DMC Global Inc. (BOOM) Q2 2015 Earnings Report, Transcript and Summary

Greetings, and welcome to the Dynamic Materials Corporation 2015 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, Geoff High, Director of Investor Relations.

Thank you. Good afternoon and welcome to DMC's second quarter conference call. Presenting on behalf of the Company will be President and CEO, Kevin Longe and Chief Financial Officer, Mike Kuta. I’d 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 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 dmcglobal.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’ll now turn the call over to Kevin Longe. Kevin?

Thanks, Geoff, and good afternoon everyone. Our second quarter sales were $44.7 million, down 14% from last year's second quarter and slightly better than the 15% to 20% decline we’ve previously forecasted. Excluding the impact of foreign currency translation, sales were down 6% from the year-ago quarter. Our top line performance was negatively impacted by the sharp downturn within the global energy industry from which we generate more than 70% of our consolidated revenue. Second quarter gross margin was 28% versus 31% in the year-ago quarter. This decline was due to a lower margin product mix at our NobelClad business as well as lower sales volume on fixed manufacturing overhead expenses. Second quarter operating income excluding restructuring charges, was $1.1 million as compared with $3.8 million last year. Restructuring costs totaled $1.1 million in the quarter and were related to the previously announced consolidation program at our NobelClad and DynaEnergetics businesses. The consolidation projects announced substantially complete and will improve the efficiency of the production capabilities of our operations in both North America and Europe. Loss from continuing operations excluding restructuring was $356,000 or $0.03 per share versus income from continuing operations of $2.1 million or $0.15 per share in the year-ago quarter. Despite our loss from continuing operations, the second quarter included a $1 million income tax provision or $1.2 million excluding restructuring. Mike will discuss this further in a moment. Second quarter adjusted EBITDA was $4.4 million versus $8.2 million in the second quarter a year-ago. Looking at our businesses, DynaEnergetics reported second quarter sales of $23.3 million down 9% from the second quarter of last year or 4% if you exclude the impact of foreign exchange translation. DynaEnergetics second quarter sales benefited from shipping the full value of an order from India, but largely the value of this order was split between the second and third quarters. DynaEnergetics gross margin performance held steady at 37% versus last year’s second quarter, despite the downturn in the oil field services sector. This performance reflects outstanding demand for new products and technology that are helping our customers drive down completion costs and improve the safety and operating performance. Operating income was $1.2 million versus $3.1 million in the year-ago second quarter. A decline related to high commission expense in two large orders, and increased marketing costs associated with the rollout of two new product line. Adjusted EBITDA was $3.4 million versus $4.8 million in last year’s second quarter. Unite sales volume of DynaSelect integrated switch detonator was up 8% versus the first six months of 2014, which reflects an expansion in the number of service companies using the product. At the mid year market 2014, 70% of DynaSelect sales were just single customer. Today there are 20 different oil field service companies using the product in the United States, Canada, and China. We are encouraged by the success DynaSelect is having in China’s emerging unconventional oil and gas market were several energy service companies are incorporating the product into the perforating operations. The superior performance and reliability of our detonating technology in China’s deep high pressure wells is opening the door for other DynaEnergetics products such as our DynaSlot well abandonment tooling. Our team in China is preparing to commence a testing program with a major E&T Company. That is interested in using DynaSlot and its plug in abandonment operations. Since our last call we’ve made significant progress towards commercializing our factory-assembled DynaStage perforating system. The field trials we referenced in our last call are continuing and have already validated our concept of a factory-assembled perforating system that improves performing and brings us reliability and lowers the cost of completions for our customers. We are now ramping our supply chain to commercial volumes and protecting our manufacturing assembly operation. Our customer partners involved in the testing have reported the DynaStage is delivering meaningful improvements in the safety and reliability of the well completion program. We expect to enter commercial supply agreements with these companies during the second half of this year. In anticipation of commercial production, DynaEnergetics has opened a second DynaStage assembly facility as its production center in Blum, Texas. This is in addition to our first assembly center in Mt. Braddock, Pennsylvania. Our NobelClad business reported second quarter sales of $21.4 million, down 18% from the second quarter last year or 9% if you exclude foreign exchange impact. The decline reflect ongoing project device and limited spending in many in NobelClad’s industrial process market. The business also experienced certain shipment delays in Europe during the quarter as production of large clad plates has been transitioned to the NobelClad’s new manufacturing center in Liebenscheid, Germany. Operating income was $1 million versus $3.2 million last year and adjusted EBITDA of $2.4 million versus $4.8 million in the year-ago quarter. NobelClad’s order backlog at the end of the quarter was $37.7 million, down from $39.4 million at the end of the first quarter. Despite the weak capital spending environment there were some encouraging development taking place in NobelClad’s target market. Two of the large specialty chemical projects, our U.S sales team has been pursuing, [indiscernible] advancing towards procurement and construction phase. We anticipate orders from both projects will be awarded later this year or early in 2016. We are also seeing steady demand from the downstream energy sector where our sites are being used in repair and maintenance projects for domestic and overseas for [indiscernible]. We’ve made substantial investments during the first half of the year in restructuring both of our businesses, strengthening the sales and marketing organization and launching new products. The benefits of these investments are evidenced on many levels, including increased large site production capabilities for NobelClad in Germany. The 8% improvement in unit sales volumes for our DynaSelect switch detonator and the advancement towards commercialization of DynaStage, which will be again changing product line for the perforating industry. We are confident these investments will be to improvements in our financial performance, including a return deposit of cash flow during the second half of this year. With that, I’ll turn things over to Mike for some additional detail on our financial results. Mike?

