DMC Global Inc (BOOM) 2009 Q1 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 first quarter earnings conference call.

(Operator instructions.) I would now like to turn the call over to Geoff High of Pfeiffer High Investor Relations.

Please go ahead, sir.

Thank you, Tasha.

Good afternoon and welcome to Dynamic Materials First Quarter Conference Call.

Presenting on behalf of the Company will be President and CEO, Yvon Carlou, and Senior 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 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 beginning approximately two hours after the conclusion of this call.

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

And with that, I will now turn the call over to Yvon.

Thanks, Geoff, and welcome to all of you who have joined us for today's update.

The explosion welding team at our Mt.

Braddock, Pennsylvania facility turned in another strong performance, and as a result our first quarter revenue came in at the upper end of our forecasted range.

As we have been reporting for many quarters, the contract opportunities being pursued by our explosion welding (inaudible) teams have spanned a wide range of end markets and have involved an extensive list of industrial infrastructure projects.

While this situation has not changed, we did see continued weakness in the conversion of prospective orders into bookings and this led to an anticipated decline in our explosion welding order backlog, which came in at $74 million versus $97 million at the end of the fourth quarter.

We do not believe that any single factor has led to the slowdown in our order conversion rate.

Rather, it appears to be the confluence of several issues, including the rebudgeting efforts as a result of dramatic changes in the cost of inputs, project funding challenges due to the limited availability of financing options, and perhaps most significantly a heightened level of caution among customers as they watch for signs of a turnaround in the economy.

The good news is that bookings by our European cladding businesses have remained relatively strong.

Moreover, we have not seen a surge in cancellations of potential projects we have been quoting.

In fact, the quoting activity by our U.S.

and European explosion welding sales teams has been at levels comparable to our most active periods during the past several years.

One of the sizable other prospects we've been tracking is for the hydrometallurgy sector and involves plates that will be used in (inaudible) clad for [volume] production.

We recently received a letter of intent on this project and are optimistic we will receive the firm (inaudible) order in the near future.

We are currently bidding on some sizable metallurgy related projects in the Middle East.

Because of the competitive nature of these opportunities as well as increased pricing pressure in general, the contribution margin from these prospective orders would be less significant than those of our historic [live] contracts.

Nevertheless, our success in capturing these orders would help expand our market share in a strategically important region and we are therefore pursuing the opportunity aggressively.

Our oilfield product segment had a slow start to the year due to some seasonality in this business, as well as certain licensing delays and capital limitations in the CIS [region] and the general state of the LNG industry.

Nevertheless, we are optimistic we will see an upturn in business during the balance of the year and are encouraged by the breadth of opportunities this segment is currently pursuing.

We also are proceeding on plan with the end market development work I told you about last quarter.

It is too early to predict the outcome of our efforts in any of the sectors, but this is probably the broadest range of new market prospects we have pursued at any one time.

It should be clear that we are very serious about the further expansion of DMC's end market exposure.

As we noted in today's news release, we are pursuing opportunities in transportation, defense, nuclear NLG and alternative NLG, and (inaudible) orders on the horizon.

I will now turn things over to Rick who will provide another view of our Q1 financial reserves.

Rick?

Thanks, Yvon.

We reported sales in the first quarter of $49.8 million versus $58.4 million in the first quarter of last year.

Roughly 42% of this decline resulted from changes in currency exchange rates.

First quarter sales were down 15% versus the fourth quarter and you'll recall that we had forecast a sequential decline in the range of 15 to 20%.

First quarter gross margin improved to 31%, compared with 30% in the 2008 first quarter and 29% in the fourth quarter.

The improvement is largely related to the higher proportion of sales coming out of our U.S.

cladding operations, as well as a favorable product mix with respect to our U.S.

sales.

Operating income was $8.3 million versus $9.4 million in the first quarter last year.

Net income came in at $4.9 million or $0.38 per diluted share, versus net income of $5.2 million, or $0.41 per diluted share in last year's first quarter.

