DMC Global Inc (BOOM) 2011 Q2 法說會逐字稿

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  • Operator

  • Greetings and welcome to the Dynamic Materials Corporation second quarter 2011 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, Geoff High of Pfeiffer High Investor Relations. Thank you, sir, you may begin.

  • Geoff High - IR

  • Thank you, Christine. Good afternoon and welcome to Dynamic Materials' second quarter conference call. Presenting on behalf of the Company will be President and CEO, Yvon Cariou, 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 SEC.

  • 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.

  • Yvon Cariou - President, CEO

  • Thank you, Geoff. Good afternoon, everyone.

  • Our second quarter results benefited from an outstanding performance by our US Explosives Metalworking group, as well as by continued strong worldwide sales from our Oilfield Products segment.

  • Despite a very tight production schedule in June, our Explosion Welding team in Mt. Braddock, Pennsylvania took advantage of timely metal arrivals near the end of the quarter and completed deliveries on two large foreign orders that were placed last December. These shipments helped us deliver second quarter sales results at well above our prior forecast. They also illustrate the strength and flexibility of our US production platform.

  • We mentioned in our last call that optimistic pricing pressure for our extrusion welded plates would begin to ease as demand in certain end markets was showing signs of improvement. We are, in fact, getting better pricing on certain projects and this is reflected in the expansion of our second quarter gross margins. We expect (inaudible) margin performance will remain somewhat valuable based on product mix, but it's encouraging to see these initial improvements.

  • We continue to see indications that capital spending in (inaudible) processing markets is on the rise and these signs are being verified by many of the large engineering and construction firms we work with. More specifically, activity in the worldwide (inaudible) markets continues to pick up, and we have seen sustained investment activity in both the upstream and downstream NLG sectors.

  • We also are monitoring a number of international capital projects that are in the early planning phases and we hope to add some of them to our hot list of legitimate order prospects in the coming quarters.

  • In the meantime, we continue to work internally on our Explosive Metalworking end market development effort. While it is too early to provide specifics on the opportunities we are pursuing, we're optimistic that the roster of industries utilizing our specialized clad plates will continue to expand.

  • As I said earlier, our Oilfield Products business delivered another quarter of solid organic growth, which was enhanced by incremental revenue contributions from last year's acquisitions. We expect this segment to deliver continued growth during the second half of 2011 as we are seeing sustained demand for our perforated equipment in both North American and international markets. Strong oil prices and the ongoing proliferation of horizontal drilling continues to bode well for this segment.

  • Now, I'll turn the call over to Rick for some additional highlights of our second quarter financial performance. Rick?

  • Rick Santa - SVP, CFO, Secretary

  • Thanks, Yvon. Good afternoon, everyone.

  • Second quarter sales increased by 42% to $54.2 million versus $38.3 million in the second quarter last year. As Yvon noted, these results were above our prior forecast, thanks largely to expedited shipments on a couple of large orders out of our Mt. Braddock facility.

  • Our second quarter gross margin came in at 29% versus 24% in the same quarter a year ago. Our forecasted gross margin range for Q2 was 24% to 25%.

  • Operating income improved 183% to $5.9 million from $2.1 million in last year's second quarter. Net income was $3.9 million, or $0.29 per share, up 27% from net income of $3 million or $0.23 per share in the year-ago second quarter.

  • Adjusted EBITDA increased 73% to $9.5 million from $5.5 million in the same quarter last year. As always, please see our earnings release regarding our use of adjusted EBITDA, which is a non-GAAP measure.

  • Our Explosive Metalworking segment closed the second quarter with an order backlog of $54 million. Although sales increased by $9.7 million from this year's first quarter, our backlog only declined by $4.5 million over the same period, which illustrates that we achieved relatively strong bookings during the period.

  • Turning to expenses, G&A increased by 25% to $4.2 million versus last year's second quarter. The increase was due to incremental costs associated with our Austin Explosives and Russian joint venture acquisitions, increased salaries, and increased accrued incentive compensation, among other things. As a percentage of sales, G&A declined to 8% from 9% in last year's second quarter.

