DMC Global Inc. (BOOM) Q2 2016 Earnings Report, Transcript and Summary

Greetings, and welcome to the Dynamic Materials Corporation 2016 Second 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. I would now like to turn the conference over to your host, Mr. Geoff High, VP of Investor Relations. Thank you, Mr. High. You may begin.

Hello, and welcome to DMC’s second quarter conference call. Presenting today are President and CEO, Kevin Longe; and Chief Financial Officer, Mike Kuta. I’d like to remind everyone that matters discussed during this call may include forward-looking statements that are based on our estimates, projections and assumptions as of today’s date and are subject to risks and uncertainties that are disclosed in our filings with the SEC. Our business is subject to certain risks that could cause actual results to differ materially from those anticipated in our 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 made available at dmcglobal.com after the call. In addition, a telephone replay will be available approximately two hours after the call. Details for listening to the replay are available in today’s news release. And with that, I will now turn the call over to Kevin Longe. Kevin, please go ahead.

Thanks, Geoff, and hello, everyone. DMC reported second quarter sales of $41.3 million which was up 2% sequentially and down 8% from last year's second quarter. Sales was lower approximately 8% below our original forecast due to a further slowdown in drilling and well completion activity in the global oil and gas industry which had a negative impact on demand of our DynaEnergetics business. We also experienced a shipment delay in a large order in NobelClad, our explosion welding business. Sales at NobelClad were $26.4 million, which was a 5% sequential improvement versus the first quarter and a 23% increase versus last year's second quarter. NobelClad completed shipments during the quarter on a large order from the semiconductor capital equipment industry. Nonetheless, the sales were below our internal forecast due to the previously mentioned delay in shipping another large order from an agricultural inputs customer. The majority of this project is now scheduled to ship in the third quarter. Second quarter sales at DynaEnergetics were $14.9 million, down 4% sequentially and 36% versus last year second quarter. The decline reflects very low levels of well completion activity particularly in our core U.S. market where the rig count declined by another 23% sequentially. Consolidated gross margin was 24%, down from 26% in the first quarter and 28% in last year's second quarter. Gross margin was below our original forecast of 28% to 30% due primarily to severe pricing pressure and an unfavorable product mix at DynaEnergetics. DynaEnergetics recorded gross margins of 22% for the quarter down from 42% in the first quarter and 37% in last year's second quarter. I'll speak more about the pricing environment in DynaEnergetics end-markets in a moment. NobelClad reported second quarter gross margin of 25%, up from 15% in the first quarter and 19% in last year's second quarter. The improvement is related to the strong margins on the semiconductor capital equipment order mentioned earlier. Consolidated operating loss was $822,000 and included approximately $830,000 in restructuring expense related to staff reductions at DynaEnergetics. Operating loss in last year's second quarter was $63,000 and included $1.1 million in restructuring charges. At the business level, operating income was $4.1 million at NobelClad but DynaEnergetics reported an operating loss of $2.9 million. Consolidated net loss was $766,000 or $0.05 per diluted share versus the net loss of $1.3 million or $0.10 per diluted share from last year's second quarter. Consolidated adjusted EBITDA was $3.3 million versus $4.4 million in the second quarter a year ago. NobelClad reported adjusted EBITDA from $2 million while DynaEnergetics reported a negative $443,000 in adjusted EBITDA. The challenges in the oil and gas markets during the second quarter went beyond the steep decline in well completion activity. Price concessions demanded by exploration production companies put significant pressure on DynaEnergetics customers in the oilfield services market. In this environment, some customers have temporarily stopped purchases of high value, high performance products such as our DynaSelect and DynaStage systems in favor of lower cost alternatives that can help facilitate short-term cash flow on low margin job. Despite these dynamics, DynaEnergetics has maintained pricing discipline on its premium products and believe customers will return to the safety and performance advantages as the market recovers. As was noted by two of the largest players in the services industry during their recent earnings call, the current pricing environment is not sustainable and should begin to improve as crude prices recover. During the downturn, DynaEnergetics has maintained its aggressive market development program, which has led to growing interest in its advanced perforating technologies and shape charges. This is particularly true North America. The business has added three new U.S. customers for its DynaStage factory-assembled perforating system, up from one customer in the first quarter. While DynaStage sales volumes reflect a low overall level of well completion we are encouraged by the system's improving market penetration. DynaEnergetics has maintained its investments in research and development and expects to introduce multiple new perforating products during the second half of this year. We told you during our last call about our plug and abandonment program being conducted in China by one of the world's largest integrated energy company. The project incorporates DynaEnergetics plug and abandonment tool DynaSlot which is helping address China's strict well decommissioning standards. We are encouraged by the continued success of the program and DynaEnergetics is now working with the customer to develop several new DynaSlot configurations for use on a broad range of wells in China and other international markets. The business new shaped-charge plant in Tyumen, Siberia is fully operational and recently shipped its first commercial order. Unlike North America, the Russian oil and gas industry is very active and we can now supply it with a level of shaped-charge quality and performance that is not available from the country's current manufacturers. The sales team in Tyumen is now actively marketing these products to perspective customers throughout Russia and the CIS. As I mentioned earlier, NobelClad completed shipments on the large order for a semiconductor capital equipment customer. The order called for highly specialized plates which are produced at NobelClad's new manufacturing facility in Liebenscheid, Germany. This was the largest project produced of the facility since we opened last year and I'm very pleased with the performance of the production team and manufacturing infrastructure. Backlog at NobelClad declined to approximately $35 million at the end of the second quarter from $40 million at the end of Q1. However, quoting activity has increased in recent months to the highest levels in more than a year. The majority of the inquiries are coming from the downstream oil and gas, chemical and mining industries. We believe this important improvement in quoting activity should lead to a rebound in our backlog during the coming quarters. We are cautiously optimistic that the oil and gas services sector has reached a cyclical bottom. However, we believe capital budgets across the services industry will remain constrained for the next two to three quarters. As we enter the second half of 2016, we are maintaining a sharp focus on cash flow generation, cap reduction and continued investments in new technologies, products and market development programs. We believe these investments have positioned us to outperform the market when the recovery takes hold. I'm confident our efforts to further strengthening DMC has significantly improved our prospects for the long-term success and enhance shareholder value. I want to thank everyone on the DMC team for extraordinary efforts they have put forth during the downturn. As a result of their dedication we are a much stronger company today when the industry declined again two years ago. With that, I will turn things over to Mike for some additional details on our second quarter results and an update in our guidance for the balance of the year. Mike?

