DMC Global Inc (BOOM) 2012 Q2 法說會逐字稿

Greetings, and welcome to the Dynamic Materials Corporation 2012 second 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, Geoff High of Pfeiffer High Investor Relations. Thank you. You may now begin.

Thank you, Shay. 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 www.dynamicmaterials.com after the call. In addition, a telephone replay will be made available beginning approximately two hours after the conclusion of the 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.

Thanks, Geoff. Good afternoon, everyone. Second quarter sales came in on the high end of our focused range as each of our business segments achieved its projected objectives. Consistent with the past several quarters, orders shipped by our explosion-welding segment were predominately for capital projects in the upstream oil and gas, chemical and petrochemical industries. Based on our market analysis and recent quoting activity it appears these sectors will continue to be our best prospective end-markets for the foreseeable future.

From a geographic perspective, the Middle East and Asia remain our strongest regions although North America has also been quite active. Quoting activity has remained very healthy and our sales team is pursuing a wide range of order opportunities, several of which are quite large. That said, we have seen a slow-down in the rate in which we are converting those prospects into firm orders. We believe this is largely due to widespread concerns about the direction of the global economy, particularly Europe.

You recall we saw a 28% surge in our explosion-welding backlog during the first quarter and we were optimistic that figure would continue to grow during Q2 but with the recent slowdown in bookings our quarter-end backlog remained sequentially flat at $57 million.

Despite this year of lumpy bookings performance our marketing efforts for the explosion-welding business continued in earnest during the second quarter. Our principal areas of focus continue to be geographic expansion in Asia and new industrial applications for our weld clad plates. Both of these initiatives are lengthy processes but every quarter seems to win new progress and Q2 was no exception.

The oilfield product segment delivered another quarter of solid growth with sales advancing 20% versus the second quarter last year and operating income improving 47%. During the quarter we saw sustained firm demand for our well perforating products across most of the international regions we serve and we continue to capture more market share.

In North America, exploration and production companies continue to shift their primary focus away from natural gas and more to oil. Since these shifts are not necessarily happening in parallel we think we could see a near-term dip in order volume for our perforating gun systems in the United States and Canada. However, given the promising increase in oil and gas reserves taking place in both countries we believe they will represent very large markets for our oilfield products business for many years to come.

Of course we are taking steps to ensure we capitalize on anticipated demand growth, not just in North America but globally. The shape-charged manufacturing facilities we are establishing in Texas and Siberia are proceeding on plan. We have selected the consortium contractors for the facility in Russia and have narrowed the field of prospective builders for our Whitney, Texas facility. We also have begun working with the fabricator that will begin the manufacture of the presses for our shape charges.

At AMK management has continued its active pursuit of new customer relationships. Both for traditional markets such as ground power and aerospace and in non-core industries such as oil and gas. The dialogue with prospective customers continues to be very encouraging and has revealed a range of new opportunities for our specialized welding services. We also have seen new opportunities emerge with some of our large, existing customers. We believe the current market development efforts will return AMK to growth mode by the end of the year.

I will now turn the call over to Rick for a review of our second quarter financial performance. Rick?

Thanks Yvon, and good afternoon everyone. Our second quarter sales came in at $48.7 million, down 10% from the second quarter last year. As Yvon mentioned, sales were at the top end of our forecast range with anticipated decline of 10% to 14% versus last year's second quarter. The decline was mainly due to the timing of shipments out of our explosive metalworking backlog.

As many of you know, it generally takes approximately three to nine months to process our larger explosion welding orders so the bulk of the bookings that came in during the first quarter will ship sometime during the second half of the year.

Explosion welding sales during the quarter were $27.4 million, down 23% from the second quarter last year. This was partly offset by the performance of our oilfield products segment which reported sales of $18.9 million, up 20% from the second quarter last year. Sales at AMK dipped 11% to $2.4 million compared with last year's second quarter.

Gross margin met our expectations at 29% which was flat versus last year's second quarter. Operating income declined to $3.7 million from $5.9 million in the second quarter a year ago while net income came in at $2.7 million or $0.20 per share versus $3.9 million or $0.29 per share in the year-ago second quarter.

Adjusted EBITDA was $7.5 million versus $9.5 million in the same quarter last year. Operating cash flow at the six month mark increased to $8.1 million versus $755,000 at last year's mid-year point. The strong improvement is in part due to the substantial investments we made last year in building up our oilfield product inventory.

