DMC Global Inc (BOOM) 2015 Q2 法說會逐字稿

Greetings and welcome to the Dynamic Materials Corporation 2015 second-quarter conference call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Geoff High, Director of Investor Relations.

Thank you. 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 the matters discussed during this call may include forward-looking statements that are based on management's estimates, projections and assumptions as of today's date and are subject to risks and uncertainties that are disclosed in 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 these 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 in today's news release.

And with that, I will now turn the call over to Kevin Longe. Kevin?

Thanks, Geoff, and good afternoon, everyone. Our second-quarter sales were $44.7 million, down 14% from last year's second quarter and slightly better than the 15% to 20% decline we've previously forecasted.

Excluding the impact of foreign currency translation, sales were down 6% from the year ago quarter. Our top-line performance was negatively impacted by the sharp downturn in the global energy industry from which we generate more than 70% of our consolidated revenue.

Second-quarter gross margin was 28% versus 31% in the year ago quarter. This decline was due to a lower margin product mix at our NobelClad business, as well as lower sales volume on fixed manufacturing overhead expenses.

Second-quarter operating income, excluding restructuring charges, was $1.1 million as compared with $3.8 million last year. Restructuring costs totaled $1.1 million in the quarter and were related to the previously announced consolidation program at our NobelClad and DynaEnergetics businesses.

The consolidation projects are now substantially complete and will improve the efficiencies and production capabilities of our operations in both North America and Europe.

Loss from continuing operations, excluding restructuring, was $356,000 or $0.03 per share versus income from continuing operations of $2.1 million or $0.15 per share in the year ago quarter.

Despite our loss from continuing operations, the second quarter included a $1 million income tax provision or $1.2 million excluding restructuring. Mike will discuss this further in a moment.

Second-quarter adjusted EBITDA was $4.4 million versus $8.2 million in the second quarter a year ago.

Looking at our businesses, DynaEnergetics reported second-quarter sales of $23.3 million, down 9% from the second quarter last year or 4% if you exclude the impact of foreign exchange translation. DynaEnergetics second-quarter sales benefited from shipping the full value of an order from India, while last year the value of this order was split between the second and third quarters.

DynaEnergetics gross margin performance held steady at 37% versus last year's second quarter, despite the downturn in the oilfield service sector. This performance reflects expanding demand for new products and technologies that are helping our customers drive down completion costs and improved safety and operating performance.

Operating income was $1.2 million versus $3.1 million in the year ago second quarter, a decline related to high commission expense on two large orders and increased marketing costs associated with the rollout of two new product lines. Adjusted EBITDA was $3.4 million versus $4.8 million in last year's second quarter.

Unit sales volume of DynaSelect's integrated switch detonator was up 8% versus the first six months of 2014, which reflects an expansion in the number of service companies using the product.

At the midyear mark at 2014, 70% of DynaSelect sales were to a single customer. Today there are 20 different oilfield service companies using the product in the United States, Canada and China.

We are encouraged by the success DynaSelect is having in China's emerging, unconventional oil and gas market where several energy service companies are incorporating the products into their perforating operations. The superior performance and reliability of our detonating technologies in China's deep high-pressure wells is opening the door for other DynaEnergetics products such as our DynaSlot well abandonment tool.

Our team in China is preparing to a commence testing program with a major E&P company that is interested in using DynaSelect in its plug and abandonment operations.

Since our last call, we made significant progress towards commercializing our factory-assembled DynaStage perforating system. The deal trials we've referenced in our last call are continuing and have already validated our concept of a factory-assembled perforating system that improves performance, increases reliability, and lowers the cost of completions for our customers. We are now ramping our supply chain to commercial volumes and perfecting our manufacturing assembly operations.

Our customer partners involved in the testing have reported that DynaStage is delivering meaningful improvements in the safety and reliability of their well completion programs. We expect to enter our commercial supply agreements with these companies during the second half of this year.

In anticipation of commercial production, DynaEnergetics has opened a second DynaStage assembly facility as its production center in Blum, Texas. This is in addition to our first assembly center in Mount Braddock, Pennsylvania.

Our NobelClad business reported second-quarter sales of $21.4 million, down 18% from the second quarter last year or 9% if you exclude foreign exchange impact. The decline reflects ongoing project delays and limited spending in many of NobelClad's industrial process markets. The business also experienced certain shipment delays in Europe during the quarter as production of large clad plates is being transitioned to NobelClad's new manufacturing center in Liebenscheid, Germany.