Thanks Kevin. Good afternoon, everyone. Beginning with our expenses, selling, general and administrative costs were $8.9 million or 22% of sales, down from $10.5 million or 24% of sales in last year’s second quarter, and below our original forecast of $9.5 million. Amortization expense was unchanged from last year at $1 million or 3% of sales. As Kevin noted, we reported restructuring charges of approximately $830,000 which were related to staff reductions at DynaEnergetics facilities in Troisdorf, Germany, and Austin, Texas. Turning to our balance sheet, we ended the second quarter with cash and cash equivalents of $9.4 million. We reduced our net debt to $14.1 million which is down 21% from the end of the first quarter and 33% from December 31, 2015. Year-to-date operating cash flow stands at $8.4 million which is an improvement of $13.1 million when compared to cash we used from operations during the six months period last year. We mentioned in our last earnings call that current marketing conditions have made it challenging to forecast short term financial performance and we would modify our full year guidance as appropriate. In light of the weaker than expected demand in DynaEnergetics market, we now anticipate full year sales will be down 5% to 7% versus the $166.9 million we reported in 2015. We previously anticipated sales would be flat year-over-year. Gross margin is expected in the range of 22% to 24% versus the 25% we reported last year in our prior forecast range of 24% to 26%. For the first quarter we expect sales will be down approximately 5% from the $39.5 million reported in last year's third quarter. Gross margin is expected in the range of 20% to 22% versus the 26% we reported in the year ago quarter. SG&A is expected to total approximately $9 million and the amortization expense is anticipated approximately $1 million. We expect DynaEnergetics will incur roughly $750,000 in remaining restructuring charges and most of this will be seen in the third quarter. And now we are ready to take any questions. Operator?

Thank you. At this time, we will conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Edward Marshall with Sidoti & Company. Please proceed with your question, Mr. Marshall.

So I wanted to ask, I guess, on the severe pricing pressures that you talked about on the shaped charges and I think we've talked about one particular customer in the past but I wanted to get your sense as to the degree of that price compression that you've seen throughout the industry and have you seen it subside somewhat in the third quarter?

We actually saw it increased dramatically in the second quarter compared to the first and I'd say the third quarter is continuing at about the same pace as the second quarter. It’s interesting, Ed, we were doing our very best to hold onto pricing, our business philosophy or strategy is to not go below our competitors in order to gain orders. In fact, we instructed our sales people that there's a severe penalty for them if they do. And so we're finding to competitive situations lot less when we get a chance but we'll not go below our competitors and we just saw significant amount of I think irrational pricing that showed some declaration on some of our competitors in the second quarter. I suppose it is not that much of a surprise late into a downturn but prices that we're seeing in the market, to us, are not sustainable or irrational but some of those competitors. And so we're picking and choosing and it has impacted our volume in some cases and it has impacted our margin in others and I would say that about half of our drop in margin from the first quarter was the result of pricing.

