DMC Global Inc (BOOM) 2011 Q4 法說會逐字稿

Greetings and welcome to the Dynamic Materials Corporation 2011 fourth 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.)

It is now my pleasure to introduce your host, Geoff High of Pfeiffer High Investor Relations. Thank you, Mr. High, you may begin.

Thanks, Robin. Good afternoon and welcome to Dynamic Materials' fourth 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'd 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 call or webcast are available in today's news release.

And with that, I'll turn the call over to Yvon.

Thanks, Geoff. Hello, everyone. Our fourth quarter represented a strong finish to a year that exceeded our original expectations by a sizable margin. At this time last year, we were forecasting 2011 sales growth of between 20% and 25%. By year end, our sales of $209 million represented a 35% improvement over 2010. This performance reflects much-improved demand from the markets we serve and our ability to effectively capture it.

Throughout 2011, we saw mounting evidence that capital expenditures were on the rise in many of our Explosive Metalworking end markets, and this was particularly true in the two largest industries we serve, oil and gas and chemicals. From our current vantage point, it appears this investment activity is gaining momentum. We see a number of large potential projects on the horizon, and while we expect continued lumpiness in our quarterly bookings performance, our hot list of prospective orders is healthier today than it has been in recent memory.

As we noted in our last call, activity has been strong in the Middle East, where major investments are being made in new industry and processing infrastructure. We also are tracking large projects in Asia, the United States, and even Mexico and Australia. Again, these opportunities are primarily in the oil and gas and chemical sectors, but also include metalsmithing, power generation, and various other process industries.

Our Oilfield Products segment, which represents our second core business, also delivered strong results in 2011. Sales increased 61% year over year, and if you exclude chemical sales contributions from our acquisition program, the segment still delivered organic growth of 48%. This performance reflects consistent, strong demand from the global oilfield exploration and production industry and illustrates the effectiveness of our international manufacturing and distribution network, which we believe is one of the strongest in the perforating sector.

In January of this year, we expanded our family of oilfield product businesses when we purchased Texas-based TRX Industries. The company manufactures a line of perforating guns and has been a long-time supplier to our US operations. We paid approximately $11 million for the business, which generated sales of about $11.6 million last year. Much like our core Oilfield Products business, TRX has achieved strong revenue and earnings growth in recent years.

Looking forward, we have established a corporate initiative designed to bolster the strengths of each of our business segments. Our Explosive Metalworking business is exploring opportunities in Asia for establishing new manufacturing capacity and a broader sales and marketing presence. It also is working on new clad plate configurations that could open the door to additional product applications and end markets.

At Oilfield Products, we intend to commence greenfield projects in both North America and Russia during the coming year, which should allow us to capture additional market share and strengthen our manufacturing and distribution infrastructure.

At AMK, which is in a transitional period as we work to improve its product mix and expand its customer base, we have hired a talented new divisional president who is keenly focused on securing new business opportunities for our specialized and highly profitable welding services.

None of the opportunities we have discussed comes without risk. But when taken as a whole and coupled with an improving economic outlook in our respective target markets, these opportunities have given us a genuine sense of optimism about our prospects for the coming year and beyond.

Now I'll turn the call over to Rick for information on our financial performance and a look at guidance. Rick?

Thanks, Yvon. Good afternoon, everyone. Our fourth quarter sales came in at $54.3 million, which represents a 21% increase versus the $44.8 million in sales reported in last year's fourth quarter. During our last call, we indicated Q4 sales would likely decline by about 10% sequentially, but they were off by only 1% versus the third quarter. This performance resulted from strong shipments by our US cladding operations and better-than-expected sales in our Oilfield Products segment.

Gross margin was 27%, up from 22% in last year's fourth quarter. The margin improvement reflects a more optimal mix of Explosive Metalworking orders and strong contributions from our higher-margin Oilfield Products business.

Our fourth quarter operating income increased 241% to $5.2 million from $1.5 million in last year's fourth quarter. Net income was up 174% to $3.6 million, or $0.27 per share, from $1.3 million, or $0.10 per share, in the year-ago fourth quarter. Adjusted EBITDA improved 62% to $8.7 million from $5.4 million in the same quarter last year.

