DMC Global Inc. (BOOM) Q1 2017 Earnings Report, Transcript and Summary

Greetings and welcome to the DMC Global 2017 First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. An interactive 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, Vice President of Investor Relations. Thank you. You may begin.

Hello and welcome to DMC's first quarter conference call. Presenting today are President and CEO, Kevin Longe; and CFO, 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 available at dmcglobal.com after the call. In addition, a telephone replay will be made 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 turn the call over to Kevin Longe. Kevin?

Thanks Geoff, and hello, everyone. Increased activity in North Americas unconventional oil and gas industry help drive better than expected sales and margin results during the first quarter of 2017. Consolidated sales were $39 million, which was down 3% sequentially and 4% from last year's first quarter. Our guidance for sales decline at 5% to 10% versus last year's first quarter. DynaEnergetics, our oilfield products business, reported sales of $22 million up 28% sequentially and an increase of 42% from last year's first quarter. Sales at NobelClad, our explosion welding business was $16.9 million down 26% sequentially and 32% versus last year's first quarter. The expected decline reflects continued soft capital spending across several of NobelClad's end markets as well as the impact it delivered [in those] [ph] orders during last year's fourth quarter, they were originally scheduled for early this year. Our consolidated gross margin was 27%, which was up from 25% in the fourth quarter and 26% in last year's first quarter. The result was above our forecasted gross margin range of 24% to 26% and this was primarily due to a favorable product mix at DynaEnergetics. At the business level, gross margin was 33% at DynaEnergetics and 19% at NobelClad. We reported a consolidated loss from operations at $2.3 million versus an operating loss of $85,000 in the first quarter last year. The increase was primarily due to higher legal expenses related to a successful pattern infringement defense at DynaEnergetics. At the business level, operating income was $40,000 at DynaEnergetics and $395,000 at NobelClad. Consolidated net loss was $3 million or $0.21 per diluted share versus a net loss of $400,000 or $0.03 per diluted share in last year's first quarter. Consolidated adjusted EBITDA was $930,000, at the business level, adjusted EBITDA was $1.7 million at DynaEnergetics and $1.4 million at NobelClad. The first quarter performance at DynaEnergetics reflects in accelerating recovery in North Americas onshore unconventional oil and gas industry as well as a much stronger market position established by DynaEnergetics during the downturn. Over the past two years, the business significantly expanded its [indiscernible] of top-tier North American wireline customers and broadened its portfolio of advanced perforating technology. Collectively, these initiatives are enabling DynaEnergetics to outpace the average growth rate of the broader oil and gas services industry during the early stages of the recovery. For the third consecutive quarter, unit sales of DynaEnergetics intrinsically safe DynaSelect detonator were at record levels. DynaSelect sales volumes during the first quarter were up 24% sequentially and 56% versus last year's first quarter. The business also reported growing demand in the North Sea for its DynaSelect plug and abandonment system. And also saw increased sales of its high performance formation optimized shape charges. Customer interest in the back three assemble DynaStage perforating system grew significantly during the first quarter and continued to accelerate at the start of the current quarter. Request are coming from major and mid-size service providers as well as acceleration in production companies [indiscernible] the system to their wireline companies. There are more than a dozen service company either using DynaStage or going through an boarding program in preparation adopted. We expect DynaStage will be deployed within most of North Americas major unconventional oil and gas space since by the end of the current quarter. We believe factory assembled perforating system will ultimately become the standard in the well completions industry. In anticipation of increased demand, we are planning an expansion of DynaEnergetics manufacturing capacity at its U.S. facilities in Blum, Texas. I noted during our last call that DynaEnergetics was working to restore profit margins following several quarters of severe pricing pressure. The concerted focus on selling differentiated high value products coupled with structured price increases improved DynaEnergetics sequential incremental gross margin is greater than 50% during the first quarter. At NobelClad, the prolonged cycle of week industrial infrastructure spending continued during the first quarter which led to a 6% sequential decline in NobelClad's order backlog. This trend is playing out across the global engineering, construction and fabrication sectors, particularly for companies that served the downstream energy infrastructure markets. We are cautiously optimistic this environment will begin to improve during the second half of this year. We are also are confident that NobelClad's ongoing efforts to extend its leadership position in the explosion welding industry had positioned the business to benefit when the spending cycle strengthens. NobelClad recently received a key industry certification that strengthens its position in the industrial pipe market and the business continues to pursue a number of large projects in the petrochemical and transportation sectors. Both NobelClad and DynaEnergetics participate in cyclical industries that have gone through severe contraction in recent years. The unconventional oil and gas industry, the first of our end markets were meaningful recovery is taking hold. DynaEnergetics is ideally positioned to capitalize on this opportunity. We look forward to reporting on the progress at both of our businesses during the balance of 2017. With that, I will turn the call over to Mike for some additional comments and our first quarter financial results. Mike?