Operating income was $1 million versus $3.2 million last year, and adjusted EBITDA was $2.4 million versus $4.8 million in the year ago quarter. NobelClad's order backlog at the end of the quarter was $37.7 million, down from $39.4 million at the end of the first quarter.

Despite the weak capital spending environment, there were some encouraging developments taking place in NobelClad's target markets. Two of the large specialty chemical projects our US sales team has been pursuing appear to be advancing towards the procurement and construction phase. We anticipate orders from both projects will be awarded later this year or early in 2016.

We are also seeing steady demand from the downstream energy sector where our plates are being used in repair and maintenance projects for domestic and overseas refineries.

We have made substantial investments during the first half of the year in restructuring both of our businesses, strengthening the sales and marketing organization and launching new products. The benefits of these investments are evident on many levels, including increased large plate production capabilities for NobelClad in Germany, the 80% improvement in unit sales volumes for our DynaSelect switch detonator, and the advancement towards commercialization of DynaStage, which will be a game-changing product line for the perforating industry.

We are confident these investments will lead to improvements in our financial performance, including a return to positive cash flow during the second half of this year.

With that, I'll turn things over to Mike for some additional detail on our financial results. Mike?

Thanks, Kevin, and good afternoon, everyone.

Looking at our expenses, selling, general and administrative costs during the second quarter were $10.5 million or 23.5% of sales versus $10.5 million or 20% of sales in the second quarter of 2014.

SG&A included a $514,000 increase in commission expense associated with the DynaEnergetics orders Kevin referenced earlier, as well as $0.5 million increase in marketing and advertising expenses. These costs were partially offset by a decrease in bad debt expense and salaries, benefits and payroll taxes.

Amortization expense was $1 million or 2% of sales versus $1.6 million or 3% of sales in last year's second quarter. As Kevin noted, we recorded $1.1 million or $0.07 per share in second-quarter restructuring expenses associated with the consolidation and restructuring programs at both NobelClad and DynaEnergetics.

Despite the fact that we had a second-quarter loss from continuing operations of $356,000 ex-items, we recorded an income tax provision of $1.2 million for the quarter. As I mentioned during our last call, our tax rate has been challenging to forecast in recent quarters.

Without going into too much detail, this has been due to both the geographic mix of income and losses and the fact that several of our international business entities have had cumulative losses over an extended period of time.

Generally, the US GAAP requires us to record valuation allowances against prior year tax benefits when the cumulative loss history of an entity extends beyond three years. As we did last quarter, we recorded valuation allowances against the second-quarter tax benefit generated by the losses at these entities.

We believe these entities will ultimately transition to profitability as a result of our restructuring programs, and when they do, the valuation allowances will be reversed.

Looking at our balance sheet, we ended the quarter with cash and cash equivalents of $10.9 million and working capital of [$70.5] million. Current liabilities were $31.2 million, and total liabilities were $75.6 million. Our net debt position was $22.8 million, up from $13.4 million at the end of 2014.

The increase is due in part to investments in inventory as we prepare for the commercial launch of DynaStage, as well as cash paid for our restructuring programs. We used cash from operations of $4.7 million during the second quarter, which reflects our net loss and an increase in working capital.

We noted in today's news release that U.S. Customs and Border Protection sent us a notice of action that proposed to classify certain of our imports as being subject to anti-dumping duties pursuant to a 2010 anti-dumping order on what are known as oil countries, tubular goods from China.

A companion countervailing duty order on the same product also is in effect. The notice of action was related to a single entry of steel mechanical tubing made in China and imported earlier this year into the US by our DynaEnergetics business in Canada. DynaEnergetics uses the mechanical tubing to manufacture its perforating guns.

Earlier this month, we sent a response to U.S. Customs outlining wire mechanical tubing imports do not fall within the scope of the anti-dumping duty order and should not be subject to anti-dumping duties.

Since then, U.S. Customs has proposed to take similar action with respect to other recent entries of this product and has requested a $1.1 million cash deposit or a bond for anti-dumping and countervailing duties. The estimating deposit or bond would be held by U.S. Customs until future administrative proceedings to determine whether actual duties should be assessed.

We continue to believe these imports are not subject to the proposed duties and are defending these actions. In the interim, we'll make a cash deposit or post a bond of $1.1 million to U.S. Customs during the third quarter of 2015 pending the outcome of this matter.

