DMC Global Inc (BOOM) 2013 Q2 法說會逐字稿

Greetings, ladies and gentlemen and welcome to the Dynamic Materials Corporation's 2013 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, sir, you may begin.

Thank you, Jen. Good afternoon and welcome to Dynamic Materials' Second Quarter Conference Call. Presenting on behalf of the Company will be President and 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 this 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 Kevin.

Thanks, Geoff, and good afternoon everyone. Our second quarter sales performance was stronger than anticipated, thanks primarily to the performance of Nobelclad's U.S. production team. Certain metal shipments arrived earlier than expected at our Mount Braddock, Pennsylvania facility, allowing our cladding teams effectively produce and ship several orders before the close of the quarter.

We've continued to make operational and organizational enhancements at both the corporate level and within our individual businesses and these improvements are having the desired effect. One illustration of this is our operating cash flow performance, which came in at $15.4 million for the six-month period, ended June 30. This represents a 91% improvement versus the first six months of last year.

We saw a number of encouraging developments within each of our businesses during the second quarter. In Nobelclad, our sales team is reporting an improvement in project quoting volume. The global energy and chemical markets continue to generate steady activity and we're also seeing increased interest from the worldwide power generation market.

For the past several quarters, Nobelclad has been closely tracking a series of projects related to specialized chemical production and we believe these projects could lead to multiple orders. Although it is difficult to anticipate the specific timing of these potential awards, the dialog with the equipment fabricators and end-users have been encouraging and we believe the projects will move forward in the coming months.

We've been anticipating for the past several years that there would be a pick-up in infrastructure spending for the North American refining sector. [It appears that] investment activity may finally be on the upswing and we're cautiously optimistic this could lead to an increase in clad plate demand during 2014 and beyond.

At DYNAenergetics, production testing is underway at our new shaped charge facility in Blum, Texas and we expect to initiate commercial production by the end of the third quarter. Gary Burke has joined the DYNAenergetics team as Vice President, Manufacturing for the Americas, as well as Head DYNAenergetics' Global Environmental Health and Safety Program. As you may know, Gary was the Head of Operations at Nobelclad, where he directed the construction of our Mount Braddock facility and helped instill the culture of safety and operational excellence that exists throughout our explosion welding business. He is now working to ensure a similar culture is adopted across DYNAenergetics expanding global production operations.

We also have assembled a strong manufacturing team in Texas, which is headed by [Michelle Dennis]. Michelle is an experienced and talented operations manager, who joined us earlier this year, and also oversees our gun manufacturing facility in Whitney, Texas.

During the Q2, DYNAenergetics team in Germany successfully shipped the full value of the $3.2 million international tender order. The business also began marketing its new DYNAselect product, which is the perforating industry's first detonating system to incorporate in the integrated switch. The DYNAselect system will accommodate up to 20 perforating guns at a time and it's designed to enhance the safety, reliability and efficiency of the detonating process.

DYNAenergetics also took an important step in its geographic expansion program with the recent opening of a new distribution center in Colombia, South America. We expect this investment will begin providing returns during the second half of the year.

The AMK Welding, business President, Gary Klein is directing the installation of a new machining center, which will augment our capabilities in the aerospace to ground power industries. Gary has also added a Director of Sales who has extensive experience in the aerospace industry, and he has added new talent and depth to his engineering team. We are increasingly optimistic about the new business opportunities AMK is pursuing with both existing customers and with prospects operating in the broader oil and gas industry.

With that, I'll turn the call over to Rick for a review of our financial results. Rick?

Thanks, Kevin, and good afternoon everyone. Second quarter sales came in at $57.9 million, which is a 19% improvement over the second quarter last year. As Kevin noted, this topped our projected sales growth range of 11% to 14%. Second quarter gross margin was 30%, versus 29% in the year ago second quarter. Operating income was $6 million, an improvement of 65% versus last year's second quarter. Net income in the second quarter increased 30% over the second quarter last year to $3.4 million, or $0.25 per diluted share.

Second quarter adjusted EBITDA also increased 30% and came in at $9.7 million. As Kevin noted, our [second quarter] operating cash flow of $15.4 million was an increase of more than 90% versus the first six months of last year. The improvement was principally driven by a $3.3 million net positive change in working capital during the first half of 2013, a swing of $7.6 million when compared with net negative working capital changes of $4.3 million at the six-month mark last year. With respect to our balance sheet, the most notable change was the $9.9 million or 26% reduction in our line of credit borrowings.

