DMC Global Inc (BOOM) 2009 Q3 法說會逐字稿

Good afternoon.

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

At this time I would like to welcome everyone to the third-quarter earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question-and-answer session.

(Operator Instructions) Thank you.

Mr.

High, you may begin your conference.

Thank you, Angelia.

Good afternoon and welcome to Dynamic Materials' third-quarter conference call.

Presenting on behalf of the Company will be President and CEO Yvon Cariou, who is dialing in from Austin, Texas, today, and Rick Santa, who is Vice President and Chief Financial Officer.

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 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 2 hours after the conclusion of the call.

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

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

Yvon?

Thanks, Geoff.

Welcome, everyone.

Hope you can hear me good.

Our third-quarter sales results came in a bit better than projected thanks to strong shipment volumes at the end of the quarter out of our Mt.

Braddock production facility.

We were awarded a very large third-quarter contract associated with the Gorgon natural gas project in Australia.

This order helped elevate our backlog while also strengthening our position in the upstream oil and gas sector.

Within the petroleum industry our clad plates have primarily been used for midstream refining applications.

This contract is relevant both for its size and the fact that it validates the usefulness of our products in another important segment of the broader oil and gas arena.

We noted in our last call that the quantity and quality of projects on our hot list was healthy and spanned several end-markets.

Three months later that remains a fitting description of our new business opportunities.

We continue to bid on a wide variety of international projects in the alternative energy, aluminum smelting, power generation, and oil and gas industries.

While the Gorgon order indicates that some of these projects are breaking free, our quote-to-book conversion rate remains somewhat sluggish.

We believe this reflects ongoing end-markets' concerns about the direction of the economy as well as our position in the capital spending cycle for certain industrial processing projects.

Although the timing of a rebound in demand remains elusive, the current disconnect between quoting and booking activity suggests there is a growing worldwide backlog of planning projects.

We are optimistic this situation could fuel a much-improved bookings performance sometime during fiscal 2010.

During the third quarter we made continued progress on our efforts to establish new end-market opportunities for our clad plates.

We also have taken an important step in strengthening the market position of our Oilfield Products segment.

In early October we acquired Alberta-based LRI Oil Tools, which has been a longtime distribution partner of our perforating business.

Given the strong growth projected for the Canadian exploration and extraction sector over the next several years, we view this as a strategically important transaction that will help us expand our role as a key supplier of perforating equipment both in North America and in other international markets.

As we position ourselves for a rebound in capital spending we also continue to closely monitor our costs, and this has helped us maintain a strong financial position.

Rick will touch on this in his review of our Q3 financial performance.

Rick?

Thanks, Yvon.

Hello, everyone.

Third-quarter sales came in at $34.7 million and, as previously mentioned, this was slightly above our projections.

Our gross margin of 25% was also moderately above expectations, thanks to the better-than-expected sales volume as well as the favorable product mix at our US cladding operations.

We reported third-quarter operating income of $2.5 million versus $9.4 million in last year's third quarter.

Net income was $1.1 million or $0.08 per share versus $7.2 million or $0.57 per share in the same quarter a year ago.

Last year's Q3 net income benefited from certain previously unrecognized tax benefits and tax provision adjustments that collectively resulted in an effective tax rate for the quarter of 7%.

This year's third quarter effective tax rate of 12.1% was also well below expectations due primarily to adjustments identified during our Q3 preparation and filing of our 2008 income tax returns.

Our third-quarter adjusted EBITDA was $6 million versus $12.8 million in the comparable year-ago quarter.

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

As Yvon mentioned, we continue to keep a tight rein on costs.

Our third-quarter G&A expense, which came in at $2.7 million, was down 25% versus the third quarter last year and by 10% compared with this year's second quarter.

As a percentage of sales, third-quarter G&A was 8% versus 7% in last year's third quarter and 8% in the second quarter.

Selling expenses in the third quarter were $2.2 million, a reduction of 15% versus Q3 last year and a 20% increase versus our 2009 second quarter.

