DMC Global Inc (BOOM) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2007 Dynamic Materials earnings conference call.

My name is Towanda and I will be your coordinator for today.

(OPERATOR INSTRUCTIONS).

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to Mr.

Geoff High of Pfeiffer High Investor Relations.

Please proceed, sir.

Thank you, Towanda.

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

Presenting on behalf of the Company will be President and CEO, Yvon Cairou, 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 upon 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 this call.

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

With that I will now turn the call over to Yvon Cairou.

Yvon, please go ahead.

Thanks, Geoff.

I'm pleased to report that we are off to a strong start to fiscal 2007, thanks to better-than-expected results during our first quarter.

As you may recall, we had previously predicted that the first quarter could be impacted by tightness in the metal supply chain.

Throughout most of the quarter, this situation played out as expected.

However, late in the period, our suppliers performed better than expected and were able to deliver unanticipated shipments of carbon steel backing plates.

The production teams that were at Mount Braddock facilities put forth an incredible effort and a lot of extra hours to process these metals.

We also were able to leverage some of the new equipment recently placed online as part of our capacity expansion program.

The combination of each of these factors allowed us to exceed our previously anticipated top-line results.

We utilized significant quantities of high alloy steel plates, which are employed as one of the primary backing materials in our cladding operations.

There are very few manufacturers of these premium quality plates and given the current level of global industrial activity, competition for this supply is fierce.

We believe that over the long term, manufacturers will improve their ability to address demand, but in the meantime we are working very hard to stay in front of the situation.

We're improving our ability to monitor and analyze a global supply chain and also are extending our relationship with some of the minor manufacturers.

We ended the first quarter with an order backlog of $67.9 million, which is within a million dollars of the all-time high backlog which we posted at the end of the fourth quarter.

We're encouraged by the strengths we have to maintain in our backlog given that no order during the first quarter was larger than $2 million.

This should give you a sense for the strong volume of smaller orders we have been receiving.

The momentum we have carried into the new year reflects the continued demand we are seeing within our global market -- target markets.

We are now in the final boost of our expansion program at Mount Braddock, new construction has largely been completed and nearly all of the new equipment we have ordered should be up and running by the end of the current quarter.

We recently learned that one large piece of machinery, a press for plate flattening, is now expected to arrive some time in the third quarter.

Interestingly, this delay is also related to a metal supply issue.

The modernization efforts we have initiated in France and Sweden are also progressing nicely and we have nearly completed the expansion program at our AMK welding facilities in Connecticut.

It is worth noting that to our knowledge, DMC, the only player in our industry that is making significant investments in new production capacity.

We believe, these efforts will help us maintain our position as the world's leading provider of explosion welded metals.

I will now turn the call over to Rick Santa who will provide you with some of the financial highlights from our first quarter, Rick.

Thanks Yvon.

Let me start by recapping a few highlights from our statement of operations.

Our first quarter sales of $33.1 million represent an increase of 31% versus the comparable 2006 quarter.

Gross margin came in at 33% versus 37% in the year ago quarter.

The difference reflects the normal fluctuations we tend to experience due to the makeup of our product mix in any given quarter.

With respect to our expenses as a percentage of sales, first quarter G&A expenses decreased to 5% from 6.1% in the same period last year, while selling expenses decreased to 5% of sales, from 5.3% in the first quarter of 2006.

These declines illustrate the leverage we gained from sales growth when spread over a relatively fixed cost structure.

Our first quarter income tax rate was flat at 37% as compared with the first quarter last year.

Looking at our balance sheet, at the end of the quarter, cash and cash equivalents stood at $19.8 million, while total current assets were $64.5 million.

Working capital was $41 million, and we closed the quarter with stockholders' equity of $63 million.

We are reiterating our prior 2007 sales forecast, which calls for revenue growth in the range of 20% versus 2006.

In addition, we expect our second quarter results to be comparable to those reported in the first quarter.

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

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Matt McGeary with Sentinel Asset Management, please proceed.

