DMC Global Inc. (BOOM) Q1 2012 Earnings Report, Transcript and Summary

Greetings, and welcome to the Dynamic Materials Corporation 2012 First Quarter Conference Call. [Operator Instructions] As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Mr. Geoff High of Pfeiffer High Investor Relations. Thank you, Mr. High, you may begin.

Thank you, Jane. Good afternoon and welcome to Dynamic Materials first quarter conference call. Presenting on behalf of the company will be President and CEO, Yvon Cariou, and Senior Vice President and Chief Financial Officer, Rick Santa. 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 Dynamic Materials filings with the Securities and Exchange Commission. The company's business is subject to certain risks that could cause actual results to differ materially from those anticipated in its forward-looking statements. 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 will now turn the call over to Yvon.

Thanks, Geoff. Welcome everyone. Fiscal 2012 got off to a strong start as we achieved better than forecast sales and gross margin results during our first fiscal quarter. We also saw a significant improvement in Explosive Metalworking bookings which increased our order backlog to $57 million from $45 million at the end of the fourth quarter. Just after closing Q1, we added to our backlog a $7.3 million order from the chemical industry. This recent booking activity reflects continued strong capital spending by the oil and gas, chemical, and aluminum smelting industries which collectively represent our most active explosion welding markets, both from a booking and quoting perspective. Our hot list of prospective contracts includes multiple potential orders from each of these sectors. We are especially encouraged by the resurgence of the chemical sector which has been relatively dormant market over the past several years. As many of you know, processing equipment used in chemical facilities often incorporates clad plates that are made from dissimilar metal combinations, such as carbon, steel and titanium. Cladding these plates is a process most effectively addressed with explosion welding and as a result these orders often come in better pricing for DMC. This situation is one of the factors that has been driving the recent improvements in our gross margin. From a geographic perspective, North America, the Middle East, Europe and Asia, all remains healthy regions for our explosion welding business. DMC’s oil field products segment delivered another quarter of solid sales growth, reflecting continued strong demand from our broad line of well perforating equipment and seismic explosives. First quarter sales activity was particularly strong in the United States, where perforating and re-perforating efforts in both conventions and unconventional oil and gas fields continued to be very active. The planning and design folks on our new shaped charge and gun manufacturing facilities in both United States and Siberia are moving forward on schedule. In addition, we are effectively integrating the recently acquired TRX Industries into our DYNAenergetics U.S. operations. At AMK welding, our new divisional President is spearheading a range of initiatives designed to position this segment in various non-core industries including oil and gas. He also is working to expand AMKs work in our core aircraft engine and ground power markets. While winding down a multiyear contract in a customer’s ground based turbine project and are working as quickly as possible to replace this revenue stream. Based on the progress report out of AMK, we are very optimistic this segment will return to a position of growth relatively soon. Now I will turn the call over to Rick for a review of our first quarter financial performance. Rick?

