DMC Global Inc (BOOM) 2009 Q4 法說會逐字稿

Good afternoon.

I will be your conference operator today.

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

All line versus been placed on mute to prevent any background noise.

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

(Operator Instructions)

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

Geoff High of Pfeiffer High Investor Relations.

Please go ahead, sir.

Thank you, Bonnie.

Good afternoon and welcome m to Dynamic Materials' fourth quarter and year-end conference call.

Presenting on behalf of the Company will be President and CEO, Yvon Cairou; 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 managements' 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 this 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.

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

Yvon?

Thanks, Geoff.

Although fourth quarter volume reflected ongoing sluggishness in several of our end markets, the year end period also brought a number of strategic developments that are indicative of what we believe is an encouraging long term outlook for DMC.

I will spend a few minutes addressing these developments as well as activity in our event markets, and then Rick will provide you some financial highlights for the fourth quarter, and full fiscal year.

You will recall that during the third quarter we received a very large order from the upstream oil and gas industry.

This order called for explosion welded plates that are being used to specialized clad pipe within upstream separating equipment.

This contract is helping elevate our profile in the upstream energy market, which we believe could represent a substantial long term opportunity for DMC.

In addition, our work the are of clad pipe could ultimately expose us to ancillary opportunities in midstream and outstream energy markets.

We have taken our first order from the transportation sector, which will record the new end marks that we have been pursuing for several quarters.

This initial order came from a major international designer and manufacturer of modern rail systems that is at the leading edge of this evolving industry.

We work closely with the customer to create a transition joint solution that is being used in a new line of rail cars.

We are optimistic that our work on this project will lead to a long-term customer relationship, and will help us build recognition and acceptance of DMC's product within the global rail industry.

The aluminum production sector has been an active end market for DMC in recent quarter.

A portion of this activity has been fueled by demand from large aluminum producers that have been drawing down their inventories of maintenance equipment, which includes explosion clad electrical transition joints.

Additionally, we are bidding on major new projects in India, the Middle East, and as well around the world.

Given current quoting activity, we are optimistic that the demand we have been seeing will continue for the foreseeable future.

We have witnessed some project postponements in the power generation industry in recent quarters, but we are aware of several large international facilities being planned and this could be meaningful opportunities for us once they move closer to the construction stage.

In spirt of the capital spending downturn, the shipbuilding market was relatively steady for DMC in 2009.

We are well positioned within this sector, and have maintained a strong long term relationship with a worldwide ship equipment distributer based in Holland.

We believe there are prospects for increased future demand from this market, as there are construction plans in place for some very large cruise liners that could likely incorporate our specialized transition joints.

The refinery space, which was a very active market for us for 2008 remains relatively quiet.

We fully expect this sector will rebound and there are discussions of several large new refinery projects in Mexico, China, and the Middle East.

The timing of this rebound remains very difficult to predict.

As we discussed throughout 2009, there has been limited capital spending in the global, chemical, and petrol chemical markets.

And this will likely continue over the near term.

However the infrastructure build out in China and some emerging opportunities in Europe and North America suggest that a turn around in demand from this sector is also on the horizon.

Although our oil field product segment has been impacted by the volatility in the energy markets, we remain very optimistic about its long term prospects for growth.

We continue to pursue opportunities to expand our distribution footprint and consolidate the industry.

You will recall we acquired a better based LRI oil tools during the first quarter of last year.

And I am pleased to report that we just signed a definitive agreement to purchase the assets of Texas based Austin Explosives Company.

Austin Explosives has been a key North American distributer of our (inaudible - highly accented language) charges for several years.

The business reported sales of $10.7 million in 2009, and our consideration for the acquisition will be $7 million.

We expect to close this transaction during the second quarter.

As Rick will discuss in a moment ,we took several steps during 2009 to realign our cost structure, and we made our already lean organization even more so.

As we head into fiscal 2010, we do not anticipate taking additional major restructuring measures.

We have spent many years building our infrastructure and assembling the world class talent that allows DMC to be the dominant player in its industry.

We believe it is critical that the specialized resources are in place as the new business opportunities I highlighted earlier, begin to materialize.

I will now turn the call over to Rick for discussion of our financial performance.

Rick?

Thanks, Yvon.

Fourth quarter sales came in at $42.6 million, down from $58.6 million in last year's fourth quarter but a bit above our prior projections.

Our gross margin was 23% versus 29% in last year's fourth quarter.

This decline was largely due to lower margin work we are are performing for customers in the oil and gas sector.

