DMC Global Inc (BOOM) 2014 Q2 法說會逐字稿

Greetings and welcome to the Dynamic Materials Corporation 2014 second-quarter conference call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Geoff High. Thank you, Geoff, you may now begin.

Thank you, Mike. Good afternoon and welcome to DMC's second-quarter conference call. Presenting on behalf of the Company will be President and CEO Kevin Longe and Chief Financial Officer Mike Kuta.

I would 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 DMC's filings with the Securities and Exchange Commission.

The Company's results -- excuse me, 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. DMC 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 Longe.

Thanks, Geoff, and good afternoon, everyone. Our second-quarter sales of $53.6 million were in line with our expectations and represented a 12% top-line improvement over the first quarter. Second-quarter gross margin was 30%, flat versus the first quarter.

The revenue increase over the first quarter was largely due to the continued growth of our Oilfield Products business which delivered a 17% sequential sales increase to a quarterly record of $27 million. Gross margin at Oilfield Products was strong at 36%, but down sequentially from 41% in the first quarter, which benefited from very favorable product mix. For the six-month period, gross margin at Oilfield Products improved to 38% from 34% in 2013.

DynaEnergetics, the primary component of the Oilfield Products business, continues to benefit from active well completion work by the global oil and gas industry. The performance has been especially strong in the United States and Canada, thanks in large part to demand for our DynaSelect detonator which was introduced in the US late last year and generated considerable sales volume during the first half of 2014.

North America remains DynaEnergetics' largest market, and given the expansion initiatives outlined by many of our US and Canadian customers, we see strong growth prospects in this region for the foreseeable future. We continue to expand our North American distribution network to more effectively meet customer demand and have opened new distribution centers in Mount Braddock Pennsylvania, which will serve the Marcellus and Utica shale regions, and Bonnyville, Alberta, where customers are operating in the Cold Lake heavy oil region.

Beyond North America DynaEnergetics is reporting strong sales in the Middle East and is making further inroads into China's expanding unconventional oil and gas market. During April, DynaEnergetics representatives conducted a two-week technical roadshow through China and met with major end-users throughout the country's oil and gas producing regions. The team came away encouraged by the opportunities to strengthen DynaEnergetics' presence in this emerging energy market.

This week representatives of a joint venture between Shell and PetroChina are conducting field tests of our DPEX reactive shaped charges in an effort to improve their well stimulation programs. By demonstrating the superior performance attributes of DynaEnergetics' products and technologies we believe the business could see an acceleration of its expansion strategy in China.

Construction of our shaped charge facility in Tyumen, Siberia, should be complete by early in the fourth quarter. Of course, we continue to monitor the geopolitical situation in Russia and at this point we are not aware of any developments that would alter our long-range strategy there.

I mentioned during our last call that DynaEnergetics was preparing to make another major product introduction. During the recent offshore technology conference in Houston and again at the global petroleum show in Calgary customers got their first look at our new DynaStage product, a disposable gun system delivered preassembled and preloaded to the well site.

DynaStage is fully customizable for shot density and charge type, and because it does not require on-site wiring or loading, it improves safety, reduces labor costs, and eliminates the risk of misruns. The patent-pending DynaStage system combines several components from our perforating product line including shaped charges, detonating cord, and the DynaSelect detonators. By packaging these products into a single preassembled gun, we provide customers with a higher level of service while also benefiting from the sale of a comprehensive perforating system versus just individual components.

We are actively educating and training customers on the DynaStage system and expect to commence commercial production in the fourth quarter.

I want to note how proud I am of DynaEnergetics' research and development team, whose efforts in product innovation have positioned DynaEnergetics at the technical forefront of the global perforating industry. I'm also pleased that our increasing investments in research and development are having the desired impact on our product portfolio and sales performance.

Our NobelClad business reported second-quarter sales of $26.2 million, up 7% sequentially from the first quarter. Gross margin was 25% versus 19% in the first quarter. NobelClad closed the second quarter with an order backlog of $40 million, up 12% versus the end of the first quarter. Perhaps more encouraging is that order opportunities also expanded during the quarter and include a broad spectrum of projects in the oil and gas and chemical markets.

We talked during our last call about the many projects being planned for the US chemical market and it appears activity is also picking up in the domestic downstream energy sector. And the industry report issued recently by Global Data projected that approximately $4 billion will be invested in new domestic oil and gas refining capacity between 2014 and 2020 and much of this spending will be directed towards relatively small, geographically dispersed projects.

