DMC Global Inc (BOOM) 2010 Q3 法說會逐字稿

Good afternoon.

My name is Selema 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.

I will now turn the conference call over to Mr.

Geoff High of Pfeiffer High Investor Relations.

Please go ahead.

Thank you, Selema.

Good afternoon and welcome to Dynamic Materials' third quarter 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 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.

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

Yvon?

Thanks, Geoff.

Our third quarter financial performance reflects the benefits of the diversified revenue stream we have established in recent years.

While sluggish demand from the industrial processing sectors continue to restrain growth at our explosive metalworking business, the broader economic recovery has led to much improved reserves at both our Oilfield Products and AMK Welding segments.

We told you during our last call about increased quoting activity for our external welded plates, and we have not seen any let-up in other SKUs during the past three months.

The sales teams at both our U.S.

and European cladding businesses continue to track several projects that are percolating in a variety of end markets.

The most active of the sectors we participate in continue to be upstream oil and gas, power generation, aluminum and transportation, our U.S.

end market, as well as the chemical and petrochemical space.

On the operations front, the consolidation of our NitroMetall business in Sweden into our Dynaplad facilities in Germany is proceeding on plan.

Our relocation of specialized production equipment will give Dynaplad important new cladding capabilities, and because we have redundant shooting capabilities with France and Germany we believe our European operations will have more than adequate capability for the foreseeable future.

We expect the consolidation process will be complete by the end of next year's first quarter and we lead to enhance efficiency in the operating cost for our overall European cladding business.

As I mentioned, we experienced strong sales growth at our Oilfield Products segment during the third quarter.

Accelerating exploration and production activity combined with bolder use of horizontal drilling technologies has increased worldwide demand for our perforating gun systems and related products.

In the third quarter, sales from our [legacy] Oilfield Products business increased 56% versus the third quarter last year.

When you layer on the incremental revenue from our recent acquisitions in Canada, the United States and Russia, our year-over-year sales were at 158% compared with the third quarter of last year.

We think the financial and geographic benefits we are getting from these new operations clearly validates our recent acquisition problem.

I should note that the two large international order prospects I told you about during our last call were both awarded to our Oilfield Products business.

Customers in the Middle East and India placed the orders and deliveries will take place over the next several quarters.

Our AMK Welding business also had a very solid third quarter, delivering a 41% year-over-year improvement in sales and a 95% increase in operating income.

In spite of the slow speed of recovery at our Explosion Welding business, we are very confident about this segment's long-range prospects for growth.

Clad metals will continue to play an essential role in the build-out of the world's industrial processing infrastructure.

As the global economy recovery gains steam, we fully expect demand for our flat sheet products will increase.

For more on our third quarter financial performance, I will now turn the call over to Rick.

Thanks, Yvon.

Good afternoon, everyone.

Sales during the third quarter advanced 19% to $41.3 million versus the same period last year.

Gross margin during the comparable quarters improved to 26% from 25%.

Gross margins at our Explosion Welding business declined to 19% from 26% due to less favorable absorption of fixed manufacturing costs and a very competitive pricing environment.

However, our Oilfield Products business delivered a significant expansion in gross margin, which increased to 39% from 22% in the third quarter last year.

The improvement is attributable to the segment's strong sales increase, favorable changes in product and customer mix and the incremental margin we have picked up on inter-Company sales to the distribution businesses we recently acquired.

We are optimistic that over the long term we will see improvement in consolidated gross margin as market conditions improve for the cladding industry.

Third quarter operating income improved 18% to $2.9 million from $2.5 million while net income increased 21% to $1.3 million or $0.10 per diluted share, from $1.1 million or $0.08 per diluted share in last year's third quarter.

Adjusted EBITDA was $6.7 million versus $6 million in the third quarter a year ago.

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

With respect to cost the most notable changes versus last year's third quarter are the 27% increase in general administrative expense and the 38% increase in selling expense.

Of course, the primary driver of these increases was our previously mentioned acquisitions of new Oilfield Products operations.

Excluding the impact of these acquisitions, G&A expense increased $310,000 or 11%, while selling expenses declined by $425,000 or 19% versus last year's third quarter.

During the third quarter we recorded net other expense of $416,000 versus $633,000 in the same period of 2009.

These expenses relate principally to realized and unrealized foreign exchange losses recognized by consolidated subsidiaries that prepare their financial statements in functional currencies other than the U.S.

dollar.