Looking at expenses, G&A increased by 21% to $4.5 million from $3.7 million in last year's fourth quarter. As a percentage of sales, G&A was relatively flat at approximately 8%. Salary and distribution costs increased 18% to $3.8 million from $3.2 million in the fourth quarter last year. As a percent of sales, selling and distribution costs were flat at roughly 7%.

Turning to our balance sheet, total current assets increased by 25% to $91.2 million from $72.7 million at the end of 2010. The increase reflects higher accounts receivable due to the improvement in fourth quarter sales versus last year's fourth quarter, as well as higher inventories as our Oilfield Products segment increased its finished good supplies to more effectively meet growing demand.

Current liabilities decreased 24% to $29.3 million from $38.4 million at December 31, 2010. We finished the year with working capital of approximately $62 million and a current ratio of better than 3 to 1.

Just prior to the end of the year, we entered into a new five-year credit agreement with a syndicate of four banks. The agreement, which amends and restates our prior credit facility, replaces our term debt with revolving lines of credit that collectively provide approximately $60 million in total borrowing capacity. The credit line consists of $36 million US, EUR15 million, and CAD1.5 million. We anticipate average borrowings in a range of $35 million to $40 million during 2012.

Turning to guidance, we are forecasting that full year 2012 sales will increase 7% to 10% from 2011. Depending on our success rate in booking prospective orders on our explosion welding hot list, as well as our ability to achieve sustained growth at our Oilfield Products segment, we may adjust this forecast later in the year.

Our 2012 gross margin is expected to improve to a range of 28% to 29% versus the 27% we achieved last year. The anticipated improvement reflects the growth in contributions from our higher-margin Oilfield Products business and a more profitable product mix expected within our Explosive Metalworking segment.

We expect full-year SG&A expense of approximately $36 million, or an average of roughly $9 million per quarter based on current exchange rates. This includes $5.6 million of expected full-year amortization of purchased intangible assets.

I'd also like to provide you with a little color on the anticipated impact of our new credit facility. We expect 2012 interest expense of approximately $1 million based on expected average borrowings. This would represent a reduction of roughly $900,000 from 2011. The expected decline is attributable to lower borrowing costs, including an interest rate reduction of 150 basis points as well as lower non-cash amortization of deferred debt issuance costs.

For the first fiscal quarter, sales are expected to be in a range of flat to up 3% from sales in last year's first quarter of $45.6 million. Gross margin is expected to improve to a range of 26% to 27% versus the 23% reported in Q1 a year ago.

Looking at the balance of the year, we currently expect a steady progression of sales growth in Quarters 2 through 4.

Our blended effective tax rate for 2012 is projected in a range of 27% to 30%. For Q1, however, we expect a blended effective tax rate of 20% to 25% based on anticipated pre-tax earnings.

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

Thank you. (Operator Instructions.) Edward Marshall, Sidoti and Company.

A few questions, but first, what caused the variance from, say, the initial guidance for 2011, as well as the variance versus the fourth quarter when you gave guidance in 3Q? Is this something that's referred to as spot? I don't know how you guys characterize it for that type of business, but what was the variance that you guys saw from your initial guidances?

You're referring to the guidance of 20% to 25% in full-year sales versus the 35% that we achieved?

That's one part of the question. And I guess the second part of the question is when you're looking from 3Q, when you had the 3Q conference call and you're looking at the fourth quarter and exceeding that number as well.

Yes, first, on the fourth quarter, it relates largely to timing issues right around year end. In our explosive welding business, it can be very challenging to forecast from quarter to quarter because metal deliveries and the timing of production, and if you have larger orders where you have to ship a large number of plates together to efficiently deal with the freight costs, things can move quite a bit.

In terms of payment or so.

Yes, things just went, sometimes there's a down payment by customers, especially on export shipments. So things like that were largely responsible. And then I think the Oilfield Products sales were probably about $1 million ahead of what we had forecast for Q4.