Thanks Kevin and good afternoon everyone. Looking at our first quarter expenses, SG&A was $11.7 million or 30% of sales and it was approximately $900,000 above our prior forecast. This was due to the higher than expected legal expenses associated with DynaEnergetics successful patent infringement defense. First quarter amortization expense was $1 million or 3% of sales. Turning to our balance sheet, we ended the quarter with cash and cash equivalents of $5.1 million. Net debt at March 31 was $16.1 million up from $9.3 million at the end of fiscal 2016. The increase primarily relates to our tendering $3 million to the U.S. customs department pending the resolution of an anti-dumping and countervailing these cases at DynaEnergetics. The increase was also driven by higher legal expenses and increased working capital requirements. Cash used for operating activities was $5.2 million which reflects anti-dumping duties and net changes in working capital. Turning to guidance, we expect second quarter sales level increase 5% to 10% versus the $41.3 million we reported in the same period a year ago. We are forecasting second quarter gross margin in a range of 27% to 29% versus the 24% we reported in last year's second quarter. SG&A is expected to total approximately $10.5 million versus $8.9 million in last year's second quarter but down sequentially from a $11.7 million in the fourth quarter. The expected year-over-year increase is primarily related to higher expected legal fees associated with additional pattern litigation. We expect legal expense will decline substantially beginning in the third quarter. Second quarter amortization should be approximately $1 million. At this time, we are not adjusting the full year 2017 financial guidance we gave a few weeks ago. We will revisit our full year forecast at the end of the second quarter. And now, we are ready to take any questions. Operator?

Thank you. [Operator Instructions] Our first question comes from Gerry Sweeney from ROTH Capital. Please go ahead.

Hey, good afternoon guys. How are you?

Good afternoon Gerry.

I got a few questions, I guess I will start on the DynaEnergetics side; obviously very good quarter margins probably looked like they are head of what your trend or expectations. As we look out the rest of the -- into the second quarter, I was doing some work on drill but uncompleted wells and it look like Q1 accelerated over fourth quarter, but it also look like there was an acceleration into the third quarter over the second quarter and also there is a lot of talk about completions accelerating further into the second quarter. Are you seeing that or are you forecasting that any thoughts on just the macro environment from that perspective?

We are just month ended the second quarter and the activity is continuing at a pretty brisk pace for us Gerry. So, it's comparable to what we are seeing in the first quarter.

Got it. And then, on the price side, I think you had a price increase March 1, 5% to 15% depending on I guess some of the product line, two things, one, how well did that hold up and then two you also mentioned in your comments something about the structured pricing improvements and I'm curious if we would -- you are planning another price increase at some point later this year?

Well, first of all, as far as the first quarter results, the price increase took effect primarily in March in the third month of that quarter. Having said that, we were tightening things up before the announced price increase. We are not satisfied yet where our margins are. We feel that our products and our technology warrant a better margin than what we are receiving. And so we are really focused on maintaining our market share and improving our margins as we go into the balance of the year.

