DMC Global Inc (BOOM) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2007 Dynamic Materials earnings conference call.

My name is Antoine, and I will be your Operator for today.

(OPERATOR INSTRUCTIONS)

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

Geoff High, of Pfeiffer High Investor Relations.

Please proceed, sir.

Thanks, Antoine.

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 of today's call -- a replay of today's call, excuse me, 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 to today's call or webcast are available in today's news release.

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

Yvon, please go ahead.

Thanks, Geoff.

Hopefully you have had a chance to review this afternoon's news release, which highlighted another very strong quarter for DMC.

The [systems] capital spending within several of our end markets, coupled with the benefits of our new production capacity, helped fuel third quarter sales and net income growth of 69% and 93%, respectively.

From a demand perspective, chemical processing applications continued to be a solid contributor to our bookings, and we also saw healthy activity in the aluminum smelting sector.

Of course, the global push to expand oil and gas production capacity has also led to continued steady order volume from the energy industry.

Based on current coating activity and the breadth of projects we are talking on our hot list, we are optimistic that we will see continued steady demand for most of the industries we serve for the foreseeable future.

The new capacity at our Mount Braddock facility has come online smoothly and has been very effective at boosting our domestic work through.

We are still awaiting the arrival of one large piece of equipment, which we now expect will be online before the close of the year.

We are seeing continued tension in the supply chain for high-quality carbon steel.

This issue has persisted due in part to an increase in high-priority military orders, which obviously take precedence over commercial production orders.

As indicated by our third quarter sales performance, we're effectively navigating our way through this situation, which we hope will show some improvement during 2008.

As you know, we also have been working to expand capacity at our AMK Welding operations in Windsor, Connecticut.

We are really encouraged by the improving prospects for AMK's business.

It appears that one of our major customers is now prepared to ramp up production efforts on its H-System ground-based turbines.

As most of you know, AMK has a long-term contract to perform specialized welding services on these systems.

We believe the new facilities, equipment and personnel that we have been added -- that have been added in recent months should effectively position AMK to handle the added workload.

I will now turn the call over to Rick Santa, who will discuss the highlights of our Q3 financial performance.

Rick?

Thanks, Yvon.

Starting with the top line, we reported third quarter sales of $42.1 million, up 69% from revenue of $24.9 million in the third quarter last year.

Our gross margin came in at 34%, up from 33% in the year ago quarter.

Looking at our expenses, G&A as a percent of sales decreased to 4.5% from 5.1% of sales in the third quarter last year.

Selling expenses increased to 4.3% of sales from 3.6% in the third quarter of 2006.

The increase is largely attributable to a $543,000 increase in sales commissions, which reflects a higher mix of export sales in 2007.

Our third quarter income tax rate dropped to approximately 34% from 41% in the third quarter last year.

The decline reflects a favorable tax provision adjustment that we recorded upon the filing of our 2006 U.S.

federal and state tax returns during the third quarter and to minor adjustments to our estimated effective tax rate for the full year 2007.

We now expect our tax rate for the full year 2007 to approximate 36% before returning to a more normal level of roughly 37% in 2008.

Turning to our balance sheet, cash at the end of the quarter increased to $22 million from $10.4 million at the end of the second quarter and $20.9 million at the end of fiscal 2006.

The sequential increase resulted from strong third quarter earnings and favorable changes in the non-cash components of working capital.

We reported a fairly significant in inventories versus the second quarter, and this was primarily due to the current level of work in process.

Working capital at the end of the quarter stood at $50.3 million, and stockholders' equity increased to $76.1 million, an increase of 32% versus our 2006 year-end figure.

Turning to guidance, we are now expecting that our fourth quarter sales and earnings results will be similar to those of the third quarter.

This would indicate that we should be able to surpass our prior full year sales forecast of 30%.

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

Antoine?

Thank you.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Avinash Kant with Broadpoint Capital.

Please proceed with your question.

Good afternoon, Yvon and Dick.

Good afternoon, Avinash.

Good afternoon, Avinash.

How are you?

Very good.

Very good.

Some questions.

You are guiding for similar revenues versus Q3.

What kind of margin assumptions should we take for the fourth quarter?

If you look at the last three quarters, Avinash, our margins were 33% in Q1, 35% in Q2 and 34% in Q3.

It's probably pretty safe to assume an average of those three quarters, which is in the 34% range.

Okay.

And so, clearly, this year you seem to be growing at above the [30%] range, and you talked about business remaining pretty healthy for the foreseeable future.

