DMC Global Inc (BOOM) 2012 Q1 法說會逐字稿

Greetings, and welcome to the Dynamic Materials Corporation 2012 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, Jen. Good afternoon, and welcome to Dynamic Materials' first-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 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 will turn the call over to Yvon.

Thanks, Geoff. Welcome, everyone. Fiscal 2012 got off to a strong start as we achieved better than forecast sales and gross margin results during our first fiscal quarter. We also saw a significant improvement in explosive metal working bookings, which increased our order backlog to $57 million from $45 million at the end of the fourth quarter.

Just after closing Q1, we added to our backlog a $7.3 million order from the chemical industry. This recent booking activity reflects continued strong capital spending by the oil and gas, chemical, and [aluminum] smelting industries, which collectively will [present our most active] explosion welding markets, both from a booking and quoting perspective. Our hot list of prospective contracts includes multiple potential order from each of these sectors.

We are especially encouraged by the resurgence of the chemical sector which has been a relatively dormant market over the past several years. As many of you know, processing equipment used in chemical facilities often incorporates clad plates that are made from [dissimilar] metal combinations such as carbon, steel, and titanium. Cutting these plates is a process most effectively addressed for explosion welding. And, as a result, these orders often come in better pricing for DMC. This situation is one of the factors that has been driving the recent improvements in our gross margin.

From a geographic perspective, North America, the Middle East, Europe, and Asia, all (inaudible) for our explosion welding business.

DMC's Oilfield Product segment delivered another quarter of solid sales growth, reflecting continued strong demand from our broad line of well [perforating] equipment and seismic explosives. First-quarter sales activity was particularly strong in the United States, where perforating and re-perforating efforts in both conventional and unconventional oil and gas fields continue to be very active.

The planning and design efforts on our new ship [chart] and gun manufacturing facilities in both United States and Siberia are moving forward on schedule. In addition, we are effectively integrating the recently acquired TRX Industries into our DYNAenergetics US operation.

At AMK Welding, our new Divisional President is (inaudible) the range of [entities] designed to position the segment in values, [non-core] industries, including oil and gas. He also is working to expand AMK's work in our [core] aircraft engine and [ground] power markets.

We're winding down a multi-year contract [on a customer's] (inaudible) project and are working as quickly as possible to replace this revenue stream. Based on the progress reports out of AMK, we are very optimistic this segment will return to a position of growth productivity soon.

Now I turn the call over to Rick for a review of our first quarter financial performance. Rick.

Thanks, Yvon. Good afternoon, everyone. First quarter sales came in at $50.2 million, up 10% from the first quarter last year. As Yvon mentioned, this was above our prior sales forecast of flat, to up 3% versus the year-ago first quarter. The strong top-line performance resulted from oilfield product sales in the United States and were ahead of expectations, as well as certain clad orders that shipped from our US production facility ahead of schedule.

Our first-quarter gross margin of 29% beat our forecast range of 26% to 27%, thanks in part to the impact of the stronger-than-expected sales from our higher margin oilfield product segment as well as the better pricing environment for our clad plates.

First-quarter operating income increased 177% to $4.1 million from $1.5 million in last year's first quarter. Net income was up 224% to $2.4 million or $0.18 per share, from $750,000 or $0.06 per share in the year-ago first quarter.

Adjusted EBITDA advanced 59% to $8.1 million from $5.1 million in the same quarter last year.

Operating cash flow during the first quarter increased to $6.7 million from $1.3 million in last year's first quarter. The improvement reflects the increase in this year's first-quarter net income, as well as the significant investments we made in last year's first quarter to increase inventory.

Turning to expenses, general administrative cost increased by 23% to $4.5 million from $3.7 million in the first quarter last year. As a percentage of sales, G&A was 9% versus 8% in last year's first quarter. Selling and distribution costs increased 13% to $4.2 million from $3.7 million in the first quarter last year. As a percent of sales, selling and distribution costs were flat and roughly 8%. Combined first quarter SG&A expense of $8.7 million, was inline with the guidance we provided in our last call when we said 2012 SG&A should average roughly $9 million per quarter. We also noted that our SG&A forecast excluded $5.6 million of expected full-year amortization of purchase intangible assets.