Turning to expenses, G&A costs increased by 11% to $4.6 million from $4.2 million in the second quarter last year. Selling and distribution costs increased 6% to $4.1 million from $3.9 million in the second quarter last year. Combined second quarter SG&A expense of $8.8 million was in line with our past guidance which called for 2012 SG&A of roughly $9 million per quarter. We have also noted that our SG&A forecast excludes full-year amortization expense of purchased intangible assets.

Looking at our June 30th balance sheet, total current assets increased to $95.3 million from $91.2 million at December 31, 2011 while total assets increased to $222 million from $213.4 million over the same period.

As we noted in our last call, the increase was partially attributable to our first quarter acquisition of TRX Industries with that approximately $10.3 million. Current liabilities were $27.1 million versus $29.3 million at December 31 and total liabilities were $73.2 million versus $67.4 million at the end of the fourth quarter.

We finished the second quarter with working capital of approximately $68 million and a current ratio of better than 3.5 to 1.

Now to guidance. As Yvon noted, we have seen some trepidation creep back into our end markets and this has slowed the strong bookings momentum we enjoyed during the first quarter. Although our hot list of prospective cladding orders remains strong and could lead to resurgence in bookings during the second half of the year it is unlikely we could fulfill those orders in 2012 unless they came in very soon.

So with that in mind we are modifying our 2012 sales guidance downward. We now expect 2012 sales will be roughly equivalent to the $209 million we reported last year. We previously expected a year-over-year sales increase of 7% to 10%. Our full-year gross margin forecast is unchanged at 29% to 30% and our anticipated blended effective tax rate is expected to be 30% to 32% versus our previously forecast range of 28% to 32%.

For the third quarter we anticipate consolidated sales will be down 6% to 10% from sales of $54.9 million in the third quarter last year. We expect gross margin will improve to approximately 29% from 27% in the year-ago third quarter. Again, we expect SG&A expense of $9 million per quarter or $36 million for the full year. Of course this excludes approximately $6 million of expected full-year amortization of purchased intangible assets.

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

(Operator instructions). Our first question comes from Taryn Kuida with D.A. Davidson.

Hello, this is Taryn Kuida, filling in for Avinash. I was just calling to see, you had mentioned you had seen more turn towards oil and I was wondering what the oil versus natural gas mix was for your explosion clad business?

Hello, and good afternoon. You are asking of the oil segment versus clad?

I was wondering what the mix was in your explosion clad business?

Oh, inside the explosion clad.

Inside the explosion clad.

Yes. Well in term of mix we have a pretty steady 2/3 of our business has to do with oil and gas and petrochemicals. That is pretty constant and I don't think we are seeing a big shift in there.

Okay. What was the mix between the oil and the natural gas?

Inside clad oil versus gas, I would say in the oil and gas segment first we have more upstream opportunities than downstream; downstream being the refineries and the like. Upstream being separators and slug catchers and everything that is just around the well head and this will be downstream from that.

I would think there is more natural gas opportunity than oil but it is a mix. It is hard to pick a number. It shifts with every project. I would call it maybe 60/40, maybe loaded a little more towards gas overall.

You are talking about opportunities, right, not necessarily shipments?

Right. Thank you so much. In regards to your rolled bonding business I was just wondering how the utilization rates were for this steel and if you have been able to see any extra work come from it?

We do not get involved in rolled bond. Rolled bond is a competitive technology. It is a technology that we need on some market segments. For example, we do not see them as much in the chemical industry because that is a segment where you see more corrosive applications where typically you have more non-compatible metals such as titanium and steel.

While in the earth stream oil and gas you see more compatible metals such as stainless steel and steel and so we compete against rolled bond more in that arena. As the market mix gives us more opportunities in the upstream oil and gas we see more of the rolled bond competition in our existing quoting.

That situation has been such for a couple of years or more and there is no drastic change there. It remains steady in terms of relative competition.

Okay. Perfect. That's all I had thank you.

Thank you. You are welcome.

Thank you. Your next question comes from Joe Giamichael from Global Hunter.

Thank you. You mentioned some of the acquisition opportunities without getting into any real detail but I was just curious more from a segment and geography standpoint what you are looking at right now?

