DMC Global Inc (BOOM) 2014 Q4 法說會逐字稿

Greetings and welcome to the Dynamic Materials Corporation 2014 fourth-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 Mr. Geoff High, Director of Investor Relations for Dynamic Materials Corporation. Thank you Mr. High, you may begin.

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

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 DMC's 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. 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 dmcglobal.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 on today's news release.

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

Thanks, Geoff, and good afternoon everyone. Sales in the fourth quarter came in at $52 million, a 5% improvement over the 2013 fourth quarter. The growth was driven by the performance of our DynaEnergetics business which delivered a 47% top-line increase versus the 2013 fourth quarter.

Although US oil prices in December were down more than 40% from their 2014 highs DynaEnergetics had not yet seen a decline in demand from customers in the oilfield services sector. Sales growth at DynaEnergetics more than offset a 23% top-line decline at NobelClad which continues to see soft demand from its industrial end markets.

Consolidated gross margin improved to 30% versus 26% in the 2013 fourth quarter. The improvement reflected sales of a more favorable product mix at DynaEnergetics.

Fourth-quarter operating income excluding restructuring charges related to NobelClad's European consolidation program was $3.2 million, up from $1.1 million in the prior fourth quarter. Operating income included a $931,000 reserve adjustment at DynaEnergetics for excess, slow-moving and obsolete inventory which reflects an ongoing program of evaluating aged inventory and matching it against anticipated customer demand.

In the fourth quarter of 2013, DynaEnergetics took an $808,000 inventory reserve adjustment for aged inventory. Both the 2014 and 2013 fourth quarters were impacted by various other expenses which are detailed in today's earnings release. Income from continuing operations excluding restructuring expenses was $839,000, or $0.06 per diluted share versus a $95,000 or $0.01 per diluted share in the 2013 fourth quarter.

Fourth-quarter adjusted EBITDA was $7.2 million, up from $5.4 million in Q4 of 2013. At the business level, DynaEnergetics reported fourth-quarter sales of $29.3 million, up from $19.9 million in last year's fourth quarter. The growth was primarily due to higher sales in North America of the DynaSelect integrated switch detonator as well as strong demand in the Middle East for both perforating and seismic explosive products.

DynaEnergetics gross margin improved to 36% from 30% in the prior fourth quarter and as I noted earlier, this was due to a higher margin product mix. Adjusted EBITDA including the previously mentioned inventory reserve adjustment was $5.2 million, up from $1 million a year ago.

At NobelClad fourth quarter sales were $22.7 million, down from $29.4 million in the prior-year fourth quarter. The decline reflects the ongoing low level of capital spending within several of NobelClad's industrial end markets.

Gross margin was 24%, flat versus the 2013 fourth quarter while adjusted EBITDA was $4 million, down from $5.5 million a year ago. NobelClad's year-end order backlog was $41.2 million which was up 12% from the end of 2013 but down 3% from the end of the third quarter.

As I noted earlier, the decline in oil prices had little impact on DynaEnergetics during the fourth quarter. However, the steep drop in the North American rig count as well as planned capital spending cuts by exploration and production companies have made for a much more challenging environment early in 2015.

DynaEnergetics' management team is moving quickly to rationalize its North American production and distribution infrastructure. Perforating gun manufacturing is being consolidated into DynaEnergetics' facilitate in Whitney, Texas and a smaller operation in Edmonton will be closed. A new centralized distribution center will open later this quarter in Blum, Texas which will allow for consolidation of several smaller facilities as well as more effective service for our customers.

We have already closed two small distribution centers in Hobbs New Mexico and Lloydminster, Alberta. And the facility in Edmonton will close later in the first quarter. DynaEnergetics also plans to exit its distribution operation in Colombia, South America later in the quarter and will serve that market from its facilities in Texas.

We are reducing costs at the corporate level as well. Two of our nine directors will not stand for reelection at our Annual Meeting in May and we intend to continue with a seven-member Board. Additionally Rick Santa who served as a DMC executive for nearly 20 years will retire this month and we will not fill the vacated position of Senior Vice President of Business Development.

The foregoing expense reduction initiatives when combined with the consolidation of our European cladding operations will take more than $5 million out of our annual cost structure. Concurrent with these efforts has been an ongoing focus on new products, applications and market development initiatives. These investments are crucial to our mission of expanding marketshare and helping customers improve their cost structures and operating efficiencies.

One of our primary initiatives is the commercialization of DynaStage of preassembled all-in-one perforating gun. DynaStage, which is built around our commercially successful DynaSelect integrated switch detonator, is designed to improve efficiencies and reduce completion cost for exploration and production companies.

