DMC Global Inc (BOOM) 2007 Q2 法說會逐字稿

Accented officer(s), speakers trail off and become inaudible; transcript is best product.

Good day, ladies and gentlemen, and welcome to your Q2 2007 Dynamic Materials earnings conference call.

My name is Rob, and I'll be your operator today.

(OPERATOR INSTRUCTIONS.)

At this time, I'd like to turn the conference over to your host, Mr.

Geoff High.

Thank you, Rob.

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 Vice President 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 & 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, (inaudible) 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 to today's call or webcast are available in today's news release.

With that, I will turn the call over to Mr.

Yvon Cariou.

Yvon, please go ahead.

Thanks, Geoff.

Q2 was another strong quarter for DMC, and this was reflected in our solid revenue and earnings performance, as well as a number of operational achievements.

Our Explosive Metalworking business was awarded an array of new contracts during the quarter, and this elevated our order backlog to an all-time high, $84.7 million, a 25% increase over our backlog at the end of the first quarter.

Quoting activity was strong during Q2, and this trend has continued in the weeks since the close of the quarter.

This is a good indication of the persistent strong demand we are seeing across the spectrum of [end] markets we serve.

One of the prospects we recently converted into a firm order came from the alternative energy industry.

While we are limited in what we can say about this $8.3 million contract, we obviously are intrigued by the long-term opportunities this emerging industry could represent to DMC.

In light of our current workload, we are pleased with the progress of our capacity expansion effort.

Our new facilities at Mt.

Braddock are operating smoothly, and we are already benefitting from enhanced production efficiencies.

We still anticipate that the final pieces of equipment related to this expansion will arrive during the current quarter.

As we have discussed in the past, supplies of carbon steel [backing] plates remain fairly tight, but it appears the [heightened] interaction we have had with our supplier is improving the predictability of shipments.

I want to emphasize that this situation is primarily a timing issue and we do not believe it has impacted our ability to attract new orders.

At the midyear mark we are very pleased with the progress we have made against our objective for fiscal 2007, and are optimistic about our prospects during the second half of the year.

I will now turn the call over to Rick Santa, who will provide you with some highlights related to our financial performance.

Rick.

Thanks, Yvon.

Good afternoon, everyone.

Looking at our statements of operations, second quarter sales advanced 24% to $34.5 million from $27.8 million in the comparable quarter last year.

Gross margin came in at 35% versus 36% in the year ago quarter.

From an expense perspective second quarter G&A increased to 5.4% of sales, from 4.2% of sales in the same period last year.

The increase resulted primarily from higher stock based compensation expense, annual salary adjustments, staffing changes, and increased legal and consulting expenses.

Selling expenses increased to 4.2% of sales from 3.4% in the second quarter of 2006, reflecting, among other things, higher commissions resulting from increased sales levels.

Our second quarter income tax rate was just under 37% versus 37% in the second quarter last year.

Turning to our balance sheet, cash at the end of the quarter stood at $10.4 million versus $20.9 million at the end of fiscal 2006.

The change resulted from our investments in work-in-process inventories, as well as payments related to our capacity expansion effort.

Working capital at the end of the quarter was $43.8 million, up from $38.6 million at the end of last year.

We ended the quarter with stockholders equity of $67.5 million, an increase of 17% versus our 2006 yearend figure.

With respect to guidance, [given] our progress in the first half of the year, our strong order backlog, and our assessment of metal supplies required for near-term order fulfillment, we now believe we are in a position to achieve top line growth in a range of 20% to 30% versus fiscal 2006.

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

Rob?

(OPERATOR INSTRUCTIONS.)

And, sir, we have your first question today coming to you from Matt McGeary from Sentinel Asset Management.

Good afternoon.

Excellent job on the backlog.

It looks like order growth is nice.

Have you noticed any difference in who you're getting orders from, you know, the complexion of the customer base, anything changing, whether it's geographic or industry exposure?

Good afternoon.

No, nothing indicates -- it's steady, the same mix that we seen for some time now.

Okay.

I've been hearing in other industries, too, that you're seeing some supply chain constraints and some people holding back on orders when they're involved in, you know, whether it's nickel based alloys or other sort of expensive metals, given the price volatility a lot of people are holding back, waiting for maybe even lower prices.

