DMC Global Inc (BOOM) 2008 Q3 法說會逐字稿

Good afternoon.

My name is Tasha and I will be your conference operator today.

At this time, I would like to welcome everyone to the Dynamic Materials Corporation third quarter earnings conference call.

(OPERATOR INSTRUCTIONS.) Thank you.

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

Geoff High of Pfeiffer High Investor Relations.

Please go ahead, sir.

Thank you, Tasha.

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 Senior Vice President and Chief Financial Officer, Rick Santa.

I'd like to remind everyone that the matters discussed during this call may include forward-looking statements that are based on management's estimates, projections and assumptions as of today's date, and are subject to risks and uncertainties that are disclosed in Dynamic Materials' filings with the Securities and Exchange Commission.

The Company's business is subject to certain risks that could cause actual results to differ materially from those anticipated in its forward-looking statements.

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

A webcast replay of today's call will be available at dynamicmaterials.com after the call.

In addition, a telephone replay will be made available for 48 hours, beginning approximately two hours after the conclusion of this call.

Details for listening to today's call and 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 welcome to everyone joining us for today's call.

As you know, there has been extreme volatility throughout the commodities markets.

And this has created a challenging environment for many companies in these sectors.

For those of you new to the DMC story, I want to reiterate something that we have stated on past calls.

Dynamic Materials is not a commodities business; rather, we are an advanced and general materials company that provides high-value components for large infrastructure projects.

While most commodities businesses require major capital investments to operate, our cost structure (inaudible) to pricing swings as commodity-based businesses.

As you read in today's news release, our third quarter earnings performance came in better than expected.

We benefited from strong results at our Oilfield Products and AMK Welding segments, which helped offset the anticipated sequential reduction in third quarter sales at our Explosives Metalworking business.

The dip in clad metal sales was primarily due to the limited availability of PVQ, or pressure-vessel-quality steel, which serves as the backing components in our Explosion welded plates.

I'm pleased to report that our efforts to mitigate our supply challenges are beginning to pay off.

Although supplies are still tight, we have made solid progress in diversifying our domestic sourcing network for this specialized metal.

In spite of the tenuous economic climate, bookings during the third quarter remained steady.

The slight sequential drop in our order backlog was largely related to changes in foreign currencies.

On the first day of the fourth quarter we booked an additional $5 million into backlog when we received a sizeable order for plates to be used in a large refinery project.

We continue to monitor our very active hot list of prospective orders.

In fact, during August and September, the total pool of projects on that list was higher than at any time in the past year.

We have not experienced any material project postponements and our backlog has not been impacted by other considerations.

As Rick will discuss in a moment, we are maintaining our prior guidance for the fourth quarter.

While the current economic conditions make it difficult to forecast 2009, we are encouraged by the level of activity in our end markets and our confidence in our ability to address these opportunities.

We have established a solid industrial platform, an outstanding global salesforce, and a strong balance sheet.

In short, we believe DMC is well positioned for long-term growth.

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

Rick?

Thank you, Yvon.

Good afternoon, everyone.

We reported third quarter sales of $52.4 million, which was slightly better than our forecast and represented a 24% increase over last year's third quarter.

For the year-to-date period, sales were $174 million, up 58% versus the nine-month period of 2007.

It's worth that, through the first three quarters, approximately 18% of our revenue increase was from organic operations.

So, if you strip out the impact of our acquisition you can see that the growth in our core business has remained very respectable.

Third quarter gross margin was 33%, down slight from 34% in last year's third quarter, but well above our forecasted range of 28% to 29%.

The improvement over forecast was the result of a favorable product mix at our Oilfield Products segment, strong growth at AMK, and higher than expected proportionate sales by our US Explosion Welding business.

We reported a sharp drop in our effective tax rate for the quarter, which came in at 7% versus our forecasted full-year effective tax rate range of 32% to 33%.