At this time, we've not recorded a reliability related to this matter as the outcome is indeterminable, and a loss is neither probable nor estimable.

Turning to guidance, we are maintaining our prior year full-year forecast of an 8% to 12% decline in consolidated sales versus the $202.6 million we reported in 2014. Our forecasted gross margin range is unchanged at 26% to 28%, down from 30% in 2014.

For the third quarter, we also expect sales will be down 8% to 12% versus the $51.9 million we reported in last year's third quarter. The expected decline relates to DynaEnergetics, which reported strong comparable results in last year's third quarter. We expect third-quarter gross margin in the range of 27% to 29% versus the 29% we reported in last year's third quarter. SG&A expense is expected to be approximately $10 million, and amortization should be roughly $1 million.

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

(Operator Instructions). Edward Marshall, Sidoti & Company.

So, if we are looking at maybe the acceptance from some of the wireline customers, you've broadened your comments to discuss maybe customer base and maybe even to the point that you anticipate some bookings or some contracts. I'm curious to see if you can kind of talk to maybe the structure of the deal. I think you've talked about maybe some exclusivities in the past, etc.

And then more importantly, I wanted to move that and ship that off to maybe your production capabilities and what you are ramping up to versus where you were in the first half of the year?

There's two products involved in this. There's the DynaSelect and DynaStage, and the DynaSelect estate product that we went from primarily one customer to close to 20 between 2014 and 2015. And the DynaSelect is the integrated switch detonator which we sell as a component to field assembled systems, and it's a premium product which we sell on value because of the technology that's incorporated into it. But it is a component that is field assembled into a perforating gun system, and that's available to the general market.

The partnership -- customer partnership agreements that we are in the process of negotiating, those are for a select handful of customers for the DynaStage product line, which is a complete perforating system that is factory assembled. And so we're choosing to do limited testing with a handful of companies, primarily two today. And really in that product line because it's one that we will be assembling and they will be reducing their crews in the field for the assembly of guns, we need to make sure that we have assured sources of supply to those companies. And so that's limiting the number of customers that we are working with, not to mention that we prefer to create a product advantage for them and an operating advantage on the completion of a well. And so that with a small number of customers, primarily two right now that we've been doing the testing on the products.

As you ramp up to your production capabilities, I'm curious as to what type of -- maybe you measure it by utilization, or could you measure it maybe by potential revenue that can be generated from these facilities?

In terms of utilization, we are looking at the number of guns that can be manufactured in a month or a quarter relative to the demand of the customers that we are working with. And we are well under their requirements, which is by design. But it will add significantly to the revenue out of these facilities because what we're doing is we're essentially gaining a detonating cord, shaped charge and switch detonator sales with new customers.

And so it's the assembly operations are what we put in Mount Braddock, and our Blum facility, the components are coming from our existing capacities. And what we're really doing is we are moving from a system b- from a component company to a systems company. So the capacity is in place, quite frankly, to serve the demand that we're pursuing.

And what type of revenue will these facilities generate in total, annually?

I think that's really demand driven more than it is supply driven, and it really is going to be tied to our success with the introduction of these products in this quarter.

I think that's what I'm trying to gauge though, the success that you think you're about to have regarding this product line. And I'm wondering if you can give us some kind of -- maybe it's too early, I don't know. But maybe can give us some sense as to kind of the impact the P&L that you might see from some of the discussions that you've been having thus far?

I imagine b- and I think most of the shareholders I talk to think it could be somewhat significant.

We believe that it will be over the near to medium term, but we have to operate within the guidance that we are giving for the year. And so we're sticking with the guidance that we have for the balance of the year.

Okay. So shifting gears just a hair, if I could look at the revenues relative to the cost, if I look at the revenues off 15% year to date, the SG&A costs are up almost 4%, and I assume it's related to the expense of the rollout and so forth.

First, I guess can you confirm that? And second, when will the costs subside, and how much of this SG&A rolling out, what's the approximate number from an absolute value term that is related to the new product rollouts?

In the quarter, there was about $0.5 million associated with the marketing and introduction of the product into the market, plus about $300,000 in miscellaneous costs associated with -- in the costs of goods sold line with how we're pricing the product. We have a price at which we are introducing the product into the marketplace at a value that is similar to what people are doing today in the testing program, but when we go off testing, it's more at commercial pricing.