Good afternoon.

Good afternoon.

Could you -- I'm trying to understand the relationship between your sales and backlog, essentially, even if we go back just three quarters, the backlog has essentially been flat at a very high level, while sales growth has been extraordinarily strong.

How am I to read that?

I mean, how much do you sell out of backlog every quarter, trying to understand your order growth, I know, you don't -- that can't be disclosed at least in the press release, but trying to understand how that dynamics work between your backlog and sales and how we should -- can use that information to determine what your order flow looks like on a quarterly basis.

Okay, I'll let Rick go into some of the details of that, but I think the general statement here is that as you indicated our shipments have been strong, backlog has been steady or increasing, which is an indication that our bookings have been strong.

Okay, so you definitely do sell out of backlog every quarter?

We, you know, we do.

There's always some book and ship during a given quarter, with the larger the backlog gets, and with somewhat longer lead times on metals, perhaps the percentage of total quarterly sales is smaller today than it was a year or two ago, but certainly, with -- when the metal supplies situation settles down, and with respect to smaller orders where we can source the metals quite readily at service centers around the U.S., with the expanding capacity, we'll have the ability to do even more book and ship as we go into the future.

Right.

So but just --

It's hard to forecast at the beginning of a given quarter --

Yeah.

-- how much of that will likely occur in a given quarter.

Yeah, no, I'm just trying to understand, because it seems like you're -- you know just, and you could say in the -- my ballpark that your order growth looks something like your revenue growth, right, is that the right interpretation?

I mean, same ballpark of growth rate?

Yes, yes.

Okay, okay, that's very good.

On your revenue guidance, I understand you might be -- you don't want it to be somewhat conservative given the tightness in the market, but for you guys to do 20% revenue growth would imply, a mid-teens growth rate over the back three quarters of the year.

The team's awfully conservative given what you just said about order growth and revenues et cetera.

I guess -- can you offer any further comment on that.

You know, probably one important comment is the impact of the larger orders that we periodically book on results, during the course of the year for any -- for any given quarter.

I mean, it clearly is a very tough competent quarter.

And we -- we feel comfortable with what we see today with respect to the 20%.

In order to do better than that we need to book large orders, and there are certain large orders that we're quoting on currently, and depending on the metal tight, the lead times vary.

So if these orders are not booked fairly early during the second quarter, there's some likelihood that we can't get the metal in our shop in time to turn those orders around during the course of 2007.

So there's just a lot of factors that come into play that lead us to conservatism, when we try to forecast our future business.

And also maybe an additional point, the 20% guidance was following up a year where we had an incredibly high last quarter.

Right, yeah, you definitely had a tough --

We raised the bar height there.

Right, right.

Plus I think 43% growth on the full year of 2006 over 2005.

Yeah, it's not bad.

And just lastly, the fact that you were able to source some metal late in the quarter as Yvon indicated, is that any indication that things are getting any better at all or is that just kind of a fluke, you're able to get some --

Well, I don't won't call it a fluke, but they're working -- like we are, they are working hard to satisfy the demand.

But I would qualify the situation as remaining tight.

It's not uncontrollable, the 20% guidance we gave includes the tightness of the supply chain.

The situation is the worst, it's a little better in Europe than it is in North America.

It's a little better for the cladding material than it is for the base plate.

You know, the high alloy pressure vessel, quality metals, it remains the most difficult area for us.

So is it improving, we are not really -- there's one thing that is consistent for us.

All our -- most of our metal suppliers are late.

So it's an education that things are still tight.

We really do believe that it will improve over time and that's where we are at.

Okay, and this is the final one, I promise.

If you -- you've talked about in the past, sort of this hot-list, stuff that's not in your backlog but things you're looking at as potential.

I know you can't talk about things specifically, but can you just talk about directionally?

You know, qualitatively how things look out there and --

Certainly, we always refer to that hot-list, it remained steady, it remained steady as compared to comments we've made in the past quarters.