  • Selling and distribution costs increased 53% to $3.9 million due to incremental costs associated with last year's acquisitions, as well as increased selling and distribution expense at both our US and foreign operations. As a percentage of sales, selling and distribution costs were flat at 7%.

  • Looking at our balance sheet, cash and cash equivalents increased $7.6 million -- increased to $7.6 million from $4.6 million at December 31, 2010.

  • You probably noted that accounts receivable and inventories were up significantly at the end of the quarter. The 26% increase in accounts receivable versus December 31st was due to strong Explosive Metalworking shipments made in the quarter. The 36% increase in inventories was due to increased Explosive Metalworking work in process and an increased level of finished goods at our Oilfield Products segment.

  • Our total current assets increased to $97.5 million from $72.7 million at December 31st, while total current liabilities increased to $53.4 million from $38.4 million over the same period.

  • Working capital at the end of the quarter was $44 million and our current ratio was 1.8 to 1. Our long-term debt was flat at just under $24 million.

  • Turning to guidance, we expect third quarter sales will be flat to down 5%, and this is due to our stronger than expected shipment levels late in the second quarter. We anticipate Q3 gross margins will be in a range of 27% to 28%.

  • For the full fiscal year, we are now forecasting that sales will increase by 28% to 30% versus fiscal 2010. This is up from our prior forecast range of 24% to 28%.

  • We also have elevated our 2011 consolidated gross margin forecast to between 26% and 28%. Our prior forecast range was 24% to 26%.

  • We now expect our blended effective tax rate for fiscal 2011 will be in a range of 26% to 28% versus our previously forecasted range of 25% to 28%. And again, we expect our rate -- tax rate in years thereafter will rise to a normalized level of between 28% and 30%.

  • With that, we're now ready to take questions. Christine?

  • Operator

  • Thank you. (Operator instructions.) Avinash Kant, D.A. Davidson.

  • Avinash Kant - Analyst

  • Good afternoon, Yvon and Rick.

  • Yvon Cariou - President, CEO

  • Hello, Avinash.

  • Rick Santa - SVP, CFO, Secretary

  • Hi, Avinash.

  • Avinash Kant - Analyst

  • A few questions, the first one related to the bookings. You did see pretty strong bookings in the quarter. Could you give us some idea in terms of end markets, which end markets those bookings are coming from, qualitatively.

  • Yvon Cariou - President, CEO

  • Yes. The good news, I think, in our bookings and quotation activities, we see a more diversified outlook, more markets are coming in. We talk always about oil and gas in upstream. We see some downstream. We see chemical, we see alternative energy, power, metals, marine. So, it's interesting to see little by little we are diversifying again into our end markets.

  • Avinash Kant - Analyst

  • Okay. And the gross margin improvement that you saw, would you give us some idea in terms of what percentage of that or what portion of that was from high utilization and how much of that was from better pricing?

  • Rick Santa - SVP, CFO, Secretary

  • I think more of it was from better pricing than from utilization. With the two large orders that we referred to, we certainly had some benefit of utilization in our US Explosion Welding operations, but the volume was lower in Europe and we didn't have very favorable utilization there. So, it could be a 30/70 situation, I think, with product mix representing the biggest improvement.

  • Avinash Kant - Analyst

  • Okay. And final question then I'll come back in line. Could you give us the mix of domestic versus international this quarter and for the first half of this year?

  • Yvon Cariou - President, CEO

  • You're asking, Avinash, for clad or company total?

  • Avinash Kant - Analyst

  • Total.

  • Yvon Cariou - President, CEO

  • 60/40?

  • Rick Santa - SVP, CFO, Secretary

  • Yes. I mean, if you look at where the shipments emanated, it's probably higher than 60/40 because of the significant shipments from our Mt. Braddock facility in Q2. But, a lot of those shipments from Mt. Braddock were export business, so probably if you looked at the 10 customers, it's probably closer to 60/40 or 55/45. We compile that at year-end, but we don't compile those statistics each quarter.

