DMC Global Inc (BOOM) 2011 Q1 法說會逐字稿

Greetings and welcome to the Dynamic Materials Corporation 2011 first-quarter conference call.

At this time all participants are in a listen-only mode.

A brief question-and-answer session will follow the formal presentation.

(Operator instructions).

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr.

Geoff High, of Pfeiffer High Investor Relations.

Thank you.

Mr.

High, you may begin.

Thank you, Manny.

Good afternoon and welcome to Dynamic Materials' first-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 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 this call.

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

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

Thanks, Geoff.

Hello, everyone.

During our year-end conference call we told you that capital spending in many of our end markets was increasing.

Clad plate bookings were up, and we believe our Explosive Metalworking business had finally turned the corner.

The message today is very consistent with what we said two months ago.

Projects we have been pursuing for the past several quarters continued [to schedules], and this resulted in steady order volume from a variety of end markets during the first quarter.

It also led to a slight increase in our explosion welding backlog, which at quarter end was approximately $59 million versus $57 million at the end of 2010.

First-quarter sales results came in slightly ahead of our forecast.

However, gross margins were on the lower end of our projected range.

This was largely the results of product mix, but also reflects the competitive pricing environment that has pressured margins on a number of large projects.

We remain optimistic that the improving economy and greater reach capacity utilization amongst our competitors will, over time, alleviate some of this margin pressure.

If you have been monitoring the comments of the large engineering and construction companies during the current earnings season, you are aware that their collective view of global infrastructure opportunities continues to improve, particularly in the areas of energy and petrochemicals.

These sectors historically have been our two largest end markets, so we view these comments as encouraging news that validates much of what we are hearing from customers and end users.

Sales at our Oilfield Products business increased 143% during the first quarter.

This improvement was due to both acquired operations and solid organic growth of the oil fleet, $10 million in first-quarter sales growth achieved by this segment.

Approximately $6.5 million came from legacy operations that were in place during the same quarter last year.

We believe that worldwide exploration and production activity will remain robust for the foreseeable future, and we therefore intend to evaluate additional opportunities to expand the market share and growth prospects for our Oilfield Products business.

Now I will turn the call over to Rick for some highlights of our first-quarter financial performance.

Rick?

Thanks, Yvon, good afternoon, everyone.

First-quarter sales increased 50% to $45.6 million versus the $30.4 million we reported in the first quarter last year.

Gross margin held steady at 23% versus the same quarter a year ago.

Operating income was $1.5 million versus $245,000 in last year's first quarter, while net income came in at $750,000 or $0.06 per diluted share versus a net loss of $412,000 or $0.03 per diluted share in Q1 last year.

Adjusted EBITDA was $5.1 million versus $3.5 million in the year-ago first quarter.

Please see today's news release regarding our use of adjusted EBITDA, which is a non-GAAP measure.

With respect to our expenses, salary and distribution costs were where we saw the biggest variation from last year.

And, as was the case in the fourth quarter, this was principally due to incremental expenses associated with our acquisitions of Austin Explosives and our Russian joint ventures.

Selling and distribution expenses increased approximately 60% to $3.7 million or 8% of sales from $2.3 million or 8% of sales in the first quarter last year.

Looking at our balance sheet, cash and cash equivalents increased slightly from December 31 to $4.8 million, while total current assets increased 11% to $80.5 million.

Working capital increased 11% to $38.2 million, and our current ratio held steady at approximately 2-to-1.

Our long-term debt was flat at approximately $24 million.

Turning to guidance, we expect second-quarter sales will increase from 10% to 15% versus the first quarter, and we anticipate our gross margin will improve to a range of 24% to 25%.

We are now forecasting that full-year 2011 sales will increase from 24% to 28% from the $154.7 million we reported in fiscal 2010.

This is an upward revision from our prior forecast range of a 20% to 25% increase.

We are maintaining our prior gross margin forecast range of 24% to 26%.

We now expect our blended effective tax rate for fiscal 2011 will be in a range of 25% to 28% versus the prior forecast range of 27% to 29%.

We also anticipate that the normalized levels in years thereafter will be in a range of 28% to 30% versus our prior long-range forecast of between 30% and 32%.

With that, we are now ready to take questions.

Manny?

(Operator instructions) Avinash Kant, D.A.

Davidson.

A few questions here -- the first one is that you talk about your guidance for the full year actually going up some, it looks like almost like 3 percentage points.

Where would you think this upside is coming from?

Is it coming from the Explosion/Clad side, or it's coming from the Oilfield side of the business?

I would say both, Avinash.