I wonder if you're experiencing any of that?

I mean obviously not too much, given the backlog, but if you're hearing any of that from [potential customers]?

Yes, we have those kind of comments, but we have not seen a direct relationship into our quoting/booking activity.

Certainly, some of it may have happened, but there's still plenty left to address.

Great.

Okay.

Great.

Thanks.

And thank you.

We'll take your next question from Deborah Fiakas from Crystal Equity Research.

Thank you.

Just a balance sheet question.

I noticed your inventories continued to increase in the quarter.

Could you give us some ideas is this just related to the flow of business or are there timing issues there?

You know, I think the answer to that, Deborah, is a little bit of both.

You know, we'll oftentimes see short-term swings in work-in-process inventory levels relating to some of the larger orders, as well as the timing of billing and receipt on the accounts receivable.

And, you know, I think at the end of June we saw a higher than customary build-up in the work-in-process inventories associated with the strong backlog that we reported, and I would expect that, you know, we will -- we'll see that inventory investment level off as we go forward through the rest of the year.

Okay.

So we'll see something of a reversal in the next couple of quarters?

I, you know, I would think that that will be the case, if we produce and ship on time.

And there were some receivable collection carryover items that resolved themselves in early July.

Okay.

And you alluded to your capital spending in your opening remarks, will we see similar levels of capital spending in the second half as in the first half?

Yes, probably similar, you know, maybe a little bit higher because some of the spending that we have planned for our European locations will occur during the second half of the year, and then we have final payments on the last piece of equipment to be delivered to Mt.

Braddock.

Okay.

Excellent.

Thank you.

And thank you.

We'll go to Yvonne Varano calling in from Jefferies.

Thanks.

Rick, could you just comment a little bit on what's going on in AMK Welding?

The sales seem to be down there and the profitability, as well.

Well, maybe I'll stop -- what you see there is, as far as the bottom line, we had an adjustment relating to severance payment.

We had a change of leadership in that company, unrelated, I should say, to the general background of business.

And while we are -- we are still growing there at a slower pace than we would like, the outlook is extremely good, and we are not changing our way of view on the prospects for AMK.

And then just to add to that briefly, Yvonne, the sales were down from Q1 by approximately $260,000, and that really relates to the flow of business from the primary customer on the [ground] turbine work, and we do expect that to get stronger in the second half of the year.

So the combination of reduced sales and the severance payment that Yvon mentioned certainly impacted the bottom line during the quarter.

Okay, but the sales being down, that's no indication of any longer term issues that (inaudible) issue?

No, (inaudible).

And it's kind of timing, and we come a little bit at the end of the food chain.

Okay.

We expect a much stronger performance in the second half.

And then just on D&A is what we saw in 2Q the kind of run rate we should use through the remainder of the year?

Yes, if you look at Q1 and Q2 they were within $1,000 of one another, so it looks as though it has stabilized.

I would expect a modest --

Sorry.

D&A?

Oh, D&A, I thought you said G&A?

D&A?

I'd rather talk about G&A.

You can talk about G&A, too.

Well, you know, I think we would see it -- it move-up a little bit in the second half of the year as we bring some of this equipment on-stream and it's depreciated during the second half of the year.

Okay.

That's what I'm trying to get a feel for --

Yes, there were --

Do you see the big bump in 2Q or is there more?

There's more.

Okay.

You know, some of the projects did not begin to depreciate until very late in Q2, so we should see an increase in Q3 and 4.

Do you have an estimate for the full year that we could work off of?

I don't at this point in time.

Okay.

Thanks very much.

Okay.

Thank you.

Your next question is from James Bank, calling in from Sidoti & Co.

Hi, good afternoon.

Good afternoon.

Hi, James.

Hi.

So gross margins improved considerably from the first quarter, and I think this is really stemming from that supply issue, but as we can assume the supply issue is improving weekly and it should pretty much I think be completely improved by the end of this year.

Should we see gross margins continue to improve throughout the year?

Yes, the first quarter was 32.8% versus the 35% that we enjoyed in the second quarter.

And the lower first quarter margin was largely attributable to product mix and one large titanium order that brought the margin down a little bit.

Uh-huh.

Looking at the backlog at the end of the second quarter and looking at the prospect of increased sales in the second half of the year, we're quite hopeful that we'll be able to maintain margins at the Q2 level and perhaps slightly improve on that during the remainder of the year.

