DMC Global Inc (BOOM) 0 Q0 法說會逐字稿

Greetings, and welcome to the DMC Global 2017 First Quarter Earnings 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, Vice President of Investor Relations.

Thank you.

You may begin.

Hello, and welcome to DMC's First Quarter Conference Call.

Presenting today are President and CEO, Kevin Longe; and CFO, Mike Kuta.

I'd like to remind everyone that matters discussed during this call may include forward-looking statements that are based on our estimates, projections and assumptions as of today's date and are subject to risks and uncertainties that are disclosed in our filings with the SEC.

Our business is subject to certain risks that could cause actual results to differ materially from those anticipated in our 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 available approximately 2 hours after the call.

Details for listening to the replay are available in today's news release.

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

Kevin?

Thanks, Geoff, and hello, everyone.

Increased activity in North America's unconventional oil and gas industry helped drive better-than-expected sales and margin results during the first quarter of 2017.

Consolidated sales were $39 million, which was down 3% sequentially and 4% from last year's first quarter.

Our guidance was for a sales decline of 5% to 10% versus last year's first quarter.

DynaEnergetics, our Oilfield Products business, reported sales of $22 million, up 28% sequentially and an increase of 42% from last year's first quarter.

Sales at NobelClad, our explosion welding business, was $16.9 million, down 26% sequentially and 32% versus last year's first quarter.

The expected decline reflects continued soft capital spending across several of NobelClad's end markets as well as the impact of delivering multiple orders during last year's fourth quarter that were originally scheduled for early this year.

Our consolidated gross margin was 27%, which was up from 25% in the fourth quarter and 26% in last year's first quarter.

The result was above our forecast of gross margin range of 24% to 26%.

And this was primarily due to a favorable product mix at DynaEnergetics.

At the business level, gross margin was 33% at DynaEnergetics and 19% at NobelClad.

We reported a consolidated loss from operations of $2.3 million versus an operating loss of $85,000 in the first quarter last year.

The increase was primarily due to higher legal expenses related to a successful patent infringement defense at DynaEnergetics.

At the business level, operating income was $40,000 at DynaEnergetics and $395,000 at NobelClad.

Consolidated net loss was $3 million or $0.21 per diluted share versus a net loss of $400,000 or $0.03 per diluted share in last year's first quarter.

Consolidated adjusted EBITDA was $930,000.

At the business level, adjusted EBITDA was $1.7 million at DynaEnergetics and $1.4 million at NobelClad.

The first quarter performance at DynaEnergetics reflects an accelerating recovery in North America's onshore unconventional oil and gas industry as well as the much stronger market position established by DynaEnergetics during the downturn.

Over the past 2 years, the business significantly expanded its roster of top-tier North American wireline customers and broadened its portfolio of advanced perforating technologies.

Collectively, these initiatives are enabling DynaEnergetics to outpace the average growth rate of the broader oil and gas services industry during the early stages of the recovery.

For the third consecutive quarter, unit sales of DynaEnergetics' intrinsically safe DynaSlot detonator were at record levels.

DynaSlot sales volume during the first quarter were up 24% sequentially and 56% versus last year's first quarter.

The business also reported growing demand in the North Sea for its DynaSlot plug and abandonment system, and also saw increased sales of its high-performance formation-optimized shaped charges.

Customer interest in the factory-assembled DynaStage perforating system grew significantly during the first quarter, and continued to accelerate at the start of the current quarter.

Requests are coming from major and midsized service providers as well as exploration and production companies that are specifying the system to their wireline companies.

There are more than a dozen service companies, either using DynaStage or going through an on-boarding program, in preparation to adopt it.

We expect DynaStage will be deployed within most of North America's major unconventional oil and gas basins by the end of the current quarter.

We believe factory-assembled perforating systems will ultimately become the standard in the well completions industry.

In anticipation of increased demand, we are planning an expansion of DynaEnergetics' manufacturing capacity at its U.S. facility in Blum, Texas.

I noted during our last call that DynaEnergetics was working to restore profit margins following several quarters of severe pricing pressure.

The concerted focus on selling differentiated high-value products, coupled with structured price increases improved DynaEnergetics' sequential incremental gross margin to greater than 50% during the first quarter.

At NobelClad, the prolonged cycle of weak industrial infrastructure spending continued during the first quarter, which led to a 6% sequential decline in NobelClad's order backlog.

