Dynamic Materials' CEO Discusses Q1 2014 Results - Earnings Call Transcript

Apr.29.14 | About: Dynamic Materials (BOOM)

Dynamic Materials Corporation (NASDAQ:BOOM)

Q1 2014 Results Earnings Conference Call

April 29, 2014, 05:00 PM ET

Executives

Geoff High – IR

Kevin Longe – President and CEO

Rick Santa – SVP

Mike Kuta – CFO

Analysts

Edward Marshall - Sidoti & Company

Avinash Kant - D.A. Davidson

Gerry Sweeney - Boenning & Scattergood

Operator

Greetings, ladies and gentlemen and welcome to Dynamic Materials Corporation 2014 First Quarter Conference Call. At this time, all participants are in a listen-only mode. A 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. Thank you, sir. You may begin.

Geoff High

Thank you, Jen. Good afternoon and welcome to DMC's first quarter conference call. Presenting on behalf of the company will be President and CEO, Kevin Longe; and Senior Vice President, 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 DMC’s 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.

DMC assumes no obligation to update forward-looking statements that become untrue because of subsequent events. A webcast replay of today’s call will be available at dynamicmaterials.com after the call. In addition, a telephone replay will be made available beginning approximately two hours after the conclusion of the call. Details for listening to today’s replay or webcast are available in today’s news release.

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

Kevin Longe

Thanks, Geoff and good afternoon everyone. Before we discuss our first quarter, I would like to introduce Mike Kuta, our new Chief Financial Officer, who recently joined DMC from Berkshire Hathaway's Lubrizol Corporation. Mike brings a strong financial management background and extensive experience with global industrial operations. We are excited to have Mike on the DMC team and look forward to his contribution.

Former CFO, Rick Santa, is commencing his new duty as Senior Vice President of Business Development. As many of you know, Rick has been DMC's CFO for the past 18 years and he has been a key contributor to our growth and success. I would like to thank Rick for his dedicated service and look forward to working closely with him in his new senior leadership role as we pursue strategic growth initiative.

Our first quarter financial results were in line with our forecast and benefited from strong performance of our Oilfield Products segment, which includes DynaEnergetics and AMK Technical Services. These businesses combined to deliver a 17% year-over-year improvement in sales and a seven points resulted from our emphasis on selling higher technology products and our continued focus on being compensated for that technology.

DynaEnergetics, our perforating business for oil and gas wells, is experiencing favorable market condition, especially in North America and the Middle-East. The new DynaSelect detonator system, we told you about during our last call, is generating strong demand in North America's unconventional shale plays.

With the system selective perforating and RF-Safe features are providing customers with improved efficiency and safety in the well completion. The success of the DynaSelect system is the result of our strong research and development organization based in Germany. This team is working on several new products that will extend DynaEnergetics' capabilities in the perforating market.

We will be introducing one of these new product lines, the DynaStage gun system at the Offshore Technology Conference in Houston next week. DynaStage leverages the safety and selective features of the DynaSelect detonator system and also provides its customers with increased efficiencies at the wellhead.

This gun system is fully customizable and comes preassembled, meaning it does not require field wiring or loading. It can also be used in both conventional and unconventional completions. We believe it represents a major step forward in perforating technology and we look forward to introducing it to the market.

At NobelClad, bookings remains slow despite continued strong quoting activity, particularly on projects in the global energy and chemical markets. Many of our fabricated customers are reporting similar disparities between quoting and booking activity.

There are signs that investment activity is improving, especially in the chemical industry. The American Chemistry Council reported on February that 148 projects are slated for construction in the U.S., thanks largely to the abundance of low-cost natural gas. These projects are expected to command more than $100 billion in capital investments in the coming years.

The NobelClad team has been evaluating these projects and is in regular communication with many of the fabricators and engineering companies expected to be involved.

Although, much of the initial infrastructure involves chemicals that are not highly corrosive, we anticipate an eventual progression towards down stream projects that could involve more aggressive derivatives requiring NobelClad superior explosion clad plates.

I am encouraged by the growing strength of DynaEnergetics, cautiously optimistic that NobelClad would see a rebounding in demand in the coming quarters.

