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Executives

Geoff High – Pfeiffer High Investor Relations, Inc. – Investor Relations

Yvon Cariou – CEO, President

Rick Santa – SVP, CFO

Analysts

Taryn Kuida – D.A. Davidson & Co.

Joe Giamichael – Global Hunter Securities

Phil Gibbs – KeyBanc Capital Markets

Gregory Macosko - Lord Abbett & Company

Dynamic Materials Corporation (BOOM) Q2 2012 Earnings Conference Call July 31, 2012 5:00 PM ET

Operator

Greetings, and welcome to the Dynamic Material Corporation 2012 Second Quarter Conference call. At this time, all participants are in a listen-only-mode. A brief question-and-answer will follow the formal presentation. (Operator instructions). As a reminder, this conference is being recorded.

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

Geoff High

Thank you, Sherry. Good afternoon, and welcome to Dynamic Materials’ second quarter conference call. Presenting on behalf of the company will be President and Chief Executive Officer, Yvon Cariou; 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 supplements, projections and assumptions as of today’s date and are subject to risks and uncertainties that are disclosed in Dynamic Materials filings with the SEC. 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 the call. Details for listening to today’s replay or webcast are available in today’s news release.

And with that, I’ll now turn the call over to you Yvon.

Yvon Cariou

Thanks, Geoff. Good afternoon everyone. Second quarter sales came in on the high end of our focus range as each of our business segments achieved its position objectives. Consistent with the past several quarters, orders shipped by our Explosion-welding segment were predominantly for capital projects in the upstream oil and gas, chemical and petrochemical industries. Based on our market analysis and recent coding activity, it appears this sector will continue to be our best prospective even market for the foreseeable future. From a geographic perspective, the Middle Eastern and Asia remain our strongest regions, although North America has also been quite active.

Coding activity remains very healthy and our sales team is pursuing a wide range of other opportunities, several of which are quite large. That said, we are seeing a slowdown in the rate at which we are converting those prospects into firm orders. We believe this is largely due to widespread concerns about the direction of the global economy particularly in Europe.

You will recall, we saw a 28% surge in our Explosion-welding backlog during the first quarter, and we were optimistic that figure would continue to hold during Q2. But with the recent slowdown in bookings, our quarter end backlog remains sequentially flat at $57 million.

Despite this year of lengthy bookings performance, our market development efforts for the Explosion-welding business continued in earnest during the second quarter. Our principal areas of focus continue to be geographic expansion in Asia and new industrial applications for our clad plates. Both of these initiatives are lengthy processes but every quarter seems to bring new products and Q2 was no exception.

In Oilfield product segment, there is another quarter of solid growth. We said advancing 20% versus the second quarter last year and operating income improving 47%. During the quarter we saw sustained from demand for our well perforating products. Of course most of the international regions we serve and we continue to capture new market share.

In North America, Exploration and production companies continue to shift their bringing focus away from natural gas and more towards oil. Since these shifts are not necessarily happening in parallel, we think we could see a near term dip in order volume for our perforating gun systems in the United States and Canada. However, given the dramatic increase in oil and gas reserves taking place in both countries, we believe they will all present very large markets for our oil field products business for many years to come.

Of course we are taking steps to ensure we capitalize on anticipated demand growth, not just in North America but globally. The shaped-charged manufacturing facilities we are establishing in Texas and Siberia are proceeding on plan. We have selected the construction contractors for the facility in Russia, and have narrowed the field of prospective builders for our Whitney, Texas facility. We also have begun working with the fabricator that will manufacture the pieces for our ship charges.

At AMK, (inaudible) has continued its active pursuit of new customer relationships, both in traditional market such as ground power on aerospace and in non-core industries such as oil and gas. The dialogue with prospective customers continue to be very encouraging and has revealed a range of new opportunities for our specialized welding services. We also have seen new opportunities emerge with some of our large existing customers. We believe the current market development efforts could return AMK to growth mode by the end of the year.

I’ll now turn the call over to Rick for review of our second quarter financial performance. Rick?