This is consistent with the types of opportunities NobelClad is seeing in the US refining space. Approximately 40% of the projects in NobelClad's hotlist are international and, like DynaEnergetics, the business is seeing promising developments in China. The NobelClad team at our office in Shanghai recently booked two orders, one from the power generation market and the other in natural gas processing. These orders are a direct result of the sales and marketing presence we established in China last year.

Under the direction of NobelClad's President, Jeff Nicol, the global sales team is placing much greater focus on clad metal end-users and the engineering and construction companies that serve them. While NobelClad's direct customers are typically fabricators, we believe end-users, particularly in the chemical and energy space, will benefit from our expertise in cladding applications and material science to specify our products early in a project's design and material selection phase.

As I noted in today's earnings release, our free cash flow during the first half of 2014 was below our performance objectives. This was primarily the result of investments we had made in near-term growth and we expect to achieve our cash flow objectives for the full fiscal year.

With that I will turn the call over to Mike Kuta. Mike?

Thanks, Kevin, and good afternoon to everyone. As Kevin noted, second-quarter sales came in at $53.6 million, which was down 7% from last year's second quarter and within our forecast range. Second-quarter gross margin was 30%, flat versus the second quarter last year and also in line with our forecasts.

Operating income was $4 million versus $6 million in last year's second quarter, while net income came in at $2.9 million, or $0.21 per share, versus net income of $3.4 million, or $0.25 per share, in Q2 last year. Adjusted EBITDA was $8.6 million versus $9.7 million in the 2013 second quarter.

Our balance sheet at the end of the second quarter included cash and cash equivalents of $8.7 million, working capital of $80.3 million, and a current ratio of 4.4 to 1. Current liabilities were $23.9 million and total liabilities were $65.3 million. We closed the quarter with net debt of $23.1 million and stockholders' equity of $176.6 million.

Looking at expenses, G&A came in at $5.9 million, or 11% of sales, versus $5.2 million, or 9% of sales, in the second quarter last year. The change was attributable to a $356,000 noncash increase in stock-based compensation expense as well as higher salaries, benefits, and payroll taxes. The increase in stock-based compensation was largely due to a higher stock price when shares were issued this year versus in 2013 and changes to vesting for certain participants.

It's worth noting that our full-year stock-based compensation expense is expected to be in line with recent years. The higher salaries, benefits, and payroll taxes were driven by the addition of resources, including a corporate business development organization to support our growth initiatives.

Selling expense increased to $4.8 million, or 9% of sales, from $4.3 million, or 8% of sales, in last year's second quarter. The increase principally reflects higher commissions from increased sales into regions in which we don't have a captive salesforce. DynaEnergetics also had higher costs from opening the two new distribution centers Kevin referenced earlier.

Cash flow from operations was $691,000 for the six-month period versus $15.4 million in the same period last year. The decline was due to a $15.7 million net increase in working capital. This increase resulted from a short-term inventory build of DynaEnergetics DynaSelect detonators, prepayment for raw materials with long lead times but also favorable pricing, and timing of payables. As Kevin noted, we expect a significant improvement in cash flow during the balance of the year.

Turning to guidance, we are maintaining our prior full-year forecast for revenue, which we expect will be flat to up 4% versus last year's $209.6 million. Our gross margin guidance is now 29% to 30% versus the prior forecast of 29% to 31% and our blended effective tax rate is still expected to range from 29% to 30% based on our projected full-year pretax income.

For the third quarter, we expect sales will be up 1% to 3% from the $54.3 million we reported in last year's third quarter. We expect gross margin will be in the range of 27% to 29% versus the 31% we reported in the year-ago third quarter. The expected decline in third-quarter gross margin reflects the anticipated results of NobelClad, which is forecasting a dip in sales and less favorable product mix. Both sales and product mix are expected to improve in the fourth quarter.

Given the near-term investments we're making in the organization to drive and support growth at both DynaEnergetics and NobelClad, we expect SG&A expense during the third and fourth quarters will be consistent with the $10.7 million reported in the second quarter. We expect SG&A expense will decline as a percentage of revenue beginning next year. Third-quarter amortization expense should be approximately $1.6 million, while interest expense is expected to be approximately $150,000.

With that I believe we're now ready to take any questions. Operator?

(Operator Instructions) Gerry Sweeney.

Good afternoon, guys. Wanted to start off on NobelClad. Could you give us a little bit of details, may be statistics, in terms of what you're seeing on potential orders -- I think quoting activity up X percent versus years past -- just to get a feel for how that is moving along?

I think, Gerry, it's consistent with I think in some previous calls we said that our quoting activity is up about 20% in terms of the projects that we're looking at. We are seeing that strengthen, but I don't have the current percentage to say that it's much different than that. But we're starting to see a lot of quotes, we're just anxious for when they turn to orders.

