DMC Global Inc (BOOM) 2018 Q1 法說會逐字稿

Greetings and welcome to the DMC Global 2018 First Quarter Earnings 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, Vice President of Investor Relations.

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 made 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 now turn the call over to Kevin Longe.

Kevin, please go ahead.

Thanks, Geoff, and hello everyone.

The new capacity investments we detailed during our last call, coupled with strong execution by our operating teams, led the first quarter financial results that exceeded our forecast.

Consolidated first quarter sales were $67.3 million, a 24% sequential improvement over the fourth quarter and a 73% increase versus last year's first quarter.

DynaEnergetics, our Oilfield Products business, delivered record sales of $49.1 million, an improvement of 32% sequentially, and a 123% increase versus last year's first quarter.

Improved pricing, strong customer demand and accelerated production were key drivers in DynaEnergetics' better-than-expected results.

The intrinsically-safe DynaSelect detonator and the factory-assembled performance-assured DynaStage system continued to generate very strong demand from both operators and service companies working in the onshore, unconventional oil and gas industry.

Sales at our NobleClad explosion welding business were $18.2 million, an increase of 5% sequentially and 7% versus the 2017 first quarter.

The business ended the first quarter with a trailing 12-month book-to-bill ratio of 1.04 and an order backlog of $35.6 million.

Backlog declined approximately $2 million from the end of 2017.

Consolidated gross margin was 34%, up from 33% in the fourth quarter and 27% in last year's first quarter.

Improved pricing and a favorable product mix at DynaEnergetics were the primary drivers of the increase.

At the business level, DynaEnergetics reported gross margin of 40%, while NobleClad's gross margin was 18%.

Consolidated operating income was $5.3 million versus an operating loss of $2.3 million in last year's first quarter.

Excluding $3.1 million in accrued antidumping penalties at DynaEnergetics and $144,000 in restructuring expenses at NobleClad, the first quarter adjusted operating income was $8.6 million.

DynaEnergetics reported adjusted operating income of $11.8 million while NobelClad reported adjusted operating income of $132,000.

Consolidated net income was $3.9 million or $0.26 per diluted share versus a net loss of $3 million or $0.21 per diluted share in the year-ago first quarter.

Adjusted net income was $7.2 million or $0.49 per diluted share.

First quarter adjusted EBITDA was $11.6 million, up from $7.7 million in the fourth quarter and $930,000 in last year's first quarter.

At the business level, DynaEnergetics reported first quarter adjusted EBITDA of $13.4 million, while adjusted EBITDA at NobleClad was $948,000.

DynaEnergetics global capacity expansion programs are progressing on schedule, and the 74,000 square foot manufacturing and assembly facility in Blum, Texas, should be operational by the end of July.

In the meantime, DynaEnergetics has effectively addressed a key bottleneck in its raw material supply chain, which has enabled a faster ramp-up in DynaStage production volumes than originally anticipated.

Our NobelClad business also is making important progress on a number of operational and end market initiatives, and we are confident the business is on a path towards sustainable growth.

I'm very encouraged by our start to 2018 and by our prospects for healthy long-term financial growth.

Our achievements would not be possible without the extraordinary efforts of our global workforce.

I want to thank all DMC employees for their continued commitment to our success.

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

Mike?

Thanks, Kevin.

Good afternoon, everyone.

Starting with our first quarter expenses, SG&A was $13.4 million or 20% of sales versus $11.7 million or 30% of sales in the first quarter last year.

The increase resulted primarily from higher salaries and wages.

First quarter amortization expense was $805,000 or 1% of sales.

As Kevin mentioned, DynaEnergetics recorded a $3.1 million accrual related to potential penalties on a previously-reported antidumping and countervailing duties case brought in 2015.

DynaEnergetics has initiated discussions with U.S. Customs Department regarding the potential scope of penalties and intends to present arguments for relief and mitigation.

Details of the case are available in today's 10-Q.

Looking at our balance sheet.

We ended the first quarter with cash and cash equivalents of $10.8 million.

Net debt was $18.6 million, up from $9 million at December 31.

The increase primarily relates to increased working capital requirements associated with operational growth at DynaEnergetics as well as construction of DynaEnergetics new facilities in Blum, Texas.

During the quarter, we used $3 million in cash from operating activities.

Turning to guidance.

We anticipate second quarter sales will be in a range of $74 million to $76 million versus the $47.2 million we reported in last year's second quarter.

DynaEnergetics sales should be in a range of $54 million to $56 million, while NobleClad sales are expected to be approximately $20 million.

We expect consolidated gross margin of between 33% and 34% versus the 30% in last year's second quarter.

SG&A should be in a range of $14.5 million to $15 million, up from the $10.6 million in the 2017 second quarter.