There is some additional discussion of these expenses in the MD&A section of today's form 10-Q under the heading Other Income and Expense.

Through nine months we generated an operating cash flow of $10.3 million versus $23.4 million at the nine-month mark last year.

We ended the third quarter with a cash position of $11.1 million and had working capital of approximately $40 million.

Our long-term debt now stands at $23.5 million versus the $34.1 million we reported at the end of fiscal 2009.

Turning to guidance, we anticipate fourth quarter sales will be flat versus the third quarter and we expect gross margins will be in a range of 22% to 24%.

We now anticipate 2010 sales will be down by roughly 8% versus fiscal 2009.

This is slightly lower than the 5% decline we were anticipating at the end of the second quarter.

The adjustment relates largely to the weak conversion rate of quotes to bookings.

Full year gross margins are expected to come in at 24%, which is at the high end of our prior forecast range.

We currently anticipate somewhat higher SG&A expense in the fourth quarter in light of the weakening of the dollar during Q3 and the impact of translating our Euro-based business into U.S.

dollars.

Based on the current exchange rate, we anticipate the impact to be approximately $300,000 in added expense during Q4.

We've reduced our anticipated 2010 blended effective tax rate to a range of 22% to 23%.

This below-normal rate relates primarily to adjustments resulting from the Russian joint venture acquisitions and lower pre-tax income versus fiscal 2009.

As previously noted we expect to return to a blended effective tax rate of 33% to 35% in 2011.

With that, we are now ready to take any questions.

Selema?

(Operator Instructions).

Your first question comes from the line of Dan Whalen.

Hi, Dan.

Dan, you there?

Mr.

Whalen, your line is open, sir.

Okay.

Can you hear me now?

Yes.

Okay, great.

Must have had the mute on.

So you referenced two large orders that you said you've actually locked in.

Can you just add any color in terms of size or scale or duration in terms of how long they'll be completed?

Sure.

The sum of those two orders we are referring to in the Oilfield Products is around $7 million and delivery will go through most of 2011.

Okay.

Should we spread that out evenly, or how is that going to flow through the year?

We expect more than $2 million to ship in the fourth quarter of this year.

Okay.

A little bit less than $1 million carries over into 2012 and the rest of it is largely Q2 and Q3 of 2011.

Okay, great, that's helpful.

Then just on the acquisition front, in terms of pipeline or whatever you want to call it, in terms of deals or potential deals, has the number changed dramatically this quarter versus last quarter?

I'm not sure, Dan, exactly what you refer to.

In terms of potential acquisitions, obviously we cannot talk about anything specific.

We have indicated before that we were active both in the clad space as well as in Oilfield.

Whether it's acquisition or other ways to grow those two businesses, we are active, clearly.

Okay.

But in terms of the number of deals being presented, it hasn't really changed meaningfully?

I'm not sure what you refer.

I don't think we have presented the oncoming deals.

We have realized in Oilfield Products three acquisitions between Q4 '09 and 2010 so far, right?

Sure.

Yes.

I guess what I'm saying is people present deals and ideas to you guys to take a look at certain businesses or parts of businesses.

Has that --

Yes, we would not comment how the deals come to us, I guess, Dan, but just to say again we are active in both space -- clad and the Oilfield Products.

That's part of our global strategy.

All right.

All right, I'll get back in queue, thank you.

Your next question comes from the line of Avinash Kant.

Good afternoon, Rick and Yvon.

Hi, Avinash, how are you?

Hi, Avinash.

Very good, very good.

So a few questions.

It looks like in the quarter your bookings started to improve, at least -- quite a bit, actually.

Could you give us some idea about where those bookings on the explosion clad side are coming from?

What is good about the bookings, I think they come from diversified markets, that's one, and two, I think we've been seeing stronger activity from our European platform.

And when I say European platform, you need to remember the geographic territory attached to our platforms.

For Europe it's Europe and the Middle East and India and Russia, particularly, while for the U.S.

it's North and South America, Australia and Asia, roughly.

So again, Europe has made a stronger showing during the quarter in terms of bookings.

And in terms of the traction on that, how do you see bookings trending in the current quarter?

Do you think it'll be improving from those levels, meaningfully, not?

Any qualitative understanding that you can give us on bookings, that would be great.

Yes, it would be great, Avinash.

I wish I could be specific about it.

All we can repeat is that we are very active in cladding worldwide in a number of markets.