So should we expect a run rate like this going forward for some time?

Well, we -- we are not prepared to guide on 2008 at this moment.

Certainly what we see in our prospects is encouraging, and we would hope it would continue.

But again, we are not ready to formalize guidance for '08.

Okay.

And there has been some talk about some softness in the refining activity.

You don't see it at your customer?

We are not seeing in what we do, the level of inquiry remains strong and steady.

A degree of softness that can be expressed is that engineering companies seem to be struggling to have enough hours of engineers available to process everything they have to do.

So it's not really softness, I guess.

It's rather a good sign on the persistence of the demand.

And one final question, your backlog seems to have come down from 85 to 77, and we believe you are going to ship from roughly an $8 million order this quarter.

Maybe that was the reason.

And if I understand correctly, you are scheduled to ship from one of the larger 8 million or so orders in Q4.

Should we expect the backlog to decline by similar amounts in Q4?

That's always a tough question for us to answer internally because the backlog, as you indicated, can come down if we ship large orders.

It can also go up if we book large orders.

So where we are at year end depends largely on the bookings between now and the end of the year.

And if you looked at last year, we booked $20 million in December.

Is that a seasonal pattern?

Do you tend to book more in the December quarter?

No, no, just timing.

What I wanted to say is we booked $20 million in December, but if we'd had that strong booking month in January instead, then the backlog would have been lower than it was at December 31st.

I mean, it's a moving target.

And we pay more attention when we're forecasting results to not the backlog itself, but the hot list, the level of quoting activity.

So, Rick, do you have a specific policy on which orders you announce and which you don't?

Sometimes you seem to announce larger orders, sometimes you don't.

Yes.

We don't have a specific policy.

As we've been growing pretty fast, it looks like when we get in the $7 million to $10 million or plus, we think that there's enough materiality there to announce something.

But we do get regularly multi-million dollar orders we don't talk about because we would have press releases every week.

Okay.

So the fact that you have not announced anything this quarter doesn't mean you didn't have any larger orders?

Or you may have --

Well, it's an indication we did not have a very large order.

We had a few orders worth a couple of million each.

Perfect.

Thanks so much.

Your next question comes from the line of James Bank with Sidoti and Company.

Please proceed with your question.

Hi.

Good afternoon.

Good afternoon.

Hi, James.

How much of that $8 million Middle Eastern refinery project was shipped in the third quarter?

I believe we should follow that.

Follow it, yes.

Okay.

And then the alternative fuel one?

Any of that?

Or is that -- is it going to be in the fourth quarter?

I believe that that's all in the fourth quarter.

Okay.

So I guess my question is in regard to the guidance, when you said you expect the fourth quarter to be similar to the third in terms of sales and earnings, did you mean percent of growth or the absolute dollar amount?

The absolute dollar amount.

Okay.

That's helpful.

I just -- okay.

Because I was -- when you gave the 20% to 30% top line guidance revision, there was only eight weeks left in that quarter.

I'm just curious what actually changed?

Did you guys take on a tremendous amount of new work during the quarter, and were you able to ship it in the quarter?

Because growing at, clearly, at 90%, that's --?

Some of it has to do with the expansion at Mount Braddock.

Some of it has to do with the timing of materials coming into our facility, and some of it has to do with new bookings since we last visited with you folks.

And we ended the quarter with a healthy inventory level.

Right.

And as you know, virtually everything that we do is for custom order.

So that inventory is designated for orders that we expect to produce during the quarter and perhaps in the subsequent quarter.

Okay.

So having that good starting inventory certainly puts us in a good position to perform well on the production and sales side during Q4.

Okay.

And in regard to the gross margin, did that $8 million project that shipped, did that help you guys increase that margin year-over-year from 33% to 34%?

I'd have to look at some of the details behind both quarter sales and the rest of the orders to determine that.

Okay.

I think that that $8 million was at a very normal margin level.

Yes, it was a nominal margin, yes.

Okay.

Well, how much -- I guess the supply chain issue is still there, unfortunately, for you guys.

I mean, are you able to quantify how much that affected your shipments in the quarter?

No.

We have -- we don't think we have shipped much less than we could have done, but it is a struggle, and we integrate that situation at the quoting time.

Actually, when we receive an order, we then integrate the reality of what the delivery of the material is going to be.

All we wanted to say that this -- the situation, the outlook, is really not changing much.

It's still remaining tense, and we're working with it the best we can.