The third quarter completion of an IRS examination allowed us to record approximately $300,000 in unrecognized tax benefits.

On top of that, certain adjustments identified during the preparation of our 2007 federal and state tax returns positively impacted our Q3 tax provision by approximately $1.1 million.

Third quarter amortization expense related to the acquired intangible assets was $1.4 million, and net interest expense was $1.3 million.

Q3 adjusted EBITDA increased to $12.8 million from $11.5 million in the third quarter last year.

For the year-to-date period, adjusted EBITDA was up 41% to $41.1 million versus $29.2 million last year.

Since adjusted EBITDA is a non-GAAP disclosure, we encourage you to read the section in our news release regarding our use of such measures.

Third quarter net income came in at $7.2 million, or $0.57 per diluted share.

While net income was relatively flat versus our third quarter last year, it was well above our forecast for the quarter, thanks to our better than expected gross margin and lower tax rate.

Year-to-date, net income was $18.7 million or $1.49 per diluted share versus net income of $17.7 million or $1.44 per diluted share last year.

As we stated in our last call, we expect fourth quarter sales to rebound to a level comparable with our second quarter sales of $63.2 million.

We anticipate gross margin also will be comparable to the second quarter level of 30%.

Fourth quarter operating income will be impacted by approximately $1.2 million of amortization expense associated with the DYNAenergetics acquisition, while pre-tax income will be impacted by approximately $1.2 million of interest expense.

In light of the third quarter cash provision adjustments, we expect our full-year 2008 funded effective tax rate will be approximately 27% and it should increase to a range of 31% to 32% in fiscal 2009.

We're now ready to take your questions.

Tasha?

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

Davidson & Co.

Good afternoon, Yvon and Rick.

Hi, Avinash.

Good afternoon, Avinash.

A quick question.

In the guidance that you have maintained for the fourth quarter, what's the mix that we are looking at in terms of Explosion clad and other businesses?

Would it also be similar to Q2 levels?

Yes, somewhat similar.

AMK had a very strong quarter and we could see a small drop off at AMK Welding.

Oilfield should do very well.

And as the guidance indicates, we expect a good rebound in our Explosion Welding business from the third quarter.

Okay.

And from the commentary that you have put in the press release it looks like, up until now, you've not seen any impact from the decline in oil prices and also the credit situation that is around in terms of projects being delayed or pushed out?

We have not seen a direct link to the projects we have been tracking, no.

Okay.

And as the food chain for the materials side, on the materials side it starts to get better.

Do you think -- what gives you comfort that the same situation, what happened in the third quarter, would not happen again?

Or could it happen if you saw a lag in orders?

Yes.

What you have to read in there is that the supply chain remained tight for the kind of steel that we need, but our efforts to diversify our sources are -- now we can see it starting to pay off.

So, we should be in a better position in the future.

Some of that is also depending on the product mix, but we have clearly made gain on the -- strengthening the supply chain there.

The tight situation at some of the mills that we talked about before is still there because they are busy for the same reason we are busy.

And there's still some of that Defense Department procurement jumping in front of the queue.

But we've managed to get away from that a little bit, somewhat by diversifying the chain.

And one final question, if I may.

I know you're not talking about '09 at this point.

You have seen a strong bookings and everything else but, qualitatively, do you think '09 will be a positive year?

It will be up sequentially or not?

It's way too early for us to cast a judgment on '09.

We don't see, as we indicated, a negative sign at this juncture.

But we don't know how the global economy (inaudible) it will be affected and when for the stuff we are involved with.

Okay.

Thank you.

And what we have today, in the projects we monitor, everything looks pretty steady.

Yes.

Thanks.

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

Hi.

Good afternoon.

Good afternoon, James.

Hi, James.

Hi.

If I could get into the tax a little bit more.

Rick, could you help me understand this on a per-share basis?

It Wall Street $300,000 and $1.1 million?

Yes.

Yes, maybe the best way to go through that analysis -- and I kind of did it myself.