I assume you're producing this product today as well just to the trial period as it is somewhat of a consumable? What do you think the margin drag is, what they want to measure from it a gross margin or a gross margin basis from producing this product and supplying it on a trial basis?

In the quarter, it was about $300,000.

$300,000 was the drag, which is I guess you just said (multiple speakers).

On the cost of goods sold or the gross margin (multiple speakers).

What about the loss absorption?

It's all included in the $300,000.

It's all included, yes.

Okay. And then finally, if we b- can you talk to the individual businesses and maybe the margin profile that you anticipate within your guidance for the year -- for the full year on the gross margin of the 26% to 28%?

Yes, so if you look at -b so you're asking for the full year?

Yes, I mean for the full year implied within the 26% to 28% gross margin in guidance that you provided, I'm wondering if you can give me the two different segments, DynaEnergetics and NobelClad?

Yes, so for the full year, NobelClad and DynaEnergetics are both similar to where they are at now, DynaEnergetics for the full year flattish, as well as NobelClad with a slight improvement.

Okay. And so a little bit better in the third quarter, a little bit off in the second quarter based on the way the numbers shake out, I guess, from a guidance perspective. So they would be a little bit stronger in 2Q or 3Q versus 2Q and then will fall back down again in 4Q, is that right? It looks like your guidance for 3Q is slightly higher than 2Q.

Yes.

Okay. Thanks, guys.

Robert Connors, Stifel.

I just wanted to sort of get a sense of, you know, after you sign these alliance agreements, I found in the past that alliance agreements often times you get much more visibility on the product, especially with a well-established wireline service company, but you tend to give up a little bit on price and what you could charge for that visibility. Do you think that is the case going forward, or will specifically the DynaSelect product be able to garner a pretty good margin for the Company?

Our margins, both DynaSelect and DynaStage, are projected to be much higher than what the average margin has been historically, and we actually saw some of that in 2014 with a significant improvement in margin over 2013, albeit with limited revenue from the DynaSelect product line. And so, you know, we expect our margins to strengthen going forward as we introduce these products.

And, you know, what's interesting, it's value and use, and the value these products will allow a decent margin, a healthy margin for DMC, but it's a significant lowering of the cost of completion for our customers, and their margins improve also. And so we're selling on technology and value creation, both for us, as well as for our customers.

Okay. That's great. And then to switching over just sort of the balance sheet and cash flow, can you just talk to me outside of earnings are going to be what they are. If I characterize this year, it's sort of like a down year is slightly negative/breakeven on earnings but probably more positive on the cash flow front. And just some of the components, how you can get back to -- do you think you can get back to operating cash flow somewhere in the 60% to 70% of EBITDA and how you get there?

Robert, I would say from cash from operations this year, we're looking in the $10 million range with $5 million to $6 million in CapEx at this point in time.

Okay. Great. That answers most of my questions.

(Operator Instructions) Gerry Sweeney, ROTH Capital.

Just staying on DynaStage for a minute -- sorry, just had to sort it out in my mind for a second there. I think previously you've talked about maybe manufacturing about 10,000 guns a month. I'm not sure if that's still the number that's out there. But curious if Blum, Texas, the increase in the facility down there is to get to that 10,000, or is that a step up because you're seeing increased demand from these potential clients?

We can exceed 10,000 guns a month today.

Okay.

And what we've put in place is the ability to assemble an equal amount or more in terms of a complete perforating system, and I'm referring to a gun as just the metal carrier, if you will.

And part of what we're doing, Gerry, is, to put it in perspective, back in 2010, just pure gun sales were almost 40% of our revenue. And in the past year, it's been 25%. And so we are moving from more generic-like products into more technical value add and system sales. And so it's really less of a capacity issue and more of a shift into value-added products.

Okay. I may of asked this the wrong way. I think I shouldn't of said gun, maybe DynaStage fully assembled. And, again, I'm not sure if this was the correct number, but for some reason I have 10,000 in my head. Maybe you're in a position to manufacture 10,000 DynaStage assembled products per month?

Yes. (multiple speakers)

Okay. Then back to the original part: does that expansion of Blum get you to 10,000, or does that take you to a different level in terms of production available for DynaStage?

What we've done is we were assembling the DynaStage guns or systems in Mount Braddock primarily, which was the target market for us to start the development. And a lot of the work that we're doing today is in the West Texas area, and so we were shipping components from Texas to our Mount Braddock facility for assembly, which we will continue to do for the eastern half of the United States.

