Dynamic Materials' CEO Discusses Q2 2013 Results - Earnings Call Transcript

| About: Dynamic Materials (BOOM)

Dynamic Materials Corporation (NASDAQ:BOOM)

Q2 2013 Earnings Call

July 30, 2013 5:00 p.m. ET

Executives

Geoff High – IR, Pfeiffer High Investor

Kevin Longe – President & CEO

Rick Santa – SVP & CFO

Analysts

Avinash Kant – D.A. Davidson

Edward Marshall – Sidoti & Company

Dan Whalen -Topeka Capital Markets

Gerry Sweeney – Boenning & Scattergood

Operator

Greetings, and welcome to the Dynamic Materials Corporation 2013 Second 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). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Geoff High, with Pfeiffer High Investor Relations. Thank you sir. You may begin.

Geoff High

Thank you, Jane. Good afternoon, and welcome to Dynamic Materials’ second quarter conference call. Presenting on behalf of the company will be President and CEO, Kevin Longe; and Senior Vice President and 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 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 two hours after the conclusion of this call. Details for listening to today’s replay or webcast are available in today’s news release.

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

Kevin Longe

Thanks Geoff and good afternoon everyone. Our second quarter sales performance was stronger than anticipated thanks primarily to the performance of Nobelclad’s US production team. Certain metal shipments arrived earlier than expected at our Mount Braddock, Pennsylvania facility allowing our cladding teams to effectively produce and ship several orders before the close of the quarter.

We’ve continued to make operational and organizational enhancements at both the corporate level within our individual businesses. And these improvements are having the desired effect. One illustration of this is our operating cash flow performance which came in at $15.4 million for the six months period ended June 30. This represents a 91% improvement versus the first six months of last year. We saw a number of encouraging developments within each of our businesses during the second quarter.

At Nobelclad, our sales team is reporting an improvement in project quoting volume. The global energy and chemical markets continue to generate steady activity and we are also seeing increased interest from the worldwide power generation market. For the past several quarters, Nobelclad has been closely tracking a series of projects related to specialized chemical production, and we believe these projects could lead to multiple orders. Although it is difficult to anticipate the specific timing of these potential awards, the dialogue with the equipment fabricators and end users has been encouraging and we believe the projects will move forward in the coming months.

We have been anticipating for the past several years that there would be a pickup in infrastructure spending for the North American refining sector and that investment activity may finally be on the upswing and we are cautiously optimistic this could lead to an increase in clad demand during 2014 and beyond.

At DYNAenergetics, production testing is underway at our new shaped charge plant in Blum, Texas, and we expect to initiate commercial production by the end of the third quarter. Gary Burke has joined the DYNAenergetics team as vice president, manufacturing for the Americas as well as head of DYNAenergetics global environmental health and safety program. As you may know, Gary was the head of operations at Nobelclad where he directed the construction of our Mount Braddock facility and helped to instil the culture of safety and operational excellence that exists throughout explosion welding business. He is now working to ensure a similar culture is adopted across DYNAenergetics expanding global production operations.

We also have assembled a strong manufacturing team in Texas which is headed by Mitchell Dennis. Mitchell is an experienced and talented operations manager who joined us earlier this year and also oversees our gun manufacturing facility in Whitney, Texas.

During the Q2 DYNAenergetics team in Germany successfully shipped a full value of the $3.2 million international tender order. The business also began marketing its new DYNAselect product which is the perforating industry’s first detonating systems to incorporate in an integrated switch. The DYNAselect system will accommodate up to 20 perforating guns at a time and is designed to enhance the safety, reliability and efficiency of the detonating process.

DYNAenergetics also took an important step in its geographic expansion program with the recent opening of a new distribution center in Columbia, South America. We expect this investment will begin providing returns during the second half of this year.

At AMK Welding business president Gary Klein is directing the installation of a new machining center which will augment our capabilities in the aerospace and ground power industries. Gary has also headed the director of sales who have a sense of experience in the aerospace industry. Any of the added new talent in-depth to its engineering team. We are increasingly optimistic about the new business opportunities AMK is fulfilling with both existing customers and with prospects operating in the broader oil and gas industry.

With that, I will turn the call over to Rick for a review of our financial results. Rick?

Rick Santa

Thanks Kevin and good afternoon everyone. Second quarter sales came in at $57.9 million which was a 19% improvement on the second quarter last quarter. As Kevin noted, this tops our projected sales growth range of 11% to 14%. Second quarter gross margin was 30% versus 29% in the year ago second quarter.