The increase relates to increased investments in headcount, higher salaries and wages, sales commissions, and higher expected litigation expense at DynaEnergetics.

Amortization expense is expected to be approximately $800,000 versus $1 million in the second quarter last year, while interest expense should be approximately $500,000.

We expect second quarter adjusted EBITDA in a range of $12 million to $13 million, up from $6 million in last year's second quarter.

With respect to the full fiscal year, we are raising our sales forecast to a range of $290 million to $305 million versus our prior forecast of $255 million to $270 million.

The increase reflects growing confidence in DynaEnergetics that its capacity expansion efforts and improvement in its supply chain will enable the business to more rapidly address customer demand.

We expect DynaEnergetics sales to be in a range of $215 million to $225 million versus our prior forecast of $180 million to $190 million.

The forecast from NobleClad sales are unchanged at $75 million to $80 million.

We anticipate full year gross margin in a range of 33% to 34% versus our prior forecast of 31% to 32%.

SG&A for 2018 is now expected to be approximately $55 million, up from our prior forecast of $50 million to $52 million.

The adjustment reflects an increase in expected litigation expense at DynaEnergetics, which is scheduled to commence a patent infringement trial in October.

Amortization expense is expected to be approximately $3 million, and full year interest expense is expected in a range of $2 million to $2.25 million.

Anticipated capital expenditures for the year unchanged at $30 million, $25 million of which relates to the capacity expansion at DynaEnergetics.

The company's effective tax rate for 2018 is expected in a range of 28% to 30%.

We anticipate full year earnings per diluted share in a range of $1.50 to $1.75, excluding restructuring and accrued antidumping penalties, adjusted earnings per share expected in a range of $1.80 to $2.05.

We now anticipate adjusted EBITDA in a range of $52 million to $56 million, up from a prior range of $39 million to $43 million.

And with that, we are ready to take any questions.

Operator?

(Operator Instructions) Our first question is with Gerry Sweeney with Roth Capital.

So obviously, great quarter, very positive guidance on the rest of the year.

My question revolves around where are we in terms of maybe within a demand cycle or how far could demand grow?

I understand more investments are coming towards North America.

There are some labor constraints that DynaStage addresses.

There's perforating cluster is getting, I think, a lot more intense, I think they're going from 5 to 6 to maybe even 15 in certain areas.

So there's a lot of dynamics around the end market.

But maybe you could provide a little bit of your thoughts and view on how much demand is out there.

Where are we in the cycle?

Potentially, where could this go?

Well, if you look at total North American frac stages in the forecast, and we use the IHS data.

'17, increased 65% over '16.

And the rate of increase is anticipated to slow down going forward, but it's still quite healthy, averaging anywhere from 15% to 29% per year over the next 3 years.

And so we feel that the current pickup in demand has some legs to it and will continue for the foreseeable future.

Okay, that's helpful.

Also what was the bottom like in terms of the raw materials.

You didn't mention it in particular or -- but is it a permanent fix?

Any concerns that bottleneck could arise in the future?

And maybe a little bit of [update] on that front.

There was such a dramatic increase in the second half of '17 over the -- the first half as well as the prior year, that a lot of our outsourced materials were in short supply in terms of suppliers ramping.

As well as, as we've mentioned, we're bringing on capacity with our investments that go primarily to our automated debt line in Germany to our gun assembly and component manufacturing in Texas.

So it's really across the board looking back.

And we took an aggressive stance last August, early September to try to get out in front of capacity when we saw the pickup in market activity.

And we began making investments last year that are starting to layer in this year as the year unfolds.

Got it.

And then, this may be a little bit more for Mike, but obviously -- or for you Kevin as well, actually.

But the legal costs associated with I think some of the patent cases with one of your competitors.

I think in the -- when we did the fourth quarter call, you estimated the cost associated would be about $4 million for the rest of this year.

It's -- it appears to be taking another step upwards, maybe $6 million, $7 million, $8 million.

Is anything materially changing on that front?

Are they becoming more aggressive?

Or is it just the timing of the -- the actual court dates slide closer into 2018 as opposed to next year?

It's the timing of the court dates.

And I believe what we're seeing is just a consistent stance from our competitor.

And as you know, we're defending ourselves, and to date, we've done it successfully.

And we intend on supporting that effort going forward.

The legal expenses are significant.

I don't want to underestimate that.

They're in the $7 million to $8 million range for the year.

And -- but when you're protecting your IP, it's just one of those things that comes with being a technology driven company.

How many cases or -- or positions of the company your competitor has to go against you after this next court case?

I mean, obviously, you had a great quarter, great guidance, et cetera, but you layer on some of this -- even with some of those expenses in place, you could be significantly better positioned going forward.

First of all, these primarily relate to shape charges.