Okay.

Yes, in previous releases, Rick, you offered some sort of a bottom line guidance, are you gong to do that here?

I don't recall us doing that.

I think we indicated that the second quarter would look a lot like the first, you know, when we last spoke.

Right, exactly, in not so many words, it would sort of I think guide people to a particular number, [I think] were the words that you would choose in the release, and I'm just wondering if you would do that again here?

Yes, no, I think we'd rather just go with the previous comments that we expect to achieve top line growth in the 20% to 30% range.

Okay.

And I think looking at the G&A and looking at the gross margin rates, based on the comments I've made, I think that should suffice.

Okay.

Now, I think someone was trying to get -- the speaker earlier about the AMK Welding, I was wondering a better question would be if you could just walk us through the expectations you have with the General Electric contract?

Maybe how much those H System turbines cost, and ultimately when do you expect to really begin to ship these out?

Yes, I don't think we can comment on, you know, what the H System costs.

GE is working very, very actively on (inaudible) that line.

They are trying to sell some new systems, and I think what we hear is that the prospects look good.

We are very active on the site at the shop at AMK, setting up equipment to meet a ramp-up in production, and so we are optimistic that we'll be able to deliver a better number in the coming quarter than we have been.

Okay, fair enough.

And last question, semiconductors seem to be ramping up considerably.

It's not an industry I know too well.

Rick, I think I might have began to ask you this before in the past, but apparently the polysilicon used in that process is highly caustic.

My question is is your clad plates potentially going to be used in that end market, is that a market you might see that you guys begin to build business in?

Well, it's hard to say for sure.

Any process where there is (inaudible), as you say, well, it's very caustic would be for us a potential --

Okay.

-- we would see.

Okay.

Fair enough.

Thank you.

That's all I have.

Thank you.

And thank you.

We'll go to Mike Shonstrom from Emerging Growth Equities.

Hi, good afternoon.

Hello, Mike.

Just a question on the refining industry here in the United States, there's been a lot of conversation recently about shutdowns or for repair, shortages of production because of lack of investment in prior years, as many of these refineries were running full force.

And I just wondered whether or not the experience that the refiners are having in trying to deal with these problems and breakdowns, et cetera, are positively or negatively influencing your order rates?

It's definitely positively influencing our order rates.

We may have said before, refining has become our leading market segment for the past year or so, I should say.

And we see more opportunities.

There has been talk that we've heard that some projects may be postponed or on hold, but overall our demand remains very active.

And the type of products that you sell you wouldn't think would go into a repair environment.

I was thinking perhaps that a lot of the spending that they're doing in the refineries are patching up and fixing what's already there rather than replacing and (inaudible)?

Well, it's patching, it's debottlenecking, it's changing the ability of the refinery to handle different [codes] or to make different products, so although people say they are not building refinery, many of them are reshaping the insides, the guts of their refinery, and so our products totally apply for those various projects.

Okay.

Great.

And on the expansion of both the U.S.

and plants in Europe, where is your capacity now?

Do you talk about utilization levels and where the utilization is now?

How much it will expand, and if you can touch on that?

What we have said is that we are doubling the U.S.

capacity, and we are close to having achieved that.

In Europe it's not really expansion, it's more modernization but clearly productivity brings with it a capacity addition component.

So overall we are in a position to grow significantly, which means we have good reserve of capacity ahead of us.

I don't know if we would quantify more than that, Rick?

No.

I think we're comfortable looking out over a couple of years, and believing that we can adequately serve the market demand with the existing capacity based on the investments that we've made to date or that are still on the planning board.

I guess if we could look back, let's say, a year when you started this project and you were saying that you were, you know, at the high ends of capacity and assume that -- doubling from that on a unit basis looking forward, that would give us a rough idea of where you are (inaudible)?

Yes, we said that the U.S.

was about two-thirds of our production, and we are doubling the U.S.

And that is a nominal doubling and, you know, we are always able to push the walls beyond that, so I would expect the nominal doubling will even become bigger than that as needed.

Great.

Thank you.

Thanks, Mike.

Thank you, Mike.

Thank you.

Thank you.

(OPERATOR INSTRUCTIONS.)