We have completed construction of a dedicated assembly center for DynaStage at our facility in Mount Braddock, Pennsylvania and are in discussions with several of our leading customers about field testing and follow-on product adoption. We expect to begin downhole testing with several customers in the coming weeks.

In Tyumen, Siberia DynaEnergetics has completed the buildout of its new shaped charge production facility. All infrastructure and equipment are in place and local management is now working to secure the permits required to commence commercial shaped charge production. Obtaining the various permits to operate in the Russian market is proving a time-consuming process and we now believe commercial production at Tyumen will begin by the end of the third quarter.

At NobelClad the global sales team have been very active and of commenced on aggressive marketing program focused on cost benefits of direct attached vessel fabrication using explosion clad. They also continue to target potential order opportunities in the evolving clad pipe market.

Our prospects in the pipe market have been greatly improved with the added capacity and capabilities of our new manufacturing center in Liebenscheid, Germany. Startup preparation is on schedule at Liebenscheid and the facility should be operational by the end of the second quarter.

We ended 2014 with a strong balance sheet that included a net debt position of $13.4 million even after our $13.1 million acquisition of the new Liebenscheid facility. Net debt was down from $18.7 million at the end of 2013.

We also have finalized a new $150 million credit facility from a bank syndicate led by JPMorgan. The facility which is expandable by up to $100 million provides us with additional flexibility as we evaluate strategic opportunities to grow the Company.

We entered 2015 a stronger and more nimble Company thanks to the determined efforts during the past year of our employees and management team. Current conditions in the energy industry will undoubtedly create headwinds for DynaEnergetics during 2015 but the diversity of its global market should help mitigate the impact of the downturn in North America's shale sector.

We also believe the slowdown presents an excellent opportunity to introduce new products and technologies that can expand our marketshare. We are working very hard to capitalize on other long-range growth opportunities both internally and outside of the Company.

I'll now turn the call over to Mike for some additional color on our financial performance. Mike?

Thanks, Kevin, and good afternoon everyone. I'll start with a look at our 2014 fourth quarter (technical difficulty) including general and administrative cost of $6.7 million or 13% of sales versus $6 million or 12% of sales in the fourth quarter of 2013. Selling and distribution expense was $4.5 million, or 9% of sales versus $4.1 million, or 8% of sales in last year's fourth quarter.

As Kevin noted DynaEnergetics recorded a Q4 reserve adjustment of $931,000 for excess, slow-moving and obsolete inventory. We also recorded restructuring expenses of $6.8 million, or $5.1 million after-tax, related to the consolidation of NobelClad's European cladding operations. $3.9 million of this expense were noncash impairment charges tied to a metalworking plant in Germany as well as leasehold improvements at a facility in France.

Both of these facilities are being closed under the consolidation program. We previously anticipated fourth-quarter restructuring charges of $1.5 million to $3 million but they did not include the $3.9 million in noncash impairment charges. There also were $682,000 in other expenses during the fourth quarter primarily related to the devaluation of the Russian ruble and associated foreign currency translation losses.

Turning to our balance sheet, we ended the year with cash and cash equivalents of $9.4 million and had working capital of $62.6 million. Current liabilities were $32.5 million and total liabilities were $63.9 million. Again, net debt was $13.4 million, down from the $18.7 million at the end of 2013.

Looking at cash flow, for the full fiscal year we generated net cash from operating activities of $23.1 million versus $30.2 million in 2013. A $9.9 million net increase in working capital during 2014 was the primary reason for the increase and was largely related to sales growth at DynaEnergetics.

With respect to guidance, we currently anticipate that consolidated sales for fiscal 2015 will be down 8% to 12% versus the $202.6 million we reported in 2014. The anticipated decline reflects the lower rig count and downturn in capital spending forecast by the exploration and production industry as well as soft demand from NobelClad's end markets and negative foreign currency translations.

We expect full-year gross margin to be in a range of 26% to 28%. The forecasted decline versus 2014's 30% is due to expected lower sales contributions from DynaEnergetics versus NobelClad.

We expect quarterly SG&A expense in 2015 to average approximately $10 million. This reflects the investments we have made in infrastructure and sales resources at both businesses and we would expect SG&A to decline as a percentage of sales when our top-line performance improves.

With respect to our first quarter, we are anticipating a sales decline of 10% to 15% versus the $46.8 million we reported in our 2014 first quarter. This decline relates both to unfavorable currency translation and lower expected sales at DynaEnergetics where we believe customers are working off existing inventory as they adjust to the market downturn.