As a percentage of sales, selling expenses were 6% versus 4% in the same quarter last year and 5% in the second quarter.

Amortization expense associated with purchased intangible assets declined by 5% to $1.3 million versus last year's third quarter and was up by 4% versus the 2009 second quarter.

Amortization expenses related to our 2007 acquisition of DYNAenergetics, and the year-over-year reduction relates to the value assigned to order backlog becoming fully amortized in last year's second quarter.

The sequential increase from the second quarter relates to changes in foreign exchange rates.

And as we have said previously, future changes in amortization expense will only be impacted by foreign exchange.

We recorded other third-quarter expenses of $633,000 which relate principally to foreign exchange losses by our subsidiaries that prepare their financial statements in functional currencies other than the US dollar.

The foreign exchange losses recorded by our Swedish, German, and Kazakhstan subsidiaries during the quarter reflect the weakening of the euro versus the Swedish krona, the weakening of the US dollar against the euro, and the weakening of the Kazakhstan tenge against the euro.

Through the first nine months of the year we have generated operating cash flow of $23 million, which represents only a modest decline from the same period last year.

We ended the quarter with a cash position of more than $30 million, which is an improvement of more than $10 million from the end of this year's second quarter.

Working capital at June 30 was more than $58 million.

Turning to guidance, we expect fourth-quarter sales will be up sequentially by 10% to 20% versus the third quarter.

For the full fiscal year we now expect sales will be 29% to 31% below sales in fiscal 2008.

Full-year gross margins are expected to be in a range of 26% to 27%, and we are forecasting a full-year tax rate of 32% to 33%.

We are now ready to take any questions.

(Operator Instructions) James Bank, Sidoti & Company.

Good evening.

In the quarter, Yvon, what you were referencing to, to some shipments at I guess the last couple weeks of the quarter.

Was there anything particular, any projects you could suggest that was?

No, no.

Nothing very, very particular.

Just a good effort by our team in Pennsylvania.

Okay.

Moving to Oilfield Products.

Rick, I'm sorry if this was in your prepared remarks.

The loss that you guys reported, the $414,000, that was a result of currency or was that something entirely different?

Currency has a small impact; but it relates to the fact that there is a lot of non-cash amortization.

Okay.

So they were slightly positive before the amortization of purchased intangibles.

And the performance, while it fell short of what we had expected for the quarter, it was an improvement over the first two quarters of the year.

Right, that I can see.

Do you think we could expect maybe break even by the fourth quarter?

We expect a stronger fourth quarter.

Okay.

So the loss this quarter was, what, $414,000.

So that certainly is a possibility.

Okay.

Segment gross profit, can you break that out for me right now, or no?

I can.

I'm ready for you, James, if I can find the right piece of paper here.

Okay.

For the quarter clad came in at 25.8%; Oilfield Products 22.7%; and AMK was 29.7%.

Okay, great.

Then just to give you the full year, we're expecting consolidated to be in the 26% to 27% range.

We expect clad to be in that same 26% to 27% range.

We expect Oilfield to improve somewhat from their year to date, so probably in the 23% to 25% range.

And then AMK we expect a fourth quarter that is comparable to the third quarter, so their full-year margin should come in at 27% to 28%.

Okay.

Great, thank you.

The selling expense, I heard you discuss that was a bit elevated sequentially.

Just wondering why that was, given the fact I think sales are actually down in the September quarter from June quarter just a little bit.

Yes, as we have talked about before, one of the variables in that expense category are sales commissions.

So I believe that they were up in the quarter at least sequentially.

And then we also had some one-time employee severance costs during the quarter as we trimmed staff.

Okay.

The currency impact on your amortization of intangibles, is that -- as the dollar weakens here is this something that I guess could creep up a little bit?

Yes.

That number?

Yes.

The dollar has weakened so far each quarter of this year.

And it certainly looks like we are going to see a weaker average dollar in Q4, which means that that would be up somewhat.

Okay.

Lastly and I will jump back in line, that one-penny rule, that FAS rule that I guess hit your first quarter, that is happening again here.