Operating income was $6 million, an improvement of 65% versus last year’s second quarter. Net income in the second quarter increased 30% over the second quarter last year to $3.4 million or $0.25 per diluted share. Second quarter adjusted EBITDA also increased 30% and came in at $9.7 million. As Kevin noted, our six months operating cash flow of $15.4 million was an increase of more than 90% versus the first six months of last year. The improvement was simply driven by a $3.3 million net positive change in working capital during the first half of 2013, a swing of $7.6 million when compared with net negative working capital changes of 4.3 million at the six months mark last year.

With respect to our balance sheet, the most notable change was the $9.9 million or $0.26 reduction in our lines of credit borrowings. With respect to guidance, although we are anticipating that Nobelclad business will receive several sizable orders from the chemical industry during the second half of the year, it is possible that they will not be placed in time for our production team to deliver them before December 31. We are therefore adjusting our full year sales forecast to an expected increase of 6 to 8% over our 2012 sales. Our prior guidance would anticipate an increase of 8 to 10%. Our gross margin is still expected to be in a range of 27 to 29%.

We’ve revised our anticipated blended effective tax rate for the full year to a range of 24 to 26% from the prior forecasted range of 21 to 23%. The revision is due to approximately $400,000 in non-recurring second quarter tax expense that resulted from a recent German tax audit. If you exclude the impact of previously discussed $900,000 tax benefit recognized in the first quarter and the $400,000 second quarter non-recurring expense, the blended effective tax rate for fiscal 2013 is projected to be in a range of 28 to 30% versus the prior forecasted range of 26 to 28%.

For the third fiscal quarter, we expect sales will increase by 10 to 12% versus sales of $50.1 million in the third quarter last year. Gross margin is expected to be in a range of 27 to 29%. SG&A expense should be approximately $9.5 million and third quarter amortization expense should be approximately $1.6 million. Interest expense for the quarter is expected to be roughly $200,000.

With that, we are now ready to take any questions. Jane?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Avinash Kant with D.A. Davidson.

Avinash Kant – D.A. Davidson

I had some quick questions, of course. Given that it looks like, you are feeling a little bit more positive about the booking pattern here, and clearly there is some question about the timeline in which you can meet the orders and not, could you give us some idea what are the lead times running at this point in explosion clad side of the business? And then they’re saying that you are starting to see which application or which end market is that coming from?

Kevin Longe

Well, the lead times are primarily driven by the metal suppliers and that would enable us to have a good second quarter by – we had access to metals in a timely basis. Once they come in the 8 weeks –

Rick Santa

The order you’re talking about – involves titanium and we can start to get titanium into the plant within a six week timeframe. They’re coated steel, about the same, maybe a little bit longer in some cases. But as I think we have discussed before we have significantly broadened our coated steel supply base. So some of the problems we had a few years ago do not exist today.

Kevin Longe

And I think Avinash, the key is the timing of these orders landing on whether we will be able to ship them in this year more or than anything. They really need to fall within this quarter for us to get them out by the end of the fourth quarter. And so that’s where we tampered the guidance a little bit.

Avinash Kant – D.A. Davidson

But then you would expect bookings to start to improve from next quarter onwards, because bookings have not been meaningfully higher that far?

Kevin Longe

Correct, and as you can see, the backlog fell slightly and so we shipped more than --

Rick Santa

Yeah, we had a good quarter’s activity by around the end of the first quarter and early in Q2 but then it kind of flattened out after that. So we need another --

Avinash Kant – D.A. Davidson

And could you give us some idea about which end market is driving that, is that a chemical project, or is that an oil and gas, which one is driving?

Kevin Longe

This has been – the quoting activity right now we are seeing a slightly uptick in most markets but some strength in the chemical area.

Rick Santa

Yeah, the large orders that would make a difference are in the chemical sector. They involve titanium so the roll-on competition is not a factor. But some of these specific chemical projects.

Avinash Kant – D.A. Davidson

So some of the large orders you should -- to expect to show up maybe in the third quarter, that’s why you have expectation right?

Kevin Longe

Yeah, I would say third quarter is where we hope to see them and if they are -- early in the third quarter, there may be a possibility to get some of that into the production schedule this year. If it’s later, then it starts getting -- but the holidays is a little bit more questionable.

Avinash Kant – D.A. Davidson

And what should we think of the oilfield business with the new facility coming up, are you expecting sequential growth throughout the year, or some seasonality there, what are you expecting?

Kevin Longe

I think you will see a steady climb in that business. It’s less of a production facility driven in the United States or the Americas because we’ve compensated with inventory, and we are being cautious to bring that plant on in a safe and reliable manner. It will contribute to some of our flexibility in serving our customers in more timely basis. We are really not factoring the production capability into this year’s forecast.

Operator

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

Edward Marshall – Sidoti & Company

So I would assume you would have told this already but the backlog as of now, (inaudible) same release was at the end of the quarter --

Rick Santa

It’s already down from the end of the first quarter is at 44.1 million. We are closer to 40,000 at the end of Q1.