Also, it looks like SG&A actually was up meaningfully in the third quarter on a relative basis.

Was there something that would not carry through from the next quarter onwards, or this is how we should be thinking of -- this is the level we should be thinking of going forward for the year?

Yes; I think the first quarter, SG&A expenses in total is very representative of what we would expect to see in the remaining quarters of 2011.

So, Rick, you mean in absolute terms or in percentage terms?

In absolute terms.

Of course, we have some fluctuations, as we have discussed in the past that relate to sales commissions, incentive compensation and also business development expenses that we incur from time to time.

But I think, on the average, the first-quarter total expense dollars is pretty representative of what you should expect in the future quarters of 2011.

Maybe if you could explain a little bit in terms of sequentially, Q4 versus Q1, your revenues were kind of flattish, not changed much.

So what changed in terms of SG&A between the Q4 and Q1?

And that will give us a better idea.

I'll tell you what.

One way of looking at it -- the G&A actually went down from $3,706,000 to $3,675,000.

The selling and distribution went up from $3,217,000 in Q4 to $3,726,000.

Of that $509,000 increase, $457,000 related to sales commissions.

So we had very low sales commissions in Q4, and we had a higher mix of sales in Q1 that included commission payments to third-party agents.

I see.

And all these commissions are only in the Explosion/Clad side, or they are also --

No, they are on both sides -- not on the AMK side, but they are on both the Oilfield and Explosion/Welding side of the business.

Do you have an idea roughly what percentage of your sales include commissions?

The first quarter, the $457,000 for Q1 comes out to about 1% of the total sales.

And I think, in general, the commissions, where we paid commissions, is in the 2% to 3% range, so that would indicate that one third, that -- in this quarter, maybe one third to half of the sales included commissions.

That's a little higher level than what we see typically.

Yes.

It's also a function of geography, which is a function of market mix.

That's where you have [said] that variation, Avinash.

And also bookings -- I know backlog went up, but bookings seems to be fluctuating a lot, still.

And I think this quarter's booking was not very high.

Given that you are raising your guidance, do you see bookings improving from current levels in the next quarter?

We would certainly like to see that, Avinash.

But if you look at the movement in the backlog from the end of Q3 2010 to the end of the year, I don't have -- the numbers were, what, like $41 million to $57 million, roughly.

Sales in Q4 -- in Q1 were relatively flat, so we didn't benefit at all in Q1 from that significant fourth-quarter increase in the backlog.

So shipping that increase is part of it.

And then we would hope that as we go through the year we will see some overall improvement in booking levels.

When that will hit backlog, as we've discussed before, it's hard to say.

Okay, perfect, thank you.

Mark Parr, KeyBanc Capital Markets.

Thanks for all the color, and congratulations on your business getting better.

I was wondering, in the breakdown of earnings by segment, the year-to-year comparison in the Explosion Materials business was negative.

And I'm just curious; does the first quarter represent a trough as far as -- are the end of negative earnings comparisons, based on what you are seeing right now?

I know your revenue's upside is pretty much across the board, but how would you expect the earnings to unfold here for Explosive Metalworking group over the next couple of quarters?

As we look back at the last five quarters, the first quarter of 2010 was kind of misleading because it included a sizable customer order where the customer supplied all of the metal.

So the equivalent first-quarter sales if we had purchased the metal would have probably exceeded $26 million, which indicates, if you look at the last five quarters, we have been at the equivalent of $26 million, $26.7 million, $24.9 million, $25.6 million, $26.1 million.

It has been very steady.

We expect that to increase in Q2 as we ship the backlog increase that we saw both at the end of the year and the smaller increase we saw at the end of Q1.

On the margin front we saw a decline throughout last year from 21.9% in Q1 to 19.7% in Q2, 8.7% in Q3, 15.5% in Q4.

And we actually improved modestly to 17.2% in Q1 2011, and we expect to see some continued improvement in the Clad margins.

So I think the way I am answering your question is yes, we expect both sales and margins to start trending up in that business segment, beginning with the nice increase in Q2.

All right, that's helpful, and that's really good color.

Is there anything that you are seeing in terms of a competitive environment that might be shifting?

Certainly in the United States, we've seen very strong plate, carbon steel demand and pricing.

That's certainly is not -- that helps you, I think, from a competitive perspective.

Are you seeing -- I guess, Yvon, I would just like to get an update from your perspective on the competitive profile and how you see that unfolding.

Yes, Mark, we have the same observations as you just made regarding the general metal environment.

And, as you know, with the market mix that we are given, we have more opportunity to compete against the [oil-borne] people.