I understand. Then I mean in China, first time I think in a little bit that you've actually mentioned the international side and a couple of orders coming through from China. Any qualitative underlying positives going on there? Is this part of that order activity, any details on that?

Yes, I think we're actually very excited about the orders that we have received and, quite frankly, I think we're close to getting another order from China. And it's the direct result of the office and the people that we put in Shanghai, where I believe our office is up to four, possibly five people.

We began this office, I want to say, in May of 2013 and so there's been a lot of education and training and development and expense in terms of joint sales calls from people from North America and Europe traveling with our China team. I'm pretty excited about the people that have come on board as part of our team and also equally excited about how our broader global organization is interfacing with them.

What's really gratifying is we are now local in China with our sales and our technical expertise. In the past it was people getting on a plane and going there, and you're only going to have limited growth by doing that. So we're committed to China for the long run and the first step of building out our business there was to get a strong sales and marketing experience in our industry with feet on the ground in the region.

Okay. Then the focus that you mentioned earlier in the call about shifting to the end-user versus the fabricators, what drove that? And maybe some details on the potential or how it's being received?

We've always spent time with the end-users and engineers, and so I think it's more of a change in emphasis than it is a new effort all together. And it came about primarily as a result of moving to one global organization in NobelClad.

In 2013, as you're aware, we united what were regional businesses under a common brand-name, NobelClad, and we also put in place a common management incentive program for the global business. And this year what we've done is we've created a technical marketing and application group that's supporting application development in the sales of our products globally and creating more of a pull-through demand from the end users and engineers.

And in the past this was more individually driven rather than collectively driven by the organization and it's meant to reinforce our business on a long-term basis. We've taken the approach that as the largest in the explosion clad metalworking and also the only Company with a global footprint that it's our responsibility as a business to drive the demand for our products and the benefits of those products by making end-users and engineers aware of them.

Switching gears a little bit to the oilfield products, did you have the Indian tender in the second quarter?

We had half of the Indian tender in the second quarter from a shipment standpoint. And as you are aware, the Indian tender is a competitive bid, primarily shaped charges and guns which are a lower margin than some of our other products. The balance of that order will ship. And it was really more of a technical reason on approval that it didn't ship in the second quarter, but it will be out early in the third quarter.

So that's -- about $3.2 million was sort of what it has been in the past and I guess similar again this year?

Yes.

Okay.

And actually Mike just wrote me a note saying it has shipped.

Oh, all right. Because I was looking at the margins, I mean -- I see here -- obviously I knew the Indian tender carried a little bit lower margins, but -- so we -- does that, the other half of it shipping in Q3 sort of -- it affects the margins a little bit in that business as well. There was a little surprise I guess by some of the gross margins coming down, the guidance for next quarter. I imagine a little bit of it's from that Indian tender, but it sounds like NobelClad will be pretty weak in the third quarter.

NobelClad will be weak in the third quarter and more probably similar to how they were in the first quarter of this year.

Okay, got it.

But from a margin standpoint, if you don't mind me stepping back a little bit to DynaEnergetics and our Oilfield Services, we're very excited about the investments that we've made. We've increased our spending in R&D significantly over the last couple of years and we're starting to see the results of that in the new products that are coming out. Those new products are carrying higher margins for us and better value and use for our customers and it's really the emphasis of our Company to focus on value. We're not interested in growing our business at the sake of margin.

Got it, I get that. Even on a revenue side I mean the oilfield products has had a nice uptick, backing out half that Indian tender over the Q1, and --.

Yes, and I think the -- if you look at the first half of the year in terms of the gross margin, that's more representative of where we're going as a business.

Okay. I'll jump back in the queue. I've taken up too much time with other people out there. Thank you.

Edward Marshall.

Good evening. So I wanted to -- first, let's clarify the Indian tender. This is the first year where you're splitting that tender, which used to ship in two quarters, over four; isn't that correct?

It used to ship in the first and second quarter, now it seems to be in the second and third quarter.

Okay, so it's just a shift in cadence throughout the year?

Yes. I believe in 2012 it shipped in the first quarter, in 2013 it shipped in the second quarter, and now half of it's in the second and half of it's in the third.

Okay. So as we talk about DynaEnergetics how is the development going for you in Texas? Where would you say, maybe from a utilization standpoint, are you? What's the sell-through?

And can you parse out maybe the increase that you saw in 2Q? How much of that was shipped from your Texas facility or at least a portion of it through the Texas facility?

Yes, I don't know offhand how much of the increase, but I can share with you that the Blum facility is operating at full capacity on a single shift, which is in the 45,000, plus or minus, shaped charges monthly. And we're currently in the process of hiring people to go on a second shift.

