DMC Global Inc (BOOM) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter 2006 Dynamic Materials Earnings Conference Call. My name is Tim and I will be your operator for today. (Operator Instructions.) As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Mr. Geoff High from Pfeiffer High Investment Relations. Please proceed, sir.

Thank you, Tim. Good afternoon, and welcome to Dynamic Materials Third Quarter Conference Call. Presenting on behalf of the Company will be President and CEO, Yvon Cariou, and Vice President and Chief Financial Officer, Rick Santa.

I would like to remind everyone that the 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 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 replay of today's call will be available at dynamicmaterials.com after the call.

In addition, a telephone replay will be made available for 48 hours beginning approximately two hours after the conclusion of the call. Details for listening to today's call or webcast are available in today's news release. And with that, I will now turn the call over to Yvon Cariou. Yvon, please go ahead.

Thank you, Geoff, and welcome to all of you who have joined us for our third quarter conference call. Hopefully, you have had a chance to review today's earnings release, which details another very solid quarter for DMC. In addition to strong financial results, which were in line with our internal forecast, we made important progress in our efforts to position the Company for continued growth.

Perhaps our most notable achievement was the $16.1 million we added to the backlog at our Explosive Metalworking business. This represents an increase of 31% since the end of our second quarter, and brings our total backlog to a record $68.5 million.

Our third quarter contract bookings were obviously very strong. And in fact, we have established a new single quarter record for orders. Among these contracts were the $8.7 million in orders we announced during September for work on the nickel hydrometallurgy project being constructed in Madagascar. These orders are a good indication of the continued strength we are seeing in the global metals markets. Our current expectations are that ongoing investments in nickel processing and aluminum smelting capacity will continue to benefit DMC over the long term.

We also are seeing sustained capital investment by the worldwide oil and gas industry. And again, we do not see signs of a let up in this activity anytime soon. Our hotlist, which tracks new contract opportunities across each of our target markets, is as robust as ever. As you know, we are taking aggressive steps to increase our production capacity, and the expansion programs at both our [indiscernible] site and our AMK Welding facility in Connecticut are on schedule and proceeding smoothly.

After a slower than expected start to production work under the long term [indiscernible] turbine supply agreement that we signed late last year, our AMK Welding business is beginning to benefit from increased production activity associated with this program.

I now want to turn the call over to Rick Santa, who will provide you with a review of our third quarter financial results. Rick?

Thanks, Yvon. Third quarter sales were $24.9 million, up 23% from the $20.2 million reported in the same quarter last year. Third quarter sales were below the $27.8 million we reported in this year's second quarter. You will recall that Q2 results benefited from the early fulfillment of certain customer orders that were originally scheduled to ship during the third quarter.

In spite of the accelerated deliveries, these were the strongest third quarter financial results we have ever reported. And Q3 represented the third best quarter in Company history. Gross margin in the quarter came in at 33% versus 32% in last year's third quarter. Income from operations increased 40% to $6.1 million from $4.4 million in the same period a year ago. We reported net income of $3.7 million, or $0.30 per diluted share, which was a 17% increase over last year's third quarter net income of $3.2 million, or $0.26 per diluted share.

Looking at our costs, as a percentage of sales, general and administrative expenses were 5.1% versus 5% in the same period a year ago. In actual dollars, G&A increased 24% to $1.3 million from $1 million last year. The increase resulted primarily from stock-based compensation expense, annual salary adjustments, an increase in directors' fees, and costs related to our transfer to the NASDAQ national market.

Selling expenses as a percentage of sales decreased to 3.6% from 4.2% in the third quarter last year. In dollars, selling expenses increased by 6.5% to $904,000 from $849,000 in the third quarter a year ago. The increase was a result of annual salary adjustments and higher travel expenses.

Our income tax rate for the third quarter came in at 40.8% versus 27.2% in the third quarter last year. We typically file prior year federal and state tax returns during the third quarter. In the third quarter of 2006, we reported slightly unfavorable tax provision adjustments related to the finalization of our 2005 tax return. By contrast, our 2005 third quarter effective tax rate was well below the full year 2005 effective tax rate of 33.5%, due to the favorable impact of a number of special tax projects completed during that quarter. Going forward, we expect that the effective tax rate on consolidated pre-tax income will be in the range of 37% to 38%.

Looking at our balance sheet, cash and cash equivalents came in at $19.2 million at the end of the quarter, and our working capital now stands at $32.4 million. We also reduced long-term debt through the early redemption of $1.6 million of industrial development revenue bonds.

Last quarter, we stated that our sales and earnings during the second half of fiscal 2006 should be comparable to the results we reported during the first half. Given the anticipated strength of our fourth quarter, we are reaffirming those sentiments. We currently expect that the entire $11 million refinery order we've discussed previously will ship in the fourth quarter. However, even if--the short-term supply chain issues push a small portion of this order into Q1, we will--we still expect to meet our performance objectives for the second half of the year.

With that, we are now ready to take any questions. Operator?

(Operator Instructions.) Your first question comes from the line of Gary Hauser, Private Investor. Please proceed.

