hand.

I am pleased to report our capacity expansion programs are progressing smoothly, and we are on track to complete the Mobile project by the end of next year second quarter.

I will now turn the call over to Rick Santa for a review of our second-quarter financial results.

Rick?

Thanks, Yvon.

As mentioned earlier, second-quarter sales increased 51% to an all-time high of $27.8 million.

This compares with sales of $18.4 million in the second quarter last year.

Sales were stronger than anticipated due to our early fulfillment of certain customer orders that were originally scheduled to ship during the third quarter.

The Q2 2006 gross margin was 36% versus 28% in Q2 last year.

The increase was primarily the result of our sales growth, more favorable absorption of six manufacturing expenses, and changes in our product mix.

Gross margins for both the first and second quarters were strong and exceeded the expectations we had when we entered 2006 due to better-than-anticipated sales and favorable product mix.

Income from operations advanced 127% to $7.8 million from $3.4 million in Q2 last year.

Net income increased 137% to $5 million or $0.41 per diluted share from $2.1 million or $0.18 per diluted share in last year's second quarter.

With respect to our costs as a percentage of sales, general administrative expenses decreased to 4.2% from 4.9% in the second quarter of last year.

In dollars, general administrative costs during the quarter increased 28% to $1.153 million from $898,000 in the second quarter last year.

The $255,000 increase reflects higher incentive compensation expense and legal fees, the impact of annual salary adjustments and costs associated with our transfer to the NASDAQ national market.

Selling expenses, as a percentage of sales, decreased to 3.4% from 4.7% in the second quarter last year.

In dollars, selling expenses increased by 9% to $946,000 versus $870,000 in the second quarter a year ago.

The $76,000 increase was a result of annual salary adjustments, higher sales commission and higher travel expenses.

Turning to our balance sheet, cash and cash equivalents at the end of the second quarter sit at $14 million.

This represents an increase of 143% since the end of fiscal 2005 and an increase of 7% since the end of the first quarter.

At June 30, we had working capital of $30.6 million.

That's compared with $21.7 million at the end of 2005.

As usual, we will not be providing specific quarterly guidance on expected top- and bottom-line performance.

However, our current expectations are that our sales and earnings during the second half of the year will be comparable to the results we reported in the first half.

As a result of our previously discussed early delivery of certain orders that were originally scheduled for shipment in the third quarter, we believe sales and gross margin during the third period may drop below those results in the first and second quarter.

However, our fourth quarter performance should be very strong due in part to our expected deliveries on the $11 million refinery order we received during the second quarter.

With that, we are now ready to take questions.

Operator.

Thank you, sir. [OPERATOR INSTRUCTIONS]

Your first question comes from the line of Michael Gambardella from JP Morgan.

Hi guys.

It's actually Jeff Largey.

Mike couldn't make the call.

Hello, Jeff.

Hi, Jeff.

Good quarter.

It was very, very strong.

I had a quick question just on the refinery order for the fourth quarter.

Will that $11 million order be reflected in its entirety in the fourth quarter or will it be spread out and roll over into the 2007?

It will be reflected in the -- in its entirety in the fourth quarter.

Okay.

And you guys can't give anymore specific guidance as to margins in the second half of the year?

The margins for the second half of the year, we said would be comparable to those for the first half.

Obviously, one factor in looking at margins is the way that our fixed manufacturing costs are absorbed.

So if we have lower sales in the third quarter than in the fourth quarter, we would expect an impact on gross margins in that quarter.

But on the other side, the fourth quarter margins should be somewhat stronger then.

Okay.

Great.

Thanks then.

Sir, your next question comes from Yvonne Varano from Jefferies.

Thanks.

Rick, on the G&A expense can you just remind me why it was so much higher in 1Q?

It seems to have dropped from 1Q in 2Q put obviously up from since --

That's a good question, and the biggest single reason relates to stock-based compensation expense.

In the first quarter, we had stock-based compensation expense of $307,000 in the G&A line item.

Mm-hmm.

And we actually had an adjustment in the second quarter due to the departure or the resignation of four directors that represented group [SNB].

Right.

And the compensation associated with the option grants that were cancelled as a result of their termination resulted in a reversal of expense reported during the second quarter that actually exceeded the remaining expense for that quarter.

