DMC Global Inc (BOOM) 2007 Q4 法說會逐字稿

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

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

(OPERATOR INSTRUCTIONS).

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

I would now turn the presentation over to your host for today's call Mr.

Geoff High of Pfeiffer High Investor Relations.

Please proceed, sir.

Thank you.

Good afternoon and welcome to Dynamic Materials fourth 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'd 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 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 the forward-looking statements.

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

The 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 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, and thanks to all of you for participating in today's call.

Before we get started, I want to introduce two additional individuals who have joined us today.

John Banker is Senior Vice President of Customers and Technology for our explosion welding business and Rolf Rospek is the CEO of DYNAenergetics and heads our oil field product division.

Both gentlemen will be available during the Q&A to help address any of your questions.

Q4 was another period of strong growth at DMC and it represented the final quarter of milestone year for the company.

In addition to posting record revenue and earnings results, fiscal 2007 was marked by major additions to our explosion welding production capacity as well as our global market share.

As you know, we successfully completed a two-year (inaudible)to double the size of our Mt.

Braddock facility in Pennsylvania and we are very pleased with the benefits we are now recognizing from this program.

Last November, we made another addition to capacity.

This time in in Europe.

Of course, I'm referring to our acquisition of Germany based DYNAenergetics.

This transaction altogether two of our industry's largest and most respected players and serve to expand DMC's already (inaudible) market share.

It also expanded our customer base, given us greater access to the Asian market, strengthen our management and production teams, and added more than $21 million to our explosion welding backlog.

The acquisition also has provided us with an important new business segment.

DYNAenergetics oiled field is focused primarily on manufacturing, marketing, and selling specialized oil field perforating systems and seismic explosive systems.

Given the extraordinary demands being placed on the oil and gas industry, we are excited about the opportunity this new business segment brings to DMC.

We are also encouraging by the level of activity in our core explosion welding markets.

Demand from all of our target markets remains strong and just to refresh your memory, those markets consist of oil and gas, [petro] chemicals and chemicals, alternative energy, (inaudible), power generation, aluminum (inaudible), ship building and industry refrigeration.

The level of industrial expansion and capital spending in many of the global economies we follow also is providing encouraging signs.

We continue to track (inaudible) potential opportunities and also we have not announced any (inaudible) in recent months.

There are a number of large and mid size orders we are pursuing.

Excluding the impact of new backlog added from our acquisition, we finished the year with a backlog of $78.5 million.

This represents a slight increase over Q3 and reflects the continued success our sales team is having at booking new orders.

With the addition of DYNAenergetics, our order backlog at year end was $100 million.

Given the demand we are seeing in our target markets, the expansion of our worldwide market share, our enhanced production platform, the improving performance of our MK welding business, and our added exposure to the oil and gas industry we think we have good reason to be optimistic about our prospects during 2008 and beyond.

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

Rick.

Thanks, Yvon.

Sales in the fourth quarter increased 55% to $55.2 million versus the fourth quarter last year.

This $0.9 million of revenue was contributed by DYNAenergetics which joined us on November 15 of last year.

Of this contribution, $4.4 million came from the DYNAenergetics explosion welding business and 2.5 came from its oil field production division.

Gross margin came in at 32% versus 41% in last year's fourth quarter.

You will recall that gross margin in the year ago quarter benefited from very favorable terms we received on an $11 million order.

Gross margin in the 2007 fourth quarter reflected a more normalized product mix from our pre-acquisition explosion welding business, lower gross margins on incremental sales from DYNAenergetics and a $300,000 purchase accounting adjustment to cost of goods sold relating to the acquired inventory of DYNAenergetics.

From a cost perspective, the most notable quarter-over-quarter changes on our P&L were obviously the $1.2 million in amortization expense and $800,000 in interest expense associated with the acquisition.

If you back these two items out and apply our effective tax rate to the sum, you can see how strong our fourth quarter earnings performance would have been without these expenses.