Our first quarter adjusted EBITDA was $11.5 million versus $13.5 million in the first quarter of '08.

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

As Yvon mentioned, our explosive metalworking segment ended the first quarter with an order backlog of $74 million.

Our balance sheet at March 31 included cash and cash equivalents of $16.3 million, a 13% improvement versus December 31, 2008.

Turning to guidance, we expect that our recent bookings slowdown will result in a decline in second quarter sales of between 10 and 14% versus the first quarter.

Q2 gross margin is expected to be in a range of 27 to 29%.

Lower bookings combined with the difficulty in predicting the timing of orders have led us to revise our full year revenue forecast.

We now expect 2009 revenue will decline between 17 and 23% versus 2008.

We previously forecast a 12 to 20% year over year decline.

Full year gross margin is expected to be between 27 and 29%.

We are now ready to take your questions.

Tasha?

(Operator instructions.) Your first question comes from the line of Avinash Kant with Davidson & Company.

Good afternoon, Yvon and Dick.

Good afternoon.

Hi, Avinash.

A few questions.

The hydrometallurgy project that you are talking about, the opportunity side of that, could it be double-digits in terms of revenues?

No, it's more like around the--it's less than $5 million.

It's somewhere around $4 million.

Okay.

And in the backlog, could you give us some mix of the backlog in terms of the end market, whatever it is right now, the 74 million backlog right now, what's the end market exposure of that?

Like, how much is from oil refinery and how much is from energy and--?

--I don't have a precise breakdown here, but the spectrum of the backlog I think is consistent with what it was at the end of the year.

Yes.

It certainly includes those large orders that we talked about during the last conference call - the large alternative energy order, the large aluminum production order, and the power generation orders that we booked earlier in 2009.

So it's more of that and less oil and gas than what we're seeing in the backlog throughout 2008.

All right.

And in terms of your commentary about oil and gas sector mix start to show some recovery in the second half, what kind of confidence do you have?

Are you having conversations with your customers that does indicate that?

We are bidding, as we said in the conference just a minute ago on significant projects in the Middle East, which are all, of course, LNG related.

Okay.

And maybe it's just my math, but if I look at the net income that you have and take the share count that you have, value to share counts, my EPS number comes out to $0.39, not $0.38.

Yes.

There's a new accounting pronouncement that deals with restricted shares that carry dividend rights.

And we had some restricted stock award that carried dividend rights.

So you go through a complex calculation and you end up allocating some of the income to those shares.

And we diluted EPS by $0.01 as a result of that new accounting pronouncement.

There'll be further disclosures in a table in our 10-Q that will be filed shortly.

So the actual EPS that went into this one was ex the shares with the dividend rights.

Could you give me the number of--how many shares did you have with dividend rights?

Hang on just a second.

(Multiple speakers.)

You have to--take it off--you want to take it after the call?

Yes, that's fine.

Yes, I mean, the shares involved were 42,427 for the first quarter of 2009 and then 103,000 of net income was allocated.

Okay.

Perfect.

So you'll see the full narrative disclosure and the table when we file the 10-Q.

Okay.

Thanks very much, Dick.

Thank you.

You're welcome.

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

Thank you.

In your opening remarks you mentioned that some of your new business--the business enterprise line might have lower than normal contribution margins.

And I wondered if you could comment on whether that's because of your aggressive bidding activity or because some (inaudible) in the mix of the business that you're bidding on.

The main reason is because we are bidding against different competitor, mainly the people who are involved in oil [bonding].

And traditionally, they are the lower unit prices and if we want to establish market share for what is relevant, what we do is we are subjected to significant price pressure.

However, we want to pursue those opportunities for strategy reasons to gain market share in the region and build credibility in the name.

All right, very good.

And so, I was wondering (inaudible) acquisition opportunities presenting themselves, if you might be able to capture a little bit of market share by (inaudible)?