Thank you, Yvon. Good afternoon, everyone. First quarter sales came in at $50.2 million, up 10% from the first quarter last year. As Yvon mentioned, this was above our prior sales forecast of flat to up 3% versus a year ago first quarter. The strong top line performance resulted from oil field product sales in the United States that were ahead of expectations as well as certain clad orders that ship from our U.S. production facilities ahead of schedule. Our first quarter gross margin of 29% beat our forecast range of 26% to 27%, thanks in part to the impact of the stronger than expected sales from our higher margin oilfield product segment, as well as the better pricing environment for our clad-plates. First quarter operating income increased 177% to $4.1 million from $1.5 million in last year’s first quarter. Net income was up 224% to $2.4 million or $0.18 per share, from $750,000 or $0.06 per share in the year ago first quarter. Adjusted EBITDA advanced 59% to $8.1 million from $5.1 million in the same quarter last year. Operating cash flow during the first quarter increased to $6.7 million from $1.3 million in last year’s first quarter. The improvement reflects the increase in this year’s first quarter net income as well as the significant investments we made in last year’s first quarter to increase inventory. Turning to expenses. General and administrative costs increased by 23% to $4.5 million from $3.7 million in the first quarter last year. As a percentage of sales G&A was 9% versus 8% in last year’s first quarter. Selling and distribution costs increased 13% to $4.2 million from $3.7 million in the first quarter last year. As a percent of sales -- selling and distribution costs were flat and roughly 8%. Combined first quarter SG&A expense of $8.7 million was in line with the guidance we provided in our last call, when we said 2012 SG&A should average roughly $9 million per quarter. We also noted that our SG&A forecast excluded $5.6 million of expected full year amortization of purchased intangible assets. Turning to our balance sheet. At March 31, total current assets increased to $97 million from $91.2 million at the end of Q4 while total assets increased to $230 million from $213.4 million over the same period. The increase was partially attributable to our first quarter acquisition of TRX Industries, which added assets of approximately $10.3 million. Current liabilities were $29.8 million versus $29.3 million at December 31, 2011. In total, liabilities were $77.3 million, up $67.4 million at the end of the fourth quarter. We finished the first quarter with working capital of approximately $67 million and a current ratio of better than 3.2 to 1. And now to guidance. We are reaffirming that full year 2012 sales are expected to increase 7% to 10% from 2011. However, we now believe our full year gross margin will be in the range of 29% to 30%, up from our previously expected range of 28% to 29%. We are elevating our anticipated full year blended effective tax rate to a range of 28% to 32% from the prior range of 27% to 30%. As I noted earlier we expect full year SG&A expense of approximately $36 million or roughly $9 million per quarter. And again, this excludes $5.6 million of expected full year amortization of purchased intangible assets. For the second quarter, we are expecting sales to be down 10% to 14% versus last year’s second quarter. The decline relates primarily to the expected timing of shipments out of our explosion welding backlog. The strong increase in our backlog at the end of Q1 coupled with the sustained strength of our oilfield products business suggests that sales in the second half of the year will be much stronger than in the first, which is why we still believe we will achieve our original full year sales forecast. We expect gross margin during the second quarter will remain flat at approximately 29% versus the second quarter last year. With that, we are now ready to take any questions. Jen?

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

Quick question on the gross margin, on the explosive clad welding segment, its look like its 26.2, which is clearly the highest you have had in at least over a year. Is that due to mainly pricing? It sounded like you got a little pricing maybe on the chem processing businesses. Can you kind of touch on that if you would?

Yes, as we said in the comment I just made, chemical is one component of that. Other components would be a general appreciation of prices relative to small to medium size orders, and even on some of the larger orders we think we have been able to do a little better than we have been doing in the recent history. So it’s a combination of several of those factors.

Okay.

Just to add, we had good gross margins in Q4, which were obviously sustained in Q1 for our explosion welding business. And if you go back several quarters, the last two quarters represent the best gross margins that we have reported since the first quarter of 2010. And we believe that the better blend of product mix should continue as we go through 2012.

And if I take a look at your -- and if I try to dice up your backlog, I mean is this the similar type of margin that we will be seeing coming through and I think that’s what you are saying with your guidance for the year.

Yes, that’s correct.

Go ahead, Ed.

Yes. Okay. Now if I look at AMK Welding, there’s some comments about maybe strategically looking at new markets etcetera and I think you broke a few of those out. What is your strategy exactly, what are you doing to kind of address the drop in not only revenue but also on profits from that business. I mean, help me understand that a little bit better.

Sure. We had a change of the guard. We have built in the past nine months a team that we think is quite strong, both on the sales and operation point of view. That’s number one. What AMK does is very unique. Their ability to weld complex parts of complex metals. And we have opportunities from the market place and we think we can capitalize on the fantastic 40 years history of success of that company. So to your point, yes, there was a slowdown in the power or gas turbine business. We think there are still opportunities in that business and we are not neglecting it, including with existing customers. We also see that there are growing opportunities in aerospace. And because of the skill set of the divisions and our knowledge from the perforating business and from clad of activities in oil and gas, we have identified a number of potential projects where AMK can play a role. And we are reasonably bullish on the surface of the combination of the 3 things I just talked about.

There is a lot suppliers to that market, and when I say that market I am speaking of the gas turbine market that had a lot of good commentary. And I think you are saying that there was a particular program that wound down. Is it just a closing of a particular engine type that you were on that’s just no longer gone or did you lose a contract or something like that or?

No, we didn’t lose a contract. It was a very large set of projects that seems to be slowing down and there will be a remnant of replacement business to which we will participate in coming years. But the decrease has been significant and the replacement will take some time, some time to build. I think the company we are talking about is redeploying different product mix and we will be part of that.

And when I look at your guidance for 2Q, and I don’t want to get too granular, but looking in the different segments, do I assume that oil field products will be running at the run rate that has been and then maybe a step-down in the explosive welding because of the way you said your backlog shaped up. Is that most of the variance between say the 1Q versus 2Q?

Yes, that’s pretty much it. Oilfield could be down slightly because they did benefit in Q2 from a shipment did in Indian tender, that’s once every 12 to 18 months shipment. And that was a couple of million dollars of their Q1 business. And, yes, the rest of that relates to explosion welding and the timing of shipments out of their backlog. A lot of the backlog increase came in late during the quarter and that work will not begin to ship until Q3.

And one last question on that, on that last comment that you said a lot of business came in the last -- at the end of the quarter. Do you get the sense that -- and I saw the comments about the $7.5 million order in April -- but did that momentum that kind of hits through the end of the quarter continue into April other than that order?

Well, as you know we say this all times around here we are not a quarter-to-quarter company and we certainly are not a month-to-month company. So we certainly see momentum. It’s a very signal that we see in the bookings of Q1. We had announced we had seen some of that coming in throughout 2011. We are very glad to see confirmation of it during Q1. It’s always risky business for us project far beyond but you heard Rick indicate the guidance for the year, which certainly reveals some confidence in what we can book in the coming quarters.

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

Good afternoon, Yvon and Rick. Could you help us a little bit in terms of figuring out what percentage of your revenues -- and you can give it anyway, like in the oilfields or explosive metal both combined -- came from the oil and natural gas? And maybe if you could break down the oil and the natural gas part of it?

Okay. Let's see. Oil and gas, as you heard say many times I guess in clad including petrochemical, is about 60% of what we do. It may vary 50% to 75% given in a particular quarter. Oil and gas is, obviously the perforating business is all about oil and gas. Inside that I think we have indicated previously there was about 50:50 between oil and gas worldwide as a spread. Coming back to clad, there is a share of oil and gas and petrochemical is probably less than 50% gas. But it’s a odd one to call, I don’t have that statistics right there in front of me. Let's call it close to 50:50 as well. And AMK is still a burgeoning business, so it’s a small fraction of what they do today, maybe let's call it 10%, to give you a general sense.

Okay. Perfect. And sometimes there has been some seasonality in the drilling activity in the June quarter. Do you expect to see that in your oilfields business in the coming quarter you are expecting it to stay steady?

I think the reference is largely to the difficulty of getting into the Alberta oil fields during the spring melt. And we do expect some of that impact again this year. It actually was a little bit earlier melt than most years. I think it impacted us a little bit towards the end of Q1 as well. But we expect that seasonality impact in Canada, in Alberta, to be offset by good sales elsewhere in the world.

Right. And of course again, coming back to bookings a little bit. You seem to be enjoying a good bookings quarter now and it looks like the end of April -- the month of April also bookings were good. Now is the strength coming from a broader base or is it some of the projects that -- is it some of the larger orders that are driving it.

It’s a broader base, Avinash, again. So good news is that the confirmation of what we started seeing in 2011 relative to the chemical industry. And we still have some good oil and gas projects and its spread also in geographies not just the Middle East. We have some good stuff in Europe. I would name Germany, and in Asia. So it’s kind of a balanced, a happy situation.

Our next question comes from the line of Daniel Whalen with Auriga U.S.A.

Hi, guys, how are you doing. Just if you could, I mean this $7 million chemical industry order, is that just in terms of the timing of translating backlog into revenue? Is that a 2012 revenue item or is that more early 2013?

No, that’s 2012.

Okay.

It’s a couple of orders, we are sharing out just one.

Okay. Probably this is for second half 2012?

Yes, Q3 and Q4.

Okay. I got you. And then it’s great to see your hotlist that’s yet to be in backlog but potential to be in backlog remains healthy. But directionally, has that -- was it up or down even though it was healthy?

So the hot list is steady as such with some interesting projects that we always have to predict when they are going to come through. But it’s -- I think the quality has been becoming richer over the past few months. It’s not a tsunami in terms of quantity as of yet. It’s encouraging and I think it’s a decent diversified quality.

Okay. So essentially it sounds like the quantity has stayed about the same but the conviction of it being translated to backlog has probably been incrementally positive.

Well, there is an arithmetic phenomena about the hot list, is that when you book an order you know your hot list will decrease by that much.

Right.

So when we, even internally, when we juggle with what the hot list looks like, we have that zigzag that comes only when we fortunately book business once in a while. If we never book business the hot list would increase to infinity maybe, we will be out of here.

And then just one last if I may, just in terms of -- do we need to make any adjustments to the first quarter tax rate which is a little higher than I expected? Just so I get better sense of what's the remainder of the year tax rate should be, given your full year guidance.

Yes, you know the first quarter tax rate was just shy of 36% and it related to a tax increase in one of the local German tax jurisdictions. And we were required to book an adjustment for that tax rate increase to a fairly significant deferred tax liability that relates to the 2007 acquisition of DYNAenergetics. And when you have that kind of tax increase and you have to book a deferred tax adjustment it has to be booked in the quarter. So we expect a lower tax rate during each of the remaining quarters of 2012. And again our guidance for the full year is a blended tax rate of 28% to 32%.

Right. Right. Sequentially as we progress through the year it should continue to decline and it seems like second half should be below. Yes. Okay. So keep to get to your 28% to 32%, keep the first quarter as essentially 36%.

Yes. The first quarter is going to stay there. Then you have to blend in the other quarters to get to whatever average you like within that range.

Our next question comes from the line of Phil Gibbs with KeyBanc Capital Markets.

I see that you have that 10-K out there, Rick, so I wouldn’t ask you for the segment gross margins.

It’s already there. Good.

I picked them out. But I know I touched...

Now what are you going to talk about.

I was struggling for questions but I think I found a few. I know I had touched upon it, I am just trying to get my head around the guidance. You said robust orders recently. Just wondering why the push out into the second half. Are you waiting on any cladding metals from certain mills? Because the 2Q expectations seemed just a little out of sync with the strong book to bill in the first quarter.

Yes, you know we actually have a bigger backlog right now for your European cladding business and we do probably U.S. cladding business. And the shipments that we are forecasting are what's in the backlog at March 31, and there is not great opportunity. There is not capacity in Europe to ship more than what is in their backlog at the beginning of the quarter. Obviously our biggest plant is the Mt. Braddock plant in the U.S. But again, there is not a lot of potential for new bookings ship in Q2 for that plant either just because of the lead time on the metals. So it’s really an effort to forecast as accurately as we can the shipments out of backlog. And factoring in a little bit of new business but not very much because they are just isn’t lot of potential to get the metals in, in time to achieve a big bookings ship number.

Is there any ability to move your production around in European capacity for you may be tight for certain things to move it into the U.S.?

Yes, just how realistic with the way that we source metals and the shipping costs that are involved.

Yes, that’s right.

Okay. That’s make for that color. Do you still expect to make $20 million of capital expenditures this year? I mean any further comments on the progress on some of your growth initiatives.

Yes. The projects are on track, all of them. We are very determined and very serious about the Greenfield plant in Siberia and in Texas. So it’s moving along. And the rest of the business, of course we are always careful on our spending but pretty much we are planning to spend most of what is budgeted. We know we will be cautious toward Q3, Q4 depending on our bookings coming through. But essentially, yes, we plan to spend the money. We have very good quality projects at play here.

Okay. And one more if I could. I really appreciate it. The gross margin that you achieved in the first quarter, 26.2% explosion metalworking. You said that some of that was due to mix in chemical processing. Do you see any of the gross margin appreciation due to, call it decreased competitive pressures from alternative technologies and you probably moving away from your niche right now.

Well, I will put it a little differently. I think there is more opportunities in the core, smaller orders projects and therefore we have more opportunity to get better pricing. And typically on those projects we don’t fight against the oil bound competition, so that’s deals. And those are in fact beyond the chemical industry that in general it eliminate the oil bound competition in general. And also I think we have been able to get a little bit of margin even on larger projects, better than we have seen in the past. So the oil bound competition is not going away but there are maybe a few more signs that they are filling capacity and we may get back into a position where the delivery will play in our favor. Our teams worldwide are really good at procuring metals. So we may have a head start on some of those projects, against that kind of competition.

Our next question comes from the line of Gregory Macosko with Lord, Abbett.

Just with regard, it looks as if sales sequentially will be down maybe 5% from the first quarter to second quarter, just the way you have guided. And you have basically said that the gross margins will remain flat sequentially. Am I correct on that?

Yes, yes. With probably a little bit higher proportionate contribution to sales from our higher margin oilfields product business being one reason for that. I would expect that explosion welding gross margins will be down some in Q2 because the U.S. sales will be off a few million dollars from they were in the first quarter.

Okay. So basically you are saying you can maintain the gross margin via mix?

Via mix between the oilfield products and the cladding business. And AMK should see some improvement from a very low performance in Q1 as well.

Okay. And then just with regards to the U.S. operations, the point being that though you don’t have any orders coming into that or the orders are slow coming there. How does the outlook in the U.S. look relative to third and fourth quarter?

Very good. That’s where a lot of the improvement in backlog from late in Q1 and the first of week of April is showing up. It’s in the U.S. backlog.

And the limitation in the U.S. is just because you can't deliveries of the metal to ship earlier?

Exactly. On these larger orders we are going directly to mills and there is several weeks lead time before you get the metal in. And then these large orders ship over a period of a few months.

Okay. All right. And then the idea of -- and then do you look at the second half as then relative to Europe being more balanced between the U.S. and European output from the explosion operations.

Yes. We expect a higher proportion of U.S. sales in the second half of the year versus the European sales.

Okay. And your outlook on AMK is favorable because you have a new team and you see them being able to redirect the business in a different direction?

Yes. It’s correcting the direction a little bit, not changing the direction. We will keep plugging on the power, gas turbine business and adding more aircraft and starting breaking into new activities related to oil and gas again. We feel comfortable in that space. And we think they can bring something there. So it’s an augmentation I guess of their profile.

Okay. But the point is, do you have orders? Is there much of a backlog there at AMK at this point that you can look into to see in the second or third quarter or is that really...?

We are building that backlog. We are approaching and building that backlog. It’s coming through.

Our next question comes from the line of Edward Marshall with Sidoti & Company.

Just one quick follow-up. The tax from the German jurisdiction, the deferred tax charge, what was that in the quarter?

It was in the range of $250,000.

About $0.02 then, considered one time?

Yes. An accurate calculation.

[Operator Instructions] Gentlemen, it appears there are no further questions. Do you have any closing comments?

Yes. Thank you all for joining us for today's call. We are encouraged by our strong start to fiscal 2012 and so positive developments within each of our business segments. We certainly look forward to speaking with you again at the end of the second quarter and looking forward to seeing you all. Take care.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.