Dynamic Materials Corporation Q1 2010 Earnings Call Transcript

May. 3.10 | About: Dynamic Materials (BOOM)

Dynamic Materials Corporation (NASDAQ:BOOM)

Q1 2010 Earnings Call Transcript

April 29, 2010 5:00 pm ET

Executives

Geoff High – IR, Pfeiffer High Investor Relations

Yvon Cariou – President and CEO

Rick Santa – SVP, CFO and Secretary

Analysts

Avinash Kant – D.A. Davidson

James Bank – Sidoti & Company

Phil Gibbs – KeyBanc

Daniel Hazelwood [ph] – Compliant Technologies [ph]

Operator

Good afternoon. My name is Selena, and I will be your conference operator today. At this time I would like to welcome everyone to the first quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator instructions) I would now like to turn the conference call over to Mr. Geoff High of Pfeiffer High Investor Relations. Please go ahead, sir.

Geoff High

Thank you, Selena. 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 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 Yvon.

Yvon Cariou

Thanks, Geoff. Our first quarter financial performance included revenue of $30.4 million. We slightly exceeded the forecast we gave you in March. We also reported an expected net loss of just over $400,000. In spite of the prolonged global recession and the impact it has had on many of our end markets, this was the first quarterly net loss DMC has reported since the second period of 2004. We believe these 22 consecutive quarters of profitability are but one illustration of the strengths of the business model.

Like all of you, we have been closely following the latest round of economic forecasts and corporate financial reports. And much of what we are hearing suggest that several areas of the global economy are showing convincing signs of recovery. We are optimistic that these improvements will ultimately lead to rebounding capital spending, particularly in the industrial processing space. Recent activity in our end markets is very consistent with what we reported to you last month during our year-end conference call.

Quoting volume continues to be relatively easy, but in many sectors, the conversation rate of course into firm orders remains well below historic levels. Not all of our target markets are so sluggish. For instance, we continue to see strong demand for our ETJ products from the aluminum production market. Opportunities remained very compelling in the upstream oil and gas sector where we are working to address demand for specialized clad pipe. We continue to believe this could be a sizable long-term opportunity.

Prior to the downturn, you may recall that we occasionally were awarded sizable orders for projects that emerge quickly and spent little time on our hotlist. We recently received such an order, which came out of the specialty chemicals sector. With some of the world’s largest chemical companies reporting improved demand and stronger growth forecast, we are hopeful that we could see an elevation in activity from this sector in the coming quarters.

We are making considerable progress with the expansion of our oil field products business. We expect to finalize our Austin Explosives acquisition later this quarter and are pleased with the progress we have made at integrating LRI Oil Tools. Activity in the global exploration and production industry appears to be peaking up, and we believe our efforts to expand this business segment will prove to be well timed.

Despite the recent slowdown in our business, we remain as confident as ever in the fundamental strength of our company and the long-range, strategic vision we have established. As capital spending resumes, both domestically and in emerging economies, we are confident DMC will return to a position of growth.

I will now turn the call over to Rick for a discussion of our financial performance. Rick?

Rick Santa

Thank you, Yvon. As you just heard, our first quarter sales came in at $30.4 million versus $49.8 million in last year’s first quarter. Our gross margin came in at 23% that was slightly higher than expected due to changes in the timing of shipments on our Gorgon orders, which are now expected in the second and third quarters.

Operating income was $245,000, and we reported a first quarter net loss of $ $412,000, or $0.03 per diluted share. By comparison, in last year’s first quarter, we reported operating income of $8.3 million and net income of $4.9 million, or $0.38 per diluted share. Our first quarter adjusted EBITDA was $3.5 million versus $11.5 million in the first quarter last year. Please see the section of our news release regarding our use of EBITDA, which is a non-GAAP measure.

Looking at expenses, we reduced SG&A by 11% or $381,000 as compared with last year’s quarter. If you exclude the incremental G&A expenses associated with our acquisition of LRI, G&A cost reductions were actually 15% or $556,000. Our selling expense was flat quarter-over-quarter, but the impact of the LRI acquisition masked 21% or $485,000 reduction in selling expenses that we achieved prior to factoring in the LRI transaction.

Interest expense increased by 32% to $1.1 million versus last year’s first quarter. The increase was principally related to a non-cash charge of $251,000 associated with the pre-payment of our Euro term loan. We are anticipating that interest expense in the second quarter will decline to approximately $700,000. Till March 31st, we generated operating cash flow of $13.8 million versus the $3.2 million generated during the first three months of fiscal 2009.