First of all, they've got to go through training, but the second shift will begin production in the fourth quarter of this year.

Did you say you were operating at full capacity at a full second shift or you're adding a second shift? I'm sorry.

We're adding a second shift and we're at full capacity on a single shift right now.

Okay. Now, you operate I guess -- you operate several facilities in North America that all share components that also need Blum facility.

Are there any holdups or is there any kind of jams in the system that you can see that would derail your progress in Blum with shaped charges? Or is there any backlog that would push you back?

We don't anticipate any delays or any difficulties at this point. It has been operating since November of last year and we've been careful, because of the nature of the products, not to put the foot on the accelerator too fast with it and that we develop the right safety culture in the organization. But we've been quite pleased and it's actually been a relatively flawless startup of a new facility for us.

It's really effectively and efficiently ramping up that second shift.

I guess my question is -- surrounding bottlenecks in the system is kind of the words I was looking for. But I guess to broaden that question a bit, is there any need for additional capital that you would need to put in the system, at least in North America? I know you're spending some in Siberia.

I don't see that other than annual capital expenditures, but not significantly for the next 12 or 18 months.

And then the DynaStage Gun System, are there orders for that yet or are they testing -- are any customers necessarily testing that out?

We are going through the approval process for handling explosives and completed guns systems in our two manufacturing locations that will be assembling these in North America. And we've got an initial -- two initial orders and customers that we're going to be working with on them that are sizable customers.

Quite frankly, we've introduced it. We're walking before we run and making sure that we can meet the needs of our customers as they would switch over to this system, because it does change some of the things that they do on their end.

Now you said two big customers. Can I make inferences to who they might be? Are they competitors as well?

No, not to us.

I see, okay. Is there any federal regulations with shipping? And I think this is what the development of this product was to circumvent any kind of shipment of explosives, etc.

Has there been any -- have you checked with federal government to make sure that it's okay to ship, etc.? I'm sure you have. Is there any approval, regulations that need to come down the pipeline before you can actually start shipping?

There are, but we're very familiar with the approval agencies. In the two locations that we're going to be assembling these guns we handle explosives today and ship explosives today. They'll be our Mount Braddock facility in western Pennsylvania to serve the middle and eastern half of the US and our Texas, our Blum facility.

And last question. With the DynaStage Gun are there patents associated with this that protect you from, say, competition? And how significant is this in the industry? I don't think anybody else sells actual systems to the market at this point.

With the step up in our research and development efforts we've also committed -- stepped up our commitment to protecting our intellectual property. We have three patent-pending applications filed that we're pretty excited about.

So you're suggesting that the product wouldn't be able to be duplicated by a competitor?

Not easily.

Perfect. Thanks, guys.

Avinash Kant.

Good afternoon, Kevin, Mike, and Geoff. So maybe I missed this one, but I think you gave gross margin numbers for both the segments, the oilfield and the explosion clad, for the quarter. Can you give it for the quarter and the first half, and also compare it with the last year's quarter Q2 and the first half of last year? Do you have those numbers?

Yes.

Yes, so, Avinash, for the second quarter for NobelClad the gross margin number was 25% and for the year-to-date period that was 22%.

And what was it last year's Q2 and first half of --?

The Q2 number was 26% and roughly 24% for the year-to-date period. And then on oilfield, the Q2 gross margin percentage was 36%, 38% for the year-to-date period. Q2 last year was 34% and 34% for the year-to-date period.

Perfect. Now you did talk about some weakness in explosion clad, although if I look at the bookings in the explosion clad side it looks like you did see some pickup in bookings. Now, what were the components of the pickup in bookings? Was it just the Chinese bookings part that was additional, or do you see this as a trend, or is it just a one-time pickup that may not be there in Q3?

The two orders in China were small orders and so it's really -- was a broader order base than just the China projects. And it was a significant pickup in the second quarter, albeit from a low base in the first quarter in terms of bookings. And we're hopeful that this -- we're cautiously optimistic that this will be a trend.

Having said that, the other difficulty at this time of year, because of the long lead time on the clad projects, that we're not going to see the benefit of the bookings in the second half of this year in terms of revenue unless they come in in the next 60 days or so.

Right, right. But just the bookings strength and only barring the timing, do you expect to see a pickup in the bookings? Especially based on what you have seen in Q3 thus far, does it look like you'll be running ahead of the Q2 bookings run rate or you'll be missing that?

I don't want to anticipate that, but I will say that the quoting activity continues to remain strong. And where we have not had as good of a crystal ball is when those orders that we're quoting -- or when the projects turn to orders.