We reported fourth quarter operating income of $2.4 million, versus $9.2 million in last year's fourth quarter.

Net income was $1 million or $0.08 per share, versus $5.4 million or $0.42 per share in the same quarter a year ago.

Q4 adjusted EBITDA was $5.9 million, versus $12.1 million in the fourth quarter of last year.

As always, please see the section in our news release regarding our use of EBITDA, which is a non-GAAP measure.

The economic downturn impacted our industry later than many others, but when it did we took several steps to reduce expenses.

If we eliminate the impact of fourth quarter SG&A associated with the LRI acquisition, which included $177,000 of transactions related costs, our Q4 SG&A expense was down by 21% versus the fourth quarter of last year.

For the full fiscal year, again excluding LRI, SG&A expense declined 17% versus 2008.

Fourth quarter amortization expense associated with purchased intangible assets was $1.4 million versus $1.2 million in last year's fourth quarter.

Almost all of our amortization expense relates to our 2007 acquisition of DYNAenergetics and the increase from last year's fourth quarter relates principally to changes in foreign exchange rates.

During fiscal 2009, we generated operating cash flow of $29.5 million, versus $34 million in 2008.

We ended the fiscal year with a cash position of $22.4 million, an $8 million increase versus the end of fiscal 2008.

We had working capital at December 31st of approximately $46 million.

Turning to guidance, we are anticipating a fairly slow start to the year as we are making final manufacturing adjustments to explosion welded plates for the Gorgin project; and this situation has slowed certain shipments.

We therefore expect revenue will be down by approximately 30%, versus our fourth quarter results, while gross margin is expected in a range of 20% to 22%.

For the full fiscal year, we anticipate that revenue will be flat to down 5%, as compared with the $164.9 million we reported in fiscal 2009.

We expect gross margins will be in a range of 22% to 24%, and will be impacted by both our efforts to expand our presence within the upstream oil and gas market as well as by industry-wide pricing pressure.

We believe that our gross margin performance will ultimately improve with the rebound in demand from our traditional end markets.

On the cost side, we expect that our SG&A expenses during 2010 will average approximately $7 million per quarter.

We are currently forecasting a full-year tax rate of 32% to 35%.

We are now ready to take any questions.

Bonnie?

(Operator Instructions)

Our first question comes from Avinash Kant with D.A.

Davidson & Co.

A few questions.

Quick questions on a few things actually.

First, could you talk a little bit about Austin Explosives as that's the acquisition that you seem to be--that you talked about in your prepared remarks, and they seem to have been a distributor of yours.

What was the rationale behind that acquisition and how do you think it will add further to the growth?

We are trying to consolidate our position and index in that sector--in that space, as we have indicated before.

We think we can do a much better job promoting the services and product DYNAenergetics by controlling Austin Explosives--by owning Austin Explosives.

There are opportunities for a number of products, as they were buying outside of our network that they'll be able now to buy within DYNAenergetics.

And we think with the acquisition as well of LRA in Canada, we can rationalize all distribution and promotion effort in North America.

Rick, would you like to add?

I think that pretty much covers it.

Okay.

And a little bit about the margin.

You saw some margin pressure during the current quarter, and you have talked about orders from a specific customer.

Is that for a certain time being, or that will go away once you stop shipping to this customer?

I am not sure what the customer reference was.

We talked about customers in the oil and gas sector.

Right.

You also talked a little bit about the large orders that you received for last quarter, you've been shipping from that and maybe that has a negative impact from the margin, is it?

Yes.

I think--I'm sorry, go ahead.

In Q4, in the US, the margins held up very well.

They were very strong based on the mix of work that we performed.

In Europe, the same wasn't the case, and some of the the work related to customers in the Middle East, which is a very competitive market these days.

And it turned out that we missed on some of our cost estimates a little bit.

So, the margins for our European clad business were low in the quarter but they held up very well in the US.

And also the margins for the oil fuel products were a little lower than we expected in Q4, which related principally to lower sales.

If you look at the--the sales for the oil field product segment, they were fairly flat from year to year but included--included $2.4 million of sales from LRI.

So the core business saw a decline in sales, and as a result of some pricing pressures in the business, as well as less favorable absorption of fixed manufacturing overhead costs, the margins did not improve as we had hoped for in the fourth quarter for that business segment.

You received your first order from the transportation sector?

Now, is that--where do you expect to kind of it's a continuous flow of orders, or it's going to be a bit lumpy in the beginning?

I would expect that to be lumpy.

I think it is going to take a couple of years to build up that market segment.