And, sir, we have your next question coming to you from Matt McGeary from Sentinel Asset Management.

Hi.

Just wanted to follow-up.

I know you can't talk a lot about the alternative energy type contract you got, but I'm wondering if you -- if regarding that piece of equipment, did that win have to do with specifically your technology or your -- and your capability, or is it more so your technology works well and there was tightness elsewhere in that market, other places that they could have gone?

Yes, I --

If you know what I mean?

Yes, I think I understand your question.

I, as usual, we sometimes compete against (inaudible) technologies, (inaudible) bonding and [weld overlay.]

Right.

I could not say in this case if that was the case, but definitely this was a situation where, you know, (inaudible) needed a (inaudible) solution, and that's what we do.

Okay.

Thank you.

Thank you.

We'll take your next question from [Mr.

Bob Covey.]

Hi.

Thanks for taking my call.

I had a question in regards -- in the last conference call you discussed our hot list and indicated that you had some large contracts in your hot list and expected to book one of those contracts in the near future.

Can you comment on your hot list, and maybe the prospects for large contracts in the pipeline?

Yes.

What we say about the hot list of the near-term projects is that that list has been hot and significant for a couple of years now.

It remains strong.

They are a number of significant projects out there and, you know, once in awhile we get the larger project that justify in our view to issue a press release.

This was the case for this past quarter.

So it's -- there's no -- the hot list remains strong, there's a steadiness about it, and that's about all I think we need to say about it.

Okay.

And with regards to competition, can you discuss any changes that you're seeing with regards to the competitive landscape, and maybe --

Sure.

-- both metal and nonmetal?

Is there any real like competition you're seeing from nonmetal?

No, no, we don't compete actively against nonmetal.

In the hydrometallurgy sector we, a number of years ago we were able to introduce titanium clad against [refractory bricks] and that's out of nickel [reactor] built today.

Competition, we've, you know, our main competitor size wise is a Japanese company that we estimate to be about one-third our size, and we have no information that would lead us to believe that there's a change in the pattern of how we compete.

They dominate in Japan and in -- and we compete against them in that general part of the world, in Asia.

We have a couple of Europeans, who are also active.

They are smaller than the Japanese company.

All those, by the way, are good competitors.

They are all extremely qualified in what they do.

I believe that all of us are taking advantage of benefitting from the condition of the marketplace, so everybody is (inaudible) growing, but we are the only one that has come-up with a significant capacity increase.

Okay.

Now, as far as giving a little more color to that, there's a group of Chinese companies, what they do in China with explosion welding, explosion clad, is something that would be done by (inaudible) bonding in most of the rest of the world.

So while they do explosion welding, we call them competitors, but they really navigate, you know, in a little bit of a different universe.

We don't really compete heads on.

Some of them are certainly advancing their technique, and we're going to compete with them some -- some day.

But it's -- today, it's still a relatively limited encounter between us and them.

Okay.

Now, not insignificant in size, however, because they do a significant amount of business but, again, it's for things that are normally done by (inaudible).

Right, right.

Okay.

And in regards to AMK, you indicated that you're optimistic going forward into the second half.

How much of that is centered around the H System and how much of that goes beyond the H System?

H is important to our AMK Division.

G, [NLG] is an important customer for us, but we also, we should not forget the other, other segments of what we do in (inaudible).

And in NLG there are other systems and other customers than just H.

Okay.

Thank you.

And if I could, just one more question?

Recently, I've been reading a lot of material in regards to (inaudible) the liquid projects, and I know that in your 10-K you indicate that that is one type of project that would require explosive clad, are you seeing any activity in that area?

There is R&D going on.

I definitely (inaudible) potential there, but I think it's still a number of years away.

It is a very difficult problem.

Okay.

Great.

Thank you very much for taking my call.

You're welcome.

Thank you.

And we'll go to Avinish Kant from First Albany Capital.

Good afternoon, Yvon and Rick.

Good afternoon.

Hi, Avinish.

A few questions.

The first one is that -- and pardon me if you have talked about this one earlier.

I missed part of your call, but have you -- would you be able to give us some idea about the existing backlog and which application does that come from?

Like is it a lot from oil refining or hydrometallurgy, or any idea about the [break-up] of the backlog?