We took aggressive steps to reduce our debt during the quarter. We eliminated the balance on our European term loan, cut our total debt by $16.5 million, and reduced our net debt by $12.5 million. We ended the quarter with a cash position of $18.4 million and had working capital on March 31 of approximately $36 million.

With respect to guidance, we are anticipating that second quarter sales will increase by approximately 10% to 15% compared with the first quarter. Our expectations anticipate that the first half of the $14.8 million in orders associated with the Gorgon Natural Gas project was shipped during the quarter, with the balance shipping in the third quarter. Our gross margin is expected to be in a range of 20% to 22%. We have not adjusted our full year expectations, which anticipate sales in a range of flat to down 5% compared with 2009. Our full year gross profit margin forecast remains at 22% to 24%.

Our first quarter tax rate decreased 27% from 33% in last year’s first quarter. And we are now anticipating a blended effective tax rate for 2010 in the range of 25% to 28%. This is below our prior full year forecast of between 33% and 35%. The reduction is due in part to the expected decline in our 2010 consolidated pretax income versus what we reported in 2009. We expect that our blended effective tax rate will return to a normalized level of 33% to 35% beginning in 2011.

We are now ready to take any questions. Selena?

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from Avinash Kant from D.A. Davidson.

Avinash Kant – D.A. Davidson

Good afternoon, Yvon and Rick.

Yvon Cariou

Hi, good afternoon, Avinash.

Avinash Kant – D.A. Davidson

Quick question. First, on the guidance, you have maintained your full-year guidance for flat to down 5%. If I plug in the numbers that you are talking about for Q2, maybe 10% to 15% upside from Q1 levels, it looks like the second half has to be significantly better than the first half in order to get to those numbers. Am I thinking it right?

Rick Santa

Yes, Avinash, and that relates to the shipping of the Gorgon orders from Q2 to Q3. The previous guidance had anticipated that that full order would ship by the end of the second quarter.

Avinash Kant – D.A. Davidson

Right. But as it is divided half and half, are you expecting the rest of the business to improve in the September quarter compared to the June quarter?

Rick Santa

Yes. We would expect that to be the case based on what’s in our current backlog in shifting some of that Q2 work to Q3.

Avinash Kant – D.A. Davidson

Right, right.

Rick Santa

Our Q3 forecast, absent the Gorgon orders, would remain what they were and then you add the impact of the Gorgon orders to that number.

Avinash Kant – D.A. Davidson

Right. And it does look like your bookings have started to improve some, although not a lot, but still they are improving, right? In the quarter, bookings are higher than the previous quarter?

Rick Santa

That is correct.

Avinash Kant – D.A. Davidson

Right. And could you say which segment of the market seems to be improving at this point?

Yvon Cariou

Yes, Avinash. I think it’s pretty steady as compared to the previous quarter. It’s still oil and gas. It’s still aluminum. Good support in power generation, and still somewhat inexistent in hydrometallurgy and somewhat sluggish in chemical, but maybe we’ve turned the corner. We did book a significant order during the quarter for specialty chemical application.

Avinash Kant – D.A. Davidson

So – but it looked like in order to meet the guidance for the year on net returns, your bookings have to improve meaningfully from here on, and do you see that happening at this point?

Yvon Cariou

We see the possibility of that happening, given again the quoting activity. The hotlist is reasonably steady as where we were, but we have seen an uptick in the request to quotations, particularly at the end of Q1. And we understand that the way to recovery is not going to be a linear curve. Nevertheless we – it looks like we see more uptick. So we are encouraged that indeed the certain part of the year carries the potential to do quite a bit better.

Avinash Kant – D.A. Davidson

Two quick questions. Any other quarters for the year you expect to be losing money or you expect to make money in the rest of the quarters?

Rick Santa

I think the best way to answer that, Avinash, is in the second quarter, we expect sales to go up 10% to 15%. We expect margins to decline some. I think we’ve indicated earlier that the Gorgon orders do not carry our normal historic margins. We had to provide more aggressive pricing on that project work as well as other project work. Another factor, in the first quarter we had sizable shipment that involve customer supplied metals. And if that order had – if DMC had provided the metal on that order, the equivalent sale for Q1 would have moved up by $3.5 million, $4.0 million. So in essence, we are forecasting flat volume with the lower gross margins, which leads to a second quarter in terms of pretax – in terms of operating income than we have interest, which we expect to be reduced some. And so you have a second quarter that except for the interest expense reduction looks a lot like the first quarter.

Avinash Kant – D.A. Davidson

All right. So close to $0.5 million reduction in the interest expense, you say?