Rick Santa

Thank you, Yvon, and good afternoon everyone. Our second quarter sales came in at $48.7 million, down 10% from the second quarter last year. As Yvon mentioned sales were at the top end of our forecast range with anticipated decline of 10% to 14% versus last year’s second quarter. The decline was largely due to the timing of shipments out of our Explosive metalworking backlog. As many of you know, it generally takes roughly three to nine months to process our larger Explosive-welding orders for the bulk of the bookings that came in during the first quarter were shipped sometime during the second half of year.

The Explosive-welding sales during the quarter were $27.4 million, down 23% from the second quarter last year. This was partially offset by the performance of Oilfield product segment, which reported sales of $18.9 million, up 20% from the second quarter last year. Sales at AMK dipped 11% to $2.4 million compared with last year’s second quarter.

Gross margins net of our expectations at 29%, which was flat versus last year’s second quarter.

Operating income declined to $3.7 million from $5.9 million in the second quarter a year ago, while net income came in at $22.7 million or $0.20 per share versus $3.9 million or $0.29 per share in the year ago second quarter.

Adjusted EBITDA was $7.5 million versus $9.5 million in the same quarter last year.

Operating cash flow at the six month mark increased to $8.1 million versus $755,000 at last year’s mid-year point. The strong improvement is a part due to the substantial investments we made last year and building up our Oilfield product inventories.

Turning to expenses. G&A costs increased by 11% to $4.6 million from $4.2 million in the second quarter last year. Selling and distribution costs increased 6% to $4.1 million from $3.9 million in the second quarter last year. Combined second quarter SG&A expense of $8.8 million was in line with our past guidance, which calls for 2012 SG&A of roughly $9 million per quarter. We have also noted that our SG&A forecast excludes full year amortization expense of purchased intangible assets.

Looking at our June 30 balance sheet, total current assets increased to $95.3 million from $91.2 million at December 31, 2011, while total assets increased to $222 million from $213.4 million over the same period. As we noted in our last call, the increase was partially attributable to our first quarter acquisition of TRX Industries, with added assets of approximately $10.3 million. Current liabilities were $27.1 million versus $29.3 million at December 31. And total liabilities were $73.3 million versus $57.4 million at the end of the fourth quarter. We finished the second quarter with working capital of approximately $68 million and a current ratio of better than 3.5:1.

And now for guidance. As Yvon noted, we’ve seen some trepidation feedback into our end markets, and this has slowed down the strong bookings momentum we enjoyed during the first quarter. Although our hot list of prospective planning orders remained strong and could lead to a resurgent in bookings during the second half of the year, it is unlikely we could fulfill those orders in 2012 unless they came in very soon.

So with that in mind, we are modifying our 2012 sale guidance downwards. We now expect the 2012 sales will be roughly equivalent to the $209 million we’ve reported last year. We previously expect the year-over-year sales increase of 7% to 10%. Our full year gross margin forecast is unchanged at 29% to 30%, and our anticipated blended effective tax rate is expected to be 30% to 32%, versus our previously forecast range of 28% to 32%.

For the third quarter, we anticipate consolidate sales will be down 6% to 10% from sales of $54.9 million in the third quarter of last year. We anticipate gross margin will improve approximately 29% for 27% in the year ago third quarter.

And again, we expect SG&A expense for approximately $9 million per quarter or $36 million for the full year. And of course this excludes approximately $6 million of expected full year amortization of purchased intangible assets.

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

Question-And-Answer Session

Operator

Thank you. We’ll now begin asking a question-and-answer session. (Operator instructions). One moment please as we pull for questions. Our first question comes from Taryn Kuida, from D.A. Davidson.

Taryn Kuida - D.A. Davidson $ Co.

Hi. This is Taryn Kuida, filling in for Avinash. I was just calling to see if – you had just mentioned that you’ve seen more turn towards oil and I was wondering what the oil versus natural gas mix was for your explosive clad business?

Yvon Cariou

Hello. Good afternoon. You are asking on the oil segment or oil product segment versus clad?

Taryn Kuida - D.A. Davidson

I was wondering what the mix was in your explosion clad business?

Yvon Cariou

Oh, inside the explosion clad?

Taryn Kuida - D.A. Davidson

Inside the explosion clad, yes.