In the coming quarters we intend to provide you with a breakout of EBITDA which will give you a better sense of our performance prior to the impact of amortization and interest expense.

Including acquisition-related expenses, fourth quarter net income was $6.9 million or $0.56 per share versus $6.6 million or $0.54 per share in last year's fourth quarter.

With regard to guidance, we expect to report 2008 revenue growth of up to 60%.

While our gross margin will experience normal quarter to quarter fluctuations, we expect our full year gross margin performance to be approximately 32%.

Factors we expect impact gross margins include higher proportionate sale from our European explosion welding businesses which historically have achieved lower margin than our U.S.

business and sales contributions from our new oil field product business which also tends to report lower margins than our U.S.

business.

As a result of the acquisition our full year operating income will be impacted by approximately $7.3 million of amortization expense based upon year end foreign exchange rates.

Operating income will also be impacted by increased appreciation expense which we estimate will be approximately $5 million for the full year 2008.

Pre-tax income will be impacted by more than $5 million of interest expense.

We are expecting a 2008 consolidated tax rate in the range of 36% to 37%.

Looking at the first quarter, we are expecting revenue to be approximately 80% higher than revenue in Q1 of 2007.

Our Q1 operating income is expected to be negatively affected by lower gross margins and approximately $3 million of acquisition related amortization expense.

With the addition of higher interest expense, we anticipate that first quarter net income will be comparable to the first quarter of last year.

It's important to remember that the two most recent quarters have benefited from our deliveries on a couple of large orders from the natural gas and alternative energy sectors.

As we have discussed on past calls these large orders can cause fights in our quarterly revenue performance.

Since we do not expect to deliver any unusually large orders during Q1, we are expecting only modest sequential revenue growth in the coming quarter.

As Yvon noted earlier, our end markets are very active and we have not seen a let up in demand.

We, therefore, remain optimistic about our prospects for continued long-term growth.

We are now ready to take your questions.

Nakita?

(OPERATOR INSTRUCTIONS).

Your first question comes from the line of Avinash Kant of Broadpoint Capital.

Please go ahead Rick and Yvon.

Good afternoon, Avinash.

Hi.

Quick question.

On the 60% revenue growth that you are talking about, would you be able to give us your assumption of how much from DYNAenergetics would be added and how much from the ex-DYNAenergetics business?

I think we would like to add to that question, Avinash, as we anticipate organic growth of 15 to 20% in 2008.

And in terms of the DYNAenergetics contributions, I refer you back to the 8-KA that we filed at the end of January you will see historical sales of DYNAenergetics for their year ended September 30, 2007.

So basically you are assuming 15 to 20% for both the businesses?

No.

Organic growth of 15 to 20%.

Right.

Combined entities.

That would imply both sides of the business will experience, both DMC and DYNAenergetics will experience organic growth in 2008.

Okay.

In terms of the operating expenses, what kind of synergy should we be expecting from this acquisition?

And could you talk about that a little bit in terms of going in '08 and beyond?

Are you talking about synergy of expenses?

Cost synergy.

Could you realize some cost synergy from the acquisition over time?

On the oil field product, which is a new activity for us, we don't (inaudible) particular synergies.

In terms of the explosion welding business, we want to utilize fully all of the divisions and sites that we have and, as you know, they are located in different countries.

So synergies will have a lot to do with the marketing worldwide effort and I guess more than cost cutting is going to be enhancing our access to global market.

I think that's more the way to think about this than thinking about cost cutting.

And one final question.

Is that -- your margins in Europe have typically been lower than the ones in the U.S.

But I believe you have a very significant portion of the market now in Europe.

Should we assume that over time your margins in Europe will start to come up?

Well, as you may guess, our global objective is to keep improving margin and we are going to work on that.

You also realize, Avinash, that we have a significant backlog of $100 million which is locked in, whether commercial conditions were available at the time.