This trend is playing out across the global engineering, construction and fabrication sectors, particularly for companies that serve the downstream energy infrastructure markets.

We are cautiously optimistic this environment will begin to improve during the second half of this year.

We also are confident that NobelClad's ongoing efforts to extend its leadership position in the explosion welding industry have positioned the business to benefit when the spending cycle strengthens.

NobelClad recently received a key industry certification that strengthens its position in the industrial pipe market.

And the business continues to pursue a number of large projects in the petrochemical and transportation sectors.

Both NobelClad and DynaEnergetics participate in cyclical industries that have gone through severe contraction in recent years.

The unconventional oil and gas industry is the first of our end markets where meaningful recovery is taking hold.

DynaEnergetics is ideally positioned to capitalize on this opportunity.

We look forward to reporting on the progress at both our businesses during the balance of 2017.

With that, I'll turn the call over to Mike for some additional comments on our first quarter financial results.

Mike?

Thanks, Kevin, and good afternoon, everyone.

Looking at our first quarter expenses, SG&A was $11.7 million or 30% of sales and was approximately $900,000 above our prior forecast.

This was due to the higher-than-expected legal expenses associated with DynaEnergetics' successful patent infringement defense.

First quarter amortization expense was $1 million or 3% of sales.

Turning to our balance sheet.

We ended the quarter with cash and cash equivalents of $5.1 million.

Net debt at March 31 was $16.1 million, up from $9.3 million at the end of fiscal 2016.

The increase primarily relates to our tendering $3 million to the U.S. Customs Department, pending the resolution of an antidumping and countervailing duties case at DynaEnergetics.

The increase was also driven by higher legal expenses and increased working capital requirements.

Cash used for operating activities was $5.2 million, which reflect the crude antidumping duties and net changes in working capital.

Turning to guidance, we expect second quarter sales will increase 5% to 10% versus the $41.3 million we reported in the same period a year ago.

We are forecasting second quarter gross margin in a range of 27% to 29% versus the 24% we reported in last year's second quarter.

SG&A is expected to total approximately $10.5 million versus $8.9 million in last year's second quarter, but down sequentially from $11.7 million in the fourth quarter.

The expected year-over-year increase is primarily related to higher expected legal fees associated with additional patent litigations.

We expect legal expense will decline substantially beginning in the third quarter.

Second quarter amortization should be approximately $1 million.

At this time, we are not adjusting the full year 2017 financial guidance we gave a few weeks ago.

We will revisit our full year forecast at the end of the second quarter.

And now we are ready to take any questions.

Operator?

(Operator Instructions) Our first question comes from Gerry Sweeney from Roth Capital.

I've got a few questions.

I guess I'll start on the DynaEnergetics side.

Obviously, very good quarter, margins probably look like they're ahead of what your trend or expectations.

As we look out the rest of the -- into the second quarter, I was doing some work on drill but uncompleted wells and it looked like Q1 accelerated over fourth quarter but it also looked like there was an acceleration into the third quarter over the second quarter.

And also there's a lot of talk about completions accelerating further into the second quarter.

Are you seeing that?

Or are you forecasting that?

Any thoughts on just the macro environment from that perspective.

The -- we're just a month into the second quarter and the activity is continuing at a pretty brisk pace for us, Gerry.

So it's comparable to what we're seeing in the first quarter.

Got it.

And then on the pricing side, I think you had a pricing -- price increase March 1, 5% to 15% depending on, I guess, on the product line.

Two things: one, how well did that hold up?

And then two, you also mentioned in your comments something about structured pricing improvements, and I'm curious if you would -- you're planning another price increase at some point later this year.

Well, first of all as far as the first quarter results, the price increase took effect primarily in March.

So in the third month of that quarter.

Having said that, we were tightening things up before the announced price increase.

We are not satisfied yet where our margins are.

We feel that our products and our technology warrant a better margin than what we're receiving.

And so we're really focused on maintaining our market share and improving our margins as we go into the balance of the year.

How much did that price increase recapture some of the price degradation that you saw over the downturn?

Well, I guess it's reflected in our gross margins in which we reported.

And our gross margins are still well off of where we would like them to be and where they're necessary for the investments that we're making in research and development.

And so I'd say we're halfway to where we want to be but we're evaluating that as each month and quarter goes by.

Got it.

And then one more question and I'll jump in line.

A little bit more talk, you're talking a little bit more about DynaSlot and the DPEX shaped charges.