Yvon Cariou

Yes. Well in terms of mix, we have a pretty steady two-third of our business has to do with oil and gas and petrochemicals. As I – is pretty constant and I don’t think we have seen a big shift in there.

Taryn Kuida - D.A. Davidson

Okay. And is there – was the mix is between the oil versus the natural gas?

Yvon Cariou

Inside clad oil versus gas I would say that inside the oil and gas segment first, we are more upstream opportunities and downstream being refineries and the like. Upstream being separators and sludge captures and everything that is just around the wellhead and little bit to downstream from that. I would think there is more natural gas opportunities and oil, but it’s a mix – I mean it’s hard to pick a number, it shifts with every project. But I would call it maybe 60/40 loaded a little more towards gas overall. It’s talking about opportunities, right? Not necessarily shipment.

Taryn Kuida - D.A. Davidson

Right. Perfect. Thank you so much. And then in regards to roll bonding business, I was just wondering how the utilization rates were for the steel guys and if you’ve been able to see and the extra work come from it?

Yvon Cariou

We do not get involved in roll bond. Roll bond is a competitive technology and it’s a technology that we meet on some market segments. For example, we do not see them as much in the clinical industry because that is a segment where you see more cohesive applications, where typically you have more non-compatible metals such as titanium and steel, while in the upstream oil and gas you see more compatible metals such as stainless steel and steel. And so we compete against roll bond more in that arena and as the market mix gives us more opportunities in the upstream oil and gas, we see more of the roll bond competition in our existing coding. And that situation has been such for a couple of years or more and there is no drastic change there. It remains about steady in terms of relative competition.

Taryn Kuida - D.A. Davidson

Okay. Perfect. That’s all I have. Thank you.

Yvon Cariou

Thank you. You are welcome

Operator

Thank you. Our next question comes from Joe Giamichael – from Global Hunter Securities.

Joe Giamichael – Global Hunter Securities

Thank you. You mentioned some of the acquisition opportunities without getting into real details. But I am just curious more from a segment, geography standpoint what you’re looking at right now?

Yvon Cariou

Okay, across the globe in all three business segments that we have, I think we have indicated our great interest to develop our industrial presence in Asia. On that point I can offer these details. We have opened a third office in Korea in a town called Guchan [ph] and we are opening a third office as well in Shanghai and you should look at that as steps towards a deeper involvement in the region. It’s on the initial steps. We certainly are hoping to acquisitions for the clad business in that part of the world. In terms of oil field products, as you know we have initiated significant CapEx Greenfield projects in Russia and in North America in Texas. Over the past couple of years we have done a couple of bolt-on smaller acquisitions and we are hope and mind that for further acquisition in that business segment. But I have to say the priority right now is to advance and complete our vent hill projects and we are open minded as well on our explosion welding – I’m sorry, on our AMK welding division should an opportunity arise at different divisions is building up some interesting momentum.

Joe Giamichael – Global Hunter Securities

Excellent. Thank you very much.

Operator

Thank you. Our next question comes from Phil Gibbs from KeyBanc Capital Markets.

Phil Gibbs – KeyBanc Capital Markets

Hey Yvon, Rick, Geoff. Good afternoon I guess from where you guys are at. Rick, can you give me a sense of the gross margins in the segments? I don’t think the 10Q has come out yet.

Rick Santa

No, it should be on file before the end of the day, but let me provide you these numbers. First for the second quarter standing alone, our planning growth margins in Q2 2012 were 25.5% versus 25.2% in the second quarter of 2011. Oil field products for the second quarter of this year was 35.1%. That compares to 35.7% in the second quarter of 2011. In AMK Welding who is going through this transition period this year in terms of its sales performance, our reported gross margin is 17% in Q2 of 2012 versus 34.4% in 2011. And then for the six months period the padding margins, gross margins were 25.9% in 2012, up from 21.8% in 2011. Oil field products for the six months, 34.2% in 2012 versus 32.8% in 2011 and AMK for the six months came in at 14.6% versus 32.2% in the first six months of 2011.

Phil Gibbs – KeyBanc Capital Markets

Is your operating expense guidance for this year intact? I know you gave some soft comments in the past, maybe somewhere north of $35 million.