Kevin Longe

And you’re speaking of end of Q2, not intra-quarter right?

Edward Marshall – Sidoti & Company

I was thinking intra-quarter, I was talking about end of July, and we’re 30 days through July now, can you give us any indication that --

Rick Santa

Now we haven’t – we only disclose the end of the quarter number. We do not have an updated backlog to disclose.

Edward Marshall – Sidoti & Company

And then I guess could we talk about maybe the drag on the oilfield margin as you’ve had some start-up costs with the shaped charge facilities, what would be the drag – has there been any?

Kevin Longe

We’ve also had – we are significantly strengthening that organization and we’ve had a number of significant either new hires or transfers into that business, Gary Burke being one of them and we have some people transitioning out and retiring and we just have an overlap if you will in the organization and also a fair amount of relocation expenses with the people that we are bringing in.

Rick Santa

But the gross margin performance was fairly comparable to last year. On a year to date basis, the gross margins for oilfield products were 35.8% versus 34.2% in the first six months of last year. In the quarter the gross margin was 34.5% versus 35.1%. We’ve not seen a drag on margin yet from the start-up.

Edward Marshall – Sidoti & Company

Why the sequential decline in the gross margin now in the oilfield product business assuming that you had a higher volume, I would assume that margin would have gone up?

Kevin Longe

Well, a part of that was the brand B, the Indian pending order is at a lower margin, now at 3.2 million of second quarter sales.

Edward Marshall – Sidoti & Company

While we are already on the gross margin, can we talk about the explosive business as well as the AMK, could you just give those gross margin numbers?

Kevin Longe

For the quarter, Nobelclad was 26.3% in 2013 versus 25.5% in 2012. AMK Welding was at 27.5% for the quarter in 2013 versus 17% last year. On a year to date – AMK it might turn around in the quarter. On a year to date basis, Nobelclad was at 24.6% versus 25.9% in 2012. Oilfield product year to date I just mentioned upwards again with 35.8% year to date in 2013 versus 34.2% in 2012. At AMK, on a year to date basis in 2013, that’s 14.3% versus 14.6% in 2012.

Edward Marshall – Sidoti & Company

Looking at the balance sheet and looking at kind of in particular one of the discussions we’ve had for a while was about inventories in particular in the oilfield services, and I know we don’t break inventories by division. But it doesn’t seem like there was that much of a reduction in inventory, it could be just trough at the timing, maybe kind of remind us or kind of how your thoughts were on the shaped charges and maybe some of the additional inventories there and then maybe what you’ve been able to accomplish and what’s those yet to be accomplished?

Kevin Longe

When you peer behind the gross number, our oilfields or DYNAenergetics business reduced inventories in the $5 million to $6 million range year to date. It was roughly, Rick, 3 million in the first quarter and reduced another 2 to 3 million in the second quarter. But we had a pickup in clad inventories which –

Rick Santa

A couple million which is all kind of work in process.

Kevin Longe

The timing of award – and so we feel that we are marching right along in our inventory reduction plan and the quality of the inventory that we have has improved. The Nobelclad is tied to production orders, the DYNAenergetics builds for stock and the stock has been high but we’ve been bringing down.

Edward Marshall – Sidoti & Company

I take note to one of your I guess customers that you did some work for, in this particular quarter they had a nice surge in their particular order backlog and it seems you see the same trends coming, is there -- is that kind of the demand that you are seeing or is it go for other than that, maybe more broad days in the chemical markets, forgive me for the choppy question but it seems that my discussions with some of your customers are saying that they have seen their order book coming for some time and floodgates ultimately opened just recently and there is a lot more behind it, is that kind of what you are hearing as well?

Kevin Longe

I think what we are seeing increased quoting activity, it’s up over this time last year. I would be hesitant to say the floodgates have opened but we do see it strengthening and so we are cautiously optimistic for the second half of this year and into 2014.

Rick Santa

Certainly the black backlog movements of the E&P firms like [Jacobs] and some of those public companies that are customers of ours certainly a bit of a bellwether for us. I believe that Jacob had some positive comments about both the chemical sector and the refining sector in their recent conference call.

Operator

Our next question comes from the line of Dan Whalen with Topeka Capital Markets.

Dan Whalen – Topeka Capital Markets

You [worded] this earlier, I think I may have missed it, but did you say the Texas facility and the Russian facility really are factored in the guidance, what did you see in that?

Kevin Longe

Certainly the Russia facility which isn’t going to come on stream until next year is not in the guidance. The Blum facility which will start on September 1, we are going to walk before we run and we have been utilizing inventory to support our customers in our sales organization. So I think those two combined are things that’s really not factored into the guidance for the second half of the year except from an expense standpoint.