Okay. And then, Kevin, talking with the oilfield side, of course if you're going to be at Q1 levels in the explosion clad we can just do the math and the guidance still indicates close to, I would say, a 10% or so sequential improvement in the oilfield business. Is that what you're expecting? And then should we expect continuous improvement into Q4, or how do you see the rest of the year tracking in the oilfield?

I think we -- the oilfield is performing at our expectations and it ties back to our original guidance for this year, which was flat to up 4%, and obviously the oilfield products is growing at a greater rate than that so we actually also forecasted a decline in NobelClad. And both businesses seem to be performing within our expectations.

But the oilfield is running much better this year (multiple speakers).

Much better than the forecast for the whole company for the 2014, yes, which was our expectation.

So then, asking it this way, if you were to -- given what you are talking about Q3 and if you look at the oilfield somewhere where you could be, we are clearly talking north of $30 million or $30.5 million in revenue in oilfield. What kind of utilization rate would you be at at that point and how much expansion can you think you can have on revenue turns there?

I'm not sure that I understand the question.

Okay. If you look at your guidance for Q3 and look at the oilfield business alone -- you just had a record quarter in the oilfield business, right?

Correct.

And you'll be up again, close to 10% or so, sequentially in Q3. So what I'm trying to figure is at that level of revenues what kind of utilization rates you'll be at in the oilfield business.

Oh, utilization rate. We're pretty much close to capacity on shaped charges. We have built up inventory on our DynaSelect products, which should cover us through the end of the year, plus their current production rate.

And we have plenty of capacity on Gun Systems and the focal point in the fourth quarter is the second shift on shaped charges in Blum and the startup of our Tyumen, Siberia, facility. And the Tyumen Siberia facility will take pressure off our European facility for shaped charges.

And I think you made a point previously that we don't expect significant capital needs in the next 12 to 18 months.

No.

Even at these growth rates.

Yes.

Okay. And final question, in terms of -- of course, you are not giving guidance in 2015, but you did say that after Q4 on an SG&A basis point of your line item at least you will see -- as a percentage basis, they should start to decline. And as you grow your business in -- if you were to grow, what kind of margins do you think you can get to, given that you'll have the two new facilities come up?

Yes, we're not ready to speak to 2015 at this point. We are expecting growth and leverage against the SG&A and the investments we're making in SG&A, but not ready to speak about anything beyond our current-year run rate on SG&A, Avinash.

Perfect. Thanks so much.

Robert Connors, Stifel.

Good evening, guys. I was just wondering on the mix of RFPs or proposal activity at NobelClad. If -- I think you gave a little bit of color domestic versus international. Am I correct that it's about 40% international versus domestic?

In terms of the projects that we're quoting, yes.

And can you give a breakdown as far as what is upstream oil and gas versus chemicals versus refining? Any color on that?

I don't have the breakout in front of me. I will say that about 65% to 70% of our projects are petrochemical, oil and gas and chemical. I don't have the -- they typically run about half and half.

Yes, and I think that there has been an increase on the downstream side over the last couple of quarters that wasn't there as strong within, say, the last year and a half or so. So the report that we talk about earlier kind of jives with what the sales team is seeing from the downstream side.

Okay. And then when you look at it and -- you guys have a pretty good sense on what you can capture versus what the roll bonders can do a little bit cheaper or where they're more competitive. Are you finding that the clad welding jobs are starting to pick up or is it just the overall market is starting to pick up?

We're seeing pretty much overall market picking up and we're starting to see some price increases on metals. However, they're limited and that's an indication to us that we're starting to see stronger economic activity.

Okay. And then can you give me a sense of the sequential inventory build; how much was due to the pre-buying or inventory build of the cladding materials as well as the DynaSelect? I'm just trying to get a sense ex-those items what inventory level did and if you're making any room working down some of the inventory levels.

When we look at the oilfield products, which is primarily DynaEnergetics, the majority of the build in that area was related to two things. It was half of the Indian tender and the other half would be DynaSelect and DynaStage products or materials.

And that was -- they're up about $5 million combined year to -- since the end of the year. And the balance on that would be the pre-buy on the NobelClad side of it.

The balance of the year-to-date inventory build?

Yes.

Okay. All right, thanks for taking my questions.

(Operator Instructions)

Mike, I think we're ready to wrap it up.

Okay. Would you guys like to proceed with any closing comments?

Just I'd like to thank everybody for joining us on today's call and for your continued interest in our company. We look forward to speaking with you again at the end of the third quarter.

Thank you very much. This concludes today's teleconference. You may all disconnect your lines at this time and we thank you all for your participation.

Thank you.

Thanks.