The Blum facility will serve the Texas and the Southwest region. And so it is additional capacity, and it really gives us the flexibility to serve our customers geographically, as well as from a better cost basis. Because that way we are not shipping to the East Coast and then shipping back to Texas.

Got it. And then on the DynaSelect detonator, how has pricing been holding up for the last couple of quarters? Are you seeing any pressure on pricing, or is the value add substantial enough to kind of overcome that pressure?

There's a lot of pressure on pricing within the industry on everything, if you will, but we've been able to maintain our pricing on -- our average pricing on DynaSelect.

Okay. And then not to jump around, but DynaStage, you talked about substantial value add. I mean is there any sort of empirical data on the completions, efficiencies and crews up running from 90% to 95% that you can share, or are you in that position to kind of use -b have data and present it to just give a little bit more detail on the value-add declines?

We are testing approximately 6,000 guns in the marketplace to quantify the savings, if you will, and we're approximately two-thirds of the way through the testing. And that is something that, I think, probably in the next conference call we will be able to share what our findings are.

Okay. Got it. And then India, how big was that tender this year?

It was $3.9 million.

Okay. And those margins are generally lower, correct?

Correct.

Anyway you can give a little bit of detail as to how much lower? It could have been a positive for b- it helps us strip out what the true sort of margin is ex that one project.

I would have to check on it.

Probably a couple of hundred basis points on our margin, Gerry.

Got it. And then finally, in the past I think you've given the gross profit, I think, by segment, but I think Ed was sort of asking that on a go-forward basis. But on a lot of calls in the past, you said DynaEnergetics was X and NobelClad was Y. Are you in a position to do that still?

For the quarter?

Yes.

And the gross margin, I believe I mentioned it was 37% on DynaEnergetics, which was (multiple speakers)

Oh, I didn't hear that, I'm sorry.

Which was consistent with 2014, and that is, as you've noted, despite the -b including our India border all in the second quarter versus spreading it out over the second and third quarter of last year.

Okay. Got it.

As well as the development costs that we had in DynaStage.

And Gerry, NobelClad was 18.6% for the quarter. (multiple speakers)

Let me see here, sorry, good a couple of b- no one has asked about NobelClad, obviously, that backlog has been bouncing along sort of this bottom for a long time.

Curious as to, one, it sounds like there are some chemical projects coming along. I'm not sure how big would they be? Are they substantial? And two, it sounded like a couple of orders were pushed in the third quarter. If you could quantify that?

Yes, I think there are approximately $2 million to $3 million that were pushed to the third quarter in NobelClad orders.

So that's a decent amount, yes.

In the roughly $2.5 million to $3 million. And we're seeing fairly strong maintenance and repair in downstream oil and gas. We are starting to see the chemical industry start to become stronger in terms of requests for quotes. The crack spread has gotten much stronger, but we have not yet seen a pickup in the oil and gas, the refinery part of it yet. A lot of quoting, but we are still waiting for the quotes to turn into orders.

Got it. Okay. I will jump off. I appreciate it, guys. Thank you.

Robert Connors, Stifel.

Hey, guys. I just wanted to get a sense of what the earnings leverage possibly could be. Not only if you get better price on better mix with the newer products, but also the step down in G&A expense.

So I guess my question is, can you provide any detail of percentage of revenues that DynaSelect and/or DynaStage was, say, in 2014 versus where it's been year to date and sort of your plan possibly stepping out maybe into 2016?

I could give you approximate -- I don't have the 2014 numbers in front of me on the product line, but I believe it was under 15% of revenues in DynaEnergetics.

And 20% this year.

And it's 20% year to date on DynaSelect.

And that 20%, was that 15% for just DynaSelect or for both?

Year to date it's the b- as well as last year, it was all DynaSelect. Year to date it's primarily b- in fact, it's all DynaSelect, too, in those numbers that I gave you.

Okay. And then just because that's also up year over year on nominal because we are talking percent of the mix here, so it's up like nominally as well, correct?

It is. It's up 8% in units.

Right, right. Okay, yes. Okay. Thanks.

And there are no further questions at this time. I would like to turn the floor back over to Kevin Longe for any closing comments.

I appreciate everybody joining us for today's call and your continued interest and support of DMC, and we look forward to talking with you at the end of the third quarter.

So thank you very much.