  • Avinash Kant - Analyst

  • Yes. I'm thinking more in terms of where it going to, or the customers it is going to. Probably maybe 60% outside the US?

  • Yvon Cariou - President, CEO

  • Yes. I would say maybe even a little more, Avinash. My gut feel would be 65 or --

  • Avinash Kant - Analyst

  • Okay.

  • Rick Santa - SVP, CFO, Secretary

  • Although the Oilfield Products was very strong in North America.

  • Yvon Cariou - President, CEO

  • That's true, yes.

  • Avinash Kant - Analyst

  • Right. Okay, perfect. Thank you so much.

  • Operator

  • (Operator instructions.) Phil Gibbs, KeyBanc Capital Markets.

  • Phil Gibbs - Analyst

  • Hey, good evening, gentlemen. How are you?

  • Yvon Cariou - President, CEO

  • Good evening.

  • Rick Santa - SVP, CFO, Secretary

  • Hi, Phil.

  • Phil Gibbs - Analyst

  • My question was on the markets that the expedited orders were heading from an end market standpoint and then also from a geographic standpoint. I just also wanted to clarify that those orders were placed late last year.

  • Yvon Cariou - President, CEO

  • That is correct, yes. We are talking about two orders. The sum of the two orders were north of $10 million and they were destined for a project in the Middle East in the oil and gas field for a fabricator in Asia.

  • Phil Gibbs - Analyst

  • Okay. And I think it's interesting that you've brought up the notion of expediting an order. I don't -- that seems to be the first that we've heard of that happening again.

  • Yvon Cariou - President, CEO

  • No, Phil, I don't think so. There's a tradition, I would say, at Mt. Braddock to deliver on an expediting basis as long as they receive the metals. And actually, the metal in question there were a little bit on the late side. And when it showed up in May or in June, the team leader there, as done in the past, it were an extraordinary juggle of shipping those things out. So, that's what happened. It shows we have flexibility in that plant. It's a very efficient plant and we can ramp up quickly when need be. And the personnel there is very flexible in terms of overtime and weekend time and all of that.

  • Phil Gibbs - Analyst

  • So, was it expedited because you were waiting on the metal or was it expedited because the customer would have pulled the order?

  • Yvon Cariou - President, CEO

  • Well, the customer would not have done anything, but it's always our policy to service the customer as fast as possible. It's important in the business and that's -- when we can do it, we do it.

  • Phil Gibbs - Analyst

  • I'm just curious as to whether or not you had expected the metal to arrive in the first quarter and maybe --

  • Yvon Cariou - President, CEO

  • Oh, no, nothing like that, but the metal could have arrived a few weeks before. We would have had a better time. Maybe some of it would have shipped in Q1. That is a possibility, yes, but some of it could have shipped as well in Q3. And I think that's what the performance was, to be able to complete delivery to the satisfaction of the client.

  • Phil Gibbs - Analyst

  • Okay. And I had a question here on the pricing. Can you elaborate on what you said? I think it's pretty poignant here that you say a somewhat stronger pricing environment in certain of the end markets --

  • Yvon Cariou - President, CEO

  • Yes.

  • Phil Gibbs - Analyst

  • Because I think pricing's been pretty soft.

  • Yvon Cariou - President, CEO

  • It's a mixed picture, Phil. I think there is a background business that we see, and typically smaller orders, diversified industries. And I think we start to have opportunities there for better margin, better prices.

  • On the large international projects, the pressure remains, maybe easing a little bit. And then again, it's market specific. Every time we meet our friends of the [World Bank analogy], it's definitely still very tight. And fortunately, we have other opportunities where we can stop expanding margins.

  • Phil Gibbs - Analyst

  • Okay, great. And I just have a housekeeping for Rick. Rick, do you have the gross margin by segment?

  • Rick Santa - SVP, CFO, Secretary

  • I do. For the second quarter?