You know, I think a lot of it is oil and gas, that's been the primary driver in recent months, you know, probably for the last 18 months.

I don't believe that there's any significant amount of hydrometallurgy right now.

We had one -- a couple of large orders that we fulfilled during the first half of the year.

And I think that we're seeing a nice amount of orders from the petrochemical, chemical sectors, as well as all these other smaller end markets that we talked about.

Yes, not to forget aluminum and shipyard, and power, still, although it's not the biggest for us, it's still significant.

So is it reasonable to assume that the oil and gas have roughly like 40% or so of your backlog?

Yes, we haven't looked at it to measure it that way, but I would, you know, think that that assumption would be reasonable, and it could be somewhat higher than that.

Okay, (inaudible).

Okay.

And the other question I had was you already -- you've been working on expanding your capacity, and with the expanded capacity at this point I know it may depend a little bit on the mix of products, but what kind of revenues on a quarterly basis can be achieved based on the capacity that you have now?

Yes, that's a tough one to answer because of the products, you know, mix issue, but when we first announced that we're doubling capacity in the U.S.

and the U.S.

accounted for about two-thirds of sales, you know, we were at $100 million to $110 million of sales, and we weren't at full capacity of any of our operating units.

So I think we've made general comments that, you know, we should have capacity to produce a couple hundred million dollars of revenue a year, and we keep proving to ourselves that it's an elastic concept.

You know, we have good creative people and, you know, they -- they keep producing more than we think they can produce in a given week and given month.

So some -- I'm thinking like this, if you had a -- you have a strong backlog, I think in terms of revenue a lot depends upon what's the capacity and what's the availability of materials for you; right?

So if you had a kind of $200 million a year kind of capacity, it means you could do roughly $50 million in a quarter, but if you had the orders could you be able to achieve that now?

If we had the orders?

Yes we could.

Okay, okay.

And the final question in terms of the carbon, high carbon, high grade carbon steel, there seems -- you have talked about some tension there.

And is it stopping you from supplying things on time or it's just that it's a little bit harder to get the materials?

No, it's not stopping us.

It is [rather the] the case, it takes longer to deliver an order.

That situation is steady, it's not degrading, it's somewhat improving.

We anticipate that we'll remain tight for a long time.

And I want to make, one more question, if I may?

Same thing, in the backlog was there any different kind of mix versus what you have had on geography, like what's been the domestic and the international mix?

I don't think any significant changes.

No, it's steady.

It's all the market segments are represented in the backlog and all the regions are represented in the backlog.

And the (inaudible) customer that you had during the quarter, do you expect more of similar applications?

Do you see yourself serving more of similar applications?

We hope so, but it's hard to be definite about it.

Okay.

Perfect.

Thank you so much.

Thank you, Avinish.

Thanks, Avinish.

And, sir, your last question will be coming from Mr.

Bob Johnson from [Seibert Capital.]

Yvon, I wonder in regards to the discussion concerning capacity and so forth, could you just tell us in the U.S.

operations are you operating with one shift and could you go to two shifts if you desired to do that?

We actually are operating in certain stations (inaudible) two shifts and on some one shift.

Okay.

(Inaudible) mix.

Okay.

And then my other question had to do with the alternative energy area, could you identify, if you could, even the broad generalities whether this was oil sands, or biomass, or the --

Yes.

-- nature of the work?

Unfortunately, we are tied there by a secrecy agreement, and it would be totally improper for us to qualify what that project is about.

Okay.

But, now --

I apologize, but --

I understand.

Just as a last follow-up to that, going back over four or five quarterly conference calls, I don't remember hearing you discuss that area before, so should we assume that that does represent a new area that you have now become involved with?

Yes, yes, that's why we did the press release to give that indication to the market, but that's about all we can say at this stage.

We -- it's hard to qualify where it's going to go from there.

I understand.

Okay.

Thanks.

Nice quarter.

Thank you, sir.

Thank you.

Thank you.

And, sir, I have no further questions for you.

Thank you, again, for joining us for today's call and for your continued support of the company.

I also want to thank our employees and the Board of Directors for their steadfast commitment to DMC and its long-term success.

Take care.

We'll see you next time.

Thank you, sir.

Thank you, again, ladies and gentlemen.

This brings your conference call to a close.

Please feel free to disconnect your lines, now, at any time.