How much did that price increase recapture some of the price degradation that you saw over the downturn?

Well, because it's reflected in our gross margins in which we reported and gross margins are still well off where we would like them to be. And whether necessary for the investments that we are making in research and development. And so, I would say we are half way to where we would want to be. But, we are evaluating that as each month and quarter goes by.

Got it. And then, one more question, I will jump in line. A little bit more talk -- you are talking a little bit more about DynaSelect and the DPEX shape charges, how much of that -- for those newer products figured into your original guidance maybe when you are sitting back in December, when you're going through planning for 2017. I was just curious how much of that figured into your planning and where they stand today versus is that planning back in December, are they seeing accelerating demand as well?

We're seeing a pickup in our higher performing formation tuned if you will charges which are also better margin for us than what we forecasted originally going into this year. But I'd have to say that we get it down to the line item on the product mix within the shape charges when we put together our guidance.

Okay. Got it. I'll jump back in line. I appreciate it.

Yes.

Our next question comes from Edward Marshall from Sidoti & Company. Please go ahead.

Hi, Kevin, Mike, Geoff, how are you guys.

Fine, Ed. How are you?

Good, good. So the legal expense that hitting the quarter, what was -- is it exactly $1.8 million roughly, can you kind of give me the exact number maybe tax, I wanted to back that up?

Yes. Our total legal expense at DynaEnergetics side is about $1.8 million for the quarter.

And the tax adjusted number would be about what?

Yes. I mean tax adjusted would be 35%.

Okay.

Corrected tax rate on that.

Okay. That's fine. And what's your expected total bill for the year for legal?

Legal, it's -- we're anticipating right around $3 million.

So an additional $1.2 million running through 2Q?

Correct.

Okay.

Yes. And $1.2 million will run through the rest of the year. We've got, we had some legal expenses on bench trial in April and then it will decelerate in the third and fourth quarter.

Okay. And where is that run -- does that run through the unallocated expense, or is that actually run through the segment level of DynaEnergetics?

It's in the segment.

Okay. So the margin was a lot better than what I guess it appeared from an operating level, look like you're spending an awful lot of operating expense to capture the sales dollar, but I guess that $1.8 million comes back to the model and kind of that's probably the right way to look at it.

I would agree with that.

Correct.

Okay. Was there any Indian tender in the quarter at all or and do you anticipated this year at all?

We don't anticipated this year and it was not factored into our guidance that we originally gave.

Okay, okay. And so -- now that you bring up guidance, when I look at the sales guidance for Q2, 5% to 10%, can you kind of walk me through maybe some of the assumptions at the segment level. I've noted that the backlog it drop again in NobelClad and kind of wanted to get your sense at the two business lines, they look a lot similar to what they did in Q1 or do you have a delineation from that?

Yes. I kind of start with the guidance for the year. We've guided that DynaEnergetics would be up approximately 35% for the year and that DMC as a company would be up 10% to 15%. And backing into that that says NobelClad is relatively flat for the year compared to 2016 and obviously they were down significantly in the first quarter compared to 2016. What we see that's happening in NobelClad is that we shift $91 million in 2016, we booked about $80 million and so you're seeing that trend and also the timing of shipments in the first quarter, which may get a weaker quarter. We're still holding with that business being plus or minus flat year-over-year and based on a couple of large projects that we have later in the year for that NobelClad.

Okay. Go ahead.

Yes. In NobelClad, the business because of the -- there is an everyday kind of replacement retrofit that is really the majority of our base business today, but a large project can swing a quarter one way or another pretty significantly. And so that's why I'm kind of discussing it from a year standpoint just to kind of smooth out that aspect of it.

I mean, based on kind of that color, I mean, correct me if I'm wrong, but it looks like you anticipate that at least on a sequential basis, DynaEnergetics would be down.