With respect to guidance, although we are anticipating that our Nobelclad business will receive several sizable orders from the chemical industry during the second half of the year, it is possible that they will not be placed in time for our production team to deliver them before December 31. We are, therefore, adjusting our full-year sales forecast to an expected increase of 6% to 8% over our 2012 sales. Our prior guidance anticipated an increase of 8% to 10%. Our gross margin is still expected to be in a range of 27% to 29%. We have revised our anticipated blended effective tax rate for the full year to a range of 24% to 26% from the prior forecasted range of 21% to 23%. The revision is due to approximately $400,000 in non-recurring second quarter tax expense that resulted from a recent German tax audit. If you exclude the impact of the previously discussed $900,000 tax benefit recognized in the first quarter and the $400,000 second quarter non-recurring expense, the blended effective tax rate for fiscal 2013 is projected to be in a range of 28% to 30%, versus the prior forecasted range of 26% to 28%.

For the third fiscal quarter, we expect sales will increase by 10% to 12%, versus sales of $50.1 million in the third quarter last year. Gross margin is expected to be in a range of 27% to 29%. SG&A expense should be approximately $9.5 million and third quarter amortization expense should be approximately $1.6 million. Interest expense for the quarter is expected to be roughly $200,000. With that we are now ready to take any questions. Jen?

(Operator Instructions) Avinash Kant, D.A. Davidson.

Good afternoon, Kevin and Rick.

Yeah, hi, Avinash. How are you doing?

Good. I have some quick questions, of course. Given that it looks like you are feeling a little bit more positive about the bookings pattern here and clearly there is some question about the timeline in which you can meet the orders or not. Could you give us some idea, what are the lead times running at this point in explosion clad side of the business and then the strength that you're starting to see, which application or which end market is it coming from?

Okay. Well, the lead times are primarily driven by the metal suppliers and that's what enabled us to have a good second quarter buy. We had access to metals in a timely basis. I want to say, Rick, in the eight weeks, it's the second week?

(multiple speakers). Yeah. The orders we are talking about -- or some of the orders we're talking about involve titanium and we can start to get titanium into the plant within a six-week timeframe. And carbon steel, it's about the same, maybe a little bit longer in some cases. But as I think we've discussed before, we've significantly broadened our carbon steel supply base. So some of the problems we had [two] years ago do not exist today.

And I think, Avinash, the key is the timing of these orders landing and whether we will be able to ship them in this year, more so than anything, they really need to fall within this quarter for us to get them out by the end of the fourth quarter. And so, that's where we've tempered the guidance a little bit.

So you would expect -- sorry, Kevin. So, basically then you would expect bookings to start to improve from next quarter onwards, because bookings have not been meaningfully higher thus far in the explosion clad side?

Correct. And as you could see, the backlog fell slightly and so we shipped more than that.

Yeah. We had a good flurry of activity right around the end of the first quarter and early in Q2. But then it kind of flattened out after that. So we need another surge. (multiple speakers).

And could you give us some idea about which end market is driving that? Is that chemicals market or is it oil and gas, which one is driving that?

This has been the quoting activity. Right now, we're seeing a slight uptick in most markets, but some strength in the chemical area.

Yeah. These large orders that would make a difference are in the chemical sector. And fortunately they involve titanium, so the [Rolbon] competition is not a factor.

It's not. Yeah.

It's not. Yeah.

So, some --

(multiple speakers) some of these specific chemical projects.

So some of the large orders you should not expect to show up maybe -- [starting] them to show up maybe in the third quarter, that's why the expectation is high?

Yeah, I would say third quarter is where we hope to see them. And if they are early in the third quarter, there may be a possibility to get some of that into the production schedule this year. If it's later, then it starts getting, with the holidays, a little bit more questionable.

And what should we think of the Oilfield business with the new facility coming up? Are you expecting sequential growth throughout the year or some seasonality there, what are you expecting?

I think you'll see a steady climb in that business. It's less of a production facility-driven in the United States or the Americas, because we've compensated with inventory and we're being cautious to bring that plant on in a safe and reliable manner. It will contribute to some of our flexibility in serving our customers in a more timely basis. So we're really not factoring the production capability into this year's forecast.

Okay, perfect. Thanks. I'll come back in line.

Edward Marshall, Sidoti & Company.

Good evening.

Yeah. Hi, Ed.

Hey. So I would assume you would have told us already, but the backlog as of now, does it stand at the same place it was at the end of the quarter? I mean --

It's a little bit down from the end of the first quarter. It's at $44.1 million. We're closer to $47 million at the end of Q1.

Yeah. And you are speaking of end of Q2, not intra-quarter? (multiple speakers)

No, I was thinking intra-quarter, I was talking about end of July, and we're 30 days through July now. Can you give us any indication as such?