Turning to our balance sheet, at March 31st, total current assets increased to $97 million from $91.2 million at the end of Q4, while total assets increased to $230 million from $213.4 million over the same period. The increase was [partially] attributable to our first-quarter acquisition of TRX Industries, which added assets of approximately $10.3 million.

Current liabilities were $29.8 million versus $29.3 million at December 31st, 2011. In total, liabilities were $77.3 million, up from $67.4 million at the end of the fourth quarter.

We finished the first quarter with working capital of approximately $67 million, and a current ratio of better than 3.2 to 1.

And now to guidance. We are reaffirming that full-year 2012 sales are expected to increase 7% to 10% from 2011. However, we now believe our full-year gross margin will be in the range of 29% to 30%, up from our previously expected range of 28% to 29%. We are elevating our anticipated full-year blended effective tax rate to a range of 28% to 32%, from the prior range of 27% to 30%.

As I noted earlier, we expect full-year SG&A expense of approximately $36 million, or roughly $9 million per quarter. And again, this excludes $5.6 million of expected full-year amortization of purchased intangible assets.

For the second quarter, we are expecting sales to be down 10% to 14% versus last year at second quarter. The decline relates primarily to the expected timing of shipments out of our explosion welding backlog. The strong increase in our backlog at the end of Q1, coupled with the sustained strength of our oilfield products business, (inaudible) sales during the second half of the year will be much stronger than in the first, which is why we still believe we will achieve our original full-year sales forecast.

We expect gross margin during the second quarter will remain flat at approximately 29% versus the second quarter last year.

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

(Operator Instructions) Edward Marshall with Sidoti and Company. Please proceed with your question.

Good evening, guys. Quick question on the gross margin on the Explosive Clad Welding Segment, it looks like it's 26.2, which is clearly the highest you've had in at least over a year. Is that due to mainly pricing? It sounded like you got a little pricing maybe on the chem processing businesses. Can you kind of touch on that, if you would?

Yes. As we said in the comments I just made, chemical is one component of that. Other components would be a general appreciation of prices relative to small-to-medium-size orders. And even on some of the larger orders, we think we've been able to do a little better than we've been doing better in the recent history. So it's a combination of several of those factors.

Just to add, we had good gross margins in Q4, which were obviously sustained in Q1 for our Explosion Welding Business. And if you go back several quarters, the last two quarters represent the best gross margin that we've reported since the first quarter of 2010. And we believe that the better blend of product mix should continue as we go through 2012.

And if I took a look at your -- and if I try [value this] off your backlog, I mean, is this a similar type of margin that we'll be seeing coming through? And I think that's what you're saying with your guidance for the year.

Yes, that's correct.

Right. Yes.

Now, as I look at AMK Welding, there are some comments about maybe strategically looking at new markets, et cetera, and I think you broke a few of those out. What is your strategy exactly? What are you doing to kind of address the drop in not only revenue, but also on profits from that business? I mean, kind of help me understand that a little bit better.

Sure. We [had a change of the guard] that we have built in the past 9 months, a team that we think is quite strong, both from the sales and operation point of view. That's number one. What AMK does is very unique. There was ability to weld complex parts of complex metals. And we have opportunities from the marketplace, and we think we can capitalize on [a] fantastic 40-year history of success of that company.

So to your point, yes, there was a slowdown in the power or gas turbine business. We think there are still opportunities in that business and we are not neglecting it, including with existing customers. We also see that there are growing opportunities in [our] space, and because of the skill set of the divisions and our knowledge from the perforating business and from clad of activities in oil and gas, we have identified a number of potential project where AMK can [prevail]. And we are reasonably bullish on the surface of the combination of the three things I just talked about.

