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Operator
Good afternoon.
My name is Keena and I will be your conference operator today.
At this time I would like to welcome everyone to the fourth 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) Mr.
High, you may begin your conference.
Geoff High - IR
Thank you Keena.
Good afternoon and welcome to Dynamic Materials' fourth 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 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.
Yvon Cairou - President, CEO
Thanks Geoff.
Fiscal 2010 closed on an encouraging note as many of the explosion welding orders we had been pursuing for much of the year finally came in.
These bookings fueled a 37% quarter to quarter increase in our explosive metalworking backlog, which stood at more than $56 million at year-end.
Orders came from a broad section of end markets.
Two were placed by a fabricator in South Korea which is incorporating our plates into oil and gas processing equipment headed for the Middle East.
We also saw two orders come out of the alternative energy sector where our plates will be used in both cold gasification and solar related equipment.
While the chemical sector has been fairly quiet in recent quarters, we received a sizable order related to an acetic acid project.
We also booked several contracts for metal processing project, an order for specialty US naval equipment and multiple orders from the industrial refrigeration sector.
While it's too early to claim that demand for more of our end markets is returning to pre-crisis levels, we're attacking a number of encouraging indicators that suggest we may have turned the corner.
For example, refining margins are improving.
Capacity at several international steel mills is filling up and the outlook from a number of the major EMCs is getting better.
When we combine these factors with the spike we just experienced in bookings and the continued strong quoting activity we are experiencing, we feel we have good reason to be optimistic about the future of our explosion welding business.
We're obviously very encouraged by last year's performance at our Oilfield Products business which benefited from a variety of internal and external developments.
Oil and gas drilling activity is certainly feeding (inaudible) of opportunities in our target market and if you've been tracking the domestic and international rig counts you know that the exploration and production companies are extremely busy right now.
This rebound in drilling activity helps drive organic sales growth at our Oilfield Products business by 37% during 2010.
The segment also is benefiting from the addition of 4 new businesses we have acquired during the last five quarters.
When you layer on the contributions of these operations 2010 sales increased 108% to $45.3 million which is well above our original forecast.
Our AMK Welding business also delivered impressive full year growth and we are encouraged by the plan the AMK team has put forth to broaden the business service offering and expand its customer base.
All in all, DMC has done quite well weathering a difficult period in the global economy.
We have started the new year on very solid financial footing and are pursuing an array of growth opportunities within each of our business segments.
Now I'll turn the call over to Rick for some highlights of our fourth quarter financial performance.
Rick?
Rick Santa - CFO
Thanks Yvon.
Good afternoon everyone.
Sales during the fourth quarter came in ahead of our prior forecast, increasing 5% to $44.8 million versus the fourth quarter last year.
Gross margin over the comparable quarter declined by a point to 22%.
Fourth quarter operating income was $1.5 million versus $2.4 million in the fourth quarter last year.
The decline was primarily due to a 31% increase in selling and distribution expenses associated with our 2010 oilfield product acquisitions.
Net income was $1.3 million or $0.10 per diluted share versus $1 million or $0.08 per share in Q4 last year.
Net income benefited from the lower income tax provision versus last year's fourth quarter.
Adjusted EBITDA was $5.4 million versus $5.9 million in the year ago fourth quarter.
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 our expenses, the most significant change versus last year's fourth quarter was the increase in selling and distribution cost I mentioned earlier.
During 2010 we reduced our long-term debt by 49% or more than $23 million.
We also generated operating cash flow of $16.7 million.
We ended the year with cash of $4.6 million and had working capital of approximately $34 million.
Turning to guidance, we expect first quarter sales will be comparatively flat versus the fourth quarter although we expect a bump in gross margins to between 23 and 24% from the 22% we reported in Q4.
For the full fiscal year we expect consolidated sales to increase by 20% to 25% versus last year.
This anticipated increase is based on our improved explosion welding order backlog at the start of the fiscal year and the expected continued growth in our Oilfield Products and AMK segments.