During my conference here I indicated the key markets remain extreme oil and gas, power, aluminum and transportation now with some activity as well in chemical and petrochemical.

In terms of being specific as to what's coming to us, it's a very difficult game to play for us.

We are not in a position to be too specific.

A few things to check with Rick -- in terms of the tax rate, do you mean the 22% to 23% tax rate for the full year '10, right, not just for the quarter?

For the full year, yes.

It'll certainly be higher than that in Q4.

Lower than that?

No, no, the effective tax rate will be higher than that in Q4, bringing the year-to-date rate from 18.4% up to the 22% to 23% level.

So it's been 18.4% this year, okay, okay.

That was the year-to-date effective tax rate.

Effective tax rate, okay, 18 -- okay, I see, I see, I see.

So it'll be a little bit higher than that in Q4, right?

Right, and then we expect in 2011 that we'll return to a normal 33% to 35% level.

Okay.

So basically you're kind of talking about down EPS on flattish revenues for Q4?

Yes, that certainly would be consistent with sales remaining flat and the gross margin falling to the 22% to 24% range from the 26%-plus that we enjoyed in Q3, and that has a lot to do with product mix and which locations are involved in shipping during the fourth quarter.

For example, the U.S.

clad shipments will be weaker in Q4 than they were in Q3.

All right.

How should we think of other income or interest expense going forward?

The other expenses, you say?

Yes.

If you can give me a crystal ball on the foreign exchange rate and what's going to happen in Q4 and in 2011, I would love it, because none of the experts seems to really understand what's going on.

Neither do I.

The change in the U.S.

dollar from around 1.2 -- or the euro to the U.S.

dollar for 1.22 at the end of June to 1.38 at the end of September was certainly unanticipated from what we [anticipated] but that resulted in some of the unrealized losses that we reported.

The interest expense should go down because we have a $6,750,000 principal payment due on the term loan in mid-November.

That's what I was trying to understand.

Once you have paid that term loan in November, what should we look into interest expense of that?

What will be the interest expense after the November payout?

I think our long-term -- we had some revolving credit debt at the end of the quarter but that was largely offset by cash and it related to our European operations where some large payments came in just before the quarter end and they didn't have time to pay down the revolvers.

So if you just focused on the long-term debt it should be down to $23 million to $24 million after we make that payment, and on the biggest piece of that debt our effective rate continues to be 6.37% plus the amortization of some of the deferred debt issuance costs.

So it's probably an effective rate that's close to the 7.5%, 8% when you factor in the amortization.

7.5%.

I'm guessing somewhere in that range.

I haven't computed what it is with the non-cash amortization and deferred debt issuance costs being built in.

So roughly $200k -- no, I'm (inaudible).

It should be roughly $400k or $450, roughly, for the third quarter?

Yes, I think the $450k probably sounds closer to the right number.

Okay.

Final question, in terms of the visibility, [of course] you've not made any comments thus far, and historically you have talked about growth rates in the explosion clad side, long-term growth rates of I think 15% to 20%.

Do you still believe that that's a growth rate that is achievable once we come to some normalcy in the business?

I'm not sure I'm going to, given the past couple of years, to talk about long-term growth rate, Avinash, but I think what we can say is that we see opportunities to grow in the world for our clad business and we certainly have a great team in place and great platforms, and we'll take advantage of those opportunities.

Long-term, I think clad is a growing business.

I will not put a number on it today.

Okay.

Okay, I'll come back with more later on, thank you.

There is a question from the line of Phil Gibbs.

Hey, gentlemen, good evening.

How are you?

Good, how are you?

Hello, Phil, how are you?

Doing okay.

I had a question regarding the strength in Oilfield Products and if that's an area relative to the outlook you may have had three or four months ago, if that surprised you, and really what's driving that business?

Is it just the directional drilling and the trend toward more of that?

Because we've certainly seen that shift occurring over the last several years.

What's interesting in that business, contrary to clad, is that you have a number of metrics which are published by the industry.

The weekly rig counts in the U.S.

and in the world definitely is increasing, and I cannot say we are surprised.

I think we were expecting that growth.

We saw it coming, and we also knew that we have in place a team that is in place and therefore is pursuing all opportunities.

So growth is not a surprise.

Now, are there any cross-selling opportunities ever there potentially between the explosive metalworking and the Oilfield Products businesses?

Honestly, I don't think so.

There could be a few things but they are really different businesses.