Rick Santa

No, we said interest expense should be around $700,000.

Avinash Kant – D.A. Davidson

It was $1.14 million or so this quarter?

Rick Santa

Let’s see. I believe – yes, I guess that does come to almost that much money. Yes, so $1.144 of net interest expense.

Avinash Kant – D.A. Davidson

And there was nothing –

Rick Santa

Net interest expenses $1 million, just a little over $1.1 million. So that guidance was really for net interest expense or, say, net interest expense will go from about $1.1 million to $700,000.

Avinash Kant – D.A. Davidson

Okay. Any trends in pricing? Where do you see pricing going?

Yvon Cariou

Not much change. There is still overcapacity with the people who do roll bond. And their own guess that’s going to stay, I don’t think there is going to be a lot of opportunity for pricing increase. Outside of that segment, again, pricing pressure is pretty high. And I think even if we see metals increasing, that’s going to be a positive for us, but constrained by what I just said regarding the overcapacity existing still in the roll bond business.

Avinash Kant – D.A. Davidson

Perfect. Thanks so much, Yvon. Thanks so much, Rick.

Yvon Cariou

Thank you.

Rick Santa

Thanks, Avinash.

Operator

Your next question comes from James Bank of Sidoti & Company.

James Bank – Sidoti & Company

Hi, good evening, guys.

Yvon Cariou

Good evening, Jim.

Rick Santa

Hi, James, how are you?

James Bank – Sidoti & Company

Just getting into the selling expense and G&A a little bit more from what I understand that a lot of that’s from the LRI acquisition. Is this sort of a run rate we should expect through the rest of the year or do you think you will get better cost synergies from that acquisition maybe in the last six months of the year?

Rick Santa

It’s a run rate that can be expected for the second quarter. But as you know, some of our incentive compensation is based upon net income or operating income. So very little is being recorded during Q1 and Q2. We would expect with the positive second half of the year to have some of that expense, and that sales commissions are also variable.

James Bank – Sidoti & Company

Okay. So as you expect volume to come in, then we’d expect those types of accruals to come in as well?

Rick Santa

Right, right. But we don’t expect any meaningful synergies this year associated with the LRI acquisition.

Yvon Cariou

We think we have acquired overall the oilfield products, a good human structure. It’s working well. We need to make them to work even better together, but we are – we want to use all of the power that’s available there to gain market share. So we are not going to be visiting the structure to attempt to reduce much of it. So the reduction in selling cost will come from the top line growth, yes.

James Bank – Sidoti & Company

Okay. And for the oilfield service segment, is that something we could maybe see break even by the June quarter, or I guess at least by the third quarter?

Rick Santa

I think at least by the third quarter.

James Bank – Sidoti & Company

Okay. Let’s see – Rick, any other further dept pay-down, do you think, as significant as you just did, in the March quarter by the end of the year?

Rick Santa

Nothing is planned at this point other than the scheduled repayment of the US term loan in November. And that I believe is a $6,750,000 payment.

James Bank – Sidoti & Company

Okay. And Rick, the segment gross profit, if I could?

Rick Santa

I’m ready for this one, James. Cladding, 21.9%; Oilfield Products, 27.5%; and AMK Welding, 22.5%.

James Bank – Sidoti & Company

Okay. And lastly, that specialty chemical project that you guys want, is that – could you at least say, is that domestic or was that an international win?

Yvon Cariou

It’s North America.

James Bank – Sidoti & Company

Okay. And Yvon, the clad pipe, I couldn't quite catch that in your prepared remarks, could you run through that market again for me, please, and just elaborate a little bit on the potential you have there?

Yvon Cariou

As you know, the – as you’ve heard, the Gorgon Natural Gas project, the order we got is not for clad pipe. It’s for piece of equipment. But in the process of developing that product and producing it, we see that we are establishing the base technology that will allow us to be a potential candidate in the general clad pipe business. And the reason why we may have opportunity there is that it seems like in the new gas field that they are being explored, which are in stable – politically stable countries, they seem to be deeper, hotter, dirtier quotes, meaning more corrosion associated with those, and higher pressure. All of that would seem to lead to thicker product – thick in the sense of the thickness of the pipe, and higher nickel alloys. And that combination is very favorable for explosion welding.

James Bank – Sidoti & Company

Okay, that’s great. Thank you for that. And that is all I have.

Yvon Cariou

Thank you.

Rick Santa

Thank you.

Operator

Your next question comes from Phil Gibbs of KeyBanc.