Rick Santa

Yeah. So the operating expenses excluding average base of purchase intangibles is still forecast to be roughly $36 million for the full year and $9 million per quarter and then the amortization of purchase intangibles is expected to be approximately $6 million or $1.5 million in each of the last two quarters.

Phil Gibbs – KeyBanc Capital Markets

That’s great. And if I could just ask about the acquisition revenue and oil field and how much incremental revenue did you pull from TRX in the second quarter?

Rick Santa

Hang on just a second I get that for you. In the second quarter TRX provided incremental sales of 1,745,000 which puts the incremental sales at 3,756,000 for the six month period.

Phil Gibbs – KeyBanc Capital Markets

Now that would imply that we’re now getting back to organic growth that’s 7%, 8% if I’m looking at it correctly. Given the fact that your comps are pretty tough in the back half of next year and on an organic basis are we starting to bump up against some pretty south numbers to get across here in the second half of the year?

Rick Santa

Relative to the guidance that we provided, with sales being flat, for the full year 2012 versus 2011, we’re comfortable with that guidance.

Phil Gibbs – KeyBanc Capital Markets

Are you seeing any – I know you pointed in the transition that most of the later cycle companies are pointing to as far as some of the natural gas shipping and the oil. In the very short term, is that creating pockets of inventory? And then secondly off that, maybe if you could, what were the larger drivers of the guidance reduction as far as the two major segments that you have? Thanks a lot.

Rick Santa

Yeah, the larger guidance, the decline relates more to the explosion welding business than to the oil field products business and we expected oil field products are weaker Q3 than what we were previously forecasting. But we were still looking at being on target with our previous forecast for Q4 and some of that relates to the global nature of that business. There might be a little bit of weakness in the US, but we’re very global in that business and we’re seeing good growth in other markets. Russia, Kazakhstan, the Middle East for example.

Phil Gibbs – KeyBanc Capital Markets

No, I was just asking, Rick, if first on the questions if you were seeing any pockets of excess inventory that’s leading to maybe some of your cautious comments, that’s all.

Rick Santa

Excess inventory, the inventory levels are probably a little higher than we’d like them to be and it’s always the management’s challenge to manage inventory levels. But by design we’ve been investing in inventory over the last year because we believe that that will help us in our efforts to gain market share around the globe.

Phil Gibbs – KeyBanc Capital Markets

I mean at your customers, Rick.

Rick Santa

No, because in North America we inventory on behalf of our customers for the most part. We have five distribution centers in Alberta and nine distribution centers in the United States and we’re delivering to our customers. So they’re not stuck. They are not maintaining inventory as we are.

Phil Gibbs – KeyBanc Capital Markets

Okay. Thank a lot.

Operator

(Operator instructions). Our next question comes from Gregory Macosko from Lord Abbett & Company

Gregory Macosko - Lord Abbett & Company

Yes. Thank you. Could you give us a little, just in terms of July, just anything in terms of orders? I know you talk about the quoting et cetera, but was there anything in July that you’ve seen come in?

Yvon Cariou

Yes. We have booked a very interesting order for the transportation wells in clad. We’ve been talking over the past couple of years I guess of that new market segment and we just received an order that had been expected for some time. It’s a few million dollars for regional plants application in Europe and that’s the most significant we can talk about in terms of July. We keep recording possible in all market segments. As we indicated earlier, steel, oil and gas, petrochemical remains the biggest sector of activities.

Gregory Macosko - Lord Abbett & Company

Okay. And with regard to the Texas and Siberia facilities, I assume all that cash is being capitalized. Is there any drag from that in terms of the oil and gas segments?

Rick Santa

No. It’s all capital expenditures.

Gregory Macosko - Lord Abbett & Company

Okay. And the inventory, well I don’t have in front of me the sequential increase. It was up about 3 million from December. It has been building from the first quarter as well and so we had a normalized level. You mentioned you went and invested in inventory to gain market share.

Rick Santa

Yeah. The buildup was a little bit higher than we expected from the end of Q1 to Q2 and some of that has to do with the seasonality of the business in Alberta where it was a very wet spring, difficult to get the rigs into the oil field. So as those orders were being delayed inventory built up some. The increase from the beginning of the year is $3 million $4 million and about half of that came from the TRX acquisition that closed on January 3rd. So we would expect to see a decline in inventory levels during the last half of the year.