Now, we've only disclosed the end of the quarter number. We do not have an updated backlog to disclose.

And then, I guess if we talk about maybe the drag on the Oilfield margin, as you've had some start-up cost with the shaped charge facilities. What would be the drag to the earnings? I guess, has there been any?

We've also had -- we're significantly strengthening that organization, Ed. And we've had a number of significant, either new hires or transfers into that business, Gary Burke being one of them, and we have some people transitioning out and retiring. And we just have an overlap, if you will, in the organization and also a fair amount of relocation expenses with the people that we're bringing in.

But the gross margin performance was fairly comparable to last year. On a year-to-date basis, the gross margin for Oilfield Products was 35.8% versus 34.2% in the first six months of last year. And in the quarter, the gross margin was 34.5% versus 35.1%. We've not seen (inaudible) margin yet from the startup.

Why the sequential decline in the gross margin there on the Oilfield Products business? Assuming that you had a higher volume, I would assume that that margin would have gone up.

Yeah. Part of it was the blend, the Indian tender order is at a lower margin. Now it's $3.2 million of second quarter sales.

Okay. While we're already on the gross margin, can we talk about the explosive business, as well as the AMK? Please give those gross margin numbers.

Yes, I assume we can. Ed, for the quarter, Nobelclad was at 26.3% in 2013, versus 25.5% in 2012. AMK Welding was at 27.5% for the quarter in 2013 versus 17% last year. (multiple speakers) On a year-to-date -- yeah, AMK had a nice turnaround in the quarter. On the year-to-date basis, Nobelclad was at 24.6%, versus 25.9% in 2012. Oilfield Products, year-to-date, I just mentioned that, but I'll go through it again, was 35.8% year-to-date in 2013, versus 34.2% in 2012, and AMK on a year-to-date basis, in 2013 was at 14.3% versus 14.6% in 2012.

So kind of looking at the balance sheet and looking at kind of, in particular -- I mean, one of the discussions we've had for a while was about inventories, in particular in the Oilfield Services, and I know we don't break the inventories down by division, but it doesn't seem like there was that much of a reduction in inventory, and it could be just talk about the timing, so you kind of remind us of kind of how your thoughts were on the shaped charges and maybe some of the additional inventories there, and then maybe what you've been able to accomplish and what are those yet to be accomplished?

Yeah. When you pare behind the good growth number, our Oilfield or DYNAenergetics business reduced inventories in the $5 million to $6 million range year-to-date. It was roughly, I want to say, Rick, $3 million in the first quarter and they picked up another -- or reduced another $2 million to $3 million in the second quarter. But we had a pickup in clad inventory --

Of a couple million, which is all tied to work in process.

The timing of orders going through the facilities. And so, we feel that we're marching right along in our inventory reduction plan and the quality of the inventory that we have has improved. The Nobelclad is tied to production orders. The DYNAenergetics builds for stock and the stock is what's been high and what we've been bringing down.

And I take note to one of your, I guess, call it customers that you do some work for. In this particular quarter, they had a nice surge in their particular order backlog and it seems as though you see the same trends coming. Is that kind of the demand that you're seeing or does it go further than that, maybe more broad-based in the chemical markets? Forgive me for the choppy question, but it seems that my discussions with some of your customers are saying that they've seen the order book coming for some time. The floodgates ultimately opened just recently and there's a lot more behind it. Is that kind of what you're hearing as well?

Right. I think what we're seeing is increased quoting activity, it's up over this time last year. I'd be hesitant to say the floodgates have opened, but we do see it strengthening and so we're cautiously optimistic for the second half of this year and into 2014.

Yeah. Certainly the black -- backlog movement, the E&C firms like Jacobs and some of those public companies that are customers of ours, certainly is a bit of bellwether for us, and I believe that Jacobs had some positive comments about both the chemical sector and the refining sector in their recent conference call.

Okay. Thanks, guys.

Dan Whalen, Topeka Capital Markets.

Great. Thanks. Hey, guys.

Hey, Dan.

Hey. You alluded to this earlier, I think I may have missed it, but did you say the Texas facility and the Russian facilities really are factored in the guidance? What did you say on that?

That the -- certainly the Russian facility, which isn't going to come on stream until next year, is not in the guidance. The Blum facility, which will start up on September 1, we're going to walk before we run. And we've been utilizing inventory to support our customers in our sales organization. So I think those two combined are saying it's really not factored into the guidance for the second half of the year, except from an expense standpoint.

Okay. So, as we get into 2014, expense, so to speak, is kind of a little bit of a tailwind and then you're going to have incremental revenue from that. Any early indications of the order of magnitude in terms of revenue potential there for 2014?