I can't remember what it was, but some sort of a rule where you -- because I'm not getting to the $0.08; I'm actually getting to the $0.09.

Yes, it is a very complicated calculation that relates to the dividends that are paid on restricted stock awards that have not yet vested.

Okay.

So once you see the 10-Q tomorrow you will be able to hopefully understand that calculation a little bit better.

Okay, great.

All right, thanks a lot.

I will jump back in line.

Thank you.

Mark Parr, KeyBanc Capital Markets.

Good afternoon.

I am really delighted to see the change in the backlog, and I am curious how much confidence you have, Yvon, that the upside is sustainable over the next couple of quarters.

Well, I think what we should say is that, like everyone else, we observe a number of macroeconomic indicators that seems to want to go upwards.

That is one.

Two, as we noted in the press release, our level of quotations remains healthy.

The hot list comment that we made last quarter, those comments remain valid.

So it's hard to predict if the backlog will go up or down.

Certainly the indicators keep accumulating to the fact that one of these days somebody is going to transform those requests to quote into PO.

But plus or minus one quarter, it's very hard to predict.

I remain optimistic that we'll see something move before the end of next year.

Will it be next quarter, or beyond that?

It is very hard to say.

Okay, so the --

Would you like to say something else?

It's pretty much the big picture.

Yes, I guess because I don't have a real long-term perspective, and certainly there is a tremendous amount of pent-up demand for infrastructure and big projects due to the industrialization momentum that is occurring.

I guess one way I might be able to ask a question to get some more color.

If you look at your quotation level, is it something that you would say is indicative of the current backlog?

Or is the quotation, say, similar to where you were a year or two ago, when backlogs were much higher?

Definitely the latter.

Definitely, Mark, the latter.

The quotation activity that we see since then, much stronger bookings a couple of years ago.

I cannot say that the quoting activity is going way up because it does remain at a very high level.

It is not trending down in significant ways.

It varies month to month.

But its steadiness I think is a proper word.

Okay.

Is the quotation activity down?

I guess it is not down nearly as much as backlog is down, so that is good.

Are you seeing your sales force (multiple speakers)?

The one color maybe we can say.

We talked about end-markets.

I think we have indicated the oil and gas is a strong market, particularly the upstream inside that space.

I think we have indicated we were quite active on the aluminum sector.

Power generation remains strong, and alternative energy remains active.

What has not come back from more than a couple of years is the chemical world and, attached to that, some of the petrochemical world.

Hydrometallurgy, which has been a very spiky space for us, has been very, very quiet for a number of years.

So the color is out of our traditional end-markets four of those five -- if you include shipyards, shipbuilding -- are quite active or steady, while a couple like chemical and hydrometallurgy are quiet.

Okay, all right, that is really helpful.

Just one other thing if I could.

Are you seeing your sales force quote the same job multiple times?

Yes, that is a standard of our quoting activity.

Typically when you see an acceleration of the re-budget and re-quote, it is a signal that things are maturing.

So we -- that spectrum of activities is there.

It is not that we are quoting one budget quote and we are done.

We have the re-quote business, yes.

Okay, all right, terrific.

Yvon, thanks for the color.

Congratulations on the stabilization, stabilizing your business levels.

I have to think there is more going on here than just the end-markets.

You guys have got to be doing something right here, and it is really showing in the resilience of the Company.

We certainly try.

Thanks, Mark.

I think we are ready for our next question.

Avinash Kant, D.A.

Davidson & Co.

Good morning, Yvon and Rick.

Good afternoon, sorry.

Questions here, quickly, your tax rate looks like it's going to come back to the normal levels in the fourth quarter and would stay there.

Right.

Each of the last couple of years -- each year we have been filing our tax return for the prior year during the third quarter.

And last year in 2008 we had some very significant adjustments, one relating to an audit that was completed by the IRS, and then the other relating to some tax return to provision adjustments.

So we had about $1.4 million of favorable effects in last year's third quarter and about $200,000 in this year's third quarter.

And you recognize those as discrete period impacts.

So we expect our full-year rate to be down a little bit.