Yes, I think I remember something about when you initiated that guidance, it was something, looking at backlog and the orders that are there, this is our initial outlook. And I guess that's a segue into my next question. If you look at the guidance from Q1 that you gave for the full year, and then what you gave for Q4, based on your language for the orders that you gave in the commentary, not only in this conference call, but also in the press release, can you characterize your guidance as potentially as a conservative for the full year? I mean, would you be surprised if it came in ahead of that? And are you looking at it just based on what you see right now, but the momentum that you're feeling could seem that it could be a little bit stronger than what you're giving today? Sorry to put you on the spot.

I think that we make every effort to be realistic, providing both quarterly guidance and full-year guidance. But as we indicated, there's a lot of moving pieces. And, for example, if we're getting into the year and we book a sizable order in August and it's sizable enough we're going to the mill for deliveries, we might not be able to get any of the order shipped, whereas if we see that order in July, maybe a large portion of it would ship. So there's issues like that.

With the Oilfield Products, it's probably a little bit more predictable. So when we look back at 2011, things around the globe just were a little bit stronger than what we expected when we initially forecast the year.

Yes, I think, Ed, I'd just like to add a little over the years past, and then many quarters, the explosion welding business is spiky in bookings. You know, we have all those considerations for shipments, did the metal arrive? But the booking aspect, it takes only one project to both management to postpone that project from a quarter to the next, from a year to the next. It's pretty hard to be very precise on that (inaudible).

Right. And then finally, the capital expansion, the $20 million that you're looking at for, say, 2012, I'm assuming you're funding that with the lines of credit and, I guess, essentially debt.

Yes, it's a combination of line of credit and operating cash flow that we expect to generate during the course of the year.

And you don't have any guidance range for the cash from operations, do you?

No, we have not provided that information in the past.

Okay. Thanks, guys. I appreciate it.

Avinash Kant, D.A. Davidson.

This is Eric Ramos in for Avinash. What was the oil and natural gas split in the explosion clad business in Q4? Do you guys break that out?

The difference between oil wells and natural gas.

Oh, yes.

Yes, we've been asked that question before, and so that we can try to respond, we asked our experts that work in the Oilfield Products segment the same question, and they are not able to track it currently. But what is it, Yvon? Is it roughly 50/50?

Yes, I was going to say. The best we know, it's about 50/50. The shale gas activities, as you know, brings the volume up. But they are, I think that industry, that part of the industry is making a lot of productivity effort, and so the rest of the industry remains pretty strong. So I guess 50/50 gives you an idea.

Okay. And then what is causing the gross margin guidance to be flat to down sequentially in Q1?

A lot of it relates to volume, and some of the volume that isn't there in the first quarter relates to our US clad operation, which is our largest and most efficient plant. So a lot of it relates to the less effective absorption of the fixed manufacturing overhead costs in Q1.

Okay. Is that typically the case in Q1?

Yes.

And then how do you expect revenues to trend throughout 2012? Will it be pretty linear or pretty lumpy?

We think there will be sequential improvement in each of Quarters 2 through 4.

Okay.

Right. It probably would be lumpy in the explosion cladding, but smoothed out by the more regular production in the oilfield business segment.

Okay. And then how are bookings trending thus far in Q1?

We are not really commenting on that, but one thing we can say is that the backlog at the end of January was one notch up as compared to the end of Q4. So while we have a sequential slight decrease, Q3 to Q4, we are back up a little higher than the end of Q3, actually, at the end of January.

Okay, thank you.

Dan Whalen, Auriga USA.

It's refreshing to hear some constructive commentary on our markets. Could you just -- I imagine it's probably a little early to talk about this, but it sounds like you've got some interesting things going on in terms of establishing new manufacturing capacity as well as investments in greenfield projects. Any sense in terms of timing and in terms of when that could start generating revenue, or any other details you could share on that beyond what's in the press release?