And so the fact, on one hand, that the general metal industry seems to be improving and receiving good reviews from you guys, the analysts; that's helping us.

In terms of specifics on that family of competitors, the oil-borne people, we hear of lapsed projects, such as in the desalination world, of pipes that they are getting engaged into.

And therefore we are watching with great interest to see their capacity starts to be filled up.

And hopefully we will observe some relapsing on the pricing level and maybe getting back to a competitive field where delivery becomes more of a weapon.

But we are not there yet.

But we see those signs of that pressure mounting, and hopefully we will get there soon.

Okay, terrific.

Thanks again, Yvon, and good luck on the second quarter.

Phil Gibbs, KeyBanc.

I was looking in the -- at just the filings for any color you could give him the targets that you had for the segments for gross margin.

I know that you had originally given -- Explosive Metalworking is 20% to 22%, Oilfield 32% to 34% and I think somewhere around 33% for AMK.

I wanted to know if those were still intact or you had any other thoughts.

I think we've decided it's better, because there can be some quarter-to-quarter fluctuations in each of the business segments, to stick with consolidated gross margin guidance, which is 24% to 25% for Q2 and 24% to 26% for the full year.

The Q1 gross margins I already mentioned, that Exploration/Clad came in at 17.2%, Oilfield was 30.2% and AMK was 29.7%.

I think I can go as far as saying that we expect to see margins maintained at least that those levels and hopefully some improvement as we go through the year.

Okay.

And I just have a question, too, Rick, about the reporting.

Has there been a slight change in the methodology as far as -- I'm looking back, and I had Explosive Metalworking last year at $1.2 million.

And it looks like now you have shifted unallocated expenses.

It looks like you've [changed] --

Yes, that's a good point, and we will be filing our 10-Q this afternoon and there will be more disclosure there.

But we have fine-tuned the manner in which we allocate corporate expenses, and historically we have allocated 100% of those expenses.

And Oilfield Products did not get much of an allocation because they had their own administrative structure.

So we have taken a fresh look at that.

We've restated last year's first quarter.

And there's a portion of corporate SG&A that is no longer allocated or corporate G&A that is no longer allocated.

And I believe the amount in Q1 was around $668,000.

And I think in Q1 of 2010 it was $601,000.

And for the most part that unallocated amount came out of expenses that had hit the Clad business historically.

I can see that, that bridge, what you are speaking of there.

What was the decision to do that this time?

Just to present internally our business segments more equitably and to not allocate some of the corporate expenses that are of no benefit to any of the three business segments to those business segments.

Okay.

So we think it's a fair presentation internally and then a fair presentation of those business segments to outside peer companies.

Great.

And, Yvon, can you speak a little bit about the growth that you are seeing in Oilfield?

Yes.

Back to your last point also, it does represent the quantity of effort that Rick, I and others put in all the divisions.

So it's a fairer representation, as Rick described.

Regarding Oilfield, you have seen the news out there; the number of the rig counts keep increasing.

And so we are extremely bullish on all our divisions, but giving opportunities in the Oilfield Products, we are going to take advantage of them.

We have put together by doing those acquisitions of minority partner in Russia, of a business in Canada and then in the US.

We have put a platform that can push harder and get market share.

And as we have indicated, we are certainly open regarding potential external growth as well.

We are open to that in both our key businesses, Oilfield and Clad.

So the oilfield industry seems to have found great momentum, and we are going to participate.

Great, thanks a lot, good luck going forward, guys.

(Operator instructions) Dick Ryan, Dougherty.

Yvon, could you talk a little bit about your quotation pipeline?

I know you have addressed this in past calls -- and maybe give a sense of the kind of size of the opportunities or projects getting bigger.

Are they moving to the left?

What are you seeing from the health of the pipeline?

It's a repeat of what we have said throughout the past conference calls.

It is healthy.

It tends to have an up trend.

And I think the most maybe interesting color I can give is that it is dispersed through many market segments, which is really encouraging, including things like chemicals, petrochemicals that maybe we have not seen for a while.

So it's rich in all our divisions, and with a slight [pent up].

So we are even bullish on our Clad business for that reason.

And you had some new initiatives going on to get business maybe in defense or alternative energy.

Can you address some of those efforts?

We definitely are extremely present in alternative and LGs.

And some of our backlog represents that.

Some of our pending quotations represent that as well.

On the defense sector, it's small, still, at the development stage, and we have a number of projects in the pipe.

It's still early to a declare booking victory.

Transportation was a good (multiple speakers) --

Transportation is another piece where we've talked about in the past couple of years, actually, and we have converted, and we have reached the booking level for those new product lines.

