DMC Global Inc (BOOM) 2012 Q3 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, Mr. High. You may begin.

Thank you, Pedro. Good afternoon, and welcome to Dynamic Materials Third Quarter Conference Call. Presenting on behalf of the Company will be President and CEO, Yvon Cariou, Chief Operating Officer and incoming CEO, Kevin Longe, 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 the call. Details for listening to today's replay or webcast are available in today's news release.

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

Thanks, Geoff, and welcome, everyone, particularly those of you who are on the East Coast who chose to come with us today. Our third quarter sales of approximately $50 million were in line with our forecasts, and better than expected gross margins led to net earnings that exceeded our expectations.

A favorable Explosion Welding product mix combined with sustained demand from the chemical sector were key factors in driving our gross margin improvement. We also saw continued strength in the overall pricing environment for Clad Metals.

Our sales team at Nobelclad report sustained strong continuing activity particularly from the NLG and chemical sectors, and we continue to [bead] on a broad mix of large industrial projects in the Middle East, Asia, and the United States.

As we reported in the second quarter, these projects are generally taking longer than normal to convert to orders, and we believe this is a consequence of economic and political uncertainty throughout our geographic target markets.

You may recall that last year at about this time, we saw a similar period of sluggish bookings, which were then followed by a surge in orders during the first quarter. This illustrates [in evidence speaking] us in our explosion welding booking trends, and these spikes tend to be more pronounced during periods of economic uncertainty.

Given that many of the opportunities we are pursuing are related to critical industrial infrastructure projects, we believe many will likely move forward during the coming quarters.

At DYNAenergetics, we saw a moderate pullback in demand for our [perforating], which corresponded with a decline in North American [brading] activity during this end month. Our medium- to long-range view of the markets in the United States and Canada remain very positive, particularly, as drilling in unconventional oil and gas fields continues to expand.

We, therefore, are strengthening our existing workforce in DYNAenergetics global sales, distribution, and manufacturing infrastructure.

In Texas, we have signed construction contracts for our new shaped charge plant and administrative buildings, and plan to be finished with construction by the end of the first quarter. We hope to commence production test runs by the end of next year's second quarter, and be in full commercial production by Q3.

In Siberia, we have broken ground on our [gern] manufacturing plant, and also are constructing roads, weather lines, and all the infrastructure associated with our new shaped charge facility. We expect to break ground on the actual shaped charge plant in Q3 of next year.

The team at AMK Welding has made great progress in capturing new sales opportunities, particularly from the aerospace industry, and these are helping offset our wind down of work on a large multi-year ground power project we have mentioned previously.

AMK has seen some significant opportunities emerge with other prospective ground power manufacturers, as well in the oil and gas sector, and this gives us confidence that 2013 will be a much improved year for the segment.

At the corporate level, we announced during the third quarter that Kevin Longe will be assuming the role of President and CEO in conjunction with my retirement next March. Kevin, who joined us in July as Chief Operating Officer, has been a tremendous addition to the team, and it has been a privilege to work closely with him during this and months.

I now would like to turn the call over to him for a few comments, and I'd like to add that you should have no difficulty understanding his English. Kevin.

Thanks, Yvon, and good afternoon everyone. Let me begin by saying how pleased I am to have joined Dynamic Materials, and to have been selected to lead the company into the next phase of its corporate evolution.

When I was first approached about the opportunity, excuse me, I quickly learned what a unique and successful business Yvon and his team had built over the years. Few small companies have established such a strong international presence with two distinct businesses, one of which is a worldwide leader in its sector.

Another aspect I found intriguing was the prospect of leveraging DMC's global manufacturing and distribution infrastructure, to build a larger, more diversified company, serving international energy and infrastructure markets.

I spent most of my career leading industrial manufacturing businesses, and many of them operated in the same domestic and overseas markets in which DMC currently does business in. I believe my background and knowledge of these markets will prove valuable as we work to expand DMC's revenue base, leverage its fixed assets, and enhance shareholder value.

I've been working closely with Yvon, our management team, and board of directors to advance DMC's road map for the future. We look forward to sharing it with you as it is crystallized in the coming quarters.

I'll now turn the call over to Rick for a review of our third quarter financial performance. Rick.

Thanks, Kevin, and good afternoon everyone. Sales for the third quarter came in at $50.1 million, which was down 9% from the third quarter last year. This decline reflects the timing of shipments out of our explosion welding backlog, as well as the dip in demand for perforating equipment from our Oilfield Products business.