How much of that, of those newer products figured into your original guidance, maybe when you're sitting back in December when you're going through planning for 2017?

I'm just curious as to how much of that figured into your planning, and where they stand today versus that planning back in December.

Are they seeing accelerating demand as well?

The -- we're seeing a pick-up in our higher performing formation-tuned, if you will, charges which are also better margin for us than what we forecasted originally going into this year.

But I'd have to say that we didn't get it down to the line item on the product mix within shaped charges when we put together our guidance.

Our next question comes from Edward Marshall from Sidoti & Company.

So the legal expense that hit in the quarter, what was -- was it exactly $1.8 million, roughly?

Can you give me the exact number maybe the tax, if I wanted to back that out?

Yes.

So our total legal expense on the DynaEnergetics side is about $1.8 million for the quarter.

And the tax adjusted number would be about what?

Yes, I mean, tax adjusted it'd be 35%, collected [ph] tax rate on that.

Okay.

That's fine.

And what's your expected total bill for the year, for legal?

Legal, it's -- we're anticipating right around $3 million.

So an additional $1.2 million running through 2Q?

Correct.

And $1.2 million will run through the rest of the year.

We've got -- we had some legal expenses on bench trial in April.

And then it'll decelerate in the third and fourth quarter.

Okay.

And where does that run?

Does that run through the unallocated expenses?

Does that actually run through the segment level of the DynaEnergetics?

It's in the segment.

Okay.

So the margin was a lot better than what I guess it appeared from an operating level.

It looked like you were spending an awful lot of operating expense to capture the sales dollar.

But I guess that $1.8 million comes back to the model and kind of that's probably the right way to look at it.

I would agree with that.

Correct.

Was there any in Indian tender in the quarter at all?

Or do you anticipate it this year at all?

We don't anticipate it this year.

And it was not factored into our guidance that we originally gave.

Okay.

And now that you bring up guidance.

When I look at the sales guidance for 2Q, 5% to 10%, can you kind of walk me through maybe some of the assumptions at the segment level?

I'd noted that the backlog did drop again in NobelClad.

Kind of wanting to get your sense at the 2 business lines.

So they look a lot similar to what they did in Q1?

Or do you have a delineation from that?

Yes, I'll kind of start with the guidance for the year.

We guided that DynaEnergetics would be approximately 35% for the year, and DMC as a company would be up 10% to 15%.

And backing into that, that says NobelClad is relatively flat for the year, compared to '16.

And obviously, they were down significantly in the first quarter compared to '16.

What we see that's happening in NobelClad, Ed, is that we shipped $91 million in '16, we booked about $80 million.

And so you're seeing that trend and also the timing of shipments in the first quarter, which made that a weaker quarter.

We're still holding with that business being a plus or minus flat year-over-year.

And based on a couple of the large projects that we have later in the year for that -- for NobelClad.

And NobelClad is a business because of the -- there's an everyday kind of replacement retrofit that is really the majority of our base business today.

But a large project can swing a quarter, one way or another pretty significantly.

And so, that's why I'm kind of discussing it from a year standpoint just to kind of smooth out that aspect of it.

I mean based on kind of that color, I mean, correct me if I'm wrong, but it looks like you anticipate that, on at least on a sequential basis, DynaEnergetics will be down.

DynaEnergetics will be ...

Down sequentially?

Stronger sequentially and NobelClad will be stronger sequentially.

And NobelClad is stronger in the back half of this year than in the first half of this year.

Okay.

So you expect it to be a different weighting second half.

So you expect to make majority of the revenue in NobelClad in the back half of the year.

Over half of the revenue will be in the back half of the year.

You mentioned capital expansion for Blum.

How much do you plan on spending?

North of $10 million and that would be over an 18 to 24 month period of time.

And we're going to endeavor to work within our depreciation, which runs about $6.5 million a year for the company.

Okay.

So my sense, I guess, is that you're going to have to renegotiate again the credit agreement?

Or do you anticipate that you're generating enough cash to bring it down since you have enough room in order to capture that $10 million?

Yes, the idea is to fund that project out of our EBITDA, and not renegotiate our credit facility.

We're not going to get out in front of ourselves in that project which is why I stretched it out over the time frame that we just discussed.

Our next question comes from Jim Mackery [ph] Macri from Jordan Capital.

On that Blum CapEx, how much -- what will that do to your capacity?

How much will that increase capacity at Blum?