Got it, and so I guess I can look backwards but do you have from the comment about the margins but do you have a specific is it 10%, is it 15% where are we to that as far as --

In terms of the reduction in margin of DynaEnergetics or? Q - Edward Marshall Reduction in pricing in the market growth place that you have seen?

Yes because of product mix and component pricing it is hard for me to -- I don’t have that number in my fingertips. But I would say it has been about half of our gross margin drop from the first quarter. And so that would be --

Got it.

Yes and that would be as you know if it's a price reduction versus volume, it has impacted back into that from a revenue standpoint to give a sense of where it is.

All right. The gross margin details just to be clear is in the Q. I don’t think it was in the release?

Yes.

Okay. I know that was filed. The third -- you mentioned the third quarter is running at the same pace as 2Q, I just wanted to make sure I clarify that, it's holding at that level what is steady from 2Q to 3Q or is it accelerating at the same pace as it did - decelerating I guess the same pace it did in 2Q?

We're only three, four weeks into it. And so I just we are operating at pretty close to 2Q levels in the first month. I don’t think it in terms of pricing degradation I don’t think it could accelerate too much if at all to where it was. Again, I think there were some really desperate moves by our competitors which we were responding to they are somewhat surprising to be honest with you. Q - Edward Marshall So you're saying that there are - they are staying at the trough somewhere to 2Q as far as price is concerned? A - Mike Kuta I -- again early end of third quarter but I think that we are going to have to see volume pick up first in the marketplace before there is a meaningful pick up in selling prices. And so I think we are going to be operating in the more generic products at these lower pricing levels for a quarter or two going forward. We don’t believe if it's sustainable, you can't have the drop off in volumes in the - it has occurred in this market and then have a significant drop in selling prices. And expect to be a strong company. And so we are hoping common sense prevails going into the second half of this year.

Got it and then let me talk about the shipment delay in cladding, I'm curious if you can give me a sense as to the size of that program or the size of that order.

I believe there was around $2 million that went from the second quarter into the third $3 million.

And just looking at the comp year-over-year when you talk about your guidance going into the fourth quarter or the third quarter, I'm sorry, that includes this $3 million order that you said was pushed out, is the biggest decline there I saw the drop in backlog but is that relative to, I guess the run rate that you seen in energy over the last couple of quarters will probably same as stay the same and you anticipate coming off the 2Q pace as far as cladding is concerned.

We shipped the large order in the, in Q2, part of it went out not in Q1 and will be slightly down in the second half of the year on Clad compared where we were for the first six months.

Probably 55%, first half 45%, second half was the large silver order that shipped.

Yeah.

55/45 in NobelClad okay good. And the final question I want to talk about is I have been on several energy calls this quarter already and everybody wants to flow a number on as far as what dollar of barrel of oil is going to make their business turnaround and may be just a dark board but aside from orders picking up or of certain dollar value in the barrel of oil, what are you paying attention to that gives you sign that there will be a signal of different turnaround coming in your business, is it inventories entered I’m just kind of get a senses to what might be may be keep us entire just what you’re looking for to give us to get to see that turnaround.

Yeah, I mean first of all we sell the consumable with the completion part of completing a well. And so rig count and in completions are the leading indicator for our corporate in sales and as far as the oil, price of oil forecast where really more of an observer and commentator on what a lot of the industry is saying, we’re hoping that it’s going to grow from where it is today. We don’t want to expect the perforating part of completions to start picking up until the fourth quarter or into the first quarter of 2017. And that is based hopefully and in improvement and the number of rigs out there and in a step up in completion activity. And we will lag this, the rig count just because of the normal delay and getting to the perforating part of it.

Got it, okay, thank you very much.

[Operator Instructions] Our next question comes from the line of Gerry Sweeney of ROTH Capital. Please proceed with your question.

Let me see where to start, so obviously want talk little bit about the oil & gas subject, there is a lot of good question there but so, we kind of getting an idea of timing on the recovery, you had the Halliburton issue and then Schlumberger profits sink, hey, listen, it’s time to start we see a bottom to put time that we need to make some profit so, there is a question on may be velocity of one, you make money for how long it takes? It takes for sometime offs into future especially lie in the big caps? But the third part of that is I’m sure serious that have changed obviously you from a lot of work concerned already, cut out a lot of call is what where we accelerations in margin just because there is a lot of cost savings in there, it’s the pricing starts coming back. I have to expect, you don’t need to get the same level of closing two years ago we get the same parts is that a fair assumption?