Okay.

And then on the AMK Welding unit, Yvon, you used the word increased significantly in coming quarters.

Is there any way you could elaborate on that?

On the definition of significant?

Well, we've been talking about AMK Welding ramping up, and I think we are now getting in a phase where we should be able to deliver on that ramping up.

It's hard to quantify.

We are at the end of the food chain of that particular activity, and we have a strong indication based on the procurement from our customers to what they buy upstream from us.

The intensity of that procurement is telling us that it should cascade down to our level in the next few months.

In the next few months?

Okay.

Well, is there any way we -- I mean, could we talk about how much each system, ground turbine system costs?

Or maybe just for one system as a hypothetical, how much revenue you would get from just building one system?

We have an idea of that number.

It's a moving target.

I would hate to be too specific about it, but it's north of $1 million for each system.

Okay.

Roughly, $1 million.

Okay.

That's --

North of that.

I'm sorry.

Oh, north of that?

Okay.

All right.

That's helpful.

I appreciate that.

Thank you.

And I'm -- just a couple more questions.

I mean, I'll move as quickly as I can.

The sales commissions that affected your SG&A, that $500,000, Rick, you mentioned, is that a one-off or is that something you're going see as these international sales do better?

The sales commission has been running a little higher all year than it was in 2006.

And I think we're filling some of that additional capacity at Mount Braddock with export orders.

Okay.

And a lot of which are directed toward the Asian marketplace.

Okay.

And those orders, there's some additional cost involved because of packaging for ocean shipment.

And then in some cases, we're competing against the explosion cladders in that part of the world or perhaps roll bonders in that part of the world, so the pricing may not be as favorable as in our relatively captive U.S.

market.

So thinking about it, that 500,000, it should maybe even become -- or this number could be a bit normalized now going forward, you'd assume?

Yes, it may be.

We'll have to wait a little longer and see exactly where it levels out.

Historically, sales commissions have been around 1% of sales.

Okay.

And now it looks like it's trending up from there.

And you'll see some specific percentages once we file our 10-Q.

Okay.

And lastly, to the CapEx.

I think you targeted 12 million on the last call.

Have you -- are you going to adjust that at all?

That would be -- it could be in that range.

But some of the spending may be delayed until next year.

Okay.

For the European operations, principally.

So the full year could be a little bit below that.

Okay.

All right.

That's all I have.

Thank you.

Your next question comes from the line of Matt McGeary with Sentinel Asset Management.

Please proceed with your question.

Good afternoon, guys.

Good afternoon.

Good afternoon.

Very nice job again.

Thank you.

Thank you.

Could you talk about capacity, you guys, I heard you mention on the call, you're still waiting for one big machine at Mount Braddock, but you are making stuff there.

And I don't need a specific number, but I'm just trying to get a feel of how hard you're running right now, just from a production standpoint?

Sure.

Sure.

First, the one machine we are waiting for is a press, and we already have a press, obviously.

So it's not like we are missing a major type of operations in our process.

That large press coming in should be fully operational in November.

We have indicated in the past, when we did the extension at Mount Braddock, that we would double roughly our U.S.

capacity.

And if you take the past four quarters, I guess we are running today, we have a run rate of about $150 million per year.

We have indicated here and to investors that we thought that a production of close to $200 million would be achievable with this new platform that we have worldwide, including the modernization we do in Europe.

So 150 to 275%, I think that's a fair description of where we are today.

Okay.

That's good.

And that sort of leads me down, what I'm sort of wondering is your balance sheet looks good, looks very good, generating speed despite your significant spending on this upgrade, spending on working capital to fuel the growth.

You're still generating free cash.

I just sort of wondered what you're -- how you guys think about just conceptually uses of capital as we look out?

I mean obviously the -- you've got a lot of work ahead of you over the next few years, it seems like.

How do you think about uses of capital?

Well, we have done a lot of work with the Board over the past year.

I think we are now reaching a vision as to where we want to go.

So it's a little premature to share that vision publicly.

We'll come back on that topic with you guys throughout the following quarters.

One concept that remains is that we are the leader in explosion welding, and we definitely want to remain the world leader in that niche industry.

I mean is there -- I don't know what your -- specifically, what your market looks like worldwide.

But are there smaller players that you could acquire out there?

That does -- that would --?

It's always conceivable.

We have decent smaller competitors, as we talked about them a number of times, and you have new activities in the Far East in those countries.