It doesn't relate to the bulk of our revenues, which are in our initiating systems and perforating systems.

The -- we have 2 more cases that will be tried by the end of this year, which we're optimistic on.

Got it.

And then, final question revolves around guidance.

Guidance looks like you took a little -- a big step-up in revenue this quarter, then I think you had I think about $75 million for the second quarter, but guidance sort of implies sort of a -- maybe a steady-state run in terms of revenue second, third, fourth quarter maybe with a little bit of uptick.

Is that the way to read it?

Or -- and is there potential for expansion in the second half?

Just want to see how guidance was, I guess, developed...

Well, we -- it's both demand-, pricing- and capacity-driven.

It's important for us that we get the value for our technology.

And our technology creates even greater value for our customers.

That's important for us.

And so we're pursuing a market segment that values that technology.

And the first half is -- of this year is really capacity-driven.

The second half, we'll start seeing more capacity layer in, however, a lot of it depends on how the market evolves from that point on.

And while we are very optimistic about the quarter-to-quarter and the year-to-year for the next 3 years, it's a very short cycle business.

And so we're confident with what we've forecasted in terms of our guidance for the year, but it is going to be fairly constant in the second half of the year.

Our next question is with Edward Marshall with Sidoti & Company.

So I wanted to touch on that last topic.

You talked about capacity constraint first half, could be capacity-driven in the second half.

And I wanted to kind of look at that $12 million delta sequentially.

I noted you added some capacity in Q1.

I wanted to kind of get a sense from you of that $12 million delta, how much was priced and how much might have been volume there?

And I'm specifically talking (inaudible) there.

Yes, exactly.

So that delta's volume.

All volume?

Primarily.

And Ed, I'll add to that.

We've been aggressively increasing our prices, which is layering in already in the first half of this year and to restore our margins to where we believe that they should be.

And the second half of the year is more volume-related.

Okay, I'm confused.

So fourth quarter and first quarter then, $12 million was driven by volume, that increase, but you're getting better pricing in the first half and less pricing -- you lost me.

You know what, Ed, let me -- what I'm saying on the delta is really our first half of 2018 versus second half.

When you look at the fourth quarter delta of $12 million through the first quarter, that's a significant portion of that is price and price increases that we put into the marketplace in 2018, being that we're at near capacity, which we were able to squeeze out a bit more in the first quarter more than we thought.

But that is primarily pricing.

2018 second half is primarily volume.

Yes, so I guess that's the second part of my question then.

When capacity comes online and you're not running all out like you are right now, what do you think happens to the pricing element of that equation?

I mean, is there going to be some compression?

And then, ultimately, what happens to the gross margin then on that?

There will not be compression.

We are very much focused on pricing to value.

And we're charging for that value today.

We're not pursuing the market on price.

And so the customers who value the products that we offer are -- in the first half, are going to be ours in the second half, hopefully.

And -- but we're not out to try to fill our capacity at any cost.

Got it.

And then on materials, are you seeing any inflation across your materials?

Yes, I couldn't -- as I sit here today, tell you which materials and what -- and the percentage, but we are seeing some inflation, and some of the increases is definitely to cover cost increases as well as restore margins.

Got it.

And is that across both businesses in NobleClad as well as DynaEnergetics and...

It is.

It is, I mean, I'm proud of NobleClad.

As you know, we've had a very difficult market for some time.

They have been very, very good, in fact, strong at maintaining their contribution margin.

It's really application-driven.

And we've maintained our contribution margin over the decline in their market activity.

And they are having also some material cost increases, which are reflected in price increases.

Their pricing is administered in a different way, where DynaEnergetics has a standard product line.

And we'll put a price increase for certain products, and usually, it goes across the board.

NobleClad is a project-driven business.

And we target a contribution margin.

And then, we're pricing realtime in every project.

And so it's baked into the pricing and the projects of which we're working on.

So you're saying, it's just a pass-through?

It's a pass-through.

Right.

If I look at backlog then, how much of your backlog -- it was at $35 million-or-so -- was driven by price inflation materials that might be baked into the projects?

Very little, if any, to this point.

We'll probably see more of that going forward.

Got it.

And then as well around NobelClad, I'm curious if you can kind of talk about -- I saw a sequential decline yet still pretty much year-over-year pretty good growth in the backlog.

I'm curious if you can kind of talk about what's going on in that market.

Generally, just provide some more color about customer inquiries related to your order book, et cetera.

Has that been kind of stale?

Or has it been picking up?

Has it slowed down...?

I actually struck a sentence in our earnings release that said that we're very optimistic with the increase in quoting activity.

That is taking place.

I feel that we've said that for such a long time, we're kind of in the show-me period.

And we feel as strong about that business as we ever have, but we need to demonstrate that to you and to our shareholders.