She was asking--Debra, sorry, you're breaking up a little bit.

She was asking if there were new market share opportunities that you're pursuing through acquisitions.

Thank you.

Thank you.

As we have indicated before, we are continuously working on developing and maintaining relationships around the world in our core business, as well as in our secondary businesses.

So we are interested by (inaudible) expand our growth, but there's nothing at this stage that we would be able to comment significantly on.

Thank you.

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

Hi.

Good afternoon.

Hi, James.

Good afternoon, James.

All right.

So in regard to the backlog that was eating roughly 20 million--because it looks like you put 20 million back in--was there--was that attributable to maybe just one project or was just several across the board?

It was several projects.

Several?

Yes.

Okay.

And then, what we have in there right now, 74, is that something we would expect to kind of work out throughout the whole year or is some of that going to probably linger out until 2010?

I think we indicated it was like 5% or 10% going into 2010, so the same--hopefully, the same production remains.

Okay.

To be shipped--to ship in 2010.

Okay.

And I think on the last conference call you sort of implied that the first quarter might have been your weakest, both in terms of sales and margins.

Obviously, it looks more like the second quarter is going to probably be that one, given the optimism you have in the back half.

Am I hearing that correctly?

I don't recall that specifically.

Perhaps we alluded to bookings being slower in the first quarter.

Okay.

The FX, it looks like you guys took quite a hit - 46% of the incremental decline.

I'm assuming that's baked into your sales guidance of down 17 to 23%?

Yes.

And then, is there any way to improve that?

I'm not really tracking the currencies too closely, but maybe if you ship more from the European plants, as opposed to (inaudible) product.

I mean, does that--would that even matter?

It's the reverse.

Yes, that would have to be--.

--It's the reverse?

That would be (inaudible) in a direction, because it's converting euros to U.S.

dollars and in the first quarter of last year, the euro to U.S.

dollar was in excess of 149 and this year's first quarter is around 131.

So I think in the future quarters, if the currency stays close to where it is today, came down throughout 2008.

So perhaps we've seen the biggest impact in Q1.

Okay.

Let's see--and I guess the revised guidance, does this take into consideration at all that the hydrometallurgy plant at 4 million--sounds like that was mentioned because it's quite sizeable, or I guess the optimism you also have in the oilfield service.

Does that take into consideration maybe those two items not panning out?

We obviously don't have the remaining sales that were included in the guidance in our backlog.

So those specific opportunities are factored into our forecast.

We haven't excluded them.

Okay.

And we have included a number of other opportunities that we're quoting on that we think will be converted to orders in the near term.

Okay.

Very good.

And we provided the range because depending on how various orders, not just the ones we talked about specifically go, we could be at the upper end or we could be at the lower end.

Okay.

A lot of it relates to not just the booking itself, but the timing of the booking.

Right.

Historically, you've been lumpy for sure.

AMK, I was wondering if you could just talk about that for a minute.

You were up 75% in sales, but then the costs were half--or excuse me, the operating income was half of what it was year over year.

In fact, if we just kept that op income flat it would have given you $0.03 more in the quarter.

But I was wondering if you could just talk to the cost side of that business and what's going on.

Yes.

Actually, we are restructuring AMK, preparing them for the next phase of their life.

And we have reinforced significantly engineering team there, which is part of the overall marketing effort in that company.

And we are aiming--we're actually gaining market share in an environment where we play in [production] items as opposed to mainly (inaudible) items where we were before.

So you should really look at this as a positive positioning of AMK for their future.

Okay.

Yvon, if you could help me, how do the clad plates go into transportation in defense that I saw mentioned in the press release?

In the transportation, I don't want to say too much about that.

It's clearly those are different products than what we would sell for petrochemical refinery plant.

It's--so it's totally different products.

It's maybe closer from the what we do in shipbuilding and aluminum industry.

And it's very significant and when we think about transportation, it's more moving equipment not stimulus, bridges, and roads.