Gregory Macosko - Lord Abbett & Company

All right. So is the point then you have inventory in kind of a relatively good position relative to what you need to go forward to gain share?

Rick Santa

We believe so.

Yvon Cariou

Yes, that’s a good observation.

Gregory Macosko - Lord Abbett & Company

Okay. Then the last thing is that you maintained your gross margins for the year for your guidance and yet you brought the revenues down obviously. What does that imply? Is there something with regard to the mix? Just very honestly I would expect the gross margin to come down if revenue growth is not what you expected.

Rick Santa

Yes. Part of it is a different business segment and how they contribute. I indicated a few minutes ago that the decline in our guidance related principally to the close of metal working business which means for the full year oil field will be a higher proportion of sales in their gross margins for this quarter we’re in the 35% range versus the 26% range for explosive metal working. So part of it is the contribution from each of the business segments with oil field contributing more to the full year sales and the other part of it is the closing and welding margins, the pricing looks quite well.

Gregory Macosko - Lord Abbett & Company

And then finally if you could look and factor the orders quoting, you say it’s decent, pretty good. Give us a sense of where those geographies are. Are the geographies the same kind of as they all have been? Are you seeing less interest in China, more interest in Europe? You’ve mentioned the Middle East and Asia, but talk about just the geographic mix of that quoting activity.

Yvon Cariou

Yes, it’s pretty steady. We quote significantly throughout Asia, but some of that and just for projects in the Middle East and that picture has not changed. We do export into China, but we export on the high end of the applications over there. It’s kind of a spiky business. So we cannot say that we have observed a definite slowdown of callings or booking throughout that part of the world. The rest, North America is not insignificant for us. We think there’s a potential for more and some projects are pushed to the right. But the background is still there and in Europe, Germany remains attractive to us and direct quotation into the Middle East remains quite significant.

Gregory Macosko - Lord Abbett & Company

Okay. And then lastly, with regard to the roll bonding, the previous question, I guess the question is to ask, you’re saying that given the situation where you’ve seen somewhat of a slowdown, you’re not seeing more of the roll bonders kind of coming into your market stronger given the slowdown in worldwide growth.

Yvon Cariou

No, we are not seeing that. I think the competitive battlefield with roll bond remains stable, both on price and delivery. Again we are not competing first of all in their total domain. We are competing on the fringe of it and that battle remains steady and constant, particularly in upstream oil and gas.

Gregory Macosko - Lord Abbett & Company

Okay. Thank you very much.

Operator

Thank you. Our next question is a follow from Phil Gibbs from KeyBanc Capital Markets.

Phil Gibbs – KeyBanc Capital Markets

Hey guys. What’s the other income in the second quarter?

Rick Santa

Most of it foreign exchange gains, some realized, some unrealized relating to the strengthening dollar versus the euro.

Phil Gibbs – KeyBanc Capital Markets

Okay. And what should we look at for your full year interest expense here?

Rick Santa

Borrowings will probably be a little bit higher in the second half of the year with the timing of the CapEx that we expect. I hope that property cash flow will also be a little bit stronger. I think our previous guidance of $1 million for the full year, roughly $250,000 a quarter is still a good number.

Phil Gibbs – KeyBanc Capital Markets

And your CapEx right now is just $20 million or so for the year so you’re expecting…

Rick Santa

Yeah. We’re still looking at $20 million for the full year.

Phil Gibbs – KeyBanc Capital Markets

15 for the back half? Okay.

Rick Santa

Yeah, exactly.

Phil Gibbs – KeyBanc Capital Markets

All right, thanks a lot.

Operator

Thank you. At this time we have no further questions. I’d like to turn the call back over to Mr. Cariou for closing comments.

Yvon Cariou

Thank you all for joining us for today’s call. As you have heard, each of our business segments is working or that is that we believe we further strengthen the DMC’s prospects for continued success. We look forward to updating you on our progress at the end of the third quarter. Thank you very much. Talk to you soon.

Operator

Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time and have a wonderful day.

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