If you look at the 31% to 32% that we estimated would be our effective tax rate last year, and now if you assume that our full-year effective tax rate is 27% for the year, if you apply that 27% tax rate to Q3 and your Q4 forecast, that'll help you quantify how much of the improvement in Q3 related to operating results versus the tax adjustment.

Could you do the homework for me?

I think it's -- if you use $0.27, then I think your earnings would come out to about 45 -- 27%, I think you'd get [45%].

And if you use 32%, which is no longer valid for the full year, it'd be $0.42.

Okay.

But right in that range.

That's why we (inaudible) that works in front of me.

Right.

Okay.

So, what I'm trying to get at -- and I hate to do this to you guys -- it just seems as that every quarter we step into there's definitely a heightened prudence and I think we're kind of stepping into it again for the year.

And I think on the last conference call an investor brought up the notion that it always seems like you guys can pull it off in the last inning.

And you certainly have done it again.

It seems like you're going to do it in the fourth quarter.

But I guess with the supply chain as tight as it is, we have to assume that there hasn't been any slowdown with the projects and what's going on out there.

So, I think it must be reasonable to assume that there is growth on the out year.

Can you -- are you able to comment on that?

Potentially there is growth.

If you look at the projects -- the backlog again of the engineering and construction companies.

Somebody noted not long ago, based on that we should have significant growth.

But we don't know if some of those projects -- or when they'll be affected, postponed.

So, certainly we don't want to cast a judgment.

We are well positioned and ready to go.

Yes.

And I think to add to that our long-term outlook for the next few years is still very positive.

It's just -- it's hard to call 2009 right now with what's going on in the global economy.

But, I don't think too many of the long-term fundamentals for our business will be changed by what's going on today, unless it's a very long duration.

Okay.

Sounds good to me.

Could I have the gross profit breakdown by segment?

Just on a margin basis?

I guess its not--.

It goes into our 10-Q, but it's not in the release.

Okay.

But it's -- it was very strong, in excess of 35% for Oilfield, slightly in excess of 35% for Oilfield.

I think in the range of 38% for AMK Welding.

And clad was, I think, a little bit shy of 31%, somewhere between 30% and 31% for the Explosion Welding.

Let me just double check that quickly.

Okay.

So, that's very helpful.

And now, the tax in '09.

So, we're assuming 31% to 32%.

Is this going to be kind of the norm going forward?

31% to 32% is what we estimate for 2009.

And at this point I would assume that that would be the rate beyond that as well.

Okay.

We don't have better information than that at this point.

And with the debt.

It looks like you took some out herein the quarter.

Any help in where you might be at the end of the year with your debt?

Just trying to think of where the interest expense should go.

Yes.

We had a strong cash balance at the end of the quarter.

We have some debt principle repayment that's scheduled in Q4, $4.5 million on the US term loan and EUR 1.4 million on the European term loan.

Okay.

And I would also anticipate that we'll pay down some of the revolving credit debt.

But if business gets a little bit stronger in the fourth quarter we could see some cash uses to support high levels of working capital than what we had at the end of Q3.

And I need to correct -- the gross margins for the Explosion Metalworking, James, were 31.9% in Q3.

Wow.

Okay.

Which includes a strong weighting of -- a stronger than anticipating weighting of US clad which, as we've indicated before, has stronger margins than our European Explosion Welding divisions.

Okay.

Alright, that's great.

Thank you very much.

That's all I have.

Your next question comes from the line of Mark Parr with KeyBanc Capital Markets.

Yvon, Rick, Geoff, hello.

It's Phil Gibbs.

How are you?

Hey, Phil.

Hey, Phil.

How are you doing today?

Doing alright.

I had a question as far as seasonal impacts in the European clad business.

It looks like about a $3 million drop off in revenue sequentially.

Is that predominantly due to seasonal impacts, or are you seeing anything in particular there as to why it dropped off that precipitously sequentially?