Gross margin for the first quarter is expected to be in a range of 25% to 27% versus the 31% we reported in last year's first quarter. As with the full year the expected decline is due to the lower sales contributions from DynaEnergetics versus NobelClad as well as a less favorable product mix of NobelClad in the first quarter.

We expect to incur an additional $3 million to $5 million of restructuring expense during the first half of 2015 and the majority of this will be recognized during the first quarter. These expenses will include cost-reduction efforts both at DynaEnergetics and our corporate office as well as the completion of NobelClad's European consolidation.

Tax expense during 2015 will be influenced by a variety of factors including geographic income mix and these factors could cause our tax rate to vary widely. We therefore do not believe it is useful to provide tax rate guidance at this time.

As previously announced we have restated financial results for 2012, 2013 and the first three quarters of 2014 to correct past accounting errors associated with income tax expense and related deferred tax assets and liabilities at our German businesses. These corrections did not change past sales results or impact our cash balances for the related periods but they did reduce net income. The adjustments are detailed in today's 10-K filing.

We are taking steps to enhance our accounting procedures and controls based on information identified during the review and restatement process. And these steps are also discussed in the 10-K.

And now we are ready to take any questions. Doug?

(Operator Instructions) Edward Marshall, Sidoti & Company.

Hey, Kevin, hey Michael how are you guys? Hey, Geoff.

So listen, I wanted to just clarify because we've talked about oil prices I guess throughout the press release and you said in the fourth quarter that hasn't affected orders as of yet. I'm not necessarily sure that you said you're feeling the impact in Q1 here but I guess you're implying that.

I just wanted to clarify, are you seeing a decline in the order activity of DynaEnergetics? Or is the decline more anecdotal at this point?

We are seeing a decline in the first quarter.

And to what degree?

I believe Mike gave the 10% to 15% down in the first quarter from a revenue standpoint. The majority of that is related to DynaEnergetics.

Yes, and Ed when you think about Q1 NobelClad's probably going to look similar to Q1 of last year. So to Kevin's comments it's driven -- the softness is all driven by DynaEnergetics.

Okay, that's fair. Do you anticipate that that's going to be the run rate for the year or do you think that it has further to go? And what are your customers telling you at this juncture as to the look into the industry itself?

Well, there's a couple -- three things at play quite frankly. There is the drop in rig count which is down approximately 40%. What we're experiencing is a further drop from the rig count due to both inventory correction and our customers are not completing some of the wells that are being drilled.

So when we first put together our plans for 2015 we thought that we'd have a strong first quarter and feel more the downturn in the second half of the year. What's unfolded or unfolding is that that's been pulled up earlier in the year than we anticipated and we're seeing a pretty dramatic decline in the first quarter.

So you're implying that the first half will feel the brunt of it and then the second half will level out from there?

I think so in that not completing of wells even though they are being drilled while it's working against us in the first half of this year depending on obviously the price of oil could work in our favor in the second half of the year.

Okay. The cost savings from the closures and the restructuring of the DynaEnergetics facilities, I think that we've talked about this before I think it would have been done regardless of the market but have you put some numbers around to what kind of cost savings?

I think you might have mentioned some in your prepared remarks but can you talk about maybe some of the cost benefits to the business overall? Maybe even from an operating structure as well, not just the fixed cost?

In approximate numbers we've taken over $5 million out of our fixed costs on an annualized basis. Roughly 40% of that is in SG&A, the other 60% of it is in cost of goods sold. But I'll add to this given the revenue decline and there's a change in business mix that's happening in our business where in 2014 we were approximately 55% DynaEnergetics and 45% NobelClad that ratio is reversing in 2015.

So we're going to be back to over 55% NobelClad, 45% DynaEnergetics and as you know the gross margin's higher in the mid-30%s versus mid- to low 20%s between the two businesses. So the cost savings somewhat get masked through the volume reduction and also the change in business mix.

Just to back up though, the $5 million is the consolidated business I guess is what you're saying and not DynaEnergetics specifically or is it DynaEnergetics and the mix of the two businesses will offset that? Can you clarify?

The $5 million is across our corporate office DynaEnergetics and NobelClad. But that reduction is not going to offset the change in the lower volume in 2015 and the change in business mix. So there is a number of moving parts there.

But you talked about some consolidation and Whitney you've talked about closure of facilities in Hobbs and Alberta and Edmonton. I'm curious is that part of that $5 million or is there additional coming?

No, it's part of it and stepping back it's an effort that started before the downturn in the markets. So this does play to the discussion that these are changes we would make even in a strong market is that we're consolidating our NobelClad business in Europe which is as a combined business has been less profitable than the Americas business primarily because of higher fixed overhead.