There's 2 aspects to the CapEx.

There's a need in the shaped charge area, and we would expect to more than double the shaped charge capacity.

And then the other part of the CapEx is assembly and space for our DynaStage factory-assembled perforating guns, which is a relatively new product that's ramping.

And so it's new capacity altogether from an assembly standpoint versus -- we've been primarily a component supplier up until this point.

Got it, okay.

Let me ask something else then.

On the gross margins I just want to -- I want to make sure I understand correctly what's happening at DynaEnergetics.

So Q1 versus Q4, the gross margin percentage increase was due to mix.

Was that right?

And -- but the year-over-year decline was due to volume -- was due to price declines?

Is that kind of right?

So from -- first from Q4 to Q1, we had favorable mix but we also had price increases in March that we got 1 month in.

When you look year-over-year, last year, DynaEnergetics had $15.5 million in sales and a very favorable product mix on a low base sales.

And I would also like to add to that the downturn for us really started happening in '15 and we saw quite a drop in volume in '15 that continued into 16.

And our pricing was stronger this time last year than the balance of '14 -- our balance at '16, excuse me.

And so it was a low month obviously from a volume standpoint, but it was the best pricing in the quarter that we had, not month, the quarter.

And in terms of the first quarter of '16, when I talked about that mix, we had some uneven purchasing of our DynaSelect detonator system, which drove the 41.8% margin last year.

And as you look at the market and how it's progressing so far, is it reasonable to think that the mix shift is permanent or semipermanent or as permanent as it gets in this industry, and that we can expect to sustain these margins going forward, sustain or increase?

I think that's a very good assumption.

Okay, great.

And then my last question is on NobelClad.

Looking at the backlog and the revenue decline, was there any significant impact from changing metal prices?

We have 2 indexes that we follow, or indices that we follow, metal pricing and then the backlogs of EPC companies.

And metal pricing over the last 5- and 10-year period of time is down significantly.

I would say right now we're starting to see it firm up a little bit, not necessarily increase but firm up.

But we still are dealing with kind of a longer-term trend over the last 18 to 24 months of a drop in the backlog of the EPC companies that are designing the facilities that we are supplying to.

And that's probably impacting us more than anything.

(Operator Instructions) Our next question comes from Gerry Sweeney of Roth Capital.

Just a couple of follow-up questions.

We've talked about this in the past.

On previous calls, you've talked a little bit about how many customers you have using DynaSelect, I think it was over 20 the last time, and then how many are using DynaStage.

I think you said 12 using or ramping up.

But could you give us maybe a little bit of a sort of history or trend as to how they've changed over the last 6, 9 months just so we can get directionally how many more people are using them?

Yes, I would say that we're over a dozen that are trialing the DynaStage systems right now.

And that's strengthening as each month and quarter goes by.

It takes a little bit longer to get them qualified because of the protocols at some of the service companies that we're working with, and this is handling explosives.

But we expect the DynaStage business to start ramping as the year progresses, and hence the investment in assembly facility in Blum, Texas.

The DynaSelect, which is the detonator that we both sell as a component but it's also incorporated in the DynaStage system, we had a record quarter of those, I think, we're up 24%, 25% sequentially.

And that's up, I want to say, approximately 50% year-over-year.

56%.

56% year-over-year.

So we're pleased with the adoption of that product line and also we're pleased with the innovative thought that continues to come out of that business in terms of enhancing it.

We're now on, I think, our 5th or 6th generation of the detonator and we're evolving on our generation in terms of the DynaStage product line and it keeps getting stronger.

And then how many companies have actually started to spec the DynaStage in?

Because that would be I imagine a pretty good barrier to entry or at least, I mean, it captures that customer for certain when you spec that.

Well there's 2 aspects, I mean the DynaStage is performance-assured, factory-assembled perforating operating system that we're assembling in our factory and testing and then sending to the job site complete.

We just add the detonator at the job site.

The real draw for exploration and production company in terms of spec-ing the DynaStage is really the ease of which it's assembled and put down the well.

But it's also the intrinsically safe and selective detonator and what that does to the operating efficiency and the safety on the well site.

And so ultimately, the DynaStage customer are those that are understanding the value proposition of the DynaSelect product line and its safety and efficiency benefits.

And so we're seeing increasing specification of the DynaSelect, which will spill over either into the components or into the DynaStage sales.

Got it.

And then just a couple of quick follow-ups on NobelClad.