Thanks Kevin and good afternoon everyone. Looking at our expenses, selling general and administrative costs during the second quarter were $10.5 million or 23.5% of sales. There was this $10.5 million or 20% of sales in the second quarter of 2014. SG&A included $514,000 increase in commission expense associated with the DynaEnergetics orders Kevin referenced earlier as well as the $0.5 million increase in marketing and advertising expenses. These costs were partially offset by a decrease in bad debt expense and salaries benefit from payroll taxes. Amortization expense was $1 million or 2% of sales versus $1.6 million or 3% of sales in last year's second quarter. As Kevin noted, we recorded $1.1 million or $0.07 per share in second quarter restructuring expenses associated with a consolidation and restructuring programs at both NobelClad and DynaEnergetics. Despite the fact that we had a second quarter loss from continuing operations of $356,000 ex-items, we recorded an income tax provision of $1.2 million for the quarter. As I mentioned during our last call, our tax rate has been challenging to forecast in recent quarters. Without going into too much detail, this has been due to both the geographic mix of income and losses and the fact that several of our international business entities have had cumulative losses over an extended period of time. Generally U.S GAAP requires us to record valuation allowances against prior year tax benefits when the cumulative loss history of an entity extend beyond three years. As we did last quarter, we recorded valuation allowances against the second quarter tax benefit, generated by the losses of these entities. We believe these entities will open every transition of profitability as a result of our restructuring programs and when they do the valuation allowances will be reversed. Looking at our balance sheet, we ended the quarter with cash and cash equivalents of $10.9 million and working capital of $70.5 million. Current liabilities were $31.2 million and total liabilities were $75.6 million. Our net debt position was $22.8 million, up from $13.4 million at the end of 2014. The increase was due in part to investments and inventory as we prepare for the commercial launch of DynaStage as well cash paid for our restructuring programs. We used cash from operations of $4.7 million during the second quarter which reflects our net loss and an increase in working capital. We noted in today’s news release that U.S customs and border protection sent us a notice of action that proposed to classify certain of our imports has been subject to anti-dumping duties pursuant to a 2010 anti-dumping order and what are known as Oil Country Tubular Goods from China. A companion countervailing duty order on the same product also is in effect. The Notice of Action was related to a single entry of steel mechanical tubing made in China and imported earlier this year into the U.S. by our DynaEnergetics business in Canada. DynaEnergetics uses a mechanical suiting to manufacturers perforating guns. Earlier this month, we sent a response to U.S. Customs outlining why our mechanical tubing imports do not fall within the scope of the anti-dumping duty order and should not be subject to anti-dumping duties. Since then U.S. Customs has proposed to take similar action with respect to other recent entries of this product and as requested $1.1 million cash deposit or a bond for anti-dumping and countervailing duties. The estimated deposit or bond will be held by U.S. Customs until future administrative proceedings to determine whether actual duties should be assessed. We continue to believe these imports are not subject to the proposed duties and are defending these actions. In the interim, we will make a cash deposit or post a bond of $1.1 million to U.S. Customs during the third quarter of 2015, pending the outcome of this matter. At this time, we’ve not recorded liability related to this matter as the outcome is indeterminable and a loss is neither probable nor estimable. Turning to guidance, we are maintaining our prior full-year forecast of an 8% to 12% decline in consolidated sales versus the $202.6 million we reported in 2014. Our forecasted gross margin range is unchanged at 26% to 28% down from 30% in 2014. For the third quarter we also expect sales will be down 8% to 12% versus the $51.9 million we reported in last year’s third quarter. The expected decline relates to DynaEnergetics which reported strong comparable results in last year’s third quarter. We expect third quarter gross margin in the range of 27% and 29% versus the 29% we reported in last years’ third quarter. SG&A expense is expected to be approximately $10 million and amortization should be roughly $1 million. And now we’re ready to take any questions. Operator?