Possible in all three business segments that we have I think we have indicated our great interest to develop our industrial presence in Asia. On that point, I can offer this detail. We have opened a sales office in Korea in a town called Busan, and we are opening a sales office as well in Shanghai and you should look at that as steps to our deeper involvement in the region. It is only initial steps. We certainly are open to acquisitions for the clad business in that part of the world.

In terms of oil field products, as you know we have initiated significant CapEx Greenfield projects in Russia and in North America in Texas. Over the past couple of years we have done a couple of bolt-on small acquisitions and we are open-minded for further acquisition in that business segment. I have to say our priority right now is to advance and complete our Greenfield projects. We are open-minded as well on our AMK welding division to the new opportunities arise as that division is building some interesting momentum.

Excellent. Thank you very much.

You are welcome.

Thank you. Your next question comes from Phil Gibbs from KeyBanc Capital Markets.

Hey, Yvon, Rick and Geoff. Good afternoon, I guess, from where you guys are at. Rick can you give me a sense of the gross margins in the segments? I don't think the 10Q has come out.

Sure. No, it should be on file before the end of the day. But let me provide you these numbers.

First for the second quarter standing alone our cladding gross margin in Q2 2012 were 25.5% versus 25.2% in the second quarter of 2011. Oil field products for the second quarter of this year was 35.1%. That compares to 35.7% in the second quarter of 2011.

In AMK Welding who is going through this transition period this year in terms of its sales performance, our reported gross margin of 17% in Q2 of 2012 versus 34.4% in 2011.

Then for the six-month period the cladding gross margins were 25.9% in 2012, up from 21.8% in 2011. Oil field products for the six months were 34.2% in 2012 versus 32.8% in 2011. In AMK for the six months it came in at 14.6% versus 32.2% in the first six months of 2011.

Is your operating expense guidance for this year intact? I know you had made some soft comments in the past maybe somewhere north of $35 million.

The operating expenses excluding amortization of purchase intangibles are still forecast to be roughly $36 million for the full-year, $9 million per quarter. Then the amortization of intangibles is expected to be approximately $6 million or $1.5 million in each of the last two quarters.

That's great. If I could just ask about the acquisition revenue in oil field, how much incremental revenue did you pull from TRX in the second quarter?

Hang on just a second and let me get that for you. In the second quarter TRX provided incremental sales of $1.745 million.

$1.745 million, okay.

Which puts the incremental sales at $3.756 million for the six-month period.

Now, that would imply that we are now getting back to organic growth that is let's call 7% or 8% if I am looking at it correctly. Given the fact that your comps are pretty tough in the back half of next year, on an organic basis are we starting to bump up against some pretty tough numbers to get across here in the second half of the year?

Relative to the guidance that we provided with sales being flat for the full-year 2012 versus 2011, we are comfortable with that guidance.

I know you pointed to the transition that most of the later cycle companies are pointing to as far as some of the natural gas shifting into oil. In the very short-term is that creating pockets of inventory? And then secondly off that maybe if you could, what were the major drivers of the guidance reduction as far as the two major segments that you have? Thanks a lot.

The larger guidance, the decline relates more to the explosion welding business than to the oilfield products business. We expect in oilfield products a weaker Q3 than what we were previously forecasting but we are still looking at being on target with our previous forecast for Q4. Some of that relates to the global nature of that business. There might be a little bit of weakness in the US but we are very global in that business and we are seeing good growth in other markets; Russia, Kazakhstan, the Middle East, for example.

I was just asking first on the questions if you are seeing any pockets of excess inventory that is leading to maybe some of your cautious comments, that's all.

Excess inventory, inventory levels are probably a little higher than we would like them to be and it is always a management challenge to manage inventory levels. But by design we have been investing in inventory over the last year because we believe that will help us in our efforts to gain market share around the globe.

I mean at your customers, Rick.

No, because in North America we inventory on behalf of our customers for the most part. We have five distribution centers in Alberta, nine distribution centers in the United States and we are delivering to our customers so they are not maintaining inventories, we are.

Okay, thanks a lot.

Thank you.

(Operator Instructions). Our next question comes from Gregory Macosko from Lord Abbett and Co.

Thank you. Could you give us just in terms of July was there anything in terms of orders? I know you talked about the quoting, etc. but was there anything in July that you have seen come in?