Yes, there's a couple thing.

And the $3 million is (inaudible) number because that is what they fell short and it was made up for by the US doing a little bit better than we anticipated.

So, the quarter came out right on our forecast.

Okay.

And I think a couple things.

Yes, they're impacted a little bit in Europe because of the summertime vacations.

And I think there were also some delays right around quarter end in shipments that required customer testing and certification before shipments from our facilities.

So, some of that just gets carried over into the early part of the fourth quarter.

Yes.

There was a bottleneck there.

There was a little bit of a bottleneck right at quarter end at both the French division and the German division.

Okay.

We expect stronger fourth quarters.

And getting back to that tax rate in the quarter, were you trying to say that the impact as far as the benefit was concerned was about $1.4 million for the quarter?

It was $300,000--.

--Yes, there might have been a couple of other smaller fine ones going on, but those were the two big things.

So again, if you take the 24% rate, which is our new full-year rate, you can kind of isolate the Q3 impact of the adjustment.

Just do the 7% versus the 24% and it should be pretty close.

Don't have my calculator handy right now.

It should be pretty close to that $1.4 million.

Might be a little bit higher than that.

You're talking about 27, is that right, Rick?

Or excuse me, 27, yes.

27 versus 7%.

Excuse me.

Okay.

Yes.

It looks like you benefited from mix, too.

You kind of alluded to that earlier as far as doing more of the clad business domestically instead of Europe.

--And some of the fourth quarter--.

--And some of the $3 million that got shifted would be--.

--The lower gross margin guidance for the fourth quarter relates to the fact that we expect a higher proportion of US shipments in Q4 to be export orders that typically have lower margins.

Okay.

Would you expect DYNAclad to rebound from the third quarter as well--?

--You know, Asia or elsewhere in the world?

Would you expect DYNAclad to rebound from the third quarter levels as well?

Yes.

They've shown steady improvement throughout the year.

We manage as one entity in our release.

So, the concept of one division behavior we're going to fade into an assembly of the three European companies.

So, we should be more or less viewing the business closer to its entirety at this point.

Yes, definitely.

The integration is achieved and they're all -- they work as one salesforce.

And although there are three plants, it's like one virtual plant, if you want.

Fair enough.

Thanks for the color, guys.

You're welcome.

(OPERATOR INSTRUCTIONS.) Your next question comes from the line of Bob Johnson with Satuit Capital.

Good afternoon.

A couple of questions.

First, in regards to the sourcing of material, we've seen in terms of the general comments about the steel industry some dramatic lessening of activity in the last -- whatever, four, five, six weeks.

Is your material that you purchase so specialized that that is immune to the weakening that we're seeing?

Yes.

I don't know if it's immune, but certainly it's not affected like the rest of the discussion regarding steel in general.

Prices are remaining steady, not going down.

And availability is tight, which is a good indicator also for our business as some of what they do has to do with CapEx and large infrastructure.

So, we are in a sector that's very different from the supply chain point of view.

Okay.

And then is that same tightness evident in Europe as compared with the US?

Yes, it is.

Is it evident.

It has not been as tight.

One reason is that we have DOD here in the US who is a strong customer for armoring materials that use the same kind of base steel and they don't have that situation.

And it is a little easier in Europe, but it's still tight as well.

Okay.

And then on a separate question.

I can understand your reluctance to show any real enthusiasm about the outlook going forward except to say that things look promising.

On the last conference call I recall a comment that said that the potential bookings, or the potential projects, or the potential of quotes that are outstanding were in the billions -- with a B -- of dollars.

Can you give us an update on that amount?

No, the comments, they are to do with the volume of quotation that we produce here.

Right.

And it isn't in the billions.

A number of those quotes are repetitive.

There is -- they start at a budget level and re-budget and re-budget.

And when it gets down to what we call the hot list, it's a much, much smaller number.

Still significant, of course, for us, but that's where we work from.

