DMC Global Inc. (BOOM) Q4 2011 Earnings Report, Transcript and Summary

Greetings and welcome to the Dynamic Materials Corp. 2011 Fourth Quarter Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] It is now my pleasure to introduce your host, Geoff High, Pfeiffer High Investor Relations. Thank you, Mr. High. You may begin.

Thanks, Robin. Good afternoon and welcome to Dynamic Materials Fourth Quarter Conference Call. Presenting on behalf of the company will be President and CEO, Yvon Cariou; and Senior Vice-President, Chief Financial Officer, Rick Santa. 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 risk and uncertainties that are disclosed in Dynamic Materials filings with the Securities and Exchange Commission. The company’s business is subject to certain risk that could cause actual results to differ materially from those anticipated in this forward-looking statement. Dynamic Materials assumes no obligation to update forward-looking statements that become untrue because of subsequent events. A webcast replay of today’s call will be available at dynamicmaterials.com after the call. In addition, a telephone replay will be made available beginning approximately 2 hours after the conclusion of this call. Details for listening to today’s call or webcast are available in today’s’ news release. And with that, I’ll turn the call over to Yvon.

Thanks, Jeff. Hello, everyone. Our first quarter represented as strong finish to a year that exceeded our original expectations by a sizeable margin. At this time last year, we were focusing 20 advances growth of between 20% and 25%. By year end, our sales of $209 million represented 35% improvement over 2010. This performance reflects much improved demand on the markets we served and our ability to effectively capture it. Throughout 2011, we saw mounting evidence that capital expenditures were on the rise in many of our explosive metal working end markets. And this works particularly true in the 2 largest industries we serve, oil and gas and chemicals. From our current vantage point, it appears this investment actually is getting momentum. We see a number of large potential projects on the horizon. And while we expect continued lumpiness in our quarterly bookings performance, our hotlist of perspective orders is as up-to-date and it has been in recent memory. As we noted in our last call, activity has been strong in the Middle East where major investments are being made and in new industrial processing infrastructure. We also are working a lot of projects in Asia, the United States, and even Mexico and Australia. Again, these opportunities are primarily in the oil and gas and chemical sector but also include aluminum smelting, power generation and values across all the process industry. Our Oilfield Product segment which represents our second core business also delivers strong business in 2011. Sales increased 61% year-over-year. And if you exclude incremental sales contributions from our acquisition program, the segments still deliver organic growth of 48%. This performance reflects consistent strong demand from the global oilfield exploration and production industry and illustrates the effectiveness of our international manufacturing and distribution network, which we believe is one of the strongest in the perforating sector. In January of this year, we expanded our family of Oilfield Product businesses when we purchased Texas-based TRX industries. The company manufactures a line of perforating guns and has been a long-time supplier to our U.S. operations. We paid approximately $11 million for the business, which generated sales of about $11.6 million last year. Much like our co-oilfield product business, TRX has achieved stronger renewed earnings call in recent years. Looking forward, we have established important initiatives designed to bolster strengths of each of our business segments. Our Explosive Metalworking business is exploring opportunities in Asia for establishing new manufacturing capacity and a broader sales and marketing presence. It also is working on new clad plate configuration that could open the door to additional product applications in end markets. At Oilfield Products, we intend to command greenfield projects in both North America and Russia during the coming year, which should allow us to capture additional market share and strengthen our manufacturing and distribution infrastructure. At AMK which is in the conditional period as we work to improve its product mix and expand its customer base, we have hired a talented new divisional president which can be procured on securing new business opportunities for our specialized and highly profitable welding services. None of the opportunities we have discussed comes without risk. But when taken as a whole and coupled with an improving economic outlook in our respective target markets, these opportunities have given us a genuine sense of optimism about our prospects for the coming year and beyond. Now, I’ll turn the call over to Rick for information on our financial performance and a look at guidance. Rick?