We are now forecasting 32% to 33% versus 34% to 35% that we indicated last quarter.

Right.

Also looking at, Rick, last year your tax rate also fell somewhere between 32% to 33%.

So I was thinking, is that a reasonable way to model years out?

I think at this point, yes, that should be a good way to model it out.

The US is still generating the majority of the income.

So as the European operations improve over time, they are actually at a lower tax rate.

So I think it is reasonable to assume that we stay close to where we are, or where we project this year to be.

Right.

Would you be willing to give us the mix of business?

How much of the business you had was domestic and how much was from outside the US?

I think it is very comparable to last year -- or last quarter.

We didn't really see significant change.

So about half of the sales are US-based and half are generated by Europe.

Then around 20% of the US, at least for this year, has been export sales.

So that would indicate about 40% in US, North America; and 60% elsewhere in the world.

Okay.

So in terms of where this thing is landing actually.

Right.

Where the fabricator customers are located.

It is 40/60 at this point, right?

Yes.

Roughly.

We don't really compile the statistics carefully until the end of the year.

And in terms -- of course you have been receiving some significant orders from the oil and natural gas, more on the natural gas side.

Now is that a phenomenon that could be a trend going forward, that you will see more from the natural gas and relatively less from oil side?

I certainly would expect and would hope so, but we are not quite ready to give specific guidance on bigger projects.

But certainly the fact that we have succeeded on Gorgon should give us opportunities to repeat that.

Even from Gorgon, do you think orders that you could have received you have already received?

Or there could be more coming in from the same (multiple speakers)?

No, Avinash, I think it would be reasonable to expect that we could get more.

Now, what were you bidding against?

Like who were you competing with at that project?

I am not sure I would like to be specific there.

But I think it would be fair to say that the three basic technologies that you are familiar on clad are all involved in that world.

Right.

So it's the other technologies, right?

I think it would be fair to say more of that than other (inaudible).

Right.

Any issue in terms of the material side, like any issues in terms of getting the material?

No, sir.

No issues there, right?

No.

Okay.

So you had some issues I think two, three quarters ago; and those issues are not there right now.

Good availability and shorter lead times than we have seen.

(multiple speakers) Supply chain of specialty steel and corrosion-resistant alloys has been under control.

Right.

So if I separate out some of the larger orders that you got during the quarter, your run rate of orders looks like it was relatively flat from the second quarter, ex the larger orders.

Relatively what?

Relatively flat.

Yes.

If I take out the two larger orders that you announced, it looks like the bookings were kind of flat compared to the second quarter.

When is that rate starting to go -- starting to pick up, actually?

I am not sure it's -- we cannot look at just a mix of baseload business and large order business.

We always have a mix of both.

Right?

Right.

I was trying to think of maybe figuring out, do you see a broadening of order pattern?

That is what I am trying to get at.

I see a steadiness in the quotation mix.

The conversion rate into the baseload, we used the word sluggish in the script.

And the conversion rate of the large orders is probably parallel.

Right?

When they come they are big, but maybe we don't get as many as we used to for that level of quotation.

So maybe a good picture is to think of the two as behaving in a parallel way, the baseload and the large orders.

And maybe that makes sense.

So do you see then a good pipeline of larger orders going forward?

Because if they were not to be there your orders could fall off.

We quote the whole spectrum from -- the spectrum of quotation has not tilted one way or the other.

It is pretty steady.

So you would say that you have been working on the larger orders which could (multiple speakers)?

We are quoting on large orders, yes, sir.

Okay, perfect.

It doesn't mean we will book them next month.

I totally understand that, Yvon.

Thank you so much.

I will get back in line later.

(Operator Instructions) James Bank, Sidoti & Company.

Quick question on the revolver that you amended last week.

It was in the 8-K yesterday.

What was the reason for that?

Well, as you may recall the five-year credit facility with a syndicate of seven banks was closed in November of 2007 when we acquired DYNAenergetics.

Right.

And the covenants, the financial covenants, the leverage ratio, fixed charge coverage ratio, were based upon five-year projections that were put together at that point in time.