And you have a bunch of smaller, even smaller players all around the world in a number of countries.

And so, yes, we know our industry.

We are monitoring.

We are interested, and we'll see what happens.

Great.

Great.

All right.

That's all I've got.

Thank you.

Your next question comes from the line of Debra Fiakas with Crystal Equity Research.

Please proceed with your question.

Thank you.

I wondered, you've been growing at a pretty heady pace, and you've made several comments in your opening remarks as well in answers to questions that you have a little bit of visibility into some of your markets.

You mentioned chemical processing, the aluminum smelting.

Just wanted to get an idea of what you believe your growth rate might be going out into the next two to three years?

Yes, we are not prepared to quantify a top-line guidance for the next year and, of course, even less for two or three years out.

I think the message is that we are still quoting at a firm level of activity on all of our key market segments, and we don't see too many reasons at this stage to become pessimistic.

But by the same token, we are -- it's way too early to guide.

Well, I actually just wasn't hoping for guidance necessarily as much as maybe just to give us some idea of what it is that's giving you so much confidence?

Well, if you --

I'm not asking for revenue numbers, just asking for what you see in your markets?

Yes, well, if you take all the key markets -- energy, oil and gas -- we still see a number of refinery projects out there.

They are not necessarily new refineries, but they are expansion, modification, adaptation.

All that gives us opportunities in the world of petrochemical, which has been our steady key market segment since the birth of DMC.

We still see around the world a lot of projects.

We typically refer to purified terephthalic acid project, acetic acid and a number of other chemicals.

In the world of aluminum smelting, just hitting the industry press or the financial news, you hear a lot about that sector, and there are a lot of projects worldwide and we participate in every one of those.

In the world of nickel smelting, the same situation.

It's more of a spiky market segment.

When it comes, it's really big, and then it may be silent for awhile, but there are a number of projects on the board.

Shipyards, they're active around the world.

It's a smaller market segment for us, but it's good.

It's a steady one.

We like it.

We know it well.

Power generation, it's all over the world.

So if you add up all of that, that's the color I can give you at this stage on how the future looks.

That's somewhat helpful.

Now you have this one alternative energy project that you've been working on, and of course, there's a great deal of activity in alternative energy.

In particular, there's a fairly significant ramp up in plans for gasification projects.

Is that also an area where clad metals might be used and you'd have an opportunity --?

I'm not sure specifically about gasification projects.

Certainly we are still intrigued by that original project that we described as alternative energy.

We still are under secret on that one, cannot talk about it.

What I can say is that we -- since we received this first order in May of '07, we have received a follow-on order for the -- from the same customer for an additional section of their project.

It's still a little bit early, though, for us to formally have a new market segment called alternative energy.

But there's something there, and we're intrigued and we'll be certainly watching it carefully.

Okay.

And then, just one last question.

Again, this also relates to the top line.

You've talked about your wind turbine customer and the prospects that you have there.

And I wondered, is there a way to -- are there multiple customers?

Is the expansion that you're looking at in your welding segment, does that involve just simply expansion with one or two customers that you already have, or is it a matter of landing new customers?

Right.

Let me clarify that.

First, it's not about wind turbine.

It's about gas turbines.

Oh.

I'm sorry.

So it's a large -- hundreds of megawatts of combined systems that we are dealing with.

That segment inside of AMK has been oriented mainly with -- the business model is mainly with one large customer.

But in addition to that, we have our traditional AMK welding business, which is about jet engines, and that segment is, of course, still very much alive.

And it's diversified.

It's not just one customer.

So it's a sum of two activities there inside our niche AMK welding services business.

All right.

Thank you.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of James Bank with Sidoti and Company.

Please proceed with your question.

Yes, sorry, my question's been answered.

Thank you.

Your next question comes from the line of Mark Parr with Keybanc.

Please proceed with your question.

It's actually Philip Gibbs for Mark Parr.

How are you?

Hello.

How are you?

Hey, Philip, how are you today?

Great.

I had a question basically based on recent momentum in end markets.

Yvon, you obviously touched upon all the end markets, and I'm aware of where your greatest presence is.

I was just wondering what the -- where recently has been the greatest percentage of your order inquiry been as far as end markets go?

I -- it remains -- that's what's exciting about this Company.

It remains balanced between the various market segments, although the bookings may be spiky, that alternative energy or big refinery project or aluminum smelting.

The bookings can be very spotty, but the overall background outlook is pretty balanced between the various market segments.

Okay.