Well, we've shared quite a bit. We have indicated the two geographies for Oilfield Products, where we have purchased a little bit chunk of that $20 million, so that tells you, that means we have initiated, we have started. And you can imagine that to build new plants, you think in terms of more than a month. It's probably a year-plus. So I think it would be reasonable to assume throughout the second part of 2013, definitely first part of 2014, to see some activity there in chemical sales as far as the oilfield quality is concerned.

Okay, that's great. Thanks for that color. And then just any color you can add in terms of what you're seeing from your European customers?

European customers, you are referring as a whole for all the market segments, the business segments?

Yes, any color you have on that.

Yes. Let's take, then, explosion welding first. We had actually a pretty good earning from the European platform over the past few months. When we say Europe, in our way, our lingo at DMC, it means it's manufacturing facilities that service Europe, the Middle East, India, Eastern Europe, and the US platform servicing North America, South America and Asia.

So the European platform has been for explosion welding doing very well, both in their exports to the Middle East and in their closer region -- France, Germany, Italy, Northern Europe and all of that, with resurgence to some of the chemical industry and continuation of some good things we have seen in aluminum smelting, for example, and some power generation. So compared to what we all read in the press, as far as explosion welding, we've done well in Europe, and we seem to be continuing to do well there.

As far as the Oilfield Products is concerned, the big driver there has been North America. But we have maintained, I think, our momentum in Europe and Eastern Europe. It is less marked than it has been in explosion welding, but as you know, we are the, we service a large geography from our European oilfield plant. And it's growing in a positive way, I guess I would say.

Okay, thanks. You haven't seen any deferrals or any cancellations in the area?

Some destruction related to the events in the Middle East, so some contracts are put on hold. But we have made some progress in other areas, so overall, we're still progressing there.

All right, well, great. Congratulations on your success here.

(Operator Instructions.) Phil Gibbs, KeyBanc Capital Markets.

Rick, an easy one for you off the bat, just the segment gross margins, if you have them, for the fourth quarter.

Yes, I just happen to have it here on a schedule. Let's see, it's entitled Phil Gibbs. Okay. What do you want first -- the quarter or the year to date?

Quarter's just fine. That's all I need.

That's all you need? Okay. The quarter margins for cladding, 23.4% in 2011 versus 15.5% in 2010; Oilfield Products, 33.3% in 2011 versus 30.7% in the fourth quarter of 2010; and AMK Welding was down a little bit, to 28.1% in 2011 from 34.2% in 2010.

Now, do you have targets for 2012 that you're looking at that you'd like to share? Or not at this point?

Yes, not at this point. We prefer to provide the overall consolidated gross margin guidance, which we indicated was 28% to 29% for the year and 26% to 27% for Q1.

Okay. Given the strong revenues that you had beginning in the second quarter, and you've been able to maintain a $54 million to $55 million run rate here, why do we step down in the first quarter of '12 and not stay at that level? It looks like --

It relates principally to the backlog situation with respect to our US clad business, which the US is our largest clad. And at the end of 2010, their backlog was much stronger than it was at the end of 2011. And as you may recall, in December of 2010, we booked around $20 million of business. Most of that went into the US backlog related to some Korean orders and other significant orders.

As Yvon indicated, we're waiting for some of those larger opportunities to be converted into bookings, and the US clad backlog is relatively weak at the end of the year, whereas the European clad backlog has improved significantly from where it was at the end of 2010. So it's really just the timing of how the orders are coming into our backlog and the blend of the backlog between US clad and clad Europe.

I would qualify this comment by adding that the quality of the hot list that we have, both in Europe and in the US, is similar, the same quality in both areas. But conversion, for whatever reasons, has been faster in Europe so far.

Has been faster?

Yes.

Okay.

As I had just earlier, we've had good success in booking the business from the European platform in Q4, and it's ongoing, and not quite yet in US clad. And that's (inaudible), as you have heard many times.

Is that somewhat counterintuitive to the headlines, that you're doing better in Europe as far as the booking momentum is involved?