Thank you, Yvon. Good afternoon, everyone. Our fourth quarter sales came in at $54.3 million which represents a 21% increase versus the $44.8 million in sales report in last year’s fourth quarter. During our last call, we indicated Q4 sales would likely decline by above 10% sequentially. But they were up by only 1% versus the third quarter. This performance resulted from strong shipments by our U.S. planning operations and better-than-expected sales in our Oilfield Product segment. Growth margin was 27% up from 22% in last year’s fourth quarter. The margin improvement reflects a more optimal mix of exclusive metalworking order and strong contributions from our higher margin Oilfield Products business. Our fourth quarter operating income increased 241% to $5.2 million from $1.5 million in last year’s fourth quarter. Net income was up 174% to $3.6 million or $0.26 per share from $1.3 million or $0.10 per share in the year-ago fourth quarter. Adjusted EBITDA improved 62% to $8.7 million from $5.4 million in the same quarter last year. Looking at expenses, G&A increased by 21% to $4.5 million from $3.7 million in last year’s fourth quarter. As percentage sales, G&A was relatively flat at approximately 8%. Selling and distribution cost increased 18% to $3.8 million from $3.2 million in the fourth quarter last year. As a percent of sales, selling a distribution cost reflects at roughly 7%. Turning to our balance sheet, total current assets increased by 25% to $91.2 from $72.7 million at the end of 2010. The increase reflects higher accounts receivable due to the improvement in fourth quarter sales versus last year’s fourth quarter as well as higher inventories as our Oilfield Product segment increased its finished good supplies to more effectively meet growing demand. Current liability decreased 24% to $29.3 million from $38.4 million at December 31, 2010. We finished the year with working capital of approximately $52 million and a current ratio of better than 3:1. Prior to the end of the year, we entered into a new 5-year credit agreement with a syndicate of 4 banks. The agreement, which [indiscernible] restates our prior credit facility, replaces our term debt with the revolving line of credits that collectively provide approximately $60 million in total borrowing capacity. The credit lines consist of $36 million U.S., 15 million euros and $1.5 million Canadian. We anticipate average borrowings in a range of $35 to $40 million during 2012. Turning to guidance, we are forecasting that full-year 2012 sales will increase 7% to 10% from 2011. Depending on our success rate and booking prospective orders on our exclusive welding hotlist as well as our ability to achieve and sustain growth and also product segment. We may adjust this forecast later in the year. Our 2012 growth margin is expected to improve to a range of 28% to 29% versus the 27% we achieved last year. We anticipate it proven reflects the growth in contributions from our higher margin Oilfield Products business and more profitable product mix expected within our explosive metalworking segment. We expect full-year SG&A expense of approximately $36 million or an average of roughly $9 million per quarter based on current exchange rates. That includes $5.6 million of expected full year amortization of purchased intangible assets. I’d also like to provide you with little color on the anticipated impact with our new credit facility. We expect 2012 interest expense of approximately $1 million based on expected average borrowings. This would represent a reduction of roughly $900,000 from 2011, the expected decline is attributable to lower borrowing cost including an interest rate reduction of 150 basis points as well as lower non-cash amortization of deferred debt issuance cost. For the first fiscal quarter, sales are expected to be in a range of flat to up 3% from sales in last year’s first quarter of $45.6 million. Gross margin is expected to improve to a range of 26% to 27% versus the 23% reported in Q1 a year ago. Looking at the balance of the year, we currently expect the steady progression of sales growth in quarters 2 through 4. Our blended effective tax rate for 2012 is projected in a range of 27% to 30%. For Q1, however, we expect a blended effective tax rate of 20% to 25% based on anticipated pretax earnings. With that, we are now ready to take any questions. Robin?

[Operator Instructions] Our first question comes from the line of Edward Marshall with Sidoti & Company.

First, what caused the variance from, say, the initial guidance for 2011 as well as the variance versus the fourth quarter when you gave guidance in 3Q? Is there something that’s referred to a spot? I don’t know how you guys characterize it for that type of business, but what was the variance that you guys saw from your initial guidance?

You’re referring to the guidance of 20% to 25% in full-year sales versus the 35% that we achieved?

That’s one part of the question. I guess the second part of the question is when you’re looking from 3Q when you had the 3Q conference call and you’re looking at the fourth quarter and exceeding that number as well.