DynaEnergetics would be…

Down sequentially?

Stronger sequentially and NobelClad will be stronger sequentially and NobelClad is stronger in the back half of this year than in the first half of this year.

Okay. So you expected it to be a different waiting for a second half, so you expect to make majority of the revenue in NobelClad in the back half of the year?

Over half of the revenue would be in the back half of the year.

Got it, got it. Okay. You mentioned capital expansion for Blum, how much do you plan on spending?

North of $10 million and that would be over an 18 to 24 month period of time and we're beginning to endeavor the work within our depreciation which runs about $6.5 million a year for the company.

Okay. So my sense I guess is that you're going to have to renegotiate again the credit agreement or do you anticipate that you'll generate enough cash to bring it down that you have enough room in order to capture that $10 million.

The idea to fund that project at our EBITDA and not renegotiate our credit facility.

Okay.

Yes. We're not going to get out in front of ourselves in that project which is why I'd structured out over the timeframe that we just discussed.

Got it. Okay. All right, guys. Thanks very much.

Our next question comes from [indiscernible]. Please go ahead.

Yes. Thanks. Good afternoon.

Good afternoon.

On that Blum CapEx, how much -- what will they do to your capacity, how much will that increase capacity at Blum?

There are two aspects to the CapEx. There is a need in the shape charge area and we would expect to more than double the shape charge capacity. And then, the other part of that CapEx is assembly and space for our DynaStage factory assemble perforating guns, which is a relatively new product that's ramping. And so it's new capacity altogether from an assembly standpoint versus we've been primarily a component supplier up until at this point.

Got it, okay. Let me ask something else. On the gross margin, I just want to make sure I understand correctly what's happening at DynaEnergetics, so Q1 versus Q4, the gross margin percentage increase was due to mix, was that right? But the year-over-year decline was due to volume -- was due to price declines, is that kind of right?

So from -- first from Q4 to Q1, we had favorable mix, but we also had price increases in March that we got one month in. When you look year-over-year, last year DynaEnergetics had $15.5 million in sales in a very favorable product mix on a low base sales.

I'd also like to add to that, the downturn for us really started happening in 2015 and we saw quite a drop in volume in 2015 that continued into 2016. And our pricing was stronger this time last year than the balance of 2014 -- our balance of 2016 excuse me. And so, it was a low month obviously from a volume standpoint, but it was the best pricing quarter that we had in a month or quarter. And in terms of the first quarter of 2016 when I talked about that mix, we had some uneven purchasing of our DynaSelect detonator system, which drove the 41.8% margin last year.

And as you look at the market and how it's progressing so far, is it reasonable to think that the mix shift is permanent or somewhat permanent or is permanent as it gets in this industry and that we can expect to sustain these margins going forward sustain or increase?

I think that's a very good assumption.

Okay, great. And then, my last question is on NobelClad, looking at the backlog in the revenue decline, was there any significant impact from changing metal prices?

Yes. We have two indices that we follow -- our indices that we follow metal pricing and in the backlogs of EPC companies. And metal pricing over the last 5 and 10 year period of time is down significantly. I would say right now we're starting to see -- it's firm up a little bit, not necessarily increase but firm-up, but we still are dealing with kind of a longer term trend over the last 18 to 24 months of a drop in the backlog of the EPC companies that are designing the facilities that we're supplying to and that's probably impacting us more than anything.

Okay. It's very helpful. Thanks a lot. I appreciate it.

[Operator Instructions] Our next question comes from Gerry Sweeney from ROTH Capital. Please go ahead.

Hey, just a couple of follow-up questions, we've talked about this in the past, on previous calls you've talked a little bit about how many customers you have using DynaSelect, I think it was over 20 the last time. And then, how many are using DynaStage, I think you said 12 using or ramping up, but could you give us maybe a little bit of a sort of history or trend at how they changed over the last 6, 9 months just we can get it directionally how many more people are using them?