Okay.

I'm sorry.

I'm still not clear.

Moving equipment?

I'm--?

--When I say moving equipment, we're looking at--between airplane, trucks, and trains, lots of possibilities.

Okay.

And then, on the defense side?

On the defense side, I think it's safe just to categorize our (inaudible) into the general world of armoring.

Okay.

That's great.

And let me take the opportunity maybe to color this a little bit.

Those are not just vague projects that we want to whet your appetite with.

In every one of these segments we are physically doing things.

Without being too specific, we have test parts which are being tested today by customers.

Discussions are taking place on cost, price.

And those are examples which is one step toward the longer view of the nuclear industry.

We just received our [use] (inaudible) for the (inaudible), which particularly would allow us to fabricate the equipment in (inaudible).

That's not the reason why we did this.

That was--that is one step where we can increase added value in what we do over there.

We--and another big step which may take over a year or maybe more will be to get similar kind of a [stamp] for the nuclear industry.

So those are specific actions taking place in those new sectors--new segments.

Okay, terrific.

I appreciate that color.

And the last question and I'll jump back in line.

The top line guidance I guess both for the second quarter and also for the full year, Rick, is that more for the DMC side or the oil side or is it mixed--is it split between the two of them?

I was wondering if you could just elaborate a little bit.

It's the consolidated DMC numbers, which obviously are heavily influenced by the explosion welding business.

Right, right.

AMK, we expect some improvements throughout the year in both their top line and bottom line results.

Right.

The oilfield products business, as Yvon talked about, got off to a somewhat slow start for the reasons that he mentioned.

We believe that business will show sequential improvement throughout the year as well.

Okay, fair enough.

Thank you.

Thank you.

(Operator instructions.) Your next question comes from the line of Mark Parr with Keybanc Capital Markets.

Hey, good afternoon, Yvon, Rick, Geoff.

(Multiple speakers.)

I've got to tell you, I don't even know what quarter I'm in to listen to you guys talk about your outlook.

Holy smokes.

I--congratulations on the nice earnings beat.

And I guess I had a couple of questions.

One is, did you disclose the level of stock based compensation in the first quarter or can we get that number?

That's just a housekeeping item.

I think we were looking for about 950,000.

Yes, that's the--let me just read it out of the press release here, because it's in the reconciliation.

It was 798, so roughly 800,000 in Q1.

All right.

Okay.

So that helps.

Another question I had, just on the fact that your business is--your revenue outlook is lower in '09 than '08.

And I guess currency is playing a part of that.

And lower metal costs are playing a part in that.

So I'm just wondering if you could help to break out--and I realize volume is kind of a--it's a different--you really can't talk about volume per se--or maybe you can.

But can you talk about the impact of currency and lower metal prices on the overall revenue outlook?

Yes.

It's always very difficult in our business, because of product (inaudible) issues and whether you're dealing with stainless steel or nickel alloys or titanium or zirconium as the cladding material.

But it certainly will have an impact for the full year.

But prices I think have been stable now for several months.

Metal prices.

Metal prices have been stable for several months.

Okay.

But we've got to look at the whole year of '09 compared to what--say the first six months of '08 or even the first eight months.

Yes.

In '08, the first six months probably had some of the high metal prices.

Not as much in the last six months.

And I think if you look at the backlog at December 31 versus March 31, probably not much difference at all.

So if we look at the full year forecast for 2009, maybe half of the decline is between the metal prices and currency.

Okay.

Because that's--really, the magnitude of the decline is somewhat overstating I think the deterioration in your business outlook.

I think that's a very good point and that's one reason why we wanted to emphasize in Q1 the foreign exchange impact.

Right.

Again, the metal price impact is just harder to decipher because of the wide variety in markets and metal combinations.

Yes.

I was wondering--I had another question on the competitive environment.

Yvon, you had talked about working on establishing market share in the Middle East and competing against roll bonding.