I will now turn the call over to Rick for review of our first quarter financial performance. Rick?

Rick Santa

Thanks Kevin and good afternoon, everyone. Our first quarter sales increased 4% to $48 million versus Q1 last year. Gross margin improved to 30% from 28% in last year's first quarter. Gross margin was above our forecast range of 27% to 28%, which was simply due to the favorable product mix at our Oilfield Products business.

Operating income was $2.8 million, up from an operating loss of $1.1 million a year ago. Remember that last year's first quarter included $3 million in non-recurring expense associated with management retirements.

First quarter net income was $1.6 million or $0.12 per diluted share, up from net income of $215,000 or $0.02 per diluted share in Q1 year ago. Last year's first quarter net income benefited from $1.2 million tax benefit.

Adjusted EBITDA increased 107% to $6.9 million from $3.3 million in the 2013 first quarter. Our balance sheet at the end of the first quarter showed that we maintain the strong financial position. At March 31, we had cash and cash equivalents of $9.1 million, working capital of $70.5 million and the current ratio of 3.5 to 1. Current liabilities were $27.8 million and total liabilities were $54.6 million. We closed the quarter with net debt of $18.3 million and stockholders' equity was $172.3 million.

With respect to guidance, we are maintaining our prior full year forecasted revenues. We expect it will be flat to up 4% versus last year's $209.6 million. Gross margin guidance remains at 29% to 31% versus 28% last year. Our blended effective tax rate is expected to range from 29% to 30% based on our full year projected pre-tax income.

For the second quarter, we expect sales will be down 5% to 7% from the $57.9 million we reported in last year's second quarter, but up 12% to 14% from our first quarter revenue of $48 million. Gross margin is expected to be in a range of 29% to 30% versus 30% in last year's second quarter.

SG&A expense should be in a range of $10 million to $10.2 million and second quarter amortization expense should be approximately $1.6 million. Interest expense for the quarter is expected to be approximately $120,000.

Before I open the call up to questions, I too want to welcome Mike to the DMC team. He and I have worked mostly over the past few weeks and I eco Kevin's sentiment. I am very glad to have him on Board. Mike?

Mike Kuta

Thanks Rick and Kevin and hello to all of you on the call. Let me just briefly say I am excited about my new role at DMC and by the opportunities the company is pursuing. I am also looking forward to getting know many of you in the months and quarters ahead.

Rick Santa

Jen, I believe we are now ready to take any questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Edward Marshall with Sidoti & Company. Please proceed with your question.

Edward Marshall - Sidoti & Company

Hey, good afternoon, guys.

Kevin Longe

Hi, Ed.

Rick Santa

Hi, Ed. How are you doing?

Edward Marshall - Sidoti & Company

Good, good. Welcome, Mike.

Mike Kuta

Thanks.

Edward Marshall - Sidoti & Company

So I wanted to just circle back on a few things. I didn’t see you like most -- so many industrial companies out there, talk about weather at all, either in the comments or in press release. I am just curious, did weather have any impact with you in the quarter. And I guess, especially with some of the fracking kind of interesting or fracking stuff that you saw.

Kevin Longe

I think some of the other companies in the industry reported that it impacted their first quarter. However, we had a number of things going on. I think that the improvement that we had in our product line offset some of the geographical and weather related things. And so we came in, quite frankly, where we anticipated in the quarter.

Edward Marshall - Sidoti & Company

And the next question I want to talk about is kind of facilities that are going on in overseas in Siberia and I am just kind of curious as to -- can you make any comment -- obviously, there has been a lot of sanctions and so forth that have been directed in that region. I am just kind of curious as to maybe any impact that you could see or any kind of difficulties you have been with construction now and is that project still online.

Kevin Longe

Yeah. First of all, as you know, these things are on holding, as we speak. But I can state that to-date we have not seen a slowdown in activity. On the construction project, we are moving with our investment. We expect that investment to be fully operational by the end of the third quarter of this year. And so we are on target with that.

We have seen -- certainly the ruble is depreciated relative to the dollar and some of the other currencies. And we are concerned, but we are focused on the long-term in hoping that this is something that's more short-term of nature. Last year, Russia was busted in the associated countries with less than 4% of our revenues and insignificant from an income standpoint. And so its impact on us going forward is really an expectation for growth and also the value the investment on the balance sheet.