The $2 billion was to indicate there was a volume of quotation which for a business of $200 million a year or so.

Okay.

You said $2 billion.

Yes, sir.

Okay.

And a last question.

Given that you're now saying that the integration is essentially complete of the metalworking operations, the big issue for some of us has been when the margins on the European business begin to approach those of the US.

Given the strong demand that still exists for the product, have you reached what you think are acceptable levels of margins from Europe compared with the US?

And I'll make the comment that it sounded when this question got raised in the past as though you were being somewhat deferential to longer-term customers over there.

And I guess some of us would like to see you be a little less deferential and a little more beneficial to the bottom line.

Yes.

It's a good question.

We certainly plan to see that margin improve as we go.

It is an exercise that takes time and we will not achieve it in one exercise.

It'll take a couple of years.

And it will probably never reach the kind of level we enjoy in the US for competitive reasons.

Some of the other technology used in Europe are more present.

And we don't have as much room to maneuver, so to speak.

So, definitely it's in our agenda.

It's not such an entity of this size.

Having said that, we have made progress and we will, of course, push out to try to do more.

Okay, fine.

And if I could -- just one more.

Rick, when does the amortization begin to be the moderate or cease?

Is it this quarter?

No -- yes.

In Q3 it -- we dropped off the amortization that showed up in Q1 and Q2 for the order backlog that was acquired.

So, except for foreign exchange effects it should be steady for the next three years.

Steady at that $1.4 million--?

--Yes, that $1.4 million.

I think we said it becomes closer to $1.3 million and it could even be a little bit below that based on where exchange rates are today.

Because all of the amortization is euro based from the DYNAenergetics acquisition.

Okay, fine.

Thanks very much.

Your next question is a follow-up from the line of Avinash Kant with D.A.

Davidson & Co.

Hi, Rick.

Quickly a question for you.

Should we expect much change in the depreciation numbers going forward?

I don't think there should be a significant adjustment.

We may have some items that -- where depreciation starts in Q4, but that would be principally in Europe.

And I think the average exchange rate will probably offset that, the lower average exchange rate.

Okay.

So, I would say it'll be pretty flat in the quarter.

Another question I had was, in terms of your -- the competitive processes that are out there, not Explosion clad, but I'm talking roll bond and other processes, given what is happening in the pricing environment have you seen any pressure from that side?

Worldwide it looks like those guys have no capacity.

We hear more about them.

They have, as you know, traditional applications which has nothing to do with what we do.

And some of them are increased capacity.

So, we do -- yes, I think it's fair to say they are more present than they have been.

Alright.

And could that have a pricing impact on your or could they kind of--?

--It could in some instances.

It could in some instances.

And in which regions would that be predominant?

I think it's more project driven than region driven, but maybe more in the -- what we call the export areas, like the Middle East or the Far East.

Okay.

And then one final thing.

Of course, one more time and we've asked this a few times so will just to clarify it a little bit.

The tax impact.

So, simply said, if I take out the $1.4 million in tax impact from you, your operating EPS would have been $0.46?

So that was roughly like $0.11 impact?

NO, when I used the 27% rate I think it came it $0.45.

I don't' have it in front of me.

I might have rounded up to 46.

But $0.45/$0.46 would have been the earnings had we used the 27% rate in Q3.

Okay.

And that's how we should look at it?

So, I think that 27% would be roughly -- yes, $0.45.

So, that's the way to look at it, right?

Yes.

Okay.

Thank you so much.

There are no questions at this time.

You may continue with your presentation or closing remarks.

Thank you, Tasha.

Thank you all for joining us for today's call.

We continue to make great progress in positioning DMC for long-term success.

And we thank you for your support of the Company.

I also want to thank the entire DMC team, as well as our Board of Directors, for their hard work and dedication.

We look forward to speaking with you again soon.

Goodbye.

This concludes today's conference call.

You may now disconnect.