We anticipate our 2011 gross margins will improve to a range of 24% to 26%.
Breaking that down by segment we expect explosive metalworking margins will remain at relatively low levels of between 20 and 22%.
As business conditions improve in our explosion welding end markets and competitive pricing pressure ease, we anticipate gross margins for the segment will begin to improve.
We have forecast full year gross margins in our Oilfield Products segment in a range of 32 to 34% while margins at AMK Welding are expected to approximate the 33% we reported in 2010.
Changes to our projected pretax income and the tax jurisdictions in which we expect to earn that income have led us to reduce our anticipated blended effective tax rate for 2011 to a range of 27% to 29%.
That range should rise to a normalized level of between 30% and 32% in the years thereafter.
We're estimating capital expenditures for 2011 are between $9 and $10 million and we are directing these investments at each of our three business segments.
With that we are now ready to take questions.
Keena?
Operator
(Operator instructions) Our first question is from Avinash Kant of D.A.
Davidson & Company.
Avinash Kant - Analyst
A few questions.
The first one of course talking about bookings and the backlog improvement that you have seen in the quarter.
Over the last few quarters bookings have been low but they have also bounced around quite a bit, like your bookings were pretty low in Q4 of 2009 and then it bumped up a little bit and then again came down in Q2 and then again went up in Q3.
You have seen a pretty meaningful improvement in the current quarter.
What's the sustainability of this one and how do you get some visibility on that?
Yvon Cairou - President, CEO
Well Avinash, as we have discussed many times, we are in a spiky business, so we will see spikes and certainly this is a welcomed one.
In terms of sustainability overall, we referred in this presentation to the macroeconomic news we hear about.
We refer to the fact that our quoting activity remains very healthy.
We refer to the fact that we are quoting to diversified markets, all the segments participate and we are encouraged by the fact that at some point decision makers released what became that spike during Q4.
So that combination of elements gives us a reasonable amount of confidence that there is sustainability out there.
But we are in a spiky business and that will probably not change.
Avinash Kant - Analyst
Okay.
But you are running at a much higher rate than the $20 to $25 million you were over the past few quarters.
Now given what you have seen in Q1 thus far, does it give you confidence that bookings could improve from the Q4 levels or they could be those levels and not going back to the previous four quarters?
Yvon Cairou - President, CEO
I think Avinash, Rick gave the guidance of 20 to 25% top line and I think that's a translation of the fact that what we see overall gives us enough confidence to give that guidance.
Avinash Kant - Analyst
Okay.
And the margin question maybe for Rick.
Rick, could you guide us a little bit in terms of historically back in 2008, what kind of margins was the explosion clad metal business running at and is your guidance consistent?
It looks like it's a bit lower than what you were running at in the past.
Rick Santa - CFO
No, it's still much lower than the past, Avinash.
I don't have the 2008 margins handy but for all of 2009 our gross margin was 27% for the cladding business and 2008 it was 30.3% and the guidance that I just provided a couple of minutes ago was 20 to 22% for 2011.
So we're still seeing prices being depressed and a fair amount of the work that we're booking these days is work that does compete with the roll bond technology.
So when we're going up against the roll bonders we tend to have more pricing pressure and results in lower gross margins.
Avinash Kant - Analyst
So the 20 to 22% you're guiding is there some element of conservatism there, because it seems to be significantly lower?
It's nothing else but competition right?
There's no metal price involved there, right?
Rick Santa - CFO
Right.
Metal prices are largely a pass through.
Yvon Cairou - President, CEO
It's a market mix, Avinash and the competition that comes with it.
The market mix may evolve as chemical and petrochemical comes back where we have naturally less competition, but in the oil and gas, which is still the dominant sector of activity, we do have more competition via the other technologies.
Avinash Kant - Analyst
But in your prepared remarks Yvon you said that utilization rates at the steel mills is going up.