Edward Marshall - Sidoti & Company

Right. And how far along are you? I know that was supposed to be done some time the end of 2014, how far along are you or are you still on target?

Kevin Longe

Yes, we are on target. The equipment is shipping as we speak. Three out of the four main parts of this project are complete. There is a gun manufacturing facility that complete, a power plant that servers the whole campus and the office, and that part of the business is up and running successfully.

The remaining part is the shaped charge manufacturing facility which is under construction. The buildings are up. They are being finished out. The equipments are going to be installed in June and July. And we are going start commissioning in September and October and hopefully will be fully operational in November.

Edward Marshall - Sidoti & Company

If I look at the margins from Oilfield Products just a bit and I look at the performance there. And I know some times you have kind of tender offer, tender kind of transactions that run through that business. Was there any other thing that might be fuggy in the quarter that might be recurring in that numbers that just kind of better demand and improve customer activity and then obviously servicing from much closer location is caused -- planning dividend, will that carry to the remainder of the year 2014.

Kevin Longe

It’s a good question to ask. The biggest impact on the margin was product mix with hard DynaSelect switch detonator system taking hold with the major customer and that's a very high margin product. And so that pulled our margin off in addition to the additional volume. And we expect that to continue throughout the full year.

Having said that, we have some large…

Kevin Longe

Yeah, the Indian tender will ship in Q2 and that was the value of that order. This year is $3.2 million. And that carries a slightly lower margin, because it's competitively bid.

Edward Marshall - Sidoti & Company

It will be offsetting -- some offsetting characteristics between those two programs.

Kevin Longe

Yeah. And that's mostly hardware versus the higher technology of the DynaSelect system.

Edward Marshall - Sidoti & Company

Okay. And then finally, Rick, I may have missed it, but if you give kind of an outlook, I know you gave it for amortization. But could you give an outlook on SG&A either for and if you did, maybe could for the quarter and for the full year.

Rick Santa

Yeah, we -- the guidance is for $10 million to $10.2 million of SG&A per quarter.

Edward Marshall - Sidoti & Company

Okay.

Rick Santa

That includes amortization expense, which is at the merit of $1.6 million.

Edward Marshall - Sidoti & Company

That excludes…

Rick Santa

That excludes amortization expense, that's right.

Edward Marshall - Sidoti & Company

All right. Thank you.

Operator

Thank you. Our next question comes from Avinash Kant with D.A. Davidson & Company. Please proceed with your question.

Avinash Kant - D.A. Davidson

Good afternoon Kevin and Rick and welcome Mike.

Kevin Longe

Hi, Avinash. How're you?

Avinash Kant - D.A. Davidson

Very good. Thank you. A few questions. The first one actually a little bit on the explosion clad side. I think you're making some remarks about the use of these corrosion resistant materials in the chemicals industry versus the oil and natural gas. Were you implying that the chemicals industry actually uses a little bit less of these versus the oil and gas or not?

Kevin Longe

It depends on the type of projects that are going on Avinash and ethylene-based projects are cleaner than a lot of the oil and gas things that we get into.

But typically the oil and gas is -- they're very dirtier, more corrosive, we'll see a much higher utilization of our clad placed in oil and gas versus chemical.

Avinash Kant - D.A. Davidson

And the improvement in margin that you've been seeing, does it also have some component of the fact that you have the Texas facility running now, if it is, then what -- how much of the component?

Rick Santa

I don't think it's benefiting us at this point in time Avinash with operating one shift. That one shift happened to absorb the full fifth overhead of that new.

I would say in the first quarter it was actually slightly negative -- product mix and the strong DynaSelect sales.

Avinash Kant - D.A. Davidson

So then how should we see that changing and then how could the impact be over the next few quarters that we're seeing this year and beyond? Like when do you expect to go to more than one shift?

Rick Santa

Over the summer we expect to go to more than one shift. We're looking at that right now. We're being very cautious to make sure that we expand at a rate that we can educate and train the employees because they are working with explosives.

The demand is therefore -- the product and we expect probably by the end of the second quarter, beginning of the third to be working on second shift.