There's a lot of suppliers to that market. And when I say that market, I'm speaking of the gas turbine market that has a lot of good commentary. And I think you're saying that there was a particular program that wound down. And is it just the closing of a particular engine type that you are on that's just no longer gone or did --

Yes, it --

-- you lose a contract or something like that or --?

No, we didn't lose a contract. It was a very large set of projects that seems to be slowing down and [as always, there] will be a [remnant] of replacement business to which we will participate in coming years. But the decrease has been significant. And the replacement will take some time, some time to build. I think the company we're talking about is redeploying a new, a different product mix, and we'll be part of that.

And when I look at your guidance for 2Q, and I don't want to get too granular, but looking [in] the different segments, do I assume that oilfield products will be running at the run rate it has been and then maybe a step-down in explosive welding because of the way you said your backlog shaped up. Is that the most of the variance between say the first Q versus 2Q -- 1Q versus 2Q?

Yes, but that's pretty much it. Oilfield could be down slightly because they did benefit in Q2 from a shipment (inaudible) that's a once every 12 to 18 month shipment. And that was a couple million dollars of their Q1 business. And, yes, the rest of that relates to explosion welding and the timing of shipments out of their backlog. A lot of the backlog increase came in late during the quarter, and that work will not begin to ship until Q3.

And one last question on that last comment. You said a lot of business came in at the end of the quarter. Do you get the sense that -- I mean, and I saw the comments about the $7.5 million order in April. But did that momentum, that kind of hit to the end of the quarter continue into April, other than that order?

Well, as you know, we said this several times on here, we are not a quarter-to-quarter company and we certainly are not a month-to-month company. So we certainly see momentum. It's a very good signal that we see in the bookings of Q1. We [had] announce we had seen some of that coming throughout 2011. We are very glad to see consummation of it during Q1. It's always a risky business for us to project far beyond. But you've heard Rick indicate the guidance for the year, which certainly reveals some confidence in what we can book in the coming quarters.

Great. Thanks, guys.

Avinash Kant with D.A. Davidson and Company. Please proceed with your question.

Could you help us a little bit in terms of figuring out what percentage of your revenues -- and you can give it any way, like in oilfields or explosion clad or both combined -- came from the oil and natural gas? And maybe if you could break down the oil and the natural gas part of it.

Okay. Let's see. Oil and gas, as you've heard us say many times, I guess [in] clad, are including [petro] chemical is about 60% of what we do. It may vary 50% to 75%, given in a particular quarter. Oil and gas is obviously, the perforating business is all about oil and gas. Inside that, I think we have indicated previously that it was about 50/50 between oil and gas worldwide as a spread.

Coming back to clad, there's a share of oil and gas and petro chemical is probably less than 50% gas, but it's a hard one to call. I don't have the statistics right there in front of me. And let's call it close to 50/50 as well. And AMK still a [maturing] business, so it's a small fraction of what we do today, maybe, let's call it 10%, to give you a general sense.

Perfect. And sometimes we have seen some seasonality in the [drilling] activity in the June quarter. Do you expect to see that in your oilfield business in the coming quarter or are you expecting it to stay steady?

I think the [reference] was largely to the difficulty of getting into the Alberta oilfield during the spring melt.

Right.

And we do expect some of that impact again this year. It actually was a little bit earlier melt than most years. I think it impacted us a little bit towards the end of Q1 as well. But we expect that seasonality impact in Canada, in Alberta, to be offset by good sales elsewhere in the world.

Right. And, of course, again coming back to bookings a little bit, you seem to be enjoying a good bookings quarter. Looks like the end of April, month of April also bookings were good. Now, is it things coming from a broader base or is it some of the projects -- is it some of the larger orders are driving it?

It's a broader base, Avinash. Again, the good news is that [confirmation] of what we started seeing in 2011, relative to the chemical industry. And we still have some good oil and gas projects. And it's spread also in geography. It's not just the Middle East. We have some good stuff in Europe. I would name Germany and in Asia. So it's kind of a balance [happy] situation.

Perfect. Thank you so much.