Gross margin came in at 31%, which was better than the 29% we had previously forecast. Operating income was $5.2 million versus $5.7 million in the third quarter a year ago. Net income was $3.8 million, or $0.28 per share versus $4.3 million, or $0.32 per share in the year ago third quarter. Adjusted EBITDA was $9 million versus $9.6 million in the same quarter last year.

We continued to deliver strong improvements in our operating cash flow. We cut the nine month mark, increased to $12.5 million versus $2.3 million in last year's nine month period. Again, the improvement is largely due to investments made last year, and building up inventories in our Oilfield Products business.

Turning to expenses, G&A increased by 7% to $4.7 million from $4.4 million in the third quarter last year. Selling and distribution costs increased 19% to $4 million from $3.4 million in last year's third quarter. Combined third quarter SG&A of $8.7 million was a bit below our forecast of quarterly SG&A during 2012 of approximately $9 million. Amortization of purchased intangible assets during the third quarter was $1.5 million, and in line with our forecast.

Turning to our balance sheet, total current assets have increased to $104.9 million from $91.2 million at December 31, 2011. Total assets have advanced to $235.8 million from $213.4 million over the same period. The significant increase is due in part to our first quarter acquisition of TRX Industries, which added assets of approximately $10.3 million.

Current liabilities were $25.6 million versus $29.3 million at December 31, and total liabilities were $79.8 million versus $67.4 million at the end of last year's fourth quarter. We finished our third quarter with working capital of approximately $79 million, and the current ratio is better than 4.1 to 1.

And now to guidance. In light of inconsistent bookings at Nobelclad, and the pullback in sales at DYNAenergetics, we now expect 2012 sales will be down 3% to 4% from the $209 million we reported last year. Our guidance at the end of the second quarter anticipated sales would be roughly equivalent to our 2011 results.

Our full-year gross margin forecast remains at 29% to 30%, and our anticipated blended effective tax rate is also unchanged at 30% to 32%.

For the fourth quarter, we anticipate consolidated sales will be down 3% to 5% from the $54.3 million we reported in last year's fourth quarter. We expect gross margin will improve to approximately 29% from 27% in Q4 a year ago. We expect fourth quarter SG&A expense of approximately $9.5 million, and amortization of purchased intangible assets of approximately $1.5 million.

With that, we're now ready to take any questions. Pedro.

Thank you. We will now be conducting a question and answer session. (Operator Instructions). Thank you. Our first question is from Mr. Avinash Kant with D. A. Davidson. Please go ahead with your question.

Good afternoon, gentlemen, this is Taryn, filling in for Avinash.

Hey, Taryn.

Hi, I was just wondering of the downward revision in guidance, which components is it specifically coming from, and if you could kind of break it down by each segment? You kind of mentioned Explosion Clad, but --

We generally haven't provided revenue guidance for each of our three business segments.

Okay. Okay, and then of the Oilfield, I notice that Oilfield has moderated. Is this more of a seasonal, or do you expect it to recover in Q4, and/or seeing it growing in 2013?

The Oilfield market has weakened in the US in Q3, and we expect it to remain somewhat weak in Q4 relative to where it was in the first and second quarters of this year. Globally, we believe the market for our products will hold up quite well.

Okay. And you said that Oilfield product segments kind of declined due -- or due to the rig count decline in the US and Canada. I just want to wondering how much of your Oilfield business is driven by Canada and the US, because worldwide rig counts seem to have picked up for the quarter.

Generally, it can fluctuate a little bit from quarter to quarter, especially if we have large tender order that we ship as we did early this year in Q1. But, typically, 50%, 55%, 60% of our total Oilfield products sales are North America.

Okay, thank you. And then, turning to Explosion Clad, how much of the business was from oil and gas and qualitatively, do you expect a sequential uptick in bookings for Q4?

You know, traditionally, in the past quarters, Taryn, oil and gas has been the lead sector for us, particularly upstream oil and gas, but we also should note the chemical industry has been pretty good. Based on our quoting activity, we, of course, every quarter I expect to do better than the past one. We've been reporting this to you guys for quite some time. Quoting activity is healthy. Oil and gas, upstream; chemical, Asia, Middle East and -- but it's very hard to predict with certainty when some of those projects will turn into bookings.