But this is a--this is a real, it is a real segment.

It is going to go.

And you also talk about the clad pipe market, your entry into that.

Do you need a specific technology that you think you need to fill some hole in terms of technology to get into the market or you already have it?

I think as we indicated, in the press release, the order we have forgotten is not strictly a pipe project.

But, what we are learning in making that, that--in fulfilling that order is techniques, and specification that is will be useful as we get opportunities to go into the, into the clad pipe business.

So, we, you know, there's, it is a complex set of specification, little different from what maybe we, we traditionally do.

But it is something that we can totally master and so we are looking forward to opportunities in that space.

Final question for Rick.

Can you talk about your CapEx and depreciation estimates for calendar year '10?

Yes.

The CapEx budget is in the range of $6 million.

Okay.

And I am try to see if I have something with the--

Somewhere close to that, right?

It is around $6 million, and the--

The CapEx into the depreciation.

I think the depreciation is slightly higher than this year but not a big difference.

Okay.

Perfect.

Thank you.

I will get back in line.

What is notable, Avinash, in CapEx, one interesting project we have is a worldwide new ERP system for the Company, so it will take us a couple of years to unfold that, but we should get benefit at the level of new managing this group of small companies.

Okay.

Perfect.

That explains it.

Thank you so much.

(Operator Instructions)

Our next question comes from James Bank of Sidoti and Company.

Hi.

Good evening.

Good evening.

Yvon, I think this is like the first call in six calls you didn't bring up hot list.

Is it still hot?

We still have a hot list.

We can talk a little bit about that if you want.

The way I like to characterize or at least it is--it is continuing on the previous quarters, and a little bit maybe of a down trend.

I think there's a number of quotes and requotes, remain in line with the rush of last year.

The total dollar is similar a little bit down, but not much.

I think maybe it is a little stronger in Europe based, than maybe the US based.

But, pretty much in line.

And when we say US base, US base, maybe a refresher.

US means North and South America, Australia, China, Korea, Japan.

While Europe means Europe, India, Middle East, Africa, Russia, and CIS countries, right.

The content of the leased has shifted where the opportunities are, which is in oil and gas, upstream particularly.

So, if we would like to notice a change, it is--the hot list is weighted more toward that market segment, which is good because our opportunities, which is less good, because that's also where we compete most with people, which has a chance to have an impact on our margin.

Okay.

That's very helpful.

The, I guess more for Rick, when you look at the guidance overall, is this sort of similar to last year?

And take into account what Yvon just said where the beginning of the year is going be a bit slow but you guys are anticipating maybe some of these quotes to come in and turn into back log as we get toward the end of the year.

Yes.

I think the way that it will evolve, the first quarter will be slow as we indicated.

The second quarter will include a large portion of the bookings on the Gorgin project order.

So we should see an increase in sales during the second quarter.

And then the second half of the year, we could see a third quarter that's a little bit slower than the fourth quarter, as you know we hopefully start to get orders on the books and buildup the backlog again.

Okay.

So it could be a little lower in the first quarter, up some in the second, then lower in the third, and up again in the fourth.

Okay.

All right.

Great.

Very much of a moving target.

No, I know.

It's always--historically you guys are lumpy.

I do understand.

Peeling back the oilfield products, it really looks like the operating loss is stemming from the amortization of the intangibles in that group.

At any point, is that amortization going to go away, or is that more of a five year, 20 year amortization.

Yes.

Most of it is there for the next ten years.

Looking at 2010, in euros the amortization expense is 3.6 million Euros.

Yes.

And then it's another small amount CAD80,000 from the LRI acquisition.

That will all continue for a good number of years.

So we need to get some volume in that group before we can see some profit.

And for my second question, oil field services being an upstream market, is this a segment that you guys would anticipate could really work this year, maybe be profitable?

Certainly.

We see that business segment, rebounding to a level of sales that's more comparable to what we enjoyed in 2008.

It should rebound sooner than clad from the macro indicators we see in that particular space.

Yes.

And it will likely be kind of a sequential quarter to quarter improvement as we go through the year.

Okay.

And the--as you referenced at the margins in the fourth quarter, being down really due to the oil and gas sector, is that typical of that group, or is it just those projects that you were working on that just so happen to be in that group?

Yes.

I think it is fair to say that in group, again, we meet competition from the oil boom people, and it tends to, to bring our prices--prices down.

Okay.

I believe that going forward, as a--as the oil boom companies fill up their capacity, we are going to see some opportunity for pricing.

I also believe that as we see the metal costs, metal prices going up, it will also our opportunities that way.