Thank you. Dan Whalen with Auriga USA. Please proceed with your question.

Just if you could, this $7 million chemical industry order, is that just in terms of the timing of (inaudible) backlog into revenue, is that a 2012 revenue item or is that more early 2013?

No, that's 2012. It's a couple of orders [maturing], not just one.

Probably second half 2012?

Yes, Q3, Q4.

I got you. And it's great to see your hot list that's yet to be in backlog but potential to be in backlog remains healthy. But directionally, has that -- was it up or down, even though it was healthy?

The hot list is a steady healthy with some interesting projects, always hard to predict when they're going to come through. But I think the quality has been becoming richer over the past few months. It's not a tsunami in terms of quantity as of yet. It's encouraging, and I think it's a decent (inaudible) quality.

Okay. So essentially sounds like the quantity has stayed about the same, but the [condition] of it being translated to backlog has probably been incrementally positive?

Yes, there is a arithmetic [filament] about the hot list is that when you book an order, your hot list will decrease by that much.

Right.

So when we, even internally, when we juggle with what the hot list look like, we have that zigzag that comes. We fortunately book business once in a while. If we never book business or at least would increase to infinity maybe, [would be out of] here.

Right. And then just one last, if I may, just in terms of, do we need to make any adjustments to the first-quarter tax rate which is a little higher than I expected? Just so I get a better sense of what the remainder of the year tax rate should be given your full-year guidance.

Yes. But the first-quarter tax rate was just shy of 36%, and it related to a tax increase in one of the local German tax jurisdictions. And we were required to book an adjustment for that tax rate increase to a fairly significant deferred tax liability that relates to the 2007 acquisition of DYNAenergetics. So when you have that kind of tax increase and you have to book at the per-tax adjustment, it has to be booked in the quarter. But we expect a lower tax rate during each of the remaining quarters of 2012. And again, our guidance for the full year is a blended tax rate of 28% to 32%.

Right. So sequentially as we progress through the year it should continue to decline, and it seems like second half should be below -- yes, okay. So to get to your 28% to 32% tax rate, keep the first quarter as essentially 36%?

Yes. Yes, the first quarter's going to stay there, yes. And then you have to blend in the other quarters to get to whatever average you like within that range.

Got you. I appreciate that. Thank you.

Phil Gibbs with KeyBanc Capital Markets. Please proceed with your question.

I see that you snuck that 10K out there, Rick, so I wouldn't ask you for the segment gross margins. Thanks for anticipating that one.

It's already there? Okay. Yes. Good.

I picked them out. I know I touched --

Now what are you going to talk about?

I was struggling for questions, but I think I found a few. I know I touched upon it. I'm just trying to get my head around the guidance. You've had robust orders recently. Just wondering why the push-out into the second half. Are you waiting on any cladding metals from certain mills? Just the 2Q expectations seem just a little out of sync with the strong book-to-bill in the first quarter.

Yes, we actually have a bigger backlog right now for our European planning business than we do for our US planning business. And the shipments that we're forecasting are what's in the backlog at March 31st, and there's not great opportunity, there's not capacity in Europe to ship more than what's in their backlog at the beginning of the quarter. Obviously, our biggest plant is the Mount Braddock plant in the US. But again, there's not a lot of potential for new book-and-ship in Q2 for that plant either, just because of the lead time on the metal.

So it's really an effort to forecast as accurately as we can, the shipments out of backlog and factoring in a little bit of new business but not very much because there just isn't a lot of potential to get the metals in in time to achieve a big book-and-ship number.

Is there any ability for you to move production around? European capacity for you may be tight for certain things, so to move it into [the] US.

Yes, [but not realistic] with the way that we source metal and the shipping costs that are involved.

Yes, that's right.

Okay. Thanks for that color. Do you still expect to make $20 million of capital expenditures this year? I mean, any further comments on the progress on some of your growth initiatives.