We're just getting into the planning process with our businesses. I think that we're focusing kind of broadly on the DYNAenergetics business from, not just the production capacity, but from a product management and engineering and sales standpoint too. And so, we're hoping that a lot of the programs that we're working on there will all be coming together in 2014. But it's quite a work in progress at this point and it would be hard for us to anticipate what that number is going to be till we sit down with the businesses closer to the fourth quarter.

Got you. All right. So you're working on that. You've got some other inventory initiatives that you are clearly making -- working on. Is there any reason to think that we couldn't revisit or exceed the 29.6% gross margin you had in 2012? I mean that's probably (inaudible) all right?

I guess, we don't see that at this point. Our guidance is 27% to 29%.

I'm sorry, for 2014?

Again, we just haven't gotten there with respect to planning the activities for 2014.

Okay. But given the stronger macro backdrop, wouldn't be out of the realm?

Yeah. A lot of it is driven by product mix in our Nobelclad business. And as we've talked about before, we'll take the money on freight and duty, duties as we start to manufacture locally, but then there will be some inefficiencies as we start up production facilities. So that could end up to be a wash when you look at 2014.

Got you. Okay, great. Thanks.

Gerry Sweeney, Boenning.

Hi, good afternoon, guys.

Yeah. Hi, Gerry.

I want to talk about the Oilfield Services real quick. I guess in the call on Q1 you said, and the guidance was about 8% to 10%. You talked about Oilfield Services growing faster than Nobelclad. Now, with looking at the guidance, the revised guidance of 6% to 8%, it sounds like most of that is coming from the Nobelclad side of the business. So, this sort of implies that you're still seeing some good growth opportunities from Oilfield Services, probably in excess of 10%. Am I looking at that correctly?

In the second half of this year, yeah. And what's happening there, Gerry, is, as an example, we have the expense in the first half of this year of that Colombia, South America distribution center. But it has not produced yet, and we're expecting that to kick in, in the second half of this year. And we've also added another distribution center in West Texas that we expect to kick in. And so, we're strengthening our presence in the marketplace and those investments are being made, but they are not all up and running yet. So, we'd expect the growth rate to accelerate on the DYNAenergetics business, compared to where it was in the first half.

Got it. And then you also, in your comments you -- I think you talked about the DYNAselect.

Yeah.

I imagine, when you're talking, it sounds like [20 stages], it sounds like it's a little bit more for unconventional E&P --

Correct, yeah.

How big of a market -- I mean, maybe I should ask, how much of the macro E&P right now is Oilfield Services? Do you ever break that out, do you have an idea?

How much -- could --

I was curious to see how much of your sales of your Oilfield Services goes to unconventional E&Ps in the U.S., North America?

Yeah, it is a little bit hard to track that. But, yeah, I think it's 30% to 40%, in that range.

Okay. I was just curious then, like how big of a market would that DYNAselect go after?

From a --

I mean, I can follow up, it was just this --

Yeah. It's not just the DYNAselect, it's also all those components with it and what it really is enabling us to do is sell more guns and shaped charge systems. And so, the panel itself is not so much where the revenues come from, it's just a more effective system that we get overall in the perforating products area. And to be honest, I don't have at my fingertips how that's factored into the second half of the year.

No. I know -- Again, I'll actually follow up. It was more a materiality thing. AMK Welding, obviously you had a nice turnaround in the quarter and you did mention specifically there was some repair work. Does this repair work continue on into Q3 or was in the quarter a little bit more one-time work and it goes off?

I think it was a little bit one-time for that particular repair work. So, AMK saw a good turnaround in Q2, it will be challenging to repeat that performance in Q3 and Q4. But as Kevin indicated in his opening remarks, we're working hard there. We are organizing the team and they're making progress.

Okay. I wasn't sure if that was a function of some of those enhancements and it's just a different workflow, but got it. Then just real quick, maintenance CapEx, you probably mentioned in the past, but just a general idea what maintenance CapEx is, excluding all the CapEx you're doing on the new plants and distribution systems to stay --?

Yeah. I think we've indicated that the maintenance CapEx would typically be in the $7 million to $10 million range.

Okay. I just want to double check that. Perfect. That's all I had. Thanks a lot guys. I really appreciate it.

Yeah, you're welcome.

Thanks, Gerry.

(Operator Instructions) As there are no further questions at this time, I'd like to turn the floor back to Kevin Longe for any closing comments.

Yeah. Well, first of all, thank you everybody for joining us. And then also like to thank the Nobelclad team for a good quarter and I'm more encouraged by the progress across the businesses. And we appreciate your support and we look forward to speaking in again at the end of the third quarter. So thank you everybody.

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