Yes. First, in the fourth quarter, it relates largely to timing issues right around year-end in our explosive welding business. It could be very challenging to forecast from quarter-to-quarter because metal deliveries and the timing of production and if you have larger orders where you have to ship large numbers of plates together to efficiently deal with defrayed cost. Things can move quite a bit and things just went better...

In terms of [indiscernible].

Yes, things just went up, sometimes as advance payment by customers especially on export shipments. So, things like that were largely responsible. And that I think - the Oilfield Product sales were probably about a million ahead of what we had forecasted for Q4.

Yes. I seem to remember something about - when you initiated that guidance. It was something looking at backlog and the orders are kind of there. This is kind of our initial outlook. And I guess that’s a segue into my next question. As you look at the guidance from Q1 from what you gave for the full year and then I guess what you gave for Q4. Based on your language for the orders that you gave in the commentary, not only in this conference call but also in the press release, can you characterize your guidance as potentially as, say, conservative for the full year? I mean, would you be surprised if it came in ahead of that? And are you looking at just based on what you see right now but the momentum that you’re feeling could be a little bit stronger that what you’re giving today? Sorry to put you on the spot.

Yes. I think that we make every effort to be realistic in providing both quarterly guidance and full-year guidance. But as we indicated there are a lot of moving pieces. And for example, if we’re getting into the year and we book a sizeable order in August and the size will not - or going to mill for delivery, we might not be able to get any of that order shipped. Whereas if we see that order in July, maybe a large portion of it would ship. So issues like that with the Oilfield Products, it’s probably a little bit more predictable. But when we look back in 2011, things around the globe just were a little bit stronger than what we expected when we initially forecast the year.

Yes. I just would like to add, over the years past and then in many quarters, the explosion welding business is spiky in bookings. We have all those considerations for shipment in the middle. There’s a booking aspect there. It takes only a one project both [ph] managements to postpone that project from a quarter to the next, from a year to the next. It’s pretty hard to be very precise on that crystal ball.

Right. And then finally, the capital expansions, the $20 million that you’re looking at for, say, 2012, I’m assuming you’re funding that with the lines of credit and I guess essentially debt...

Yes, to accommodate the line of credit and operating cash flow that we expect to generate during the course of the year.

Okay. And you don’t have any guidance range for the cash on operations, do you?

No, we have not provided that information in the past.

Our next question comes from the line of Avinash Kant with D.A. Davidson.

Hey, guys, this is Eric [ph] for Avinash. What was the oil and natural gas split in the explosive clad business in Q4? Can you guys break that out?

It’s a difference between oil wells and natural gas.

Oh, yes. Yes, we’ve been asked that question before so that we can try to respond. We ask our experts that work in the Oilfield Product segment the same question, and they are not able to track it currently. But, what is it, Yvon, is it roughly 50-50?

Yes, I was going to say, the best we know it’s about 50-50. And the shale gas, actually these brings the volume up. But I think that industry, 1/2 of the industry is making a lot of productivity effort. And so, the rest of the industry demands pretty strong. So, probably I guess 50-50 gives you an idea.

Okay. And then what is causing the gross margin to be flat to down sequentially in Q1?

A lot of it relates to volume. And some of the volumes that isn’t there in the first quarter relates to our U.S. clad operations, which is our largest and most efficient plant. So, a lot of it relates to the less effective absorption of the fixed manufacturing overhead cost in Q1.

Is that typically the case in Q1?

Yes.

And then, how do you expect the revenues to trend throughout 2012? You think it would be accretive one year or pretty lumpy?

We think there will be sequential improvement in each of the quarters 2 through 4.

Okay.

It probably would be lumpy in the explosion-cladding but smoothed out by a more regular production in oilfields business segment.

Okay. And then how are bookings trending thus far in Q1?

Well, we are not really commenting on that but the one thing we can say is that the backlog at the end of January was one notch up as compared to the end of Q4. So, while we add a sequential slight decrease Q3 to Q4, we are back at a little higher than the end of Q3 actually - at the January.

Our next question comes from the line of Dan Whalen with Auriga USA.

Good, good. It’s refreshing to hear some constructive commentary in end markets. Could you just - I imagine it’s probably a little early to talk about this but it sounds like you've got some interesting things going on in terms of establishing a new manufacturing capacity, as well as investments and greenfield projects. Any sense in terms of timing and in terms of when that could start generating revenue or any other details you could share on that beyond what’s in the press release?