And the new Liebenscheid facility is allowing us to consolidate as well as increase our capacity and capability. But then conversely on DynaEnergetics we're consolidating in the Americas through both distribution centers and perforating gun manufacturing.

And we were able to -- we're moving pretty quickly on these programs because they quite frankly were started before the downturn. Admittedly we did accelerate the reduction in our corporate expenses given the headwinds that we're facing in 2015 but we're very comfortable with how we're positioned from a corporate expense standpoint.

Okay. The 931 in inventory reserves the adjustment, that was in cost of goods I assume?

Yes.

What's going on in particular I guess it's general and administrative? That number was excessively high in the quarter and from an absolute dollar value, from a percentage of sales value, and it stands out I guess over the past eight quarters or seven quarters or so. Was there something that particularly ran through this quarter that hadn't hit in prior quarters that we should be aware of?

It's just a few factors really. We had the cost in DynaEnergetics for supply chain and distribution centers which now we're consolidating some of those cost and also our investment in business development that we made in 2014 and which we're pulling back at some of those activities as well. If you look at the prior year it also includes some lower expenses from reversals some items that were one-time reversal items.

You reversed some charges in Q4?

Yes of the prior year.

You reversed them in Q4 2014 though?

The expenses were reversed in the prior year so it made the prior year a lower expense number.

I see. But on a run rate basis from Q1 I mean 5.7, 5.9, 5.5, and Q4 is 6.7. So and based on your comments I mean you said some cost supply chain's investment and business activity, can you put some numbers around I mean it ran $1 million, $1.2 million higher than normal.

Yes, so there's -- it's the last in the prior year we had some items that came out of expense. We also did have overall higher salaries and wages as I mentioned and also we had some changes in our stock compensation, we had to accelerate some vesting activity.

So there was catch-up from the compensation --

Yes.

Okay, so you underaccrued for the majority of the year and you picked up in the fourth quarter?

Yes, it was a change in investing.

Okay, and final question the tax rate. I mean even if in the adjusted base you're looking at about 65% did the charges throughout the year the restatement, did they hit in Q4 and that was the adjustment there or why such a high tax rate out of curiosity?

Yes, a couple of items. We did push those adjustments back through the quarters through our restatement. When you look at the year-to-date rate as reported I think you're going to see about as you said I think it's a 67%.

If you take out restructuring charges, because a lot of the restructuring charges were taxed at a lower rate or the costs weren't deductible. If you exclude those and it's in our table in our press release, you come up with a tax rate of about 44%. So it's a little bit more normalized but we've also been taking valuation allowances continued in the fourth quarter for our losses in Germany and Siberia.

Yes, yes, but I'm specifically referring to the fourth quarter. It's 1,559 over 2,398 which is 65%. Can you address that as relative as opposed to the full year?

Okay, yes.

That is your adjusted numbers.

Excuse me, I addressed the full year. The Q4 rate is really a push to get to the year to date rate.

Okay. It was loaded with additional taxes?

Correct, yes.

And what was the number the absolute value of that number? (multiple speakers) I'm trying to get to your normalized rate on a go forward.

So we're not necessarily providing guidance on our tax rate. As far as I would look at it from a year-to-date perspective and look at that as a more normalized tax rate. And I wouldn't necessarily use that going forward but at least for 2014 the tax rate excluding restructuring is what you should be looking at for the year-to-date period.

Okay, thanks.

(Operator Instructions) Gerry Sweeney, ROTH Capital.

Good morning or good afternoon everyone. I jumped on a little late. Ed asked a lot of questions here.

But I'm curious on the acquisition front if you could say I think in some of the comments that you do have a pretty good line of credit, etc., you're looking at acquisitions or expansion opportunities but you also have seemed to be pulling back a little bit on that front with Rick retiring. Little thoughts around how you're going to look at that on a go-forward basis where your focus is going to be, etc.?

We're actually not pulling back on the activities. We're pulling back on the investment in that position.

I can actually say that our activities have actually picked up dramatically. I think that Rick's skills are more on part of the due diligence and things that we would get into with his background as a CFO and he is available on an as-needed basis going forward. The sourcing is coming from within our businesses and myself if you will in terms of opportunities that fit strategically with the Company.

Are you looking at the oil and gas side or obviously there's a lot of distress in the market, is it a good opportunity or do you want to maybe go somewhere else?

I learned from a recent investor meeting that I had so I'm borrowing this from somebody that said never waste a downturn or never waste a crisis. And it's unfortunate that we're running into the headwinds that we are from a revenue standpoint which will impact our income but then on the other hand we have such great new technology and new products that this is the type of market that you want to introduce new products in that benefit our customers operationally both from an effectiveness standpoint and from a cost standpoint.