Okay, perfect. That's it for me. Thank you.

Thank you. Our next question is from Mr. Phil Gibbs with Keybank Capital Markets. Please go ahead.

Hey, good evening. How is everyone?

Yvon Cariou. Hello Philip.

How are you, Phil?

Welcome Kevin.

Yes, thank you, Phil.

I just had a question for Kevin right off the bat, not to necessarily put him on the hot seat, but, Kevin, given your international background, how do you see yourself fitting into the culture, and what may you be adding to the table from a vision perspective in so much that your background could provide for the company?

Well, I think from an international perspective, I've always operated in global markets, and these are complex niche businesses in global markets, which is a good fit from an operating standpoint, and also from a cultural standpoint. And what I hope to do is take our current business platforms and use those as platforms, and define our businesses at a broader level, which can create growth opportunities in the different prospective end markets that we participate in.

Okay. Well thank you for that. Rick, do you know the question I'm going to ask now?

You want to know the margin break -- gross margin breakdown by business segment.

I would.

Would you like the quarter to date first or the year to date first?

No, just the quarter is fine. Just for the quarter.

Okay, for Explosion welding, the third quarter of 2012, a strong 29.7% versus 22.6% in last year's third quarter. Oilfield products, a little bit weaker this quarter than in Q3 of 2011, 33% this past quarter versus 34.5% in Q3 of 2011. And then AMK, which as you know is going through a little bit of a transition year, their gross margins did improve this quarter, but still are lower than last year. Q3 came in at 26.5% versus 31.5% in the third quarter of 2011.

Okay, now as far as the Explosion welding margins, you obviously have a margin there close to 30%, 33% for the Oilfield products. I believe your guidance for the fourth quarter is 29. Now, should we think about that as a mix drop off for you or is it more less just a sequential pullback in Oilfield or both?

No, it's more of a -- it's more of a mix fall off in the Explosion welding --

You could say it was a mixed pickup during --

Yes, it was exactly. It was a mixed pickup in both. It was a mixed pickup in Q3 that relates to chemical order, where the customer supplied a fairly expensive cladding material. So when the customer supplies the cladding material, which would be more expensive of the two metals, and we get the same amount of money for our conversion services, that tends to lead to higher gross margins in that quarter.

Okay, so when the -- when the customer supplies the material, you typically --

Yeah, it's not very customary in our business, but in certain instances the customer does provide the metal.

Now back several years ago when the market was really humming along, now was it common for the customer to provide the metal that you're speaking of?

No. We discourage it in general, because we're more in control over our own destiny in terms of controlling when the metal comes into our shop if we're doing the purchasing, and we're controlling the relationship with the supplier. In other words, it's a better plan of production.

Yes, it's a very important industrial point that Rick makes here. We really do not encourage, customer supplying metals. It's not a good way to do business. But when it does happen and, if it is an expensive metal, then you have those positive impact on the margin.

So the -- so another way to say that to be fair and reasonable is that the margin we saw in the quarter is good but not necessarily sustainable relative to what we saw in the first half? We should probably think about something more of a blend?

But across -- across the three segments, we expect our blended margin in Q4, to be -- I think if you do the math, the 29% full year leads you to a 29 to 30% full year leads you to the same range for Q4. So it's just Explosion welding will fall off, but the blend will be such that we -- our forecasting to end up about the same place.

Okay.

On a consolidated basis.

That's helpful. And the last question here on the capital spending. I had just in my model, and I don't know if this is what you were thinking to begin with, but at CapEx of $20 million this year, to date, you guys are around $10 million or so. Does that pertain to a pretty strong fourth quarter, or --

Yes, it will be a strong fourth quarter, but I'm not sure if we have quite enough time to spend the full $20 million. So some of it will likely roll over into next year, which relates principally to the project in Russia, and a little bit to the timing of the payments for the Texas Greenfield as well.

Okay. All right. Thanks a lot, guys. Good luck.

Thank you.

(Operator Instructions). No further questions at this time. I would like to turn the floor over back to Yvon Cariou for closing comments.

Well, thanks for joining us for today's call. We recognize that a lot of you, including many employees of DMC, live and work along the East Coast, and have been dealing with an extremely serious weather situation. We want you to know that all of you are in our thoughts as you weather the storm and its aftermath. Please be safe, and we're looking forward to talk to you next quarter. Thank you.

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