It's counterintuitive to the headlines, but maybe in this CapEx business, we went into the capitalization after other industries, and I guess we're coming out of it after other industry as well. For example, we have clear indication that the German chemical industry is investing again, and we are benefiting from that. Because they have not invested anything. Now they are falling behind and they are trying clearly to catch up.

Okay, so they put themselves in a position where they had to invest, head's-up maintenance, most likely.

Exactly.

And some new projects, too. Also that reverse trend of reintegrating some capacities in the western world. We see some evidence of that, and we hear talks to that effect, including North America for the chemical industry.

Okay, that's great. I just have two follow-ups here. The revenues that you expect for TRX in '12 -- is that baked into your guidance?

It is.

Okay. Is there anything from an intercompany perspective that we lose with the $11 million to $12 million in revenues?

Yes, probably close to half of it.

Okay. And then lastly, just a nuance question, Rick. What was the other income in the back end of the year there, the almost $1 million?

It related to the strength of the US dollar versus the Euro, and mostly -- not all, but mostly -- intercompany activity, where the European plants got energetic. Our Oilfield Products division supplies Canada and the US, and they manufacture in Euros and they bill in Euros, and the Canadian and US companies were able to use less US dollars and less Canadian dollars to satisfy those obligations. Some was not realized and some was realized.

Did you have some debt, debt issuance or debt cost baked in there, in the interest?

We did, about $284,000 of nonrecurring write-offs in Q4. That's okay with the new bank deal. And that write-off related to the fact that we eliminated the term debt that had another year to run, roughly. And also, three of the seven banks in our old deal are not part of the new deal, and we had a write-off associated with those three banks.

Okay, great. Thanks a lot, gentlemen. I appreciate it. Good luck.

Edward Marshall, Sidoti and Company.

My question's on the AMK Welding. I think you said you hired somebody there. And I think, if I heard you properly, you said you wanted to address some things that were going on in that division. Sales were down in the fourth quarter. Is that seasonality that happened there?

Because as I look at your largest customer, I guess, in that business, in the energy, GE, and I'm assuming that's a gas turbine business, which I think it is. And their guidance for '12 is up 10% year over year. I would have thought, and I know it's early in the cycle here, but I would have thought that we would have started to see that building, or at least framing the discussion around how that might strengthen into 2012.

Yes, that's a good question, Ed. Actually, GE has had some difficulties in their supply chain that impacted AMK in the recent quarters, although the total outlook for their German business was positive. And also, they transferred to Europe some activities that we were, before, were making for them in the US. So transition year is a word we use there.

We also, we've been (inaudible) for some time now to broaden the portfolio of accounts for that division, which is doing a great job in -- it's a great business. And we have hired a person, who as new division president there, and we have a great momentum going on at AMK, and we think we're going to deliver some sales growth in the couple of years to come there. We're supporting the business. We always are, with CapEx required to assist them their momentum. But the dip is related mostly, as you said, to GE and if the outlook there is not positive, it will conflate into AMK's business as well.

So there wasn't some kind of fourth quarter seasonality or anything?

It's not seasonality. It was related to specific projects where there were some difficulties. And as you know, the longer-term outlook for the big machine, the H system, is probably limited, so we have to replace that kind of business by other things. We believe that the aircraft segment is going to give us a lot of opportunities. You will remember that AMK Welding was born around the need of servicing the aircraft industry, and we are seeing great opportunities there again.

And is the same customer GE?

Not only. There again, part of that thought of diversifying the accounts, not only GE. We're determined to expand our portfolio.

And I would imagine you're relatively early -- in the safer gas turbines, you're relatively early in the supply chain there, so you're, how early are we? 18 months? 12 months prior to actual turbine --

They say they have a whole mix of products -- small machine, medium machine -- so it's hard to be too specific in that respect.

Thanks very much.

There are no further questions at this time. I would like to turn the floor back over to management for closing comments.

Thank you, all of you, for your continued interest. We obviously are anticipating an active year in each of our business segments, and we look forward to keep you apprised of how they fare during the coming quarters. Thank you again, and we'll see you next time.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.