So we have to, based on commercial conditions, which product line, which application, which account, we'll see where we can cut cost or improve margin in some way.

Of the 100 million, how much is coming from oil and natural gas?

This is the backlog of the CLAD business.

Okay.

So the exposure.

What kind of exposure do you have to upstream in that $100 million backlog?

I'm not sure I understand your question.

We are combining upstream oil and gas and oil and gas refining.

Okay.

That continues to be one of our strongest market segments and comprises a major portion of the backlog the most significant portion of the backlog.

Would it be more than half of it?

No, no.

We have the eight market segments that Yvon referred to earlier.

Right.

So it's the most significant of those eight but it's not more than half.

Thank you so much.

Thank you.

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

Please proceed.

Good evening.

Good evening.

Taking a look at your end markets, and they are certainly incredibly strong, I'm curious why your core DMC backlog is flat when I strip that 21.5 million additional from DYNA.

Well, as we referred in the previous observations, we have sustained significant quoting and booking activities.

We have not recalled for a number of months unusual large projects and of course we have expanded the capacity -- production capacity.

So a combination of all of that gives you a stable backlog.

Okay.

Now the new oil field products, is that going to be a new stand-alone reporting segment going forward?

Yes, it will be.

Okay.

And the $3 million of acquisition related amortization expense, should that be more or less a good run rate for amortization expense?

Well, that is the first quarter run rate, James.

And we mentioned 7.3 million for the full year.

Right.

That can change a little bit based upon changing exchange rate because we start with Euros and we convert to dollars.

The reason the first quarter is higher relates to the fact that we attach value to the order backlog and the order backlog, the value attached order backlog amortizes over the first several months, where as the backlog that is attached to other categories of intangible assets, core technology, customer relationships and trade names and trademarks, they get amortized over several years.

The first quarter is higher simply because it includes a fairly significant component for the order backlog amortization.

Can I assume though that by the fourth quarter of 2008 really the majority of these amortization expenses should be going away?

No, no.

Some of these you'll see -- we'll file our 10-K by the March 17 deadline.

It will include disclosures regarding the intangible assets and the amortization period.

The core technology, that gets amortized over 20 years.

Customer relationships a weighted average of nine years and trademarks and trade names I think the weighted average for that category is also nine years.

So the expenses will continue after 2008 but the portion relating to the order backlog will disappear after 2008.

The run rate will be a couple million dollars less as we go into 2009 and beyond.

Okay.

I don't have that 8-K in front of me, the one that you filed in regard to the pro forma purchase price adjustments, but ultimately if I remember correctly even with the FX that, are those numbers material enough to show some sort of dilution beyond '08 when you talk about the customer relationships and the other intangibles?

I think we've provided good information that will enable you to prepare a range of forecast for 2008, and I think that that would help you answer the question.

Okay.

Okay.

I was trying to look beyond '08.

I'm sorry.

I think I'm misreading this part in the guidance.

80% top line growth in the first quarter but then later on you say a modest sequential increase in first quarter revenue.

That is versus what we reported in the fourth quarter of 2007.

Okay.

I wanted to double check.

As you look back to 2007, you'll see that our first quarter was the weakest quarter in 2007, and that's the reason why you see an 80% quarter to quarter increase when you compare to the first quarter but much lower increase sequentially.

Right.

Right.

Okay.

I wanted to double-check the language.

And the long-term debt you now have on your balance sheet you have great success in generating cash.

How fast do you think you'll be able to pull that down?

To a third degree, it depends on future business development activity.

We have fixed repayment requirements of 10% of principal in year one, 15% in year two and three, but there's also a requirement to pay additional principal with excess cash flow as defined in the debt agreement.

Right.

So it's a little bit hard at this point in time to forecast.

Would that be -- I wouldn't assume you would be eager to jump into other acquisition at this point.

Would that be really your primary use of cash would be debt pay down?

Debt pay down, capital expenditures and business development activities.