Phil Gibbs – KeyBanc

Hi, gentlemen, good evening. How are you?

Yvon Cariou

Good evening, Phil.

Phil Gibbs – KeyBanc

I had a question about potential opportunities in the shale gasification market. Obviously, unconventional wells are becoming almost conventional at this point in the US and around the world. And I just wondered how much of that is an opportunity for you as we look at some of these energy sources going forward?

Yvon Cariou

Shale gas potentially could have some opportunity for us. I see deeper configuration will probably carry a bigger potential as opposed to shallow situation.

Phil Gibbs – KeyBanc

Is there any noticeable change between the North American and European markets in general from what you're seeing? Is Dynaplat or your shop up in Mount Braddock, is there a difference in activity?

Yvon Cariou

Yes. The way we look at it is, when we say US, it means US-based operations servicing South and North America and the Far East region and Australia, while Europe-based, including Dynaplat, Nobelclad and Nitro Metall, service Europe, Russia, India and the Middle East. And so both industrial bases really service a global market. And I think we see them both carrying opportunities that can be somewhat different, maybe more oil and gas in this part of the world, although in the Middle East you have certainly opportunities, but a lot of the fabrication for the Middle East project can be in Asia, for example.

In Europe, we’ve been quite successful in the aluminum sector for the some of the emerging economies where we have a great product line. So it’s – the product mix is different from one region to the next. And I think they are both carrying good potential. One thing that may be a little bit of a crystal ball indicator for us is that we have an internal jargon here, and we call that cats-and-dogs, meaning small projects, as opposed to white elephants, that would be a big project. And we see more cats-and-dogs across the world. And although they are not going to carry us into huge growth, they are an indication that things are starting to come back.

Phil Gibbs – KeyBanc

Thanks for that color. I was more curious upon your view of the rate of recovery between the two regions. Seemingly to us, Europe would be – Europe appears to be somewhat lagging. And I'm just curious of your perception now with the debt issues.

Yvon Cariou

Europe may be lagging, but again, our Europe platform services all the markets in Europe, which includes India and the Middle East and Russia. And so we have the opportunities in that region. I meant aluminum is one. The power generation would be another one that could be of significance, while maybe chemical would be more on this part of the world or oil and gas. When I say this part of the world, what is serviced from North America, which includes the Far East and Australia and South America.

Phil Gibbs – KeyBanc

Perfect. Yes, I think that's all I've got. Thanks, guys.

Yvon Cariou

Thanks.

Rick Santa

Thanks, Phil.

Operator

Your next question comes from Daniel Hazelwood [ph] of Compliant Technologies [ph].

Daniel Hazelwood – Compliant Technologies

Good evening, gentlemen. Thank you for your time. My quick question is, do you see the basic – the stock price staying in line with last year's figures, or are we looking at something that may bump based on dividends?

Yvon Cariou

We really would not guide on that, and I don’t think we would be able to guide on that intelligently, Daniel.

Daniel Hazelwood – Compliant Technologies

Are there dividends based on the earnings?

Yvon Cariou

We have a policy of dividends that was instituted in 2006. And we’ve been paying first yearly dividend and we switched to quarterly dividend last year. And I think we are a company that will probably stick with that general policy. I don’t think it would be altered in any significant way.

Daniel Hazelwood – Compliant Technologies

I – as a personal investor of over $30,000, I see the future with you guys as pretty exciting, and I've seen the stock kind of dip over the last six to eight months. Nothing to be alarmed about, but I just wanted to make sure that you guys are on the right track too.

Yvon Cariou

Well, we are really excited about the opportunities, both our global expansion in the explosion and welding world is still not complete. So we have work to do that should give us growth. And we are very excited about the Oilfield Products segment where we feel we have sales opportunity for organic and external growth as well.

Daniel Hazelwood – Compliant Technologies

Is that based on the rate of the US dollar falling, or are we looking at international currencies that play into that?

Yvon Cariou

No, it’s just based on the growth of the general economies and opportunities in the developed economies and growing economies.

Daniel Hazelwood – Compliant Technologies

Okay. Well, thank you for your time, gentlemen.

Yvon Cariou

You’re welcome.

Operator

This concludes the Q&A session. Mr. Cariou, do you have any closing remarks?

Yvon Cariou

Yes. I’d like to thank everybody for participating, for your continued interest. We remain extremely bullish on the future of DMC. And with great support of our employees and great guidance of our Board of Directors, we think we are going to deliver what is investors’ desire. And I look forward to speaking with you all again in the next quarter. Thank you.

Operator

This concludes today’s conference. You may now disconnect.

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