And this question was -- could be for Rick as well.

Because he had more insight into it.

Obviously the gross margins are relatively stable.

It came in slightly less than the second quarter, not noticeably less, but I noticed there's some quarter-over-quarter variability.

What's -- when your gross margin is in, let's say, the mid to high 30 range versus the mid to low 30 range, what is the variability differences there?

Is it in the metal used?

It certainly can be that.

If there's less expensive metals versus more expensive metals, that can have an impact.

There can also be an impact from things like the fourth quarter of last year, where we had a very large $11 million Russian order.

That boosted the gross margin up to the 40% level.

But there was an offsetting sales commission, a very significant one, that showed up down below gross margin in selling expenses.

So if you would have adjusted the selling price and sales commissions, you would have seen a more normal margin in Q4 of last year.

And then there's the rare occasion, fairly rare in the U.S., somewhat more common in Europe, where customers supply the metal.

And in that case, we earn higher margins.

And then it's just the old mix.

We custom price each and every order.

And there's a big range when you look at the orders that we ship in any given quarter or the orders that are in backlog.

So it's a challenging business to forecast, and I always tend to err on the side of conservatism.

If, let's say, for a given percentage of your orders, you're competing against someone who would necessarily make roll bond equipment, which would -- roll bonded, welded metal.

In that case, is that usually lower margin?

It oftentimes can be, but in a lot of cases where we compete against roll bond, we can deliver sooner.

And if delivery is a key issue, then we can hold our prices and maybe not drop them where we oftentimes do to compete more effectively with roll bond pricing.

And I think -- personally I think one of the reasons why roll bond pricing is lower is because steel companies are used to selling based upon tonnage.

And I don't think they capture all the value-added that goes into the roll bond product.

So it could be beneficial to us at some point in time if they do a better job of capturing all those costs.

It would increase their prices.

But I think in general we have to be very cognizant of the fact that roll bond can be priced a little lower than our product.

And again we compete on the edge of our respective domains.

The -- we do not compete in the sweet spots.

Yes.

You would -- would you be competing more in those markets like the roll bond, like the rolled overlay?

As far as a -- I wouldn't say emergency, but more times when there -- they can't -- the roll bonders cannot meet the orders?

It's not just emergency.

If -- we are aware of the -- most of the projects in the world where we would compete and we go after everything.

It's not necessarily emergency.

Okay.

And of course, emergency helps us.

Okay.

I was just asking the question in light of cost effectiveness for anyone on a given project.

Because usually they would probably want to go cheaper, and if it wasn't cheaper, they would next go to timeliness.

But there's a quality issue there, too, and the quality's probably better with you?

There could be technical requirements and classifications, but most of the time it's around delivery and sometimes about price.

Well, great.

Well, congratulations.

It looked like a pretty solid quarter for you, and I look forward to all the progress.

Thank you very much.

Thanks, Mark.

Your next question comes from the line of Barry Gladstein with Delaware Investments.

Please proceed with your question.

Yes, hi, guys.

How are you doing?

Hey, Barry.

Hi, Barry.

How are you?

Let me add my congratulations as well.

And just, kind of picking up on the last line of questioning.

With your added capacity, obviously assuming material availability, has your throughput improved at all in terms of when you get an order, the time it takes to fill it?

And along those lines, assuming that that speed has improved, have you seen increased orders as a result of that?

It's a little early for that.

We -- it's still a new plant.

We're still tweaking that, getting the workforce fully productive.

So it's a little early for that.

But we certainly hope to get to that kind of a scenario in '08.

Okay.

And then you mentioned you're competing with the military on -- for some of the raw materials.

Do you have a sense in terms of is it specific programs, is it related to this M-Wrap build out or is it something else that you might see?

Well, we don't know their business, obviously.

But what we hear is it's about armoring material for DoD, for land vehicles and it's fairly significant.

So that came, I believe it was last year, the year before, then went away.

Now it's coming back again.

We are not sure how long that's going to last.

Okay.

Great.

Keep up the good work.

Thanks, Barry.

Thank you.

We'll try.

Okay.

There are no further questions.

I would now like to turn the call back over to Yvon Cariou.

Well, we are really encouraged by our third quarter performance and all that we have achieved thus far in 2007.

As always, I want to acknowledge everyone on the DMC team for their dedication and hard work.

I also want to thank our Board and you, our investors, for your continued support.

We look forward to speaking with you after the end of the year.

Take care.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect, and good day.