You said star one. I thought you were restarting the Q&A. So, no question at this point.

Your next question comes from the line of Mike Shonstrom from Emerging Growth Equities. Please proceed.

How are you doing, guys? A question on the supply of stainless that you mentioned I guess at the beginning of last quarter--or your last quarterly conference call. Where does that stand? And have you made any efforts to sort of diversify your supply?

Yes. Hello, Mike. How are you?

Good.

We have observed during the past months a certain tension on the supply of metal. We use mainly for the base plate high alloys of carbon steel. And it's pretty difficult to really diversify the supply chain. We have been--I guess we are impacted particularly in the U.S. by the fact that the rolling mills are running at full capacity. We reported I think earlier that one of the key mills that works for us had a significant capital equipment breakdown, which is now repaired. And also, the Defense Department has all the armored plates for the same mill. And those products, like ours, go through the same heat treatment processes.

And all of that combined [indiscernible-accented], we believe that we will be back to a nominal situation early next year. In part--for different reasons--just I guess labor of activities in Europe, heat treatment facilities have been taxed. And also, we have had some challenges there. But again, we think we--those problems are being digested. There's not much we can do as far as diversifying that. The -- I was referring to the base plates of the plates we do, the flat plates, the corrosion-resistant material -- those -- that situation has been under control - titanium, aluminum, nickel alloys -- the situation there has not been too challenging.

Great. And you talk about an increase of about $16 million in your backlog. And I'm just curious whether that's coming from numerous small orders, is it focused on continued building in the petroleum refining area, or is it much more spread out than that?

It's all of the above, Mike. The oil and gas refining industry is strong worldwide. We are seeing small orders, large orders, in the U.S. and in Europe for various parts of the world. And, of course, we have the large hydrometallurgy project in this quarter that we have announced. So it's strong across the board, really.

And any comments about construction orders coming out of China?

Well, one piece of that hydrometallurgy order is coming from China, directly coming from China. And as has been the case for the past couple of years, a piece of the stuff that we sell in Europe to European fabricators, the end product goes to China.

And just a little bit on the financial side. I'm looking back at your G&A line. Going back to the first quarter, when you had a very strong quarter, those numbers were a lot higher than they've been in subsequent quarters, as well as your selling and marketing expense. I'm just curious, as we go into the fourth quarter, should we look at that as an indication of what kind of levels we should expect for those expense accounts?

Yes. Those -- hi, Mike. Yes, those expenses do vary some, but not very significantly. The G&A in the first quarter related to somewhat higher stock compensation in the first quarter than what we had in the second quarter. And the expense was also smaller in that category during the third quarter.

On the selling expense side, we had one fairly large sales commission hit in the first quarter. But going forward -- then I think we also had some carryover audit consulting projects that carried over from 2005 into the first quarter of 2006 that impacted the first quarter. Going forward, most of the variability would relate to sales commissions.

Okay. Great. Well, I'll step out of queue.

Thank you.

Your next question comes from the line of Trey Snow from Priority Capital. Please proceed.

I had a question initially about your back -- excuse me, your balance sheet. Even though your revenues were down about $2.9 million sequentially, your receivables were up $3.6 million. Is there a timing issue there or what happened with receivables?

There's always a little timing around when orders ship near the end of the quarter. Typically, our terms in the U.S. are generally 30 days. In Europe, we may offer some customers 60 days. But some customers are very diligent about paying, some stretch out payments. And I believe that we had some amounts outstanding at the end of Q3 that were scheduled to be collected just after the end of the quarter.

So, it's just temporary timing differences. We have no concern relative to the collectability of those receivables. Our bad debt experience for the last 10 years has been pretty nil.

And do you sense that DSOs may remain in the 70s level, or are they going to come back down to 50 or 60?

No. I think 55 is--55 to 60 is a more normal level for us.

Okay. And can you estimate what your utilization rate was this quarter? I think you said it was 90% last quarter.

Yes. It's -- I would say it's about a similar rate. Again, the utilization rate is extremely, call it mix sensitive, so it's always a little difficult to exactly quantify that. Because some of the metal is coming in on the longer delivery time, in a way we've had some relaxation in the capacity utilization.

Okay. And finally, on AMK, I think last quarter you said there were some supply chain issues there, which kind of slowed down the sales rate. Were those -- or have they been resolved? It looks like revenues weren't up as much as I figured they would be.

Yes. They -- toward the end of the quarter I think we are getting into a level of activity that is higher. The situation is better, but I will not say it's 100% resolved yet. We still can see some tension in their supply chain related to some material specification, and maybe some design adjustments that are still being made. So, it's not full speed yet, but it's certainly better than it was.

So then, maybe '07 is really the year for AMK.

We'll see about that. It should be better and the ramp up may go throughout the year.

Okay. Thank you very much.

Your next question comes from the line of Saed Raymond from [4A] Computers Incorporated. Please proceed.

Yes. Hi. I was just wondering -- you mentioned focusing your marketing in USA and in Europe. But I did not hear anything concerning countries like the Middle East and especially countries -- growing countries like Pakistan. There is substantial potential in Pakistan. The other day they had news that there will be a new refinery set up in Pakistan somewhere around the Gulf Coast.