We are always looking in a number of ways to grow the business.

Okay.

Fair enough.

Thank you very much.

Thank you.

Thank you.

(OPERATOR INSTRUCTIONS).

Your next question comes from the line of Michael Shonstrom from Emerging Growth Equities.

Please proceed, sir.

Hi.

Just a couple of short questions here.

One is in general certainly the industry you are selling into is quite strong, but the credit markets are in turmoil and I'm just curious if you've seen any weakness, any cancelation of projects or push backs or anything from that side?

A good question, Michael.

Thanks.

We are not seeing directly any of the effects of the credit (inaudible) that you are referring to.

We are not seeing that, we are seeing (inaudible).

We do hear from the industry that it is difficult to find professional talents to execute the design, the manufacturing, installation of a number of projects.

We do hear about someone looking at the situation.

There's been some inflation and cost of projects.

Although we have heard about that, we have not seen any direct impact and we are actually our list of projects remains very healthy.

Maybe I'll give the floor to John Banker here.

He can color that.

What do you think, John?

We are certainly not seeing any evidence in the project list of things being cancelled or any slowing down of new things showing up on the list.

We are tracking things that are relatively close to purchase.

We generally are looking things only four to six months in great detail.

Again, no evidence of any trends there at present.

When you look at your business, you often made the comment that the fact that refiners are really sort of increasing capacity and, therefore, that's where your domestic demand is coming from, not from necessarily new Greenfield refinery construction, and I'm just curious whether or not as new refineries are built or new refinery capacity is built that there are not greater applications within an amount of capacity for your product and whether or not the corrosion resistant quality has to be higher.

Are there trends on the manufacturing side that increasingly benefit a greater use of a higher quality of corrosion resistance?

Yes.

Your observation is totally correct.

(inaudible) high sulfur coals are being used more and more.

Higher metal energy is required to process those coal and, again, I'll let John comment to that.

He can do it better than I can do it.

You've definitely defined one of the components that is helping us out.

There is a lot of refinery expansion bottlenecking going on in this country.

It's moving at an unbelievable pace.

And when new capacity is being added, they are being added to be able to handle a very slight of screw everything from nasty stuff coming from Canada to nasty stuff coming from Venezuela, and the plans are this equipment has to last for years and got to handle it slight of things, let's build it to be extremely hardy.

Things that ten years ago would have been bottom in 304 stainless steel are now 317 stainless.

Things that ten years would have been 317 are up in the (inaudible).

It drives up the cost of metal.

It drives the benefits of clad and it drives it all in to our sweet spot.

Great.

One other question sort of on the competitive landscape, the DYNAenergetics acquisition, the major competitor we heard about was in Japan.

Are there other companies similar in size and capacity to DYNA out there that still exist?

Okay.

Not in the western world, not really.

Our Japanese friends are good competitor of high quality like us they are pretty busy and we have not seen signs of them expending their reach beyond their local region.

The case of China, we've talked a number of times with the investors is a different situation.

In China, they do not have the (inaudible) capacity that western and Japanese steel makers have to produce clad metal.

So they are doing a low end product with explosion welding and some of those guys have reached significant size doing that.

Typically a low price kind of a game and although they are significant, they have not yet projected on the outside world in most sophisticated metal energy and the response to your question is no, there are no other competitors like the one in Japan of that size that would be quite a bit smaller or quite unique in that activity in China.

Great.

Thank you.

One final question for Rick.

Do you have -- do you have a capital spending number for the current year?

We have and it turned out to be somewhat higher than we expected and perhaps what we've conveyed to this point in time.

The capital budget is $10 million.

And most of the spending will be in Europe to expand some of the manufacturing facilities and some building expansion and also some equipment additions.

It's spread between all of our business units but the majority of the spending in 2008 will be in Europe.

There's also, in terms of cash flow, there's also a couple million dollars of carry over from the $12 million -- excuse me, $14 million budget that we had for 2007.