Just curious what sort of product shapes and sizes--is there any color you could give us on the metals that you're talking about or the thicknesses, the gauges of the materials that you want to be bidding on?

Yes.

I'll give you a couple of colors.

In general in that world, we're talking about stainless steel and nickel alloy type things.

And we talked before about our respective domains that would overlap and that's where we would compete.

So we always try, of course, to go for the thicker material in that world.

Yes.

Which is where we have the most chance to succeed.

And we are not going down to their sweet spot.

We have enough opportunities in [ranges] which are a little bit of the (inaudible) for their thickness and low (inaudible) and that's where--I think it's fair to say that's where we've concentrated our competition.

Okay.

I had one other question.

And getting back to the metal cost issue, we've seen such reduction in commodities like nickel and carbon steel and aluminum, et cetera.

Is this potentially an opportunity for say increasing order momentum, given the fact--maybe there were some projects that didn't get done or got delayed because of high metal prices or delays even in getting material in '08.

I'm just wondering if there's--I mean, I'm sort of--I'd be curious to what extent your revenue outlook for the full year would include some of that type of activity.

Yes.

It's a very good observation.

That is why when we discussed in the conference call here the level of coating activity, that level of coating activity remains again as (inaudible) and as strong as it has ever been.

And I believe that somewhere that's going to translate into bookings when customers are done rebudgeting their projects and they can get financing and they have enough confidence in the demand shaping up, I think the coating activity we see today will translate into bookings.

Most of the metal decrease I think took place--stopped throughout Q4 '08.

And I think it's fair to observe that as far as we are concerned, it's stable--steady now in Q1 '09.

So the rebudgeting effort based on cost inputs hopefully is coming to an end for those projects.

Now we are left with can they finance their project and do they have enough confidence in their demand to continue.

But what it sure is that they keep asking us to quote.

And we have a hot list that we keep--we talk about regularly.

That hot list demands (inaudible) good projects and we are stricter than we have ever been on declaring something to belong to the hot list or not.

Yes.

All right.

Well, anyway, congratulations on the ongoing evolution of your business, Yvon and Rick.

In this kind of market environment you would think you guys would really be struggling and it's just not the case.

So I just think it's amazing.

Thank you.

Thank you.

Your next question is a follow-up from the line of Avinash Kant with Davidson and Company.

Hi.

A quick follow-up for Rick, actually.

You were talking--I think you mentioned CapEx tightening in your press release.

Could you give us some idea where could CapEx be for calendar year '09?

I think a little less than what we probably suggested last time around - 4 million up to 5 million at the higher end.

4 to 5 million, right?

Yes.

So I think you see 1 million--well, it was 1.170 million in the first quarter and we'll try to stay closer or below that run rate for the rest of the year.

And as far as some of the directionality of (inaudible) is concerned, if we look at the low end of your guidance down 40% or so in the next quarter, and we try to model it at the low end of the full year guidance, it looks like your revenues could be down again maybe in September versus June.

Is that--?

--I think you could make the assumption that Q3 could be lower than Q1 and lower than Q4.

Yes.

Based on what we know today.

And it really relates to the timing of bookings going forward.

Yes.

I don't know that we see it being down from Q2 in a significant way at this point.

Okay, perfect.

Thank you so much.

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

Hi.

The debt - I just wanted to know if there was any change to it in regard to roughly 15% should be taken out of the 45 million that stands on there right now of the long-term debt, Rick?

Yes.

What we did is in the first quarter we have a small term loan in Europe where we have quarterly payments in the 200,000 range, a little bit above.

That's a pretty small piece.

We were required in Q1 to prepay 3.862 million on the term debt under the U.S.

dollar term loan and the euro term loan.

Right.

Because that was out of excess cash flow from last year.

But for the U.S.

piece, because we had a swap agreement in place, we replaced 2.8 million of the 3.8 million repayment with line of credit borrowings to keep the hedge accounting in place for the swap agreement.