Would that free up some of the margin pressure that you have?
Yvon Cairou - President, CEO
We are seeing signs that definitely the situation at some of the steel mills improves, which means capacity of that particular competitive technology is filling up.
Nevertheless, I think they still have room to go and so we still see pretty tense competition.
Operator
Your next question is from Mark Parr of KeyBanc Capital Markets.
Mark Parr - Analyst
Yvon, you may have mentioned this but as far as the competitive environment, I think you talked about that a little bit with Avinash just a few minutes ago, but have you seen any change in the nature and the competitive scenario with the plate mills on some of the thinner gauge material?
Yvon Cairou - President, CEO
I don't think we can say a change.
They are around.
They take the lion's share of their mature markets.
We take the lion's share of our mature market and we do meet on the borderline of our respective territories and so when we meet, definitely we need to pay attention to pricing.
We used to compete on delivery a lot.
We are not seeing big signs that that's still an effective weapon for us.
I think those guys, although they are filling up their coffin, their backlog, they still have capacity left.
So we've been talking about that type of competition for some time now, a couple of years and I don't see a significant change one way or the other.
It's reasonably stable.
But they are filling up some of their capacity and so are we.
Mark Parr - Analyst
It seems like that would be the case based on what we're seeing unfold for the carbon steel market here in the first part of 2011.
As far as your backlog, you had indicated it was fairly broad-based.
Is there any geographic peculiarities of the backlog momentum in the fourth quarter?
Does it seem like a normal mix from your perspective or any unusual geographic activity?
Yvon Cairou - President, CEO
Not unusual since the past year, couple of years.
Again, the dominant markets for us is oil and gas and chemical, petrochemical.
As we have said before, that's about 60% to 70% of what we do, depending on the quarter.
So that's important.
And when you say oil and gas, petrochemical, the end market where our backlog ends up is Middle East a lot, Asia and there is of course some North America and Europe in there.
But I don't see sheet -- now the fabricators that are building the equipment are all over and from the Middle East to Asia and Europe.
I don't see a shift taking place.
I think that fabrication mix and market mix geographically remains pretty steady.
Mark Parr - Analyst
Okay.
If I could ask one more question.
Could you update me on your explosion welding capability, your capacity?
I know at one point there was some talk about some consolidation in the European fields and could you update us there and then give us a sense of what your capacity utilization looked like in the fourth quarter and where you might see that unfolding?
First quarter is flat but based on the 20 to 25% upside you're expecting, what sort of utilization rate would that represent?
Yvon Cairou - President, CEO
We have good capacity and as you heard Rick make a comment about our CapEx plans, we are preserving the platform and enhancing what we have.
We are around 50-60% capacity during Q4, maybe 65%.
What we pay attention to is reducing the shooting size and we have created redundancy and we are consistently working on enhancing that capacity.
The rest, headcount we feel we can address it at shifts where we need, when we need.
We are very sensitive doing a good job at cross training the teams.
You made a reference to rationalization and yes, we have stopped operations in Sweden.
We are transferring the equipment to Germany mostly, some to France.
However, we are only mothballing that facility; we are not completely closing it down and that is to preserve that shooting site.
So that's well advanced.
So with the guidance that we have provided, we are very comfortable capacity wise and as I indicated, we are still doing productivity investment and capability mix enhancement in our operations.
Mark Parr - Analyst
Congratulations, it's nice to see things moving in the other direction for a change, right?
Yvon Cairou - President, CEO
Thank you for your support, Mark.
Certainly it is nice.
Operator
Your next question is from Phil Gibbs with KeyBanc Capital Markets.
Phil Gibbs - Analyst
I had a couple of questions; a couple in housekeeping but one of them is just on the pace of the business.
The new orders you saw in the fourth quarter, is that rate in the explosion welding business would that be similar in the first quarter or have you seen that abate since the spike that you incurred in the fourth?