Thank you.

Your next question comes from the line of Yvonne Varano from Jefferies.

Please proceed.

Thanks.

I know raw material was a problem a while back.

Can you comment on the situation there and if there is any difficulty getting any of the --

Sure.

The situation remains steady, stable.

It's relatively tense to get the special kind of steel we need.

I think the clad material the situation is a little more relaxed, but no negative change but still relatively tense.

I would invite John to maybe color that statement.

Anything you would like to add?

I can't really add to that.

The steel supply is still a little challenging, but my boys seem to be very successful at beating the challenge.

Some of the others are becoming, most of the clad metals are becoming a little easier supply-wise and shortening of some.

Okay.

And then I just want to clarify, Rick.

The 7.3 million, that's an additional on the amortization to the 2.2 million rate that the rest of the business is running at?

We didn't have amortization at DMC before these intangibles.

Maybe a very small amount of dead issuance cost perhaps showed up on amortization but now that's been classified differently in the cash flow statement.

We are talking about 7.3 million of incremental acquisition related amortization and then approximately $5 million of depreciation.

Okay.

That includes both DMC depreciation and the added depreciation from DYNAenergetic.

So in total what we are looking at is 13.3 million DNA for the year?

No.

I think 5 and 7.3 adds up to a little over 12 million.

That's right.

Sorry.

You answered the question about CapEx.

So I'm good.

Thanks.

Great thanks.

Your next question comes from the line of Ken [Grisalez] of (inaudible) Asset Management.

Good evening.

How are you?

Good.

How are you doing?

Good.

A quick question.

I want to talk about G&A real quick.

I apologize if you went over this already.

So if I look sequentially between September and December roughly $700,000 increase for half a quarter of DYNA, is that a good way for me to think about how G&A might look going forward?

DYNA was included for six weeks roughly.

Right.

November.

So about $700,000 sequential increase for six weeks?

Am I over estimating if I look at it that way?

Well, perhaps because some of the increase sequentially would relate to some additional legal tax consulting fees that we experienced.

Got it.

In the fourth quarter relating to setting up the organizational structure in Europe.

We set up a couple Luxembourg holding companies and a new German GMBH and some of these expenses have to be -- are not part of the acquisition so they cannot be capitalized as transaction cost.

Fair enough.

A little bit high there.

Okay.

And then does DYNA do most of their business in dollars or in Euro?

Actually it's about 60%, 40%.

Well, we have to answer that in two ways.

There's the DYNA plat explosion welding side which I think is principally Euros and then there's the DYNA well oil field products division which is about 60% Euro, 10% Canadian dollars, and 30% U.S.

dollars.

Okay.

So the majority Euros.

The majority because all of the explosion welding is Euros.

And then finally my last question you talked about no very large contracts that have been signed recently, but in general you would indicate that booking or bidding activity in the general level of activity on the market place is similar to what we've seen over the last couple of years or has there been any deterioration at all in activity or more in terms of timing issue in terms of no large contracts recently?

It's more of timing issue.

We don't see any significant degradation or any degradation in the level of activity.

Again, John, do you want to say something on that?

There are quite a number of relatively large projects sitting out there that seem to be cuing up to come through the shoot as we go forward.

It doesn't appear to be much different than last year.

There were a few big orders that were spiked unusually by the very high nickel prices of a year ago that would be lower today simply because nickel is a lot lower.

The contribution to us would be the same.

The contribution would be the same but the appearance of them being a $7 or $8 million order versus a $5 or $6 million order would certainly have transpired purely because of the nickel prices.

Great.

Thank you very much.

Keep up the good work.

Thank you.

Thank you.

Your next question comes from the line of Bob [Tuffy], private investor.

Please proceed, sir.

Hi, guys.

Thanks for taking my call.

Is there a point in the future you think you might be able to give a little more color on the alternative energy contract and whether or not you see additional opportunities in this space?

Sure.