  • Phil Gibbs - Analyst

  • Yes, please. If you -- do you have the second quarter and first half, by any chance?

  • Rick Santa - SVP, CFO, Secretary

  • Yes, I can give you both.

  • Phil Gibbs - Analyst

  • Okay.

  • Rick Santa - SVP, CFO, Secretary

  • So, I'll give you the second quarter first.

  • Phil Gibbs - Analyst

  • Okay.

  • Rick Santa - SVP, CFO, Secretary

  • So, the Explosive Metalworking was 25.2% in 2011 versus 19.7% in last year's second quarter, the Oilfield Products was 35.7% in 2011 versus 34.7% in the 2010 second quarter, and AMK was 34.4% in 2011, down somewhat from 37.4% in 2010.

  • And then for the year to date, Explosive Metalworking was 21.8% in 2011 versus 20.7% in 2010, Oilfield Products was 32.8% in 2011 versus 31.5% in 2010, and AMK Welding was 32.2% in 2011 versus 31.3% in 2010.

  • Phil Gibbs - Analyst

  • 32.2% for AMK? Is that what you said?

  • Rick Santa - SVP, CFO, Secretary

  • Yes, versus 31.3%.

  • Phil Gibbs - Analyst

  • Okay. And I just want to make a comment that the 35.7% gross margin in Oilfield Products, that seems to be a bit rich as to what you have been doing. Was there somewhat of a mix shift there for call it a --

  • Rick Santa - SVP, CFO, Secretary

  • It was 1 percentage point above Q2 2010. And the first quarter this year was low because of the [Indian tender offer] that shipped in that first quarter for $2.7 million at lower gross margins. So, the 35.7% is obviously better than the 30.2% in Q1, but I think it's reflective of a normal margin level that reflects a higher level of production and better absorption of the fixed manufacturing overhead, particularly at the plant in Germany.

  • Phil Gibbs - Analyst

  • Okay. Well, perfect. Thanks a lot for the color, guys.

  • Operator

  • (Operator instructions.) Gregory Macosko, Lord Abbett.

  • Gregory Macosko - Analyst

  • Yes, thank you. With regard to the oil field, I assume that then organic growth, excluding the acquisition, was about -- was 46%. Is that right?

  • Rick Santa - SVP, CFO, Secretary

  • Let's see. For the second quarter, it was 55.8%. So basically --

  • Gregory Macosko - Analyst

  • Leaving out the acquisitions.

  • Rick Santa - SVP, CFO, Secretary

  • Correct. Yes, 55.8% for Q2 and year to date it was 72.6%.

  • Gregory Macosko - Analyst

  • Organic?

  • Rick Santa - SVP, CFO, Secretary

  • Organic, yes.

  • Gregory Macosko - Analyst

  • Okay. That was --

  • Rick Santa - SVP, CFO, Secretary

  • And you may recall the first half of last year started out very slow and then things really picked up in Q3 and Q4 and that carried over into this year.

  • Gregory Macosko - Analyst

  • Did the addition of the acquisition dilute the margin? I mean, you had improvement in the EBITDA margin on a year-over-year basis. But, I mean, is that -- are the -- is the acquisition a little bit lower mix-wise or something?

  • Rick Santa - SVP, CFO, Secretary

  • No.

  • Gregory Macosko - Analyst

  • No? Okay. I mean, you went from -- on a year-over-year basis, it went I think from 13.8% to 14.6%, which is decent. But I mean, it was pretty strong growth.

  • Rick Santa - SVP, CFO, Secretary

  • Yes. I mean, I think we've talked a little bit about the business model for Oil Field Products, particularly in North America where we maintain a large number of distribution centers, which adds to the selling and distribution expense. So, we did see an increase in selling and distribution expenses, but as a percent of sales, selling and distribution expenses were flat year to year.