I think most of us have seen a much different world develop over the past two years than what we expected in the fall of 2007.

So what that meant is the projections used to set the covenants were no longer valid.

So we put together a new set of projections and adjusted the financial covenants accordingly.

So you would have to fall within an area of the fixed cover or the leverage ratio, and then your interest rate will be active upon that?

Is that how it works?

No.

Both the leverage ratio and the fixed charge coverage ratios were loosened somewhat, so that our ability to remain in compliance is improved.

In exchange for amending the covenants through the end of the credit facility, which matures in November of 2012, we have agreed to pay 150 basis points of additional interest.

Okay.

So what is your policy on the reduction of debt?

It didn't look like there was too much difference from the March quarter.

But is this something you guys are going to remain aggressive on?

Nothing has changed in terms of the principal payments which are annual principal payments on the term loan, a portion of which is US dollar-based and a portion is euro-based.

So we have about $10 million of annual payments that come due in November of this year.

Then we have another roughly $10 million at current exchange rates that comes due in November of 2010.

Then we have smaller term loans at DYNAenergetics that are being paid off in quarterly installments, but they are a pretty minor impact.

Okay.

So you should have a long-term debt of about $45 million roughly as a run rate through 2010?

Well, it will be reduced by $10 million this November --

From this year?

-- from what you see in the September 30 numbers.

Okay.

And then there is also a payment out of excess cash flow for the full-year 2009.

That would be made in the spring of 2010.

Last year it was about $3.8 million, $3.9 million; it would be a lesser amount this year.

We haven't computed that yet.

Okay.

No, that is fair enough.

Very helpful.

That is all I have.

Thank you, guys.

Terrific.

Seth Gelsthorpe, Welch & Forbes.

Good afternoon.

Two questions that are sort of on the same subject, one is specific and one is more general.

The $14.8 million contract in the upstream natural gas area in Australia, I wonder if you could explain specifically what that is in the upstream natural gas area.

Why does that actually represent a nontraditional segment and a hopeful segment?

And then sort of related, more generally, during your last call you described some activities to try to generate new market segments.

I don't remember if you were specific or not and even what field it was.

But I have transportation in the back of my head.

Sure, I'll be glad to comment on that.

Yes.

I am just wondering if you could --

In terms of the Gorgon Project and the upstream, we don't want to be too specific on the application, but it has to do with pieces of equipment which are located essentially at the top of the well or in that general area.

Sometimes we refer to those pieces of equipment as separators.

But they are all kinds, tanks of complex geometry.

That is the one comment.

And why?

It is because in that particular gas field you have, I understand, a mix of gas and oil and it's high temperature, it's sour, which means it is corrosive, with sulfur particularly.

So it is actually a great application for explosion welding.

It is also relatively high pressure, which implies some thickness of the walls of the equipment, thickness which is in the maybe sweet spot of our particular technology from an economic point of view.

So that is on that particular application in upstream oil and gas.

In terms of new applications, we have indicated in previous calls that we were working on a number of developments for new markets.

And we specifically indicated transportation, without being too specific.

And nuclear, the new-nuclear, where we identified a number of pieces of equipment where clad should be utilized.

Then we also talked about ballistic or armoring of plates for the military applications.

So the color we gave on that is that on the transportation segment we were quite advanced in terms of prototype and pricing and costing.

On the nuclear it is going to be somewhat of a long haul, because that industry is just beginning to be rejuvenated.

We want to be part of the supply chain, and we have to qualify, and so we are going through the steps of qualifying at this stage.

And ballistic, it is still more of an R&D -- more D than R -- type of a stage in the development.

So we have indicated those three.

There are a couple more but for now that is about all we would like to say.

Thank you.

(Operator Instructions) There are no further questions at this time.

Yvon, you want to make some closing remarks?

Yes, thank you, everybody for participating in today's call as well as for your continued support for the Company.

We look forward to speaking with all of you again after the fourth quarter.

Take care.

This concludes today's conference call.

You may now disconnect.