It's still -- we still have some significant big orders there, and maybe I'll take this opportunity to remind you on orders.

Although big orders are important and they come regularly, maybe with higher frequency, they are -- they tend to be bigger, but small orders are also excessively important in our business.

You know, we -- of course we do press release sometimes on orders, which are $5 million to $10 million in size.

(inaudible) in the Company is 100,000 or so, and based on our volume of business, you can see that we have a strong steady base under us, and that should give comfort to the outlook.

Great, thank you, good job

Your next question comes from the line of Mr.

Richard Tortoriello with Standard & Poor's, please proceed.

Yes, good afternoon.

Just a question on the industry makeup of orders, I wonder if you could talk a little bit about the activity that you saw in the first quarter by industry.

I'm interested in how the refining -- oil refining industry orders look or if you could talk any industry information about the quote activity that you're currently engaged in.

Let me say this.

Well, for the past year or so, while petrochemical-chemical had been our stronger market segment, for the past year or couple of years oil and gas refineries has become a dominant [actor] for us, a dominant market place.

Interestingly, in this Q1 '07, we have not reported any large order, the largest order for the quarter was about $2 million, and as far as market segments, it was well balanced between all of the traditional segments that we serve.

So if you include Q1 with the previous quarter there's still dominance of the oil and gas refinery, petrochemical is not negligible.

In terms of the quoting and the hot-list, it's -- I would call it balanced between all of our traditional segments.

I don't want to qualify how dominant refinery oil and gas is, it's remaining dominant; I think it's a fair statement.

Do you see the potential for some further large orders in the refining segment?

Yes, I don't see why not.

We have seen the frequency of large orders, a few per year, a couple -- one to a couple to quarter and as we didn't get one in Q1, I'd be reasonably confident, we'll see one soon.

Okay, great, and then Rick, I wonder if you could just give, I know you're not giving guidance on margins but may be some idea on how we should look at different items that might affect margins going forward?

Yeah, it's always tricky in this business to forecast accurately the product mix and as we've discussed before, virtually every order that we book is custom priced and takes into account whether we are competing against other explosion cladders, whether we are competing against roll bond whether it's a domestic order or an export order, there are lot of factors that come in to play.

But if you look at the last seven quarters going back to the third quarter of 2005, gross margins have ranged from a low of 31% to a high of 40.7% in Q4.

But we indicate that year end, that Q4 was exceptional and it benefited from a large $11 million order for which a large portion of the margin was offset by an annually large sales commission.

So if you exclude that quarter, the gross margins have ranged from 31% to 37%.

Those are all within what we consider to be a normal range given a typical product mix, and obviously because a significant portion of our manufacturing overheads are fixed, as sales go up we do have a point of leverage there.

But in some quarters that leverage is offset by a product mix that may not be as favorable as it is in another quarter.

I know that's not very specific in terms of what's the margin in Q2 or Q3 or Q4 this year.

Yes, that's okay.

But you have the range.

Okay, fine, and with the Mt.

Braddock expansion that's going to complete, I think you said as of the end of the current quarter, how should we look at that with respect to margins?

Is there a possibility for a boost in margins if the supply chain, not supply chain, the supply of metals continues favorably as it did toward the end of this past quarter?

You know, probably the best way to answer that is over time, there is room for more leverage.

You know because as we start to sell in to the capacity increase, then we'll have a fixed cost structure that we'd be able to better leverage off of.

But as we first go into it, we are going to add the fixed cost and we won't have sufficient sales to provide some of the leverage you have seen over the past few quarters, if you follow what I am saying.

Yes.

Okay, great, and then?

We don't see a degradation as a result and maybe there will be slight improvement, but I won't think a marked improvement this year.

Okay, fine.

And then final question, did you see any change in the mix of orders, international versus U.S.

this quarter?

In terms of shipments or booking?

I guess I would be interested in both.

Yeah, I think no, the answer is no.

The U.S.

commands a strong piece of what we do, and international opportunities remains also stronger.

It remains balanced; I think that's a fair statement.