Yes. Well, we’ve shared quite a bit. We have indicated the 2 geographies for oilfield products where we have budgeted a big chunk of that $20 million, so that is serious. That means we have initiated, we have started. And you can imagine that to build new plants, you think in terms of more than months. It’s probably a year-plus. So, I think it would be reasonable to assume to have the second part of 2013, certainly first part of 2014 to see some activities there with incremental sales as far as the oilfield products is concerned.

Okay. That’s great. Thanks for that color. And then, just any color you can add in terms of what you’re seeing from your European customers.

European customers, you want to be [indiscernible] as a whole for all the market segments, the business segments?

Yes. Any color on that.

Yes. Let’s take then Explosion Welding first. We had actually a pretty good run from the European platform over the past few months. When we say Europe in our lingo at DMC, it means it’s the manufacturing facilities that sell this in Europe, the Middle East, India, Eastern Europe and the U.S. platform servicing North America, South America and Asia. So, the European platform has been - for Explosion Welding, doing very well, both in their export toward the Middle East and their closer region - France, Germany, Italy, Northern Europe and all of that with the resurgence of some of the chemical industry, and the continuation of some good things we have seen in aluminum smelting for example and some generation. So, contrary to what we all read, I mean, in the press saw that Explosion Welding, we’ve done well in Europe. And we seem to be continuing to do well there. As far as the oilfield product is concerned, the big driver there has been North America. But we have maintained I think our momentum in Europe and Eastern Europe. It is less marked than it has been in Explosion Welding but as you know, we service a large geography from our European oilfield plants. And it’s going in a positive way, I guess, I would say.

Okay. You haven’t seen any deferrals or any cancellations in the area?

Some disruption related to the event in the Middle East. So, some contracts are put on hold but we have made some progress in other areas. So, overall, we’re still progressing there.

[Operator Instructions] Our next question comes from the line of Phil Gibbs with KeyBanc Capital Markets.

Okay. It’s been a long day already. Rick, an easy one for you off the bat, just the segment gross margins if you have them for the fourth quarter.

Okay. Yes. I just happen to have it here on a schedule. Let’s see if it [indiscernible] Phil Gibbs. Okay. What do you want first, the quarter or the year-to-date?

Quarter is just fine. That’s all I need.

That’s all you need? Okay. The quarter margins for Cladding 23.4% in 2011 versus 15.5% in 2010. Oilfield products, 33.3% in 2011 versus 30.7% in the fourth quarter of 2010. And AMK welding was down a little bit to 28.1% in 2011 from 34.2% in 2010.

Now, do you have targets for 2012 that you’re looking at that you’d like to share or not at this point?

Yes. Not at this point. We prefer to provide the overall consolidated gross margin guidance which we indicated was 28% to 29% for the year and 26% to 27% for Q1.

Okay. Given the strong revenues that you had beginning in the second quarter and you’ve been able to maintain a $54 million to $55 million run rate here. Why do we step down in the first quarter of ’'12 and not stay at that level? It looks like…

It relates principally to the backlog situation with respect to our U.S. Clad business, which the U.S. is our largest clad. And at the end of 2010, their backlog was much stronger than it was at the end of 2011. And you may recall in December 2010, we booked around $20 million of business. Most of that went into the U.S. backlog relating to some Korean orders and other significant orders. The divine indicator we’re waiting for some of those larger opportunities to be converted into bookings. And the U.S. Clad backlog is relatively weak at the end of year, whereas the European backlog has improved significantly from where it was at the end of 2010. So, it’s really just the timing of how the orders are coming in to our backlog and then they go in to the backlog between U.S. Clad and Clad Europe.

I would qualify those comments by adding that the quality of the hotlist that we have both in Europe and in the U.S. is similar. The same quality in both areas but conversion, for whatever reasons have been faster in Europe so far.

Have been faster?

Yes. As I’ve said just earlier, we’ve had good success in booking the business from the European platform in Q4 and it’s ongoing and not quite yet in U.S. Clad. And that’s the nature of the beast as you have heard many times.