And then the--the volume potential in the space is of such magnitude that that would also help us.

So, it may take some--a few quarters, but I think we should see an upward movement on margins in that space at some point.

Is that really where you butt heads with the Rollbond guys, is it really in the oil and gas sector and then maybe not so much in downstream?

Excuse me, I should have said upstream and maybe not so much in the downstream or petcam area?.

It is both, upstream and downstream.

Okay .

Oil and gas.

And in general, the more the products are cohesive, hot, and more pressure, the more chances we have to have an advantage.

Rick, if I could, the gross margin for each segment?

For the fourth quarter?

Or for the full year, both?

Fourth quarter is fine.

Okay.

Give me just a second here.

I will just back in the queue.

The fourth quarter margin by segment was 22.8% for the explosive metal working, explosion welding; 23.3% for oil field products, and 28.5% for AMK welding.

Okay.

And for the full year, if you want to take this down as well, the full year, explosion welding was 27%.

Okay.

Oil field products was 22.3%, and AMK welding was 27%.

Okay.

Thank you.

I will jump back in line.

Our next question comes from Jason Brosious with Keybanc Capital Markets.

Good evening guys.

Evening, Jason.

I was wondering would you be able to break out your first quarter gross margin guidance by segment?

No, I would prefer not to get into that.

All right.

And--

It's not something that we've done in the past.

Okay.

Just second question.

What you guys are seeing looking forward maybe six months to a year in shipbuilding I have just--I have heard some things and read that that might be an industry that is kind of plagued with overcapacity, a lot of orders made in the '07, '08 time frame that showing up now into the marketplace.

Yes.

You need to look there at the subsegments inside the industry.

I don't know if what you read has to do with tankers or cruise ships.

It's primarily container.

Container, yes.

It is not our primary area of interest, Jason.

We are more into ferry boats, cruise liners and we have some Navy related opportunities.

And in the space we are, it is steady, with some interesting opportunities apparently coming up.

It's not a major product line for DMC, but it has been a steady one, and we have a global footprint through that distributer we have, and so, we kind of like the product, it has been good to us.

Okay.

Very good.

Have a good evening.

Thank you.

Thanks.

Our next question comes from Avinash Kant with DA Davidson and Company.

A few more follow ups, maybe for Rick.

Rick, so, given your guidance for Q1, you will be losing money on the EPS basis in Q1?

I think if you go through the computations, that is where you end up.

All right.

Could you give us some idea about the interest expense?

The first quarter--the fourth quarter what were we slightly over 800,000, and we had an increase in rate as a result of the amendment that we made to the agreement back in November or back in October.

And that was about 100, that was 150 basis point increase in rates but then we paid off roughly 10 million of principle in November.

So, we should be--we should be somewhat below that level in Q1.

Somewhere below that, but not too far from it.

That should stay steady all through though?

What's that?

That should stay steady all through the--?

It should stay steady through most of the year, but we do have another principle payment coming up, another 10 million or so in November.

And then we also have annual payments out of excess cash flow, and we expect that to result in a payment that we will make in the middle of March of around $2.850 million.

Okay.

That will knock interest rate down a little bit for 15 days of March and then some for the rest of the year.

Okay.

And if I look at the bookings pattern for explosion clad and if I take out, I believe you had 14.7 or so million dollars in large orders in the previous quarter?

If I took that out from your booking in the previous quarter, it looks like bookings have been flat, ex-those larger orders in the current quarter.

Is that kind of how we should be thinking of the bookings pattern atmosphere at this time or stabilizing at these levels?

I am not sure of the (inaudible - highly accented language).

But certainly, at best, we can say bookings have been flat and we are still complaining about the sluggishness of the transformation of quote to bookings, and so--

I think on the average they have been stable over the past seral months and I think our hope is that they don't stabilize at this level for very long.

That we start to see improvement at some point as we move through 2010.

Right.

Any large orders that you hope to convert on some time soon?

We-- we typically don't talk too much about, about those.

There's a number of large order that we can look at.

Not necessarily mega orders, but significant, in the several millions.

And there are--of those segments that we have talked about: aluminum, power, and maybe more opportunities in, or any shell opportunities in clad pipe.

And it's all around.

It is not in chemical and it is not in refinery, we can say much.

Okay.

And could you maybe break out, if anything, between the natural gas and oil, if you are seeing any traction in the natural gas side?

When we serve stream, I think mostly, it is gas.

Okay.

Has it been like this or turning towards gas lately?

It has been like this I think.