So there was no significant net change in the indebtedness during Q1.

Right.

No, I almost followed that.

But I mean, by the end of '09--.

--So in '09 we have roughly 10 million that's due in November.

Okay.

So that's a big piece.

(Multiple speakers.)

And can I get the gross--can we get the gross margins for segment--for the segments individually?

Hang on just a second.

So the gross profit for the explosive metalworking in Q1 was 31.8%, and again, that reflects a very strong performance in the U.S.

Right.

Partly related to favorable product mix, partly related to more favorable than anticipated absorption of fixed manufacturing overhead.

The oilfield products was at roughly 25%, the same as last year's first quarter and for the full year 2009 oilfield products generated gross margins of roughly 32% and we expect the full year this year to be comparable to that.

So the first quarter was impacted by the lower volume.

It's a negative variance with respect to manufacturing overhead and probably a little bit of product mix.

AMK, because of the lower sales, and some of the investment we've made in engineering resources.

They were at 26.1%.

Last year for the full year, AMK was at 33%.

And we expect by the end of the year that AMK will be back at that level for the full year 2009.

Back at the level from '08 you mean?

From '08.

Okay.

So obviously, we see both showing gradual sequential improvement in sales and the same would be true with respect to their gross margins.

Okay, great.

That's all I have.

Thank you.

Thank you.

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

Hi, guys.

Hi, Bob.

Hello, Bob.

Can you say--the nickel project that you mentioned, is that a sulfide or (inaudible) project?

This was uranium, Bob.

Oh, it was?

Okay.

Is this a new application for this end market?

It is.

It is.

We've--the bulk of the hydrometallurgy business we have had was around nickel.

And then, we captured gold application not too long ago.

Right.

And this one is uranium.

So those are subsegments to the hydromet market segment.

Okay, great.

If you are--if you see some of the projects on the hot list turn into actual orders, will you be less aggressive in pursuing some of these lower margin projects in the Middle East that you mentioned?

Not necessarily.

This is a strategic move.

This is exploring a big geographical industrial marketplace.

And we want to establish ourselves, build credibility.

We have an office now in Dubai.

And what is neat about the work done there is that the global team, as we like to call it internally, global sales team, is involved.

The German are involved, the French are involved, the Americans are involved.

And the sales team, as you know, procures the metal.

So we have diversified our supply chain.

We put all of that together and then we--depending on the end product, we decide where each piece of the project will be manufactured.

And so, it's really a global team effort here, which is one of the big strengths we have in this industry as compared to our competitors.

And so, no, not necessarily.

This could become a permanent feature of our future.

But let's see if we win first.

We are not quite there.

Okay.

So it's not a matter of trying to fill capacity as a result of some of the orders being held up from the hot list?

No, it's more strategic than that.

Okay, good.

And then, can you comment on any work that you're doing on LNG?

I could not comment very well.

There is not that much at this stage of the game.

We've never really done much there.

It's a minimal activity for us.

Okay.

For our clad product.

All right, great.

Thanks, guys.

Thank you.

There are no further questions at this time.

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

Yvon for closing remarks or any final comments.

Thank you, Tasha.

Thank you, again, for joining us through this call.

Despite the impact of the economic downturn on our business, we are as bullish as ever about the long-term future of DMC.

When you consider our (inaudible) position in the industry, our strong balance sheet, our extensive hot list of order prospects, the range of new end market opportunities we are pursuing, and the diversification provided by our (inaudible) products and AMK welding segment, you can clearly see the reasons for our enthusiasm.

We look forward to speaking with you at the end of the second quarter.

And I lost a page here.

Sorry, guys.

Hold on me for a second.

No, that's it.

You're done.

I am done.

So anyway, thank you for participating.

Thank you for your team effort in these difficult times.

And thank you for the support of (inaudible) and of our investors.

We'll talk to you soon.

Thank you.

That does conclude today's conference call.

You may now disconnect your lines.