Yes, the projects are on track, all of them. We are very determined and very serious about the Greenfield [projects] in Siberia and in Texas. So it's moving along. And the rest of the business, of course, we're always careful on our expanding, but pretty we are planning to spend most of what is projected. We'll be cautious to our Q3, Q4, depending on our bookings this coming fall. But essentially, yes, we plan to spend the money. We have good, very good quality projects [at] play here.

And one more if I could. I really appreciate it. The gross margin that you achieved in the first quarter, 26.2% explosion metalworking, you said that some of that was due in mix and chemical processing, do you see any of the gross margin appreciation due to, call it decreased competitive pressures from alternative technologies, [anybody] moving away from your niche right now?

Well, I put it a little differently. I think there is more opportunities in the [coal or smelter] projects. And therefore, we have more opportunity to get better pricing. And typically in those project, we don't fight against the oil boom competition. So that's -- another factor [beyond] the chemical industry that, in general, eliminates the oil boom competition, in general. And also I think we've been able to get a little better margin even on larger projects, better than we've seen in the past.

So the oil boom competition's not going away, but there are maybe a few more signs that they're filling up capacity and we may get back into a position where (inaudible) will play in our favor [with] our teams worldwide are really good at that procuring metals. So we may have a head start on some of those projects against that kind of competition.

Thanks a lot. I appreciate it. Good luck.

Gregory Macosko with Lord Abbett. Please proceed with your question.

Just with regard to, it looks as if sales sequentially will be down maybe 5% from the first quarter to the second quarter just the way you've guided. And you basically said that the gross margins will remain flat sequentially. Am I correct on that?

Yes. Yes, with probably a little bit higher proportionate contribution to sales from our higher margin Oilfield Product Business, being one reason for that. I would expect that explosion welding gross margin will be down some in Q2 because the US sales will be off a few million dollars from where they were in the first quarter.

So basically you're saying you can maintain the gross margin [via] mix?

Via mix between the Oilfield Products and the planning business. And AMK should see some improvement from its very low performance in Q1 as well.

Okay. And then just with regard to the US operations, the point being that you don't have any orders coming into that or the orders are slow coming in there. What is -- how does the outlook in the US look relative to third and fourth quarter?

Very good. That's where a lot of the improvement in backlog from late in Q1 and the first week of April is showing up is in the US backlog.

And the limitation in the US is just because you can't get deliveries of the metal to ship earlier?

Exactly. Again, on these larger orders, we're going directly to mills and there's several weeks lead time before you get the metal in. And many of these large orders ship over a period of a few months.

All right. And then the idea -- and then do you look at the second half as then relative to Europe being more balanced between the US and European output from the explosion operations?

Yes, we would expect a higher proportion of US sales in the second half of the year versus the European sales.

Okay. And your outlook on AMK is favorable because you have a new team and you see them being able to redirect the business in a different direction?

Yes. It's correcting the direction a little bit, not changing the direction. We'll keep [plugging on] the power gas turbine business and adding more [via class] and starting breaking into new activities related to oil and gas. Again, we feel comfortable in that space. And we think AMK can bring something there. So it's an augmentation, I guess, of their profile.

Okay. But the point is, is do you have orders? Is there much of a backlog there at AMK at this point that you can look into to see in the second and third quarter or is that really --

We are building that backlog. We are quoting and building that backlog, it's coming [full].

All right. Thank you very much.

Edward Marshall with Sidoti and Company. Please proceed with your question.

Just one quick follow-up. The tax from the German jurisdiction, the deferred tax charge, what was that in the quarter?

It was in the range of $250,000.

About $0.02 then, considered one time?

Yes.

Yes. Okay. Thank you.

That would be an accurate calculation.

Perfect. Thank you.

Thank you. (Operator Instructions) Gentlemen, it appears there are no further questions. Do you have any closing comments?

Yes. Thank you all for joining us for today's call. We are encouraged by our strong start to fiscal 2012, and the positive developments within each of our business segments. We certainly look forward to speaking with you again at the end of the second quarter and looking forward to seeing you all. Take care.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.