I think we have started doing that in the conference call today by naming our key market segments and as you have noticed we officially recognized alternative energy as a key market segment.

We can say that that's a sector that is developing.

We have interesting opportunities and again now that we have our Sure.

I think we have started doing that in the conference call today by naming our key market segments and as you have noticed we officially recognized alternative energy as a key market segment.

We can say that that's a sector that is developing.

We have interesting opportunities and again now that we have our goal here of the industry on the table, let him speak to that.

The main application there having to do with solar in the alternative energy world.

John?

We appreciate your question.

It's a real interesting one.

No question, as you guys know, the demand for equipment for solar cells is very strong.

The high purity silicon that is needed for solar cells, I think virtually all of it is produced in high alloy equipment and most of it is clad.

We have a really fascinating range of expensive alloys there that most of them, a big fraction, are explosion clad.

Solar is really neat for us now.

But looking at other things, geo thermal has been a very good customer to us.

It spikes in the past and I expect in the future.

Coal gasification, which is I guess somewhat alternative.

It's certainly nontraditional hydrocarbon but coal gasification appears to be something needed on the horizon.

Cellulosic ethanol, which we all hear a lot about, the projects that are out there are using some really nice high and corrosion resistant alloys.

So it's a really a neat segment for us at the present.

Okay.

Great.

Thank you.

And you talked about your CapEx spending next year most of that going to Europe.

Is that specific?

Can you say if that is specifically for DYNAenergetics?

It is spread over our three European, four European entities, including the oil field products.

A fraction of it is going to DYNAenergetics, but it's not only there.

Okay.

And then finally, I assume there is some seasonality to the oil field product segment?

Let's have Rolf talk about that.

Seasonal in the year it's not, but you have a cycle over the oil price over the years, yes.

You have a typical cycle which you can see in the oil industry.

We observe a very high also on the oil price which we have never had before.

I don't see in the moment the cycle going down really.

Winter is on demand but because we are perforating, for us the winter is not such a critical thing.

It's more like a stable situation through the year.

I cannot see that as a season.

Okay.

Great.

Thank you.

One last question.

In regards to the inventory adjustment on cost to goods sold, is that going to carry into next quarter as well?

Yes.

Some will carry into the first quarter of 2008 and it will disappear after that, and the quarter the first quarter of 2008 impact will be comparable to that in the fourth quarter.

Okay.

Great.

Thanks guys.

Thank you.

Thank you.

(OPERATOR INSTRUCTIONS).

Your next question comes from the line of Mark [Par] with Keybanc.

Good afternoon.

This is actually Michael Bartlett for Mark.

I had a question on the oil field services segment.

I remember reading in the 8-K filed in late January that I guess by my math EBITDA margins were around 17% so I was trying to figure out if you are willing to disclose it, how much of the amortization expense in the fourth quarter was attributed into that segment just to kind of see what those margins would have been excluding that amount.

Let's see.

The fourth quarter was about $350,000 for the six week period.

Okay.

And then I know that it was only in the quarter for a few weeks but I guess even since that time do you have any anecdotes about kind of the oil field services being paired together with your oil and gas customers?

Not really.

No.

We cannot say that.

Rolf can comment, but you can ask similar customer name like some of the big names associated to the two businesses, but the procurement of capital equipment on one end and quarter for servicing the oil wells on the other end are not getting the same entities.

Rolf.

I also have to say that the oil product we are supplying mainly to service industry like the (inaudible) whereby the site is supplying the refinery upstream and the big producers like Shell, Exelon and what is behind there.

So it's a complete different clientele.

Okay.

Thank you very much.

Your welcome.

It appears there are no further questions.

I will now turn the call over to Yvon Cariou.

Thank you again for joining us today.

We are very encouraged by the continued demand we are seeing within our global end markets and by the steps we have taken to position DMC for continued goal.

We look forward to keeping you abreast of our progress during the coming year.

Take care.

See you soon.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a great day.