Yvon Cairou - President, CEO
Again, what we have is explosion welding is a spiky business so we got that accumulation of orders that we had been tracking for quite some time, in Q4.
We see the quoting activity remaining somewhat [active] but we certainly are not in a position to predict or to guide to another spike.
Actually Rick gave you the guidance for Q1.
So we are not going to guide more than what we just did today for the full year at 20 to 25% growth for the top line.
One thing we can be sure of is that through the quarters of 2011 we will see not a uniform linear growth; it's going to be up and down.
But we are confident we will reach that year-end growth.
Phil Gibbs - Analyst
Great.
And are we expecting to see some seasonality in the Oilfield Products business?
Typically first half is a bit weaker than the second half historically.
Should we expect that?
Rick Santa - CFO
We may see some, but some of those seasonal effects tend to be a little offsetting because of different parts of the world in which we conduct that business.
So at this point we see maybe a little bit stronger second half of the year but more steadiness in that business than what had been the case in the last couple of years.
Phil Gibbs - Analyst
Okay.
What should we be thinking as far as stock compensation for 2011, Rick?
Rick Santa - CFO
Approximately 3.4 million.
Phil Gibbs - Analyst
Okay.
Just lastly here on the fourth quarter segment gross margins; can you give us any color on what those were?
Rick Santa - CFO
The fourth quarter segment gross margins for clad a little bit disappointing, 15.5% versus 22.8% last year.
Oilfield Products 30.7% versus 23.3% last year.
AMK was 34.2% versus 28.5% in last year's fourth quarter.
Operator
(Operator instructions) Follow up question from Avinash Kant.
Avinash Kant - Analyst
A few things.
Maybe Rick, you talked about the CapEx numbers and you said it could be 9 to 11 million in the current year.
Rick Santa - CFO
9 to 10 million.
Avinash Kant - Analyst
Could you give us more in terms of whether it's going to be first half weighted or it's going to be pretty uniform throughout the year?
Rick Santa - CFO
Pretty uniform throughout the year.
Probably a little bit more weighting in the last half of the year than the first half, just because of the lead times on some of the bigger expenditures items.
Avinash Kant - Analyst
The second half is going to be a little bit higher?
Rick Santa - CFO
A little bit higher.
Avinash Kant - Analyst
And then now that your debt has come down actually, what kind of interest expenses are you incurring every quarter now?
Rick Santa - CFO
We had interest expense in Q4 of 569 and that included 1.5 months where we still have the swap in effect so we're paying a higher interest rate.
That came down for the last part so I would say until Q4 when we have to make the annual fiscal payment on our term loan and the scheduled payment this year is $9 million in the middle of November, I would say that we'll be around 10% below the Q4 rate, so probably close to 500,000 a quarter for the first three quarters of the year then a little bit less in Q4.
Avinash Kant - Analyst
Because you have the $9 million in November.
How should we think of HG&A going forward given what you had in Q4?
As you gave guidance for Q1, should we expect similar HG&A in Q1 compared to Q4 or was there something else?
Rick Santa - CFO
I think Q4 is a pretty good benchmark and as we've talked about in the past, some of the variables are commissions where we use outside agents for a portion of our sales and that can fluctuate a little bit from quarter to quarter, incentive compensation is largely based on bottom line results that can fluctuate.
We did give people modest salary increases at the beginning of the year so that will raise it a little bit.
But the fourth quarter is a pretty good benchmark to model off of, with some adjustments based on the other factors that I just mentioned.
Avinash Kant - Analyst
So your 20 to 25% revenue growth guidance in 2011 assumes HG&A in the range of or how much percentage growth from 2010?
Rick Santa - CFO
I would guess on a full year basis, based on what we see today, 3 to 5%.
Avinash Kant - Analyst
HG&A up 3 to 5% from what it was in 2010?
Rick Santa - CFO
From the fourth quarter run-rate.
If you were to annualize it.