Right.

So there was more than a $300,000 variance just from the stock-based compensation expense.

And then as we look at that going forward, it should be closer to the 1.2?

Yes.

We would expect that.

But at this point in time we -- when you look at our 10-Q, which we'll be filing shortly, you'll see some information there, and I think I'll just hold off and let you look at that.

We provide some indication as to what the expense would be in the second half of the year in absence of any additional option awards.

Okay.

And then, the same impact in the selling expense; selling expense seems to be a little bit higher in 1Q.

Is that also --?

No, the stock-based compensation expense did not really have an impact there.

The two quarters were fairly even with the amounts being fairly insignificant.

So the variance in the selling expenses really relates to the variable sales commissions which largely relate to European orders and that's impacted by product mix.

Some of the European business involves commissions, and some of it does not.

Okay.

The commission rates vary -- can vary significantly from segment business to segment business.

Okay.

It just seems to be heavier in 1Q or was so last year and this year.

Is that a trend for a specific year, reason you have more European in 1Q than you have --?

Yes, and I believe we disclosed in the first quarter 10-Q that we had a fairly significant commission on a U.S. export order, which, again, isn't the norm.

Right.

Most our U.S. sales do not involve commissions.

Okay.

Great.

Thanks very much.

Sir, your next question comes from the line of Eric Ribner from Northstar Capital.

Hi, gentlemen.

Hello.

Question regarding your capacity utilization.

What was it this past quarter?

It was -- we've been using capacity at around 90%, possibly, in the last couple of quarters.

Two words on that.

We have ongoing continuous improvement and [qualitivity] activities, and we keep stretching that capacity.

And we are -- so we are not constrained in our business by capacity.

And as you know, of course, that we are in the process of building capacity in the U.S., adding considerable capacity to what we have.

What -- how much capacity will that Mount Braddock project be?

We anticipate doubling the U.S. capacity.

Doubling capacity.

And you also cite that your -- you expect to maintain or you'd like to maintain your long-range growth trends.

What is your expectation for that long-range growth trend?

Well, we made a comment about the backlog, and we see in most of our market segment a lot of activity, and it's very hard for us not to see a continuation of the trend that we have seen recently.

If you particularly look at the new [indiscernible] growth of customer that we have of engineering companies, as you may read in the press, they are pretty loaded, and their backlog is increasing and stretching.

And as a consequence, we should normally see our long-term trend continue.

So I'm having trouble understanding why the third quarter might be lower than the first or second quarter if those trends continue, and you have the capacity to actually meet the demand.

Well, we are in the business that can be affected quarter-to-quarter -- I should say month-to-month -- by the kind of projects that we are fulfilling.

And regarding Q3, we were able, because we have metals on hand, to accelerate some of those orders in Q2.

On the other hand, a trend that we see in the metal supply is the lengthening of the carbon steel delivery, particularly in the U.S.

So we cannot quite do the same in Q3 with Q4 than we have done in Q2 with Q3.

However, we do not believe that that situation will continue and this situation localized in Q3, should not repeat in the subsequent quarters.

But again, quarter-to-quarter when we see that kind of situation.

So the delivery of the carbon steel is really the bottleneck in the third quarter and not anything --

Yeah.

It's a little bit of that, and virtually everything that we do involves a custom order.

And there's a lot of factors that affect the timing and production and shipment with metal deliveries into our shops also being a big key.

Okay.

Thank you.

Sir, your next question comes from the line of [Strath Neal] from Priority Capital.

Could you provide any additional information on the orders that were accelerated into the second quarter in terms of -- why did it happen?

Maybe what the impact on sales and margins might have been.

I think why it happened is we focused on servicing our customers, and our customers are building important capital equipment for various end users.

So we will always produce as optimally as we can.

So as soon as material comes into our shop, metals come into our shop, and we can fit it into the production schedule, we do that.

And it just so happened that we had very good deliveries during the second quarter.

So it did ship all in the second quarter?

We were able to accelerate a significant amount of what was originally schedule to ship in Q3 into Q2.

Okay.

So you --

The metal that we receive comes from the mills or from service centers, and those behave in different ways.