Let me -- so, let me explain this way. We do service the market globally--really the world. But the direct customer to whom we sell are fabricators, which conform our heavy plates into large capital equipment. And those, then, in turn, re-export that equipment to the Middle East and India and Pakistan and China and other places.

So, it's not because we don't necessarily sell directly always in those countries that our products do not go there. Large fabricators are concentrated in the -- in let's say the Far East, a little bit China, North Korea, maybe, and then, Europe, the U.S., some India, and some other countries. And we do sell to the large global fabricators as our direct customers. In turn, they re-export to all over the world.

Okay. Thank you.

Your next question comes from the line of [Bob Duffy], Private Investor. Please proceed.

Hi. Thanks for taking my call. Should we expect to see margins in Q4 around what they were in Q2 when you were shipping on large contracts?

I'll let Rick respond to that.

Yes. We did indicate I believe at the end of last quarter that we expected margins to decline somewhat in the third quarter, which they did. And then, we also indicated that in the fourth quarter, we expected them to rebound back to the levels that we enjoyed in the first and second quarters of this year. And that continues to be our view.

Okay. And could you comment on the Mt. Braddock expansion? And if it's just a capacity expansion, or if you expect to see an expansion in your product line?

It is essentially a capacity expansion. But we have added some equipment there to broaden a little bit the market than we serve.

Okay. And that equipment -- was that the equipment you mentioned last quarter -- the 1.9 million I think it was?

That is -- would be specific to that comment I just made. Yes.

Okay. And then, going back to the backlog, the $16 million increase. Even with the $8.7 million contract that was announced in the quarter, it's obviously a very substantial increase -- 31% sequentially. Can -- were there orders of a magnitude that may have constituted a press release that kept you from releasing it maybe because of a customer not wanting you to, or--?

No, sir. No. We would -- anything approaching the $8 million or above the $5 million, we have come out with a press release. I don't want to indicate that $5 million will be our milestone in the future necessarily. But, no, the backlog is rich with a mix of mid-size projects and smaller ones.

Okay, great. Thank you very much for taking my call.

You're welcome.

Your next question comes from the line of Mike Shonstrom from Emerging Growth Equities. Please proceed.

Hi. Just to finish out. Pricing in the market -- raw material pricing and pricing power that you have with your customers, how's that looking? Are prices coming down for you and are you able to hold your margins looking past the fourth quarter?

Okay. There is clearly a stabilization of the price of metals, across the board. We've seen some cases a slight trend down. And as far as our pricing power, we have been applying it judiciously. We do have some. There is such a pressure on delivery that we have opportunities to benefit from that situation in our price level.

And any capacity increases that you're seeing in -- from other producers, like Asahi in Japan or--?

We are not seeing any sign of that.

Great. That's it. Thank you.

You're welcome.

(Operator Instructions.) Your next question comes from the line of Richard Tortoriello from Standard and Poor's. Please proceed.

Yes. Hi. You talked about the oil refinery market. I wonder if you could talk a little bit about what you're seeing in the upstream oil and gas market. And also, what kind of activity you are seeing from the power generation market.

We do see activity upstream in the upstream oil and gas markets. It's the gas-to-liquid is a particular sector where we see activity. The oil sands, obviously. Those I guess maybe would be key ones. There's obviously LNG. We are not doing that much there. But by far, I think the refinery remains a bigger chunk with [indiscernible-accented].

Okay. And in the power generation market, are you seeing --?

Power generation, we have ongoing activity, particularly maybe in the Far East. And that's ongoing. It's not the biggest chunk, again, of business of ours, but it's steady.

Okay. And when your capacity expansions are online, how do you expect that to affect your backlog? Do you expect to start reducing the backlog, or do you expect that the backlog will continue to grow?

Well, we -- the capacity will come online gradually for the middle of next year. And the reason why we are building the capacity is to take advantage of opportunities we see in the marketplace. Hopefully, we are not going to saturate that capacity too fast, so the hope is that we'll see a higher level of activity, otherwise we would not have invested. That's the vision.

Okay. And one other question on your capacity utilization. I thought you said that it was perhaps a little bit below the 90% mark. Is that correct?

Well, I think our margin level there is not that precise that I could qualify within plus or minus a couple of percent. So, what I am saying that we are at a high level of utilization, which has been relieved a little bit because the supply chain of metals coming in has been slower than we would like.

I see. Okay, great. Thank you very much.

You're welcome.

At this time, I'm showing no further questions in queue.

Well, thank you for participating into this call. We are clearly pleased by our continued success and it was gratifying to see that our performance was recently recognized by Forbes and Fortune magazines, both of which named Dynamic Materials one of the nation's Best Performing Small Companies. Our accomplishments are a tribute to the efforts of everyone at the Company. And I want to publicly acknowledge the hard work and dedication of the entire DSC team.

I also want to thank our shareholders for their continued support. We look forward to speaking with you again at the end of the year. Thank you.

Thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a wonderful day.