So we're pretty excited about the products that we're introducing. There are additional products that we feel that would benefit our Company in this energy sector and quite frankly the valuations were going up quite significantly over the last few years.

They tend to go up like a rocket and come down like a feather but they are coming down and so it could be a good opportunity. Having said that, we're also looking at in the general industrial area and so it's a little bit of everything.

And then also I think there was a little comment on the NobelClad direct attach in the pipe market. I think if my memory serves correct there was maybe some opportunities there to service some markets maybe in 2015.

Any comments on that? Then also just the general NobelClad market we've always talked about the chemical CapEx spend and how you see that playing out.

The direct attach has been a conversation of ours for some time. But I think the change in our business and how we're using direct attach going towards the market is that we've looked at one of the competing technologies against explosion clad has been rollbond. And rollbond because of the process it has limited materials and thicknesses that you can roll together but it is lower cost than explosion clad in the thinner materials when you're only looking at it on a plate-by-plate basis.

But when these plates are rolled into shells and the shells had internals in them whether it's used in a heat exchanger, a vessel or a reactor the traditional method has been to strip back the cladding on the inside and do attach the internals to the exterior structural material. With explosion clad the bond has such greater integrity compared to rollbond you can direct attach those internals to the clad material and the overall cost of making a vessel out of explosion clad becomes much more cost competitive. In fact the pricing swings the other way and it's a benefit to explosion clad when we looked at it on a finished cost basis over rollbond compared to just plain plate material.

And so this is an argument or a position if you will that our marketing team has put together position papers on and we've conducted the research to make the engineering argument for it. We actually feel that we can expand our marketing and gain share against rollbond using a total cost rather than a plate cost. So we're pretty excited about what this will do long term to our business.

Got it. And any thoughts on the chemical spend, capital spend and opportunities for NobelClad?

Yes, we have the metrics in a dashboard that we track industry activity and the dashboard is up significantly, the backlogs of the EPC companies that we follow although not equally some are up, some are down but overall the group is up dramatically over this time last year. However, it was down slightly from the fourth quarter and so we're seeing that it's not declining, it's improving.

We expect it to get better. We haven't yet seen it in our own backlog but we do see the backlog of the engineering companies that focus on the projects that we would go after improving.

Got it. Thanks a lot, Kevin. I appreciate it.

Edward Marshall, Sidoti & Company.

You gave the gross margins of the different segments in the K but they were for the full year. Do you have them for the fourth quarter for both cladding and DynaEnergetics?

Yes. Hang on one second. So Ed, you're asking about the fourth quarter?

I am.

Yes, so for DynaEnergetics about 36%, 35.7% for the fourth quarter just flat with Q3 and NobelClad was 23.6% in the fourth quarter.

Just to be clear, the 35.7% includes the 931 of inventory allowance?

Correct. Closer to 39% excluding reserves.

Great, thanks, guys.

Robert Connors, Stifel Nicolas.

Good afternoon, guys. How are you? I had a question just regarding the EPC clients backlogs.

Yes they are improving but internally are you guys seeing an improvement in bid requests for chemical-related projects? And if so, just any color around that?

We're seeing an increase in bidding but if I could just to help with it our bookings in 2014 were approximately the same as 2013. So we see the bookings being relatively flat or soft even though the bidding is picking up. Having said that I think the last 90 days or so there's been a great deal of concern around oil pricing but the NobelClad market is a little bit longer a longer wave where the DynaEnergetics market responds faster to pricing.

Okay. And then I know you're reluctant at this time because of the volatility to give a tax rate but just wondering what you're thinking about just operating cash flow for 2015? Should we model it with in line with what we see on the net income related or is cash going to be a drag or net-net cash tax is going to be a positive?

There's a couple of things going on. I think we have restructuring charges that are hitting in the first quarter and some of the payment of the restructuring charges in the fourth quarter we happens in the first quarter of 2015. So the restructuring charges and maybe Mike can get some color on that will hit in 2015 primarily.

From a cash flow standpoint obviously the revenue and earnings are going to be down. But the working capital should be down in line with that and we're still expecting positive free cash flow for the year probably in line with what we did in 2014.

Okay, great. Thank you.

(Operator Instructions) There are no further questions in queue. I'd like to hand the call back over to Kevin Longe for closing comments.

Thank you everybody for joining us for today's call. And we greatly appreciate your continued interest in the Company and look forward to speaking with you soon at the end of our first quarter.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.