Yes. We have booked a very interesting order for the transportation world in clad. We have been talking over the past couple of years I guess of that new market segment and we just received an order which has been expected for some time. It is a few million dollars for regional train application in Europe. That is the most significant we can talk about in terms of July.

We keep quoting across the board in all market segments. As we indicated earlier, steel, oil and gas, petrochemical remain the biggest sectors of activity.

Okay. With regard to the Texas and Siberia facilities I assume all of that cost is being capitalized. Is there any drag from that in terms of the oil and gas segment?

No, it is all capital expenditures.

Okay. The inventory, although I don't have in front of me the sequential increase it was up about $3 million from December. It had been building from the first quarter as well. Are we at a normalized level? You mentioned you want to invest in inventory to gain market share.

Yes, the build-up was a little bit higher than we expected from the end of Q1 to Q2 and some of that has to do with the seasonality of the business in Alberta where it was a very wet spring and difficult to get the rigs into the oil field. So as those orders were being delayed inventory built up some.

The increase from the beginning of the year, as you said $3 million to $4 million and about half of that came from the TRX acquisition that closed on January 3rd. We would expect to see a decline in inventory levels during the last half of the year.

Alright. So is the point then you have inventory in a relatively good position relative to what you need to go forward to gain share?

We believe so.

Yes, that is a good observation.

Okay. Then the last thing is you maintained your gross margins for the year for your guidance and yet you brought the revenues down obviously. What does that imply? Is there something with regard to the mix? Very honestly I would expect gross margins to come down if revenue growth is not what you expected.

Part of it is the different business segments and how the contribute. I indicated a few minutes ago that the decline in our guidance related principally to the explosive metal working business which means for the full-year oilfield will be a higher proportion of sales and their gross margins for this half quarter were in the 35% range versus the 26% range for explosive metalworking. So part of it is the contribution from each of the business segments with oilfield contributing more to the full-year sales.

The other part of it is the explosion welding margins pricing has held up quite well.

Yes. Finally, if you could look going back to the orders. Quoting, you say it is decent and pretty good. Give us a sense of where those geographies are? Are the geographies the same as they have been? Are you seeing less interest in China? More interest in Europe? You mentioned the Middle East and Asia but talk about the geographic mix of that quoting activity.

It is pretty steady. We quote significantly throughout Asia but some of that ends up for projects in the Middle East. That picture has not changed. We do export into China, but we export in the high end of the applications over there. It is kind of a spicy business so we cannot say we have observed a definite slow-down of quotings or bookings for that part of the world.

The rest, North America is not insignificant for us. We think there is potential for more and some projects are pushed to the right but the background is still there. In Europe, Germany remains attractive to us and direct quotation into the Middle East remains quite significant.

Okay. Lastly, with regard to the rolled bonding and the previous question, I guess the question to ask is you are saying given the situation where you have seen somewhat of a slowdown you are not seeing more of the roll-bonders coming into your market stronger given kind of the slowdown in worldwide growth?

No, we are not seeing that. I think the competitive battlefield with roll-bond remains stable both on price and delivery. Again, we are not competing across the board in their total domain. We are competing on the fringe of it and that factor remains steady and constant, particularly in upstream oil and gas.

Okay. Thank you very much.

You are welcome.

Thank you. Our next question is a follow-up from Phil Gibbs from KeyBanc Capital markets.

Hey guys. Rick, what is the other income in the second quarter?

Most of it is foreign exchange gains, some realized and some unrealized relating to the strengthening dollar versus the Euro.

Okay. What should we look at for your full-year interest expense here?

Borrowing will probably be a little bit higher in the second half of the year. With the timing of the CapEx that we expect I hope that operating cash flow will also be a little bit stronger. I think our previous guidance of $1 million for the full-year, roughly $250,000 a quarter is still a good number.

Your CapEx right now is $20 million or so for the year?

Yes, we are still looking at $20 million for the full-year.

$15 million for the back half?

Exactly.

Okay. Thanks a lot.

You are welcome.

Thank you. At this time we have no further questions. I would like to turn the call back over to Mr. Cariou for closing comments.

Thanks all for joining us for today's call. As you have heard, each of our business segments is working on initiatives that we believe will further strengthen DMC's prospects for continued success. We look forward to updating you at the end of the third quarter. Thank you very much. Talk to you soon.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.