Okay, thank you.

Avinash Kant, D.A.

Davidson.

A few follow-ups, actually -- could you talk a little bit about the Oilfield business?

It seems to be growing sequentially every quarter.

For the rest of the year, do you see it continuing to grow from these levels, or stabilizing at these levels?

Well, given what -- the rig count keeps increasing.

Opportunities in recent oil drilling with the shale gas keep expanding.

It's around the world, but particularly in North America.

So we have, definitely, a market opportunity.

I'm not going to give guidance on what we can do there, but it certainly looks like everything is in place to succeed.

And as I indicated earlier, we have the industrial platform and sales and marketing teams in place to benefit from that.

Okay.

And also, could you give us some idea in terms of the current backlog?

What is the mix?

What end markets is this coming from at this point, or even the bookings?

It's well -- it represents well all of the key markets that we are participating into.

That's what's the strength of it.

Between Europe and the US, we cover all the key markets.

There are a couple of markets, like (inaudible) [metallurgy of nickel]; that's pretty, pretty slow at this moment.

But all of the other markets are represented in our backlog and quotations, always the strong oil and gas, obviously.

But petrochemical and chemical is showing stronger than it has.

We would like power to be a little stronger, but we see a renewed opportunity there.

Industrial air conditioning, aluminum remains good.

So all of our, of the 10 market segments or so that we address -- alternative energy; we just touch on that -- are represented, which is a healthy sign.

Okay.

Any large bookings projects that you have been working on that you expect will come through?

Nothing that we are going to guide as to it's coming, but we are participating all the time into significant multimillion dollar projects.

Also on the roll bonding front, where do you see utilization rates for those guys at this point?

And have you seen some of the margin pressures ease because of that?

There, clearly, as we talked about earlier, the metal business in general has an uptrend.

We see signs that our competition is increasing backlog with projects which are outside of the explosion welding marketplace.

And maybe we can say there's some really [firm] prices, but it's not across the board yet.

But we definitely are watching for that.

It should happen.

Within the backlog for Explosion/Clad or maybe, also, in the Oilfield business, could you give us some idea about what the mix of oil and how much is natural gas?

In the Oilfield, gas is a significant piece for perforating products.

I would not call a precise number, but it's close to 50-50, probably, maybe 60 oil/40 gas.

The gas has been growing so much.

In terms of Clad, that's a more difficult call to make.

It would have to -- we would have to be very precise on the upstream inside the backlog and inside the upstream, what is gas and what is oil.

I would not want to throw a number out there.

But of the Explosion/Clad, how much is oil and gas combined?

Oil and gas remains, in our general business, the lead segment, as we have indicated a number of times.

So if you combine the oil and gas and petrochemical and chemical, it's still over 50% what we do, 50% to 60%.

It's very -- it change quarter to quarter, but that's a good average number.

I'd like to add one comment relative to the Oilfield sales.

In the first quarter we shipped 2.7 million under an Indian tender which will not be a recurring sale in Q2, 3 or 4 of this year, which means in order to maintain sales at Q1 levels we would have to have a pretty good organic growth rate.

And I'd also like to indicate that there could be some seasonality in the business, which gets offset partially by the global nature of that business.

But, for example, in the spring it's very hard to get into the Canadian oilfields in Alberta as the snow melts, and that could be true.

So there could be some seasonality because of weather, but the more significant item is a nonrecurring tender offer at a significant sales benefit in Q1.

So in the oilfields business you will see seasonality when?

You can see some seasonality based upon weather in some of the northern reaches of Canada and Russia.

I think it's more Canada than Russia, personally, where -- in fact, it impacted us in Q1 a little bit because there's all kinds of snow in January that closed down some of the Canadian fields for a couple weeks.

So it could impact both Q1 and Q4?

No; I think Q2 is when the snow melts and it gets so muddy that you can't bring the equipment in.

There might just be a few-week period where it's really messy and difficult.

But it just depends on whether it's a fast melt or a slow melt.

But there are some of those, those impacts, which makes it hard to accurately forecast quarter to quarter.

So we focus more on the annual forecast.

Okay, thank you so much.

We have no further questions in queue at this time.

I'd like to turn the floor back over to Mr.

Cairou for closing comments.

Thanks again, all, for joining us during today's call.

We are excited about the improving prospects and long-term opportunities for all three of our business segments.

We look forward to covering you with another date at the end of the second quarter.

Thanks for your continued interest in the Company and take care.

Talk to you soon.

Ladies and gentlemen, this concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.