(Operator Instructions) Our next question is with Jim McIlree with Chardan Capital.

I'd like to understand a little bit about your gross margin expectations in DynaEnergetics.

It seems like, just working through the math, that you're kind of assuming gross margins are flat from this 40% level for the rest of the year.

Is my math correct or my assumptions correct?

Yes, yes.

Okay, and so Kevin, when you talk about getting margins back to where they should be, this is kind of where they should be in your view, is that right?

They should be.

I'd actually like to see them higher than that.

One of the kind of the anomalies of our financial statements is we include in our cost of goods sold, research and development.

And so while the gross margin is relatively constant for the balance of this year for NobleClad, we have a step-up -- a significant step-up in research and development spending that is coming out of our -- that's included in our cost of goods sold and reducing the gross margin.

And those are really investments for future revenues.

And so as that gets more normalized, ideally we'd like to see the gross margin in the 42% to 44% range for that business, but this year, we've got -- we're focusing on 40%.

Can you size or range the amount of R&D as a percent of DynaEnergetics sales?

3% to 4% for -- that would be included in the cost of goods sold.

There's also an intellectual property investment that is carried in SG&A.

And there are some of those -- there are some employees included in SG&A, but it would be in the 3% to 4% range.

And that's been -- that's a low -- lower percentage than what we've been running because of the pickup in revenues.

Right, okay.

You had it looks like a fairly significant working capital investment this quarter.

And the question is what your expectation is on the current guidance.

What you think your working capital needs are for the rest of the year?

Mike, do you want to field that?

Yes, so you can see that we had a $9.7 million unfavorable change in working capital.

In previous guidance after year-end, we said that we'd probably cap out around $40 million or top out $40 million in debt.

We've accelerated in terms of our growth a little bit more -- faster than what we thought.

So maybe we can tick above that a little bit, but no substantial change there.

And I didn't feel a need to change guidance on where our debt and working capital requirements would be.

Okay, great.

And then, on the restructuring and the antidumping.

I know it's very difficult to predict what those might be for the rest of the year or for next year, but can you just take a wild stab at it?

On the -- I mean, I'll start with the restructuring.

I think we've -- we're expecting about $1.5 million total for the year in restructuring, and that will be to finalize closure of manufacturing in our French operations in NobleClad.

And then we did accrue what we feel like are fully reserved for antidumping penalties of $3.1 million in the first quarter.

That -- would like to note that we feel that we've got good arguments against antidumping penalties.

And we're at a negotiation phase with the customs group.

And so we'll see where that goes, but we've got -- we're hopeful that we can fare well there and not incur any additional accruals.

So the current balance sheet amounts for the antidumping is about $6.7 million.

So that's what you -- that's your best guess of your liability.

If it goes against you or you just decide to say, well, let's stop this and move on, would that be a cash amount due immediately?

Or would that be payable over time?

So there's a couple pieces of that.

What you're seeing on the balance sheet is the remaining prior underlying antidumping duties that we had accrued, so that $6.7 million, $3.6 million of that is prior antidumping duties that will -- we will pay.

And then the $3.1 million, the delta is the penalties which we may or may not pay depending on outcome of negotiations with customs.

Okay.

Is that -- and that's something that's likely to be finalized this year or in the next 12 months?

2018.

Yes, we expect -- it could push into 2019, but we're hopeful we can resolve it this year.

The important thing that I would like to add to that is that we feel that we're fully accrued for what we see today.

And the tariffs and the duties themselves have been accrued, and this quarter, we've recognized the penalty portion of it.

Right, okay.

A prior questioner was asking about the pace of second-half DynaEnergetics sales versus the first half, and the math works out to be the second half by quarters about equal to the second quarter level, so topping out at let's call it this $55-ish million revenues.

I'm just a little bit confused by that.

With the removal of the bottlenecks and the increase in capacity, why is it just flattish?

Why wouldn't you see at least some pickup in second half revenues versus the first half -- or, excuse me, versus the second quarter?

Yes, so we're talking about DynaEnergetics here.

And what I'm showing is in our guidance $104 million in the first half and at the midpoint, so it's about $105-ish million in the first half and $115 million to $120 million in the second half.

So we're showing $10 million to $15 million of growth in the second half, and we're just -- we've got to get the capacity online in the third quarter.

We've had bottleneck issues.

We think we've worked through those, but those things can rear their ugly head, so we're -- we want to deliver and provide you with guidance that we feel good about and that we believe strongly that we can deliver on.

Ladies and gentlemen, we have reached the end of our question-and-answer session, and I would like to turn the call back over to Kevin Longe, Chief Executive Officer, for closing remarks.

Thank you everybody for joining us today for our call.

And we look forward to talking with you at the end of the second quarter.

Thank you.

This concludes today's teleconference.

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Thank you for your participation.