Okay.

Yeah, I think one thing I would add is as we did that -- we did ship again a large nickel autoclave border in the first quarter.

Okay.

And that is an export order.

Yeah.

So with most of the first quarter production being done in the U.S.

So you are not seeing any significant weakness in the U.S.?

No.

No.

Okay, great.

Thank you very much.

And your next question comes from the line of Mr.

James Bank with Sidoti & Company.

Please proceed.

Good afternoon.

Hi, James.

Good afternoon.

Beginning with the backlog, the rough $68 million.

Is that something you might expect to ship in this year?

Yeah, the majority of the backlog, we'll ship this year.

There is always a few orders in our backlog that extend out as much of the year, perhaps a little more.

But yes, the majority is expected to ship this year.

Okay so 50% of -- we have pretty good visibility of roughly 50% of what you're projecting for 20% top line growth which I think is very good.

Now, I guess, the one problem that I'm having, I guess I don't want to get into margins anymore than you already touched on.

I understand it's not easy to discuss, and you really don't necessarily comment on it.

Trying to find out, where is this going to play out and in the next subsequent quarters, the stock is getting whipsawed in the after market right now, and undoubtedly that's because of the guidance you gave Rich.

I would only assume that when you mention we expect the second quarter will be comparable to the first, meaning the bottom line results.

I certainly realize this is a highly, well not highly volatile business but as your project ships it's going to be very fluctuating.

You know, where are these projects, the $20 million bookings you announced in December, I think it was a gas, [Millis]' gas plant and something in Madagascar.

I think earlier we spoke, you expected this stuff to ship in the second quarter.

Should I assume then that the second quarter is hopefully kind of a one-off here, and we'll see sort of a backend loaded year in 2007, excuse the longwinded question.

You know, I think if we do the math and we indicate that the second quarter will be comparable to the first, yes, you would reach that conclusion that the second half would be stronger than the first half.

Okay.

And the 20 million that we booked in December included $8 million for a natural gas project, and I believe that order is slated for shipment largely in the third quarter.

Okay.

And the [Ambalvi] project that you talked about had significant first quarter shipments and you'll see something in the 10-Q when that's filed relative to that.

Okay, and this supply constraint, the ongoing tightness, is this something then I guess, we hope to see alleviate by some point in the third quarter?

No, I would not say that, I -- we don't know how the metals, the metals suppliers are going to address demand.

This has been going on for some time now and so I would not anticipate a full resolution of the tightness in '07 myself.

Okay.

Any comment on the AMK welding line, 60% top line growth or any idea where that might land at the end of the year?

AMK is doing well, it's essentially in a response mode to the extreme supply chain.

And the customer has experience as we've talked several times already, going then with some quality issue upstream and some design issues and we are at the very end of the supply chain, and we have to perform miracles sometimes to recover some of the demand on delivery.

So, AMK is doing well, the outlook looks good.

We still see some going then, so it will add some more.

Okay, and then the inventory turn erosion on a balance sheet.

Undoubtedly I assume some of this is coming from the year over year backlog growth.

Is there anything else going on there, I am just trying to know, get to the working capital and get a cash flow estimate.

Yeah, you know the timing issues can affect that quite a bit.

You know, Yvon alluded to suppliers deliver later than what they promise.

And we need a match of metals in order to produce our clad plate and in some cases we get the cladder in before the backer comes in and we see a short-term build up in inventory until we have a match.

But rather than trying to plan for those to come in on the same date very close together, we did that suppliers to ship as quickly as they can.

So we don't -- we don't worry too much about our inventory level and inventory turns because everything -- virtually everything we are purchasing is for a custom order.

Okay.

Just for clarification, the only product line that is not stand out is what we sell for the aluminum smelters.

That is a -- it's not our product line, and I think we have said before that about 10% and so of our web sales and for that product line only do we have inventory of metals.

Okay, thank you, Yvon.

So last question and I will jump back in line.

As a whole, taking a look at this, you guys seem fairly positive.