It is and, however, having said that we need to see selling prices of perforating equipment and systems come back to a healthy level, and our cost base is certainly a lot less coming where we sit today and when we start coming out of the downturn than where it was when we entered. We also are seeing a shift towards higher value added products, but right now they're not taking it whole these assets we like to see primarily because we're holding our pricing level on those products. And so we're very optimistic as the industry serves becoming healthier that we will see a volume pick up, a mix improvement, hopefully a selling price improvement of significance, and a margin improvement on DynaEnergetics and DMC because of the cost reductions that we have made.

Got it. And how is -- you want someone wire-line company that for using DynaStage are they in terms of if you look at spectrum of a small medium large companies and then you obviously have be (inaudible) contract out there to mentioned. How do we look at those and then any comments on with (inaudible)?

There are the smaller to medium size and one of the things that we were pleased within the quarter is that is our DynaSelect was down slightly number of units in the quarter, but with the DynaStage we’re adding significantly to the number of integrated switch that meters that are going out, and above and beyond is DynaSelect itself. And so we're seeing an adoption of albeit at a slow rate, because of the cost of what we're asking for these components. And so --

. :

Yes, that’s fair, I mean we were a believer that integrated, safe, control system should be the standard of the industry. We also find it kind of odd that the assembly of these perforating guns and systems are being done in the field versus in the factory in some of our presentations we liken it to the computer industry years ago where if you wanted a non-standard or high-performing computer you went down to RadioShack and got the components; RadioShack doesn’t exist anymore.

No, it does.

And so we're hoping that three, four, five years down the road there are customers are not assembling our systems in the field. So they're ordering them and they're still ordering them complete and they will be more reliable in say persistent than what they are doing today.

Okay, one other question on oil and gas, the -- I don’t want to call it infamous but the infamous Indian tender that comes up every year, was that in 2Q or is that 3Q?

Yes, it's going to be -- yes it has not shipped yet, will go in Q3 I’m not sure…

Most of it is going to go in Q3.

Do you know work like last year? Was it Q2 or Q3?

I think there is a split between Q2 and Q3.

That carryforward margins with that.

It did.

Back to grade, yes.

Yes, I'm hoping it's and I believe it's actually accretive to the 2Q margin. One of the things that I will point out is that our revenues were down sequentially 4% quarter-to-quarter. Our pricing was down more than 4%. And so we continue to build share in the quarter and that's I think we're pretty proud of in DynaEnergetics.

I mean, I think with Halliburton and Schlumberger, you said there actually it is down 16% sequential. So I mean massive drop there. So maybe this is sort of the crescendo finish that we all saw.

Yes, sequentially we're down less than what others are reporting and we're proud of that.

And then just on NobelClad, the oil and gas experienced more quoting activity in the downstream oil & gas, is it been a while since we saw some coding activity there, if it's over time degree of refineries were running pretty strong for that couple of years and some of that activity was absent, I guess backlog of quoting activity, is that -- am I getting that right?

Yes I mean -- yes and its quoting activity, not backlog, our backlog is lower.

Sure, yes. Absolutely.

But I will say that if I look at we collect the statistics and that the level of inquiries that we had in the last quarter, it was at a higher level than the past 18 months.

It's the downstream oil and gas traditionally again if I remember it's just correct gas was I think generally better margins and that is what has been missing, I think mix on NobelClad or several quarters, is there a potential for if the downstream picks up maybe there is some pause in improvement on the mix front?

I don’t think the downstream oil and gas is better margins, I would say they're representative margins of NobelClad as a whole. Our margin was lower in NobelClad in the first quarter than what we expected to be for the balance of the year and that was primarily due to a unique set of projects that happened to shipped in the quarter.

Okay.

It was on, we expect that to be our lowest quarter of the year and that our year-to-date margins are more representative of NobelClad.

So once you would allow to bear?

Yes, Q1.

Okay. Yes it's funny, it's the DynaEnergetics is sort of in the growth platform that NobelClad seems to be moving off thrown out cash sort of insulating you allowing you to position to marketing on the DynaEnergetics side now.

That is well said and we're very, very proud of the NobelClad's employees and what they are doing to help the goal of company.

I'm that is all from my end, I appreciate it. Thanks guys.

Yes.

As there are no further question at this time, I would like to turn the conference back over to our President and CEO, Kevin Longe.

Thanks. Thank you everybody. We appreciate your continued interest in the company and we look forward to speaking with you again at the end of the third quarter and please don’t hesitate to contact us and Geoff High if you have any questions. Thank you.

This concludes today's conference. Thank you for your participating. You may disconnect your lines at this time.