And for those particular order we had the metals, and we jumped on it, and we shipped it.

All our customers want to receive their order as soon as possible these days.

You know, we participate in the manufacturing of large capital equipment, and early delivery is a big plus for our customers.

Did you get any kind of price or margin profit bonus for that?

Or was it just --?

No.

Price was already established.

Those things were already in the backlog.

We just were able through the supply chain to accelerate the manufacturing and shipment.

Okay.

And second question -- in terms of the expansion capacity.

The additional equipment, I guess, this quarter was a little bit of a surprise.

Is there -- are there any other smaller projects associated with the larger one that you're considering or --

No.

-- is that pretty much it?

No.

This is just, you know, we continue to read the market demand, and we thought it would be very appropriate to add this particular piece of equipment.

It's going to help us focus better and be able to better service to the marketplace.

It was not something that was forgotten.

It is something that we thought we thought we could afford and, we put it on.

We had the space, and it's ongoing massaging of what we need to do to serve the market better.

Is it on the production side or the finishing side?

It's on the finishing side.

Okay.

All right.

Great.

Thank you very much.

You're welcome.

Sir, your next question comes from the line of [Paul Shaw from Setka].

Hi.

How are you guys doing?

Hi.

Good.

How you doing Paul?

Pretty good.

Hey, I have a quick question for you.

What were the gross margins by segment for the quarter?

We don't disclose the gross margins by segment.

We do disclose the operating income for each of the two segments.

You've historically disclosed gross profit margins for the quarter maybe in your Q, but I think you definitely have actually historically done that.

Paul, give us just a second.

Yeah.

Maybe while you're looking at that, just in terms of the large order.

The $11 million refinery order, that's the only one you've announced recently, right?

That's the only one?

Yes, that was the largest order, so we announced it.

In the last couple of years if you go back, we've been announcing large orders, and they seem to be getting larger.

Right.

Right.

Now, I just have -- maybe also since you're still looking that up, you've announced, I guess, in the fourth quarter you had a $7.5 million order for North American refinery work.

That's all delivered -- I assume that's all delivered in the --

That is all delivered.

That was all delivered --

That was all delivered in the second quarter.

That was all delivered in the second quarter.

Yes.

Okay.

So that didn't deliver at all in the first quarter, though; it's just in the second quarter.

There may have been some early delivery at the end of the first quarter, but it's mainly a second quarter activity.

That was mostly --

No, actually, there was some first quarter deliveries of that order.

Oh, really?

Yes, yes.

Okay.

And then, just to make sure -- all of the refinery order will ship in the fourth quarter.

Yes it will.

Okay.

So your question on the gross profit.

Gross profit margin.

Yeah, I was focusing in on what we disclosed in the press release.

In the 10-Q we do have disclosures of the gross margin rates for the two segments.

Right.

And in Q2 of '06, the Explosive Metal working margins were at 36.3% --

Mm-hmm.

-- versus 27.8% in the second quarter of 05.

Yes.

And AMK Welding was 24.9% in the second quarter of 2006, which was down from 37.6% in the second quarter of 2005.

Right.

And that follows the decrease in sales that they --

Right.

AMK Welding --

That's just adding to the expense load because of ratcheting up to the higher production level.

Right, for the GE turbine.

What -- you said -- was it a slow down in acceptance or is it a slow down, sort of delay in --?

It's a continuation of what started in Q4 of last year where the procurement of some key material is taking longer than expected because they are -- I think, the customer has been qualifying the set themselves, and there were some specification and quality verification that is taking longer.

And also, another set of minor tweaking in the design.

And we are the last supplier on the supply chain, and so we have the cumulative -- we receive the cumulative effects of all the people before us, and that is why it's kind of dragging a little bit.

But the outlook remains positive.

All right.

That's great.

Thank you very much.

You're welcome.

Sir, your next question comes from the line of Michael Shonstrom from Emerging Equities.

Yeah.

Hi.

Hello, Michael.

Hi, Mike.

How are you doing?

Good.

I had a question on the margins.

In the first quarter of this year you had -- you talked about a pretty good mix of business and overhead absorption that shot you up to close to 37% and was down in the second quarter from that.