Is that somewhat counter-intuitive to the headlines that you’re doing better in Europe as far as the booking momentum as well?

It’s counter-intuitive to the headlines but maybe in this CapEx business, we went into the great recession after other industries and I guess we’re coming out of it after other industries as well. For example, we have clear that the German chemical industry is investing again. And we are benefiting from that because they have no invested in anything, now they are falling behind and they are trying to play a little catch-up.

Okay. So they put themselves in a position where they have to invest some pent-up maintenance most likely.

Exactly.

And some new projects too. You also heard about that reverse trend of reintegrating some capacities in the Western world. We see some evidence of that. And then we hear talks to that effect including in North America for the chemical industry.

Okay. That’s great. I just have 2 follow-ups here. The revenues that you expect for TRX in ’12, is that baked into your guidance?

It is.

Is there anything from an inter-company perspective we’ll lose with the $11 million to $12 million in revenues.

Yes, probably close to 1/2 of it.

And then lastly, just a nuance question, Rick. What was the other income in the back end of the year there?

It related to the strength of the U.S. dollar versus the Euro. And mostly, not all, but mostly inter-company activity where the European plants have DYNAenergetics, our oilfield products division supplies in Canada and the U.S. And they manufacture in euros and they build in euros, and the Canadian and U.S companies were able to use less U.S. dollars and less stated dollars to satisfy those obligations. Some of it is not realized, some of it is realized.

Did you have some debt issuance or debt cost baked in there, in the interest?

We did. About $284,000 of non-recurring write-offs in Q4 associated with the new bank deal. And that write off relate to the fact that we eliminated the term debt that had another year to run roughly. And also 3 of the 7 banks in our old deal are not part of the new deal when we had the write-off cost associated with those 3 banks.

Our next question is a follow-up question from Edward Marshall of Sidoti & Company.

My question's on AMK Welding. I think you said you hired somebody there. And I think if I heard you properly, you said you wanted to address some things that were going in that division. Sales were down in the fourth quarter. Is that a seasonality that happened there? Because I look at your largest customer, I guess in that business in the energy, GE. I’m assuming that’s gas turbine business, which I think it is. And their guidance for ’12 was up 10% year-over-year. And I know it’s early in the cycle here, but I would have thought that we would have started to see that kind of building or at least framing the discussion around how that might strengthen into 2012.

Yes. That’s a good question. And actually, GE has had some difficulties in their supply chain that impacted AMK in the recent quarters, although the total outlook for their turbine business was positive. And also, they transfer to Europe some activities that we were before we’re making for them in the U.S. So, transition year was the word we used there. We didn’t determine for some time now to broaden the portfolio of accounts for that division, which is doing a good job in the clad business. We are part of [indiscernible] a new division president there. And we have a great momentum going on the AMK. And we think we’re going to deliver some serious goals in the couple years to come there. We’re supporting the business. We always have with CapEx required to sustain their momentum. But the debt is related mostly as you said to GE. And the outlook there is quite positive. It will conflate into AMK’s business as well.

So there wasn’t some kind of fourth quarter seasonality or anything…

It’s not seasonality, it was related to specific projects where there were some difficulties. And as you know, the longer term outlook for the big machine and VH [ph] system is probably limited. So, we have to replace that kind of business by other things. We believe that aircraft segment is going to give us a lot of opportunities. You will remember at AMK, welding was born around the need of servicing the aircraft industry. And we have the same kind of opportunities there again.

And it’s the same customer as GE.

Certainly. Then again, part of that effort of diversifying the accounts and not only GE as they determine to expand our portfolio.

And I would imagine you’re relatively early in the safer gas turbines. You’re relatively early in the supply chain there. How early are we? Eighteen months, 12 months prior to the actual turbine…

It’s safe to say that they have a whole mix of products - small machine, medium machine. It’s hard to be too specific in that respect.

There are no further questions at this time. I would like to turn the flow back over to management for closing comments.

Thank you all of you for your continued interest. We obviously are anticipating an active year at each of our business segments. And we look forward to keep you apprised of our efforts during the coming quarters. Thank you again, and we’ll see you next time.