Thank you. We will now be conducting a question-and-session. [Operator Instructions] And our first question will come from Edward Marshall of Sidoti & Company.

Good evening, guys.

Yes, hi, Ed.

So if we are looking at maybe the acceptance from some of the wire line customers, I mean, you’ve broadened your comments to discuss, maybe customer base and maybe even to the point that you anticipate some bookings or some contracts. I’m curious to see if you can kind of talk to maybe the structure of the deals? I think you’ve talked about maybe some exclusivities in the past et cetera. And then more importantly I want to move that and ship that off to maybe a production capabilities and what you’re ramping up to versus where you were in the first half of the year.

Yes, okay. There two products involved in this, the DynaSelect and DynaStage. And the DynaSelect is the product that we went from primarily one customer to close to 20 between ’14 and ’15. And the DynaSelect is the integrated switch-detonator which we sell as a component to field assembled systems and it’s a premium product, which we sell on value because of the technology that’s incorporated into it. But it is a component that still assembled into perforating gun system. And that’s available to the general market. The partnership -- customer partnership agreements that were in the process of negotiating, those are for select handful of customers for the DynaStage product line, which will -- is a complete perforating system that’s factory assembled. And so we’re choosing to do limited testing with a handful of companies primarily due today. And really and that product line because its one that we will be assembling and they will be reducing their crews in the field for the assembly of guns. We need to make sure that we have assured sources of supply to those companies. And so, that’s limiting the number of customers that we’re working with not to mention that we prefer to create a product advantage for them and an operating advantage on the completion of the well. And so, that with a small number of customers primarily two right now that we’ve been doing the testing on the products.

As you ramp up to your production capabilities, I’m curious as to what type of maybe you measure it by utilization or could you measure it maybe by potential revenue that can be generated from these facilities?

In terms of utilization, we’re looking at the number of guns that can be manufactured in a month or a quarter relative to the demand of the customers that we’re working with. And we’re well under their requirement which is by design, but it will add significantly to the revenue out of these facilities, because what we’re doing is we’re essentially gaining a detonating cord, shaped charge and switch that detonator fails with new customers. And so it’s the assembly operations are what we put in Mt. Braddock and our Blum facility. The components are coming from our existing capacities. And what we’re really doing is we’re moving from a system -- from a component company to a systems company. And so the capacity is in place quite frankly to serve the demand that we’re pursuing.

And what type of revenue will these facilities generate in solo annually?

I think that’s really demand driven more than it is supply driven, and it really is going to be tied to our success with the introduction of these products in this quarter.

I think that’s what I’m trying to gauge though, the success that you think you’re about to have regarding this product line. And I’m wondering if you can give us some kind of -- and maybe it’s too early, I don’t know. But maybe you can give us some sense as to kind of the impact to the P&L that you might see from some of the discussions that you’ve been having thus far. I imagine, and I think most of the shareholders I talked to, I think it could be somewhat significant.

We believe it will be over the near to medium term, but we have to operate within the guidance that we’re giving for the year, and so we’re sticking with the guidance that we have for the balance of the year.

Okay. So when I look -- shifting gears just here, if I can look at the revenue relative to the cost, if I look at the revenues are 15% year-to-date, the SG&A costs are up almost $4 million and I assume it’s related to the expense of the rollout and so forth. First I guess, can you confirm that and second, when will the cost subside and how much of this SG&A line -- what's the approximate number from an absolute value term that is related to the new product rollout?

In the quarter there was about $0.5 million associated with the marketing and introduction of the product into the market plus about $300,000 in miscellaneous costs associated with -- and the cost of goods sold line, but how we’re pricing the product. We have a price at which we’re introducing the products into the marketplace at a value that is similar to what people are doing today in the testing program, but when we go out testing its more commercial pricing.