Avinash Kant - Analyst
Got it.
And amortization expenses for the year?
Rick Santa - CFO
We budgeted using a euro to US dollar exchange rate of 1.36, which is pretty close to where we are today.
Our amortization of [purchase] intangibles is forecast at about 5.6 million and depreciation at about 5.8 million.
Operator
Your next question is from Dan Whalen of CapStone Investments.
Dan Whalen - Analyst
Most of my questions have been answered but maybe I can just kind of retouch on a couple of topics here.
One, I guess on the backlog you mentioned two large contracts.
Is there any additional color you can add just in terms of size?
Is it 5% of your backlog or any additional color?
And then secondarily, do you have other potential contracts of similar caliber on your hot list, so to speak?
Yvon Cairou - President, CEO
We mentioned more than two contracts.
Two were of significance in Oil and Gas but if you read the press release, the alternative energy sector was also two contracts of significance in coal gasification and solar and then we had the efficacy the chemical project that was significant as well and some metal processing projects and the summation of those would be significant, so are the US Naval application and the (inaudible).
So we're talking about -- I didn't do the count, but it may be 20 orders which are involved.
Several of those are a few million dollars in size and it's all over from a few hundred thousand to a few million dollars and that gave us the booking spike that we have described.
Dan Whalen - Analyst
Okay, so the first two that you mentioned in the release aren't necessarily--?
Yvon Cairou - President, CEO
They are significant.
They are a few million dollars but they are not 90% of the spike.
The spike was pretty well distributed, which is a positive sign.
Dan Whalen - Analyst
And then secondarily, you mentioned further diversifying in to AMK service offerings.
In terms of some of the growth opportunities you're looking at are they joint ventures, more bolt-on acquisitions or focus on international--?
Yvon Cairou - President, CEO
AMK is a unique business and as we've said before, we have a concentration of accounts with General Electric Aircraft on one end and General Electric Power or General Electric Energy on the other hand and we have a great skill set and equipment set there and we have embarked into promoting the capabilities of AMK to other accounts and that was launched a couple of years ago and we are starting to see the benefit of that.
So more than the thinking of JV which could also be a solution, is we are talking about organic growth here and supporting that with appropriate CapEx.
Dan Whalen - Analyst
Just lastly, as I think the first caller had mentioned, the gross margin guidance was a little more conservative than I was anticipating as well and it sounds like it's mostly competitive pricing topic but is it also maybe a mix issue or possibly from some of your prior strategic acquisitions you made here in the US as well as Canada and Russia or is it mostly pricing?
Rick Santa - CFO
It's mostly pricing and product mix and that relates to the exposure in welding business.
The oilfield product margins and AMK margins are expected to be steady to showing slight year-over-year improvement.
Yvon Cairou - President, CEO
It's really market mix that brings different competitive game.
Each market segment has almost a different competitive outlook and as we are still driven in metal welding, explosion welding by oil and gas, that's where we have the most competition for--.
Dan Whalen - Analyst
So as we progress through this recovery so to speak, there's nothing in the outer years to prevent you from returning to prior peak markets?
Rick Santa - CFO
It depends on what prior peak margins you're referring to.
I think in 2006 we had gross margins of 36 or 37%.
I don't think we'll see our consolidated gross margins getting back to that level.
I think the guidance for clad was 20 to 22% for 2011.
But both AMK and Oilfield Products are over 30% so certainly we want to see the explosion welding margins inch up but I don't think we see them getting back to the mid 30 range.
Operator
(Operator instructions) There are no further questions.
Yvon Cairou - President, CEO
Thank you again, all of you for joining us during today's call.
We are clearly encouraged about the progress we have made in all segments of our business and we are as optimistic as ever about our future.
We look forward to keeping you abreast of our progress during the coming year.
Looking forward to meeting you here again or on the road sometime.
Take care.
Thank you.
Operator
This concludes today's conference.
You may now disconnect.