On one hand you are on capital equipment for process activities.

On the other hand it's a consumable into the drilling of wells.

So we have opportunity with clad, I am sure, in the oil space, maybe beyond what we do today.

Certainly extreme oil and gas is getting us upstream, is getting us closer to the oil field, so to speak.

But those businesses are essentially quite different.

Okay.

Now, is explosion clad involved in any desalinization projects?

Because we see a big project coming on in the Middle East.

Now, that may not be something that you would participate in, but that part of the world certainly seems like it's growing a bit further and that would support what you're saying about the European business.

Yes.

In general, it is not a big driver for our business.

In general you talk about pretty thin type of material, although it is all of the alloys that we are dealing with in the standard steel and nickel alloys.

But in general, desalination has not been a segment for explosion welding.

Okay.

My last question is very general -- have you seen the global financing matrix improve for some of the projects that you may have on your radar, and how does the financing availability or the willingness to commit to new projects compare to maybe how it may have been three months ago, six months ago?

Just trying to gauge the financing side of the equation for some of these projects.

Yes, I suppose the fact that for several quarters we talk about the fact that our quotation activity are pretty strong, pretty healthy, diversified, that's a good sign.

On the other hand we've used probably the word sluggish too many times and the conversion into bookings has not been there.

So does that mean that the boards of those projects are not releasing the funds?

That's maybe a fair assumption, that some people are sitting there waiting to make sure that the economy is really growing before releasing.

But as I understand it, a lot of these companies are cash-rich.

It's not a cash or financing problem, it's just a question of when are they going to feel comfortable pushing the button, and I think that relates more to their view of how the global economies will perform in the coming years.

Yes, it's a good point.

They need the conformation that their return of investment, ROI, anticipated is probable.

We're just not hearing from our salespeople that financing of the projects is an issue.

Okay, so it's more of willingness.

That's our read on things.

Okay, perfect.

Thanks, guys, I appreciate it.

(Operator Instructions).

There is a question from the line of Gregory Mocosko.

Yes, thank you.

Just to follow up on the question about the quoting, et cetera, you've said you've done a lot of quotes and it's a sluggish whatever.

Are the jobs that you've quoted, have they said we're just not doing the job, or they just don't get back to you?

What is the character of that business out there that's relative to the quotes?

The quotation is of course what we do daily, and they have a life of their own.

You have budget quotations and typically on a given project you go through a number of iterations, many, like 10, 15.

And then when a project gets closer to being awarded, you see an acceleration, more precision in the description of the project.

So when we talk about quotations we talk about the sum of all the quotations we do, and again, a metric I have given a few times here, for a company in clad, we are between $150 million, $200 million sales a year, we quote in the billions of dollars.

We track all of that arithmetic, all of that volume, and inside that mix of quotes you have again budget quotes and some that are mature and it's a very complex, diversified world.

We may very well be quoting one project to different fabricators, and it takes a little bit of detective work sometimes to recognize that quotation A is actually the same as quotation B.

So it's a complex world but we navigate there reasonably well, I think.

Okay, but do you ever get them to say it's canceled, don't bother, we're done, or just it sort of drifts away, the quote just drifts away, the project just disappears and nobody talks about it?

Yes, sometimes the project disappears.

We never give up.

We always respond, we always send a quotation to whomever, and we try to piece together whatever intelligence we can capture about that market or that application.

Okay.

Now, with regard to the oil field and the welding business, those two clearly are growing nicely with regard to the core business, even before you consider acquisition.

Will you be required to add additional SG&A or costs to cover that growth or are you pretty well in place?

You have two projects I guess in India or wherever that you've won.

Do you need to add overhead and the like?

Yes, it is a fair question.

I don't believe that we need to add.

In buying those acquisitions over the past few months we have generated a number of good employees and managers and I think the Oilfield team is pretty well set to take advantage of the market opportunities.

So I don't think we should see a delta increase in SG&A and those businesses.

Okay, and the same for welding?

Same for welding.

Okay.

All right, thank you very much.

You're welcome.

(Operator Instructions).

There are no further questions.

Okay, well, thanks, all of you.

Thank you again for joining us today and for your continued interest in the company.

We remain bullish on the long-term future of our business and clad in particular.

We have built what we think is the best team in our industry and we have the support of a very strong board of directors.

We look forward to continue this conversation with you at the end of the fourth quarter.

Thank you again.

This will conclude today's conference.

You may now disconnect your line.