I assume you’re producing this product today as well just to the trial period, if it is somewhat of a consumable. What do you think the margin drag is, what do you want to measure from a gross margin basis from producing this product and supplying on the trial basis?

In the quarter it was about $300,000.

$300,000 was the drag which is I guess you just said…

On the cost of the goods sold or the gross margin…

What about the wealth absorption?

It’s all included in the $300,000.

It’s all included. Yes.

Okay. And then finally, if we -- can you talk to the individual businesses and maybe the margin profile that you anticipate within your guidance for the year -- for the full year on the gross margin at this point its 28%?

Yes. So if you look at -- so you’re asking for the full year?

Yes. I mean, for the full year implied was in the 26% to 28% gross margin in guidance that you provided. I’m wondering if you can give me the two different segments DynaEnergetics and the NobelClad.

Yes. So, for the full year NobelClad and DynaEnergetics are both each similar to where they’re at. Now DynaEnergetics for the full year flattish as well as NobelClad with a slight improvement.

Okay. And so, a little bit better in the third quarter, a little bit off on the second quarter based on the way the numbers shake out, I guess, from a guidance perspective. So they’re little bit stronger in 3Q versus 2Q, and then will fall back down again in 4Q, is that right? It looks like your guidance for 3Q is slightly higher than 2Q?

Yes.

Okay. Thanks guys.

And our next question will come from Robert Connors with Stifel.

Good afternoon guys. How are you?

Yes, fine Robert. How are you?

Doing well. I just wanted to sort of get a sense of, after you signed these alliance agreements, I found in the past that alliance agreements often times you get much more visibility on a product especially with the well established wire line service company, but you tend to give up a little bit on price in what you could charge for that visibility. Do you think that is the case going forward or will specifically the DynaSelect product yield would garner a pretty good margin for the company?

Yes, our margins both DynaSelect and DynaStage are projected to be much higher than what the average margin has been historically. And we actually saw some of that in ’14 with a significant improvement in margin over ’13 albeit with limited revenue from the DynaSelect product lines. And so, we expect our margins to strengthen going forward as we introduce these products. And what's interesting is its value and use, and the value of these products will allow a decent margin, a healthy margin for DMC, but it’s a significant lowering of the cost of completion for our customers and their margins improve also. And so its, we’re selling on technology and value creation both for us as well as for our customers.

Okay. That’s great. And then to, switching over just for the balance sheet and cash flow, can you just talk to me outside of earnings aren’t going to be what they are. If I characterize this year it’s sort of like a down year it’s slightly negative/breakeven on earnings but probably more positive on the cash flow front. And just some of the components how you can get back to -- do you think you’ll get back to sort of operating cash flow somewhere in the 60%, 70% of EBITDA and how you get there?

Yes, Robert I would say from the cash from operations this year, we’re looking in the $10 million range with $5 million to $6 million in CapEx at this point in time.

Okay, great. That answers most of my questions.

[Operator Instructions] And our next question will come from Gerry Sweeney of ROTH Capital.

Good afternoon guys.

Hi, Gerry.

Just staying on DynaStage for a minute, sorry I had to sort it out in my mind for a second. I think previously you’ve talked about maybe manufacturing about 10,000 guns a month. I’m not sure if that’s still the number that’s sort of out there. But curious if Blum Texas the increase in the facility down there is to get to that 10,000 or is that a step up because you’re seeing increased demand from these potential clients?

Yes, we can exceed 10,000 guns a month today.

Okay.

And what we put in place is the ability to assemble an equal amount or more in terms of a complete perforating system. And I’m referring to a gun as just the metal carrier if you will. In part of what we’re doing Gerry is, to put it in perspective back in 2010, just pure gun sales were almost 40% of our revenue, and in the past year it’s been 25%. And so we’re moving from more generic like products into more technical value add in systems sales. And so, it’s really less of a capacity issue and more of a shift into value added products.

Okay. I may have asked this the wrong way. I think I shouldn’t say gun, maybe DynaStage fully assembled. I think you -- and again I’m not sure if this was the correct number, but to some reason I have 10,000 in my head. Maybe you’re in a position to manufacture 10,000 DynaStage assembled products per month?

Yes.

Okay. And then back to the original part, does that expansion at Blum get you to 10,000 or does that take you to a different level in terms of production available for DynaStage?