  • Gregory Macosko - Analyst

  • Alright. Very good. And then, the Explosive Metalworking area, then, that too seemed to have a very strong -- I mean, is the idea that the margin that you've got in the first quarter, is that something -- is that a normal run rate for that kind of volume, or was it really because of the accelerated shipment at the end of the quarter the margins would -- are kind of above average, above expectation?

  • Rick Santa - SVP, CFO, Secretary

  • They were above our expectations in Q2 because of the expedited orders, as well as a somewhat better product mix than what we had forecast.

  • Gregory Macosko - Analyst

  • I -- okay.

  • Rick Santa - SVP, CFO, Secretary

  • And I think they're maybe a little bit higher than what we would expect for the rest of the year, but moving in the right direction and where we'd like to see them stabilize and then improve.

  • Gregory Macosko - Analyst

  • Okay.

  • Rick Santa - SVP, CFO, Secretary

  • But again, we said each quarter we're going to have a little bit of product mix and a little bit of volume impact.

  • Gregory Macosko - Analyst

  • Okay. And if I look at the backlog, particularly in the -- I mean in the Explosive Metalworking, what's the length of that $54 million would you say? I mean, what -- over what period of time? Nine months? A year?

  • Yvon Cariou - President, CEO

  • It's less than a year, six to nine months.

  • Gregory Macosko - Analyst

  • Six to nine months. Alright. Thank you very much.

  • Operator

  • Avinash Kant, D.A. Davidson.

  • Avinash Kant - Analyst

  • Hi, Yvon and Rick. A few more questions. Actually, just thinking about SG&A combined, do you think 15% of revenue is a reasonable way to run it at this point, or it could be up or down?

  • Rick Santa - SVP, CFO, Secretary

  • I mean, I think if that's what the computation comes out to based upon the run rate this quarter, if sales are down a little bit, maybe that percentage goes up a little bit because, as we've discussed in the past, most of the SG&A is fixed.

  • Avinash Kant - Analyst

  • Right.

  • Rick Santa - SVP, CFO, Secretary

  • So I mean, I think maybe a better way of answering your question is we wouldn't expect, unless there's some significant changes in foreign exchange rates, we wouldn't expect the SG&A to fluctuate by more than plus or minus $300,000 in a quarter. And those variables tend to involve commissions, incentive compensation, business development expenses to a great degree.

  • Avinash Kant - Analyst

  • Okay. And lately there has been some chatter, and of course looking at some of the broader indicators like manufacturing data and all, it looks like the growth rate in general seems to be slowing a little bit. Have you seen that in the bookings number thus far? How have bookings trended lately?

  • Yvon Cariou - President, CEO

  • Yes. I see, Avinash, what you read in the economic media is that the domestic smaller companies may be a little hard to find and large international groups are thriving reasonably well. And I think we're kind of in the middle, some of our customers being those large international groups. So, even though there might be a slowdown, there is still healthy growth in the growing economies. And so, we are somewhere in between, I would say, in terms of outlook.

  • Avinash Kant - Analyst

  • Okay. But, you've not seen any slowdown thus far?

  • Yvon Cariou - President, CEO

  • The quotation activities has remained healthy and stable and steady for a couple of years so we don't see a change there.

  • Avinash Kant - Analyst

  • But, have you seen a change in conversion rate? More people are converging now to --

  • Yvon Cariou - President, CEO

  • It's hard to give a trend on bookings. We are still not a very good quarter-to-quarter company. It -- you saw the result of Q2 with the impact of a couple of medium-sized projects and it takes only a couple more of those to change in our delivery. And I am confident that we'll see more of those happening on the background that remains steady upward with better pricing.

  • Avinash Kant - Analyst

  • Okay, that's perfect. Thank you so much, Yvon.

  • Operator

  • Gregory Macosko, Lord Abbett.

  • Gregory Macosko - Analyst

  • Yes. Just with regard to the AMK, that was down year over year. Can you just -- I mean, I know it's small, but what are you looking at there and what are your expectations there?