I understand you don't want to stand out too far given that this is the only first quarter.

It seems that really on the supply chain issue, with the two carbon plates is really the only bare parts of the story.

You know since we are still seeing strength in our end markets and I guess, Yvon you or maybe it's Rick, it was you that just said no weakness in U.S., would you agree with comment?

Yes we -- this is a happy time for DMC, we know we are investing, we believe in our business.

The market around us is good and we try to become better and better at what we do and remain a dominant force in explosion welding.

Okay, terrific, thank you.

(OPERATOR INSTRUCTIONS).

Your next question comes from the line of Mr.

Bob Johnson with Satuit Capital, please proceed.

Rick, can you hear me.

Bob you there?

It's very quiet.

Just a question (technical difficulty) and then if you'd remind capital spending?

Okay.

Yeah, the --, we had last year a capital spending budget of $14 million and we had a carry over of several million dollars from that capital budget.

I believe it was roughly $5 million of carryover, relating to the plant expansion at Mt.

Braddock.

And then we have a capital budget for 2007 of $7.1 million.

But that will require full year cash outlays of approximately $12 million.

And I believe that we spent a little bit less than $4 million in the first quarter.

Now we have another 8 million of cash spending that will occur throughout the rest of the year.

When an order is (technical difficulty) and shipped to the customer (technical difficulty).

Bob you're breaking up a bit.

Can you repeat the question?

When an order is finished and you then ship it to the customer, who pays the transportation on that order, is it customer or is it you?

Typically it's the customer, but if it's us we get reimbursed for it.

Okay, fine.

And then last one, as the expansion comes into full being in the late second and third quarter, as I inferred from the comments, would that availability allow you to (technical difficulty) more quickly into the backlog and have a more than normal impact in the third, for example?

It's interesting, we've noted that in Q1 some of the new equipment already played a role to accelerate the end of the quarter, and that could only happen because we had the metal.

So it will be the same there, if we can get more metals for new projects, certainly the new capacity will be able to help out on the additional shipments.

Okay, fine, thank you.

And your next question is a follow up from the line of Mr.

Matt McGeary with Sentinel Asset Management, please proceed.

Yeah, just one, one follow up.

I'm assuming, in the industry, everybody knows from the customer stand point that there is tightness in the market in terms of metal supply et cetera.

Is that having an impact on order rates or, do you think or do you feel like your -- I don't know if your customers have other avenues to use.

Do you feel like you may be losing orders potentially or does everyone kind of know the situation and things just get pushed down?

Let me try to explain this.

If there was no limitation of engineering hours, no limitation of metal in the supply chain, no limitation of fabricating of the equipment, I think it is said that we would have seen a spike quite a bit higher than what we've seen.

So what has happened is that that spike has been leveled of and it's still at the very high level and so the limitations you're talking about are coming from the downstream for most if you want and we do not have to respond to a huge spike that we -- may be -- we couldn't have [meet].

Did I respond to your question?

Yeah, I guess -- yeah, I guess I just wanted to be clear that there is not -- your customers aren't looking elsewhere for their solution.

The customers -- some of the projects because of the lack of resources and I'm discussing engineering hours, fabrication hours, some of the customers have postponed their project.

But again, on such potential high level of activity that the level we see each -- the demand is still very high.

Okay, perfect, thank you.

A huge spike, that could have been spread over a couple of years or three years, seems like now it's going to expand over a longer period of time.

That's the kind of thing we seem to see in some of those oil and gas refinery, petrol-chemical situation.

Okay, great, perfect, thank you.

At this time there are no further questions in the queue, I would now like to turn the call over to management for closing remarks.

We already encourage our strong staff to fiscal 2007.

I want to stress that our achievements during the first quarter would not have been possible without the tremendous efforts of everyone in the DMC team.

I also want to thank our stock holders for their continued support.

We look forward to speaking with you again soon, take care.

Ladies and gentlemen that concludes the presentation.

You may now disconnect and have a great day.