What we’ve done is we were assembling the DynaStage guns or systems in Mount Braddock primarily which was the target market for us to start the development. And a lot of the work that we’re doing today is in the West Texas area and, and so we were shipping components from Texas to our Mount Braddock facility for assembly which we’ll continue to do for the eastern half of the United States. The Blum facility will serve the Texas and the South West region. And so its additional capacity and it really gives us the flexibility to serve our customers geographically as well as from a better cost basis, because that way we’re not shipping to the East Coast and then shipping back to Texas.

Got it. And then on the DynaSelect detonator, how has pricing been holding up the last couple of quarters. Are you seeing any pressure on pricing or does the value add substantial amounts to kind of overcome that pressure?

There is a lot of pressure on pricing within the industry on everything if you will. But we’ve been able to maintain our pricing on -- our average pricing on DynaSelect.

Okay. And then, let’s jump around DynaStage. You’ve talked about substantial value add. Do you -- I mean, is there any sort of empirical data on the completions, efficiencies, I mean crew is up running from 90% to 95% that you can share or you are not positioned to kind of use, have data and present to, give it a little bit more detail on the value add to clients?

Yes, we’re testing them approximately 6000 guns in the market place to quantify the savings if you will, and we’re approximately two thirds of the way through the testing. And that’s something that, I think probably in the next conference call we’ll be able to share what our findings are.

Okay. Got it. And then India, how big was that tender this year?

It was $3.9 million.

Okay. And those margins are generally lower, correct?

Correct.

Any way you can give a little bit of detail as to how much lower. So I mean, it could have been a positive for -- you have to strip out what the true sort of margin is X that one project.

I would have to check on it, but probably a couple of 100 basis points on our margin, Gerry.

Okay. Got it. And then finally, in the past you’ve -- I think you’ve given the gross profit I think by segment, and I think Ed was sort of asking that on a go forward basis. But from a lot of calls in the past you’ve said DynaEnergetics was ‘X’ and NobelClad was ‘Y’. Are you in a position to that still?

For the quarter?

Yes.

Yes, in the gross margin I believe I mentioned in -- it was 37% on DynaEnergetics.

I didn’t hear that. I’m sorry.

Yes, which was consistent with ’14, and that’s as you’ve noted despite the including the Indian or India order all in the second quarter versus spreading it over the second and third quarter of last year.

Okay, got it.

As well as the development cost that we had in DynaStage.

And Gerry, NobelClad was 18.6% for the quarter.

I don’t want to ask about NobelClad; obviously their backlog has been bouncing along sort of this, sort of bottom for a long time. I’m curious as to one, sounds like there’s some chemical prices coming along; I’m not sure how big would they be, are they substantial? And two, it sounded like a couple of orders were pushed to third quarter, if you can quantify that?

Yes, I think the -- there were approximately $2 million to $3 million that were pushed to the third quarter in NobelClad orders -- and the roughly $2.5 million to $3 million. And the, we’re seeing fairly strong maintenance and repair in downstream oil and gas. We’re staring to see the chemical industry start to become stronger in terms of request for quotes. The crack spread has gotten much stronger. But we have not yet seen a pick up in the oil and gas, the refinery part of it. Yet a lot of quoting, but we’re still waiting for the quotes to turn into orders.

Got it. Okay. I will jump off. I appreciate the time. Thank you.

And the next question is a follow-up from Robert Connors with Stifel.

Hi, guys. I just wanted to get a sense of what the earnings leverage possibly could be, not only if you get better price on better mix with the newer products but also the step down in G&A expense. So I guess, my question is, can you provide any detail percentage of revenues that DynaSelect and/or DynaStage was saying 2014 versus where its been year-to-date and sort of your plan possibly stepping out maybe into 2016?

I could give you an approximate. I don’t have the ’14 numbers in front of me on the product line. But I believe it was under 15% of revenues in DynaEnergetics.

Okay. And 20% this year.

And 20% year-to-date on DynaSelect.

Okay. And that 20%, was that 15% for just DynaSelect or for both?

Year-to-date the -- and as well as last year it was all DynaSelect, year-to-date its primarily in fact its all DynaSelect too in those numbers that I gave you.

Okay. And then, just because -- and that’s also up year-over-year on nominal because we’re talking percent of the mix here. So it’s up like nominally as well, correct?

It is. You’ve got 8% in units.

Right. Right. Okay, yes. Okay, thanks.

Yes.

And there are no further questions at this time. I’d like to turn the floor back over to Kevin Longe for any closing comments.

I appreciate everybody joining us for today’s call and your continued interest and support of DMC. And we look forward to talking with you at the end of the third quarter. So thank you very much.

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