Avinash Kant - D.A. Davidson

And, at that point, it will start to add to margins?

Rick Santa

I would think once we -- once we get up to two-fold shift and provided we're selling through and that we should see a modest benefit this year and larger benefit as we move into 2015.

Avinash Kant - D.A. Davidson

Okay. And in the tax rate assumptions that you have, do you have -- have you assumed that the R&D tax credits will go through or not? And what's the impact of that?

Rick Santa

Good question…

Kevin Longe

The tax benefit -- tax credit,…

Rick Santa

R&D, Kevin.

Kevin Longe

I don't think we factored those into our forecast.

Avinash Kant - D.A. Davidson

Okay. And, then, in terms of CapEx, like what kind of CapEx are you targeting for the 2014?

Kevin Longe

In the $12 million range, with the majority of that being associated with completing the Tyumen facility.

Avinash Kant - D.A. Davidson

So, the second and third quarters will have higher CapEx?

Kevin Longe

Yeah, very much up.

Avinash Kant - D.A. Davidson

Okay. And…

Kevin Longe

And, then, in fact we'll see -- we'll see half of that CapEx in the second and third quarters little bit greater than that.

Avinash Kant - D.A. Davidson

More than 50% in the two quarters. And then little bit of in terms of the trend like now, I can see the full year guidance, of course is unchanged and you have given guidance on the Q2.

So, what's the directionality of revenues in Q2 -- Q3, Q4, like? Is it growing from here all through, or is it up in certain quarters and down in certain?

Kevin Longe

I think the strongest quarter on a NobelClad side of business would be the fourth quarter and we hopefully start to build backlog. And in most years we've seen a little bit of fall-off in DynaEnergetics in Q4. So, I would expect Q4 to be a little bit stronger than Q3.

Avinash Kant - D.A. Davidson

It looks like sequential growth could go through all the way to Q4?

Kevin Longe

Yes.

Avinash Kant - D.A. Davidson

Okay. Perfect. Thank you so much.

Operator

Thank you. (Operator Instructions) Our next question comes from the line of Gerry Sweeney with Boenning & Scattergood. Please proceed with your question.

Gerry Sweeney - Boenning & Scattergood

Good afternoon, guys.

Geoff High

Yeah, hi, Gerry,

Kevin Longe

Hi, Gerry.

Rick Santa

Hi, Gerry.

Gerry Sweeney - Boenning & Scattergood

Just a -- a lot of my questions have been asked, but just certain backlog oilfield services. Kevin, you mentioned -- you didn’t necessarily see an impact from weather or it maybe it was math because you had a lot of positive pull through on product.

But I'm curious as to the tone of the business that is out there versus 4Q. 4Q was a little bit slower. I think people are heading into the end of the year and weren’t that interested on upping the CapEx, but I'm interested at the tone of spending and pull-through into 1Q and what you're seeing in the second quarter as well?

Kevin Longe

The Q1, it started off strong. We also have the Indian tender, which is going to be shipping in the majority of that in Q2. So we expect growth in the Q2 for this business.

And we are in a strong market and we're introducing a strong product or have a strong product that we introduced last year followed by what we believe is going to be another strong product that we're introducing next week.

And those products take time to ramp, but we feel that the ramping on the DynaStage is going to be faster than the DynaSelect from a training standpoint.

And so, we're very -- we feel very comfortable with our forecast for the year in this business because of its strong market in the products that we're introducing.

And we still have a very small share of that overall market and we're approaching it from a technology standpoint and, in order to improve our share position. And so we feel pretty good about it.

Gerry Sweeney - Boenning & Scattergood

Okay. And then, just jumping over to, I don't know, I am sorry, staying with oilfield services or DynaEnergetic, how much is the total investment in Russia, in that plant?

Kevin Longe

$16 million.

Rick Santa

Yeah, that's correct.

Gerry Sweeney - Boenning & Scattergood

Okay. Got it. All right. I just wanted to clarify that and then first of all then obviously, I’ve talked to you a little bit about tailwind in the chemical business etcetera and maybe, obviously you mentioned that ethylene business may not fit cleaner and it doesn't have as much flow for the NobelClad business.