How much revenue was pulled into the fourth quarter from the first quarter?

A couple million dollars.

Yes.

So I know you guys did a good job giving us sort of guidance and all but I may try and take it one layer deeper.

So if a couple of million will pull it forward and then backlog was down or down a couple of million dollars, I mean are we looking at NobelClad sort of being up around that $18 million, $19 million in Q1, just -- or is there other -- what's the product line up or sales line up of look like in this first half?

You mean in Q2 second quarter?

Q2, yes.

I mean let's just say NobelClad is in the $20-ish million, DynaEnergetics is in the $25-ish million, if you look at our guidance.

Okay.

I mean, at the end of the day, I mean, guidance would have been much -- I don't want to say guidance but I mean it's obvious DynaEnergetics is on a roll, it's accelerating and things are going pretty well.

I'll just add a little more color on that.

If you take the 20-ish in Dyna or on NobelClad, along with what we did in the first quarter, you can see that we are back-end loaded on NobelClad, primarily, because of this couple of large projects that we're working towards.

And then, I mean, let's just have some fun while we're at this.

On NobelClad, margins are -- considering backlog trending down and we're bouncing along the bottom, I mean, all things said and done, margins in that business are holding up reasonably well and obviously, you've taken some costs out.

How much margin opportunity is in NobelClad, if we start to see an acceleration?

i.e., maybe how much is there sort of absorbed overhead?

Yes.

First of all, it's -- we're all disappointed with where the bookings and revenue gives at this time.

We're not losing orders to competition.

It's really we've got a large share of a very small niche market.

And that business is very well run.

It's a great leadership and operating and sales team.

They are not -- their incremental margins or the gross margins they maintain.

And we've kept in place the majority of, and in fact we've invested more into the sales and application engineering resources of that business.

And so it's operating at a rate at which there's a lot more capacity in that business.

And the incremental margin will fall to the bottom line and it will stay in that up mid-30% to 40% range.

As the revenue starts picking up, this is a strong operating business that has a revenue focus to improve its operating performance going forward.

Yes, I mean I kind of look at NobelClad as sort of the dark horse, maybe, for the second half.

If that really turns around it could be very interesting year, or second half.

Agreed.

And then just the confidence in the second half, again, we've probably been through it over multiple calls, but long lead time projects, 5, 6, 7 years, are you just seeing increasing quoting activity for a specific project?

Or are they saying, hey, it's really coming?

Not to be, well, I've heard cautiously optimistic before and it might not have played through but just interested in the -- what's driving the confidence.

I would say we're still in that cautiously optimistic range.

This is a long cycle business.

It's a marathon versus a sprint.

And it's -- the headwinds that it has faced over an extended period of time, first, the financial crisis from the pull back on investment in these long-term projects, then we started to see the -- a pick-up in the EPC backlogs and then we hit this, the drop in oil and gas pricing, which petrochemical is about 75% of that market, 70% to 75% of that market.

And then they've also been hit significantly with low metal pricing, which has come down over the last 10 years.

And so they've had a lot of headwinds.

And we were improving our optimism on that business through the end of '14.

And then the backlog started to fall in the EPC companies.

And so ultimately, we need to see those backlogs increase, we have an index that we track, that is down 25% or so since the end of '14.

And we're hoping that, that's starting to flatten out and turn the other way.

And so this business will be a modest business around its current operating performance for this year.

And it's really driven by a couple of large projects that either -- that when they fall, will change the outlook for a given quarter and a given year.

And we're expecting that to start showing up in the fourth quarter, third and fourth quarter.

Got it.

And then finally, how much was the Indian tender last year?

I mean that's -- that was a several-million-dollar deal, correct?

It was $3.5 million.

$3.5 million.

And it's quite frankly, it's...

Lower-quality business.

Yes, it's not going to be missed this year.

We're happy to fill our capacity with what we feel is better quality business for us right now.

And I think more importantly, I think, just telegraphing to the Street that's $3.5 million or $3.3 million that you're not going to miss that's already being backfilled by better business.

Correct.

Thank you.

This does conclude the question-and-answer session.

I'd like to turn the floor back over to Mr. Longe, for any closing comments.

Thank you, everybody, for joining us today, and we continue to appreciate your interest in our company.

And we look forward to talking with you after the end of Q2.

Thank you.

This concludes our conference today.

Thank you, again, for your participation.

You may disconnect your lines at this time.