When we have been talking about upstream, it was more gas than oil.

So no change in the mix at this point?

Not that I can give color about, no, I don't.

I don't know.

I don't think so.

Okay.

Perfect, thanks, Yvon, and thanks, Rick.

You're welcome.

Our next question comes from James Bank of Sidoti and Company.

Looks like it is just me and Avinash.

On the rail cars, is that those hybrid cars where I think some of these guys are having problems with the coal freeze, and they're not able to get it out of the hopper, is that where your transition joints are--?

I am not sure what you are referring to, James.

But this has to do with, with modern, I would say suburban, or mid distance regional type of trains.

Okay.

Passenger trains.

New passenger trains--a new generation of passenger train, yes.

Okay.

And actually where do the transitions, transition joints go?

They're part of the structure.

They're part of the mechanical structure of the car.

Okay, so kind of underneath?

Not necessarily underneath, it is, it is part of the whole structure of how the car is built.

Wow.

In regard to pricing, Yvon, how quickly can that rebound for you guys as obviously the environment right now is fairly competitive, everyone is going after the same stuff especially where you can use any clad welding technology you want?

In your past--in your history with this, how quickly can the pricing--?

We have not--we have not been aggressive like this, on so many segments and against, against those traditional technologies like oil boom, and I think pricing will be a function of their use of capacity.

We have already noticed that the leader in that industry Rollbond is increasing their time, which is a signal they have been filling up capacity.

So as long as oil and gas upstream remain a key segment of opportunity, the capacity filling up the Rollbond people will have a coalition to price, and the other one, again, would be middle price is going up.

Yes.

And just to add to that, James, if you look at certain orders where we are using titanium, zirconium, our aluminium transition joints, we don't compete with Rollbond, it is not in the oil and grass sector, prices have held up very well on those product lines.

They just weren't enough of the business in 2009, and they likely won't be enough of the business during the first part, certainly, of 2010.

Okay.

And let's see, just two more question, Rick.

I think at your closing remarks, before you turned to question, you mentioned a number, 27 million.

At first I thought was that the CapEx and obviously it couldn't have been.

So I didn't know what that was for.

I think I mentioned--I think you are referring to the SG&A, which was $7 million per quarter on the average.

Right.

That includes the amortization of purchased intangibles.

Oh, so I am sorry.

So excuse me, 27 million is the run rate for the quarters or for the--?

No.

$7 million is the average run rate per quarter for 2010.

So that would yield an annual of roughly $28 million.

I'm sorry if someone didn't ask this.

Why so high?

Well, it was $7.477 million in Q4.

Right.

So it is actually a little lower than Q4.

True.

That's a lot higher than what you guys turned out in the June and September quarters of last year.

Yes.

Those quarters had very low sales commissions.

Okay.

So it's more of a selling expense?

Yes.

A selling expense and it's several hundred thousand associated with the acquisition of LRI.

Okay.

Okay.

All right.

Thank you very much.

You're welcome.

Our next question comes from Lavon Von Redden of Hocky Capital.

Question.

You guys kind of highlight a number of these upstream oil opportunities for you.

Can you kind of put some numbers around the size of the potential of that market?

And if there are other areas looking back over the last three years that you were not that you are now focused on or looking at, can you kind of help us understand what potential or how big these markets could potentially be for you?

It is difficult to say.

As you know we have booked that close to $15 million on that one large project.

I--I would think that in that space, we should have opportunities for, if not similar sized project in the multi-million dollars, we will have to see the--if that conforms and we will have to see if the product mix is such that it is not more Rollbond opportunities and in explosion welding opportunities.

The difference between the two is in general, as the metal is thin, it's more oil bond.

When the metal gets thick, we have more of a chance.

So that's on the upstream that we have been engaged in in the past year particularly.

Now, in getting engaged into that space, we have got to understand that we could have opportunity in the more traditional clad pipe business, and we are not there yet.

But the magnitude seems to be quite significant if we succeed penetrating that marketplace.

When I say quite significant, it is really significant as a portion of the sales of DMC clad, but again, we are not quite there yet.

So we will see.

At this time, there are no further questions.

Are there any closing remarks?

Thank you, Bonnie.

I want to thank everybody for participating.

As you can see, we had some head wind and some challenges in the past two quarter, and present quarter.

We also have a bunch of opportunities, we are extremely active in a number of markets, traditional and new ones, and we are really very bullish still on the midterm and long term future of DMC.

So thank you for participating and we look forward to talking to you in a quarter.

This concludes today's conference call.

You may now disconnect.