But, when you talk to your clients and they're talking about increased activity, but not necessarily seeing the pull-through on the orders, is this a timing issue? Is there any inclination that we'll see an acceleration in orders? Again this is probably more qualitative, but any type of thoughts or guidance you can give us on that front?

Kevin Longe

I mean we see -- I guess to put in perspective where our coating activity is up significantly and how we measure it, when we compare the first quarter of 2014 to the first quarter of 2013. And so that -- meeting the cautious optimism on our part, there is quite a lag time between closed and orders and we had hoped by now we would be seeing an increase in bookings, to be honest with you.

And so we're cautiously optimistic in anticipating an increase in incoming orders for the balance of the year, but as you can see from where our bookings and backlog is, we did not see that in the first quarter.

Gerry Sweeney - Boenning & Scattergood

Okay. That's it from my end. Thank you.

Operator

Thank you. We also have another question from the line of Edward Marshall with Sidoti & Company. Please proceed with your question. I apologize just a moment. Hi Mr. Marshall, please go ahead.

Edward Marshall - Sidoti & Company

Hi guys, hello.

Kevin Longe

Yeah. Hi, Ed.

Edward Marshall - Sidoti & Company

Okay. So, I'm curious, did you quantify the pickup in coating activity year-over-year? Is there anyway to do that? And the coating activity that you might have had in 2013, because I think it's been relatively strong throughout. Have you seen those orders go elsewhere or is it just continuation of what we've seen, of just discontinuing to quo and just standing still and not a lot of movement?

Kevin Longe

It's the continuation, and we're up, well up, - we're up well over 20% in terms of the coats in the first quarter, compared to one year ago.

Edward Marshall - Sidoti & Company

And do you have that - versus the fourth quarter or?

Kevin Longe

I think it's been carrying through that. I don't have the chart in front of me, but I'll have that next time that you ask it. And -- but we're seeing fairly strong coating activity in the second half of last year and the first quarter of this year.

Edward Marshall - Sidoti & Company

Okay. And there's still -- the second part of that is, if we don't see those coats actually turning to orders sometime in 2Q, you're pretty standard at this $24 million, say $25 million throughout the remainder of the year, right? There's not, there's not a drag or anything along those lines, this is what you'd anticipate because obviously you did book some in the quarter, having a positive backlog in $24 million in sales, so?

Rick Santa

Yeah, and I think you can see from our guidance to add that we have that flat to 4% for the whole company this year. And we're having the growth in DynaEnergetics. So, we've been, we're forecasting a fairly slow year for NobelClad, but we, we don't see it dropping at all below where we are today.

Edward Marshall - Sidoti & Company

And this is simply the backlog down say, roughly 8% to 10% and that's kind of where we perceived a NobelClad coming in for the full year based on where backlog is, that kind of same comments you gave last quarter and there's just be no change to it. And again, is that right first and secondly if you were still coming 2Q, it'll be too tough for you to ship them in 2014 and it will be 2015 event, is that right?

Rick Santa

That's not exactly the case, I think if you look at where we've finished last year, $180 million in sales, and we have a $10 million negative change in the beginning of the year backlog and most of that negative change, unless we've pickup very quickly would show up in the full year sales results, meaning that we could be up by up to $10 million and I know about flat sales for the full year.

But with the lead time now on metal, if we book, even a sizable order, we've got a good chance of shipping a lot of that order inside of three of four months.

Edward Marshall - Sidoti & Company

Okay. And kind of down $10 million or so, is roughly implied in your guidance is basically what you're saying, correct?

Rick Santa

Correct.

Edward Marshall - Sidoti & Company

So, the risks of, - I guess the upside, unless something falls off pretty dramatically?

Rick Santa

I think on the coating activity of the quality approach, we don't expect them all along at this point in time.

Edward Marshall - Sidoti & Company

Okay. Great, thanks guys.

Operator

Thank you. And this time there are no further questions. I'd like to turn the floor back to management for any closing comments.

Kevin Longe

Thank you everybody for joining us on today's call. And we are encouraged by the start to our fiscal 2014, and cautiously as I mentioned optimistic about the near term opportunities, to look forward to updating you on our progress at the end of the second quarter. So, thank you for joining us.

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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