  • Rick Santa - SVP, CFO, Secretary

  • AMK was down -- sales were down and the growth margin was down. And most of the -- most of their manufacturing overhead is fixed. It's a service-type business. So, I think that the fluctuation and the gross margin for the quarter largely follows the decline in second quarter sales versus the prior year. Year to date it was up slightly and we expect a pretty consistent performance from AMK for the rest of the year.

  • Gregory Macosko - Analyst

  • So, basically flat, is that what you're saying? I mean, generally stable?

  • Yvon Cariou - President, CEO

  • Yes, I think that's fair to say. The two components of their business is the power generation, gas turbine and then aircraft engines. And we certainly see an uptick in aircraft engine and the gas turbine can be up and down somewhat. But, the compounding result of that, I think, is steadiness (inaudible).

  • Gregory Macosko - Analyst

  • Okay. Alright. Thank you.

  • Operator

  • Phil Gibbs, KeyBanc Capital Markets.

  • Phil Gibbs - Analyst

  • Just had a couple questions, the first on CapEx. What are you thinking there for the full year, and then would that be more maintenance related or growth related?

  • Rick Santa - SVP, CFO, Secretary

  • Yes. We spent, what, in the first half of the year about $2.3 million. I'm trying to recall what our budget was for the year. I think our budget was -- was it nine?

  • Rick Santa - SVP, CFO, Secretary

  • Yes, I thought our budget was closer to $9 million. I think we're lagging in some of the (inaudible) against that budget, so I would expect the stronger CapEx in second half. And I think at this point in time some of the projects that we budgeted may be delayed until 2012.

  • Phil Gibbs - Analyst

  • Well, what would those types of projects be, Rick?

  • Rick Santa - SVP, CFO, Secretary

  • Let's see, I think some of it relates to the seam welding equipment and how we approach capacity increases there. I think some of it relates to grinding equipment through the European facilities.

  • Yvon Cariou - President, CEO

  • Yes. In all of the sites it's productivity CapEx, replacing all the equipment. So, adding some capacity with more modern machinery. So, it's a set of investments that originally was distributed across all of our divisions, AMK, clad and Oil Field Products. And we're just being cautious in how we unfold the budget in 2011. But, no drastic change in the philosophy.

  • We may effectively not spend all of the budget and that's fine, but we're continuing to modernize all of our sites. Rick made an allusion to welding equipment, for example. Well, facilities in Europe who are not as well equipped as the one in the US for clad so we are doing that this year and that's engaged and moving on. So, it's an interesting group of CapEx.

  • Also in our business, more in clad, we have that mobile equipment to carry heavy plates between plant and shooting sites and back and forth. We always need to modernize our equipment. It does age and it's a source of good productivity if you have good mobile equipment. So, we're addressing that as well.

  • Phil Gibbs - Analyst

  • Okay, great. Thanks for that explanation. And just my last one here, Rick. What scheduled debt payments do you have this year to make?

  • Rick Santa - SVP, CFO, Secretary

  • Well, we have $9 million that falls due in November on our five-year bank syndicate facility. And the only other payments this year involve I think EUR150,000 per quarter that ends in Q3 on a euro term loan that we inherited with the DYNAenergetics acquisition.

  • Phil Gibbs - Analyst

  • Okay. So, you're biggest one is in November, though?

  • Rick Santa - SVP, CFO, Secretary

  • Yes, the big piece is in November for the $9 million.

  • Phil Gibbs - Analyst

  • Thanks, much.

  • Operator

  • Mr. Cariou, there are no further questions at this time. I would now like to turn the floor back over to you for closing comments.

  • Yvon Cariou - President, CEO

  • Thank you, Christine. Well, we are obviously encouraged by our recent financial and (inaudible) performance and by the continued progress we are making at positioning DMC for future opportunities. I'd like to thank everyone on the DMC team for their recent efforts and consistent dedication to the Company's success. I'd like also to thank our shareholders for their ongoing support of the Company. And we're looking forward to speaking with all of you very soon. Thank you. Take care.

  • Operator

  • Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.