Any guidance as to where we should think of that going forward?

Again, we indicated that the second half of the year should be largely comparable to the first half of the year.

But again, Q3, because of the expected decline in sales versus the Q1 and Q2, should be a lower gross margin, and then we should rebound in Q4.

Any comment about the mix of product in the backlog, whether there's a higher margin titanium, tantalum, stuff like that versus stainless?

I think, at this point, we expect the mix to be relatively stable and don't see any significant fluctuations in expected margins other than what happens with the overhead absorption.

Uh-huh.

I would color that a little more maybe by adding I don't believe that there is a metal system that would dominate the other in terms of mounting.

That's not how it works.

It's more on a project basis, so the metal mix, I think, doesn't have that much of an impact on how the margin comes out.

I got you.

Question about selling expenses.

I missed a part of the call.

I got cut off, and I'm just curious why that was down given the fact that your revenue was up quite substantially from Q1.

It relates largely to the commissions, principally, on European sales.

But in the first quarter of 2006, we had one fairly large U.S. order that involved commission, I think in the $140,000, $145,000 range.

Uh-huh.

And most of the U.S. sales do not involve commissions.

Got you.

And as you begin to build your plant out, do you expect a draw down in cash through the balance of the year ?

Or how does that look?

I guess the $14.1 million capital spending budget, some of which will carry over into next year in terms of the cash outflow, I think, we've spent less than $3 million during the first half of the year.

So we certainly would expect to see higher levels of spending on CapEx during the second half of the year.

But some of that will be [out best] by continued strong cash flow from operations.

As we've indicated, we expect the second half to look a lot like the first half, so we'll continue to generate positive cash flow from operations.

So you may not see the significant decrease in cash that you might expect based on the CapEx budget, but it will likely go down some.

More questions, Mike?

No.

I'm sorry.

You just got cut off.

I've got a crummy line here.

But I have no more questions.

Thanks.

Okay.

Sir, your next question comes from the line of [Bob Johnson from Sagewick Capital].

I've got a question in regard to the AMK division of a more general nature.

Given the large number of aircraft orders that we've seen -- the Boeing experience in addition to the success that GE has had -- one can infer that there are large backlogs which obviously will spread down the road.

Once AMK begins to accelerate, could you provide us a little bit background or flavor as to the slope of the takeoff in revenues?

Given the dramatically large number of aircraft engines, for example, and the very modest revenue so far with AMK, should one anticipate that your revenue ramp may be inclined with the two, three, or four year projection schedule?

I'm just trying to get a sense of how big, how soon.

Regarding the aircraft business, AMK, the business is divided in more or less equal part into -- between the turbine gas and aircraft engines.

There is a lot of talk about [Genex], and that is coming.

And we are not sure at this moment when we will not provide guidance, certainly, what the impact exact will be on AMK.

But, as you just heard, it's coming and we've been in that business for a long time, and hopefully we'll benefit from it.

We sell to GE, and we sell to [certain factor] of GE, and that weld, I'm sure will come to us.

But it's at a very early stage of that at this moment.

All right.

Just one quick follow-up.

Do you sell to the other manufacturers of aircraft engines as well?

Yes sir, we do.

We have a broad base of customers.

I think it's safe to say that the combination of the turbine business and aircraft has made GE a particularly important end user for us [indiscernible] tier suppliers.

Okay, fine.

Thanks.

You're welcome.

[OPERATOR INSTRUCTIONS]

Your next question comes from the line of [Bob Tossey].

My question has been answered actually.

Thank you.

Enrique, any more questions?

Sir, at this time we have no additional questions.

I'd like to turn the call back to Yvon Cariou for closing remarks.

Thanks again for joining us for today's call.

We are obviously very pleased with our second-quarter performance and are even more encouraged by our prospects for continued long-term growth.

We are working very hard to ensure DMC's well positioned to address the many opportunities we see on the horizon.

I want to thank all members of our workforce for their dedication and continued commitment to DMC's success.

I also want to thank our Board of Directors for their [practical] guidance and our shareholders for their continued support.

We look forward to speaking with you again at the end of our third quarter.

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes the conference.

You may now disconnect.

Have a good day.