Yes. I would say that over a dozen that are trailing the DynaStage systems right now and that's strengthening as each month and quarter goes by. It takes a little bit longer to get that qualified because of the protocols at some of the service companies that we're working with and this is handling explosive, but we expect the DynaStage business to start ramping as the year progresses and hence the investment in a assembly facility in Blum, Texas. The DynaSelect which is the detonator that we both sell as a component, but it is also incorporated in the DynaStage system, we had a record quarter of those -- I think we're up 24%, 25% sequentially and that's up I want to say approximately 50% year-over-year -- 56% year-over-year and so we're pleased with the adoption of that product line and also the -- we're pleased with the innovative thought that continues to come out of that business in terms of enhancing it. We're now on a -- I think our fifth or sixth generation of the detonator and we're evolving on our generation in terms of the DynaStage product line and it keeps getting stronger.

And then, how many companies have actually started to expect the DynaStage and because that would be -- I imagine a pretty good barrier to entry or at least I mean captures that customer for certain when you expect that?

Well, there are two aspects, I mean the DynaStage is performance assured factory-assembled perforating system that we're assembling in our factory and testing, and then, sending to the job site complete and we just add the detonator at the job site. The real draw for exploration and production company in terms of specking the DynaStage is really the ease of which it's assembled and put down the well. But it's also that intrinsically safe and selective detonator and what that does to the operating efficiency and the safety on a well side. And so ultimately, the DynaStage customer are those that are understanding the value proposition of the DynaSelect product line and its safety and efficiency benefits. And so we're seeing increasing specification of the DynaSelect which will spillover either into the component sales or into the DynaStage sales.

Got it. And then, look just a couple of quick follow-ups on NobelClad, how much revenue was pulled into the fourth quarter from the first quarter?

Couple of million dollars, yes.

So, I know you guys [indiscernible] giving us sort of the guidance and all that, I'd may try and take a one layer deeper. So if couple of million will pull forward, and then, backlog was down -- down a couple of million. I mean, are we looking at NobelClad sort of being up around that $18 million, $19 million in Q1 just or is there other -- puts the product line up or sales line up look like in the first half.

You mean in Q2 second quarter?

Q2, yes.

I mean, let's just say NobelClad in a 20-ish, DynaEnergetics is in the 25-ish, if you look at our guidance.

Okay, all right. Well, I mean at the end of the day, I mean guidance would have been much I mean -- I don't know what the guidance, but I mean it's obvious that DynaEnergetics is on a roll of accelerating and things are going pretty…

And I'll just add a little more color on that, if you take the 20-ish on Dyna or on NobelClad along with what we did in the first quarter you can see that we are backend loaded on NobelClad primarily because of this couple of large projects that we're working towards.

And then, I mean let's just have some fun while we are at this, on NobelClad, margins aren't -- considering backlog trending down and were bouncing along the bottom, but I mean all things said and done margins in that business are holding up reasonably well and obviously you've taken some costs out, how much margin opportunity is in NobelClad if we start to see an acceleration of i.e., maybe how much is there sort of absorbed overhead.

Yes. First of all, while we are all disappointed, but where the bookings in revenue is at this time, we're not losing orders to competition, it's is really -- we've got a large share of a very small niche market. And that business is very well run. It's a great leadership in operating and sales team. They are not -- their incremental margins or their gross margins they maintain and we kept in place the majority -- and in fact we've invested more into the sales and application engineering resource of that business. And so it's operating at a rate at which there is a lot more capacity in that business and the incremental margin will fall to the bottom-line and it will stay in that mid 30% to 40% range as the revenue starts picking up. This is a strong operating business that has a revenue focus to improve its operating performance going forward.

Yes. I mean, I kind of looking at NobelClad as sort of the dark horse maybe for the second half, if that really turns around, it could be very interesting year for the second half.

Agreed.

And just a confidence in the