Dan Whalen – Topeka Capital Markets

So as we get into 2014 expense so to speak you’ve had a little bit of a tailwind and then you are going to have incremental revenue from that. Any – additions of order of magnitude in terms of revenue potential for 2014?

Kevin Longe

We are just getting into the planning process with our businesses. I think that we are focusing kind of broadly on the DYNAenergetics business from not just the production capacity but from a product management and engineering and sales standpoint too. And so we are hoping that a lot of the programs that we are working on there will all be coming together in 2014 but it’s quite a work in process at this point and it would be hard for us to anticipate what that number is going to be till we sit down at the businesses closer to the fourth quarter.

Dan Whalen – Topeka Capital Markets

All right. So you are working on that, you’ve got some other inventory initiatives that you are clearly making – working on, is there any reason to think that we couldn’t revisit or exceed the 29.6 gross margin you had in 2012 and that’s probably --

Rick Santa

I guess we don’t do that at this point. Our guidance is 27 to 29%. I can’t – we just haven’t gotten there with respect to planning activities for 2014.

Dan Whalen – Topeka Capital Markets

Given a stronger macro backdrop, what would be the other around --

Rick Santa

Yeah a lot of it is driven by product mix in our Nobelclad business. And we talked about before well it pays the money on freight and duty, duties as we talk to manufacture locally but then there will be some – inefficiencies as we start up production facilities, back then than it was when you look at 2014.

Operator

Our next question comes from the line of Gerry Sweeney with Boenning.

Gerry Sweeney – Boenning & Scattergood

I just want to talk about the oilfield services real quick. I guess in the call of Q1 we said the guidance was about 8 to 10%, you talked about oilfield services growing faster than Nobelclad. Now with looking at the guidance you have provided is kind of 6 to 8%. It sounds like most of that is coming from the Nobelclad side of business, so it sort of implies that you are still seeing some good opportunities on the oilfield services probably in excess of 10%, is that – am I look at that correctly?

Kevin Longe

In the second half of this year and yeah, what’s happening there Gerry, is as an example, we have the expense in the first half of this year of that Columbia, South America distribution center but it has not produced yet, and we are expecting that to kick in, in the second half of this year. And we also added another distribution center in West Texas that we expect to kick in. And so we are strengthening our presence in the marketplace and those investments are being made, they are not all up and running yet. So we’d expect the growth rate to accelerate on the DYNAenergetics business compared to where it was in the first half.

Gerry Sweeney – Boenning & Scattergood

Then you also in your comment – I think you talked about the DYNAselect, now I imagine when you are talking, it sounds like – it sounds like it’s a little bit more for unconventional E&P, how big of a market – I mean how much of unconventional E&P right now of oilfield services? Do you have an idea? I am curious to see how much of your sales on oilfield services goes to unconventional E&P in the US --

Kevin Longe

Yeah it’s a little bit hard to track that but yeah, I think of 30 to 40% in that range.

Gerry Sweeney – Boenning & Scattergood

I was just curious then the next step is like, how big of a market would the DYNAselect go after?

Kevin Longe

Yeah, it’s not just the DYNAselect, it’s also all the components with it, and what it really is enabling us to do is sell more guns and shape charge system. And so the panel itself is not so much where the revenues come from, it’s just the more effective system that we get overall in the perforating product area. And to be honest, I don’t have it at my fingertips what that – how that’s factored into the second half of the year.

Gerry Sweeney – Boenning & Scattergood

AMK Welding, obviously had a nice turnaround in the quarter and you did mention specifically there was some repair work. Does this repair work continue on into Q3 or is this a – was it little bit one time work --

Rick Santa

I think it was a little bit one time for that particular repair work. So AMK saw the good turnaround in Q2, it will be challenging to repeat that performance in Q3 and Q4. But as Kevin indicated in his opening remarks, we are working hard, they are working as a team and they are making progress.

Gerry Sweeney – Boenning & Scattergood

And so that was a function of some of those enhancements, it’s just a different workflow but got it. And then just real quick, maintenance CapEx, you probably mentioned in the past but just in general idea, what maintenance CapEx is excluding all the CapEx that are going on the new plant and distribution system, just a –

Rick Santa

Yeah I think we’ve indicated that the maintenance CapEx would typically be in the $7 million to $10 million range.

Operator

It appears we have no further questions on the line. I would like to turn the floor back to Kevin for any closing comments.

Kevin Longe

Yeah, well first of all, thank you everybody for joining us and I would also like to thank the Nobelclad team for a good quarter and we are encouraged by the progress across the businesses. And we appreciate your support and we look forward to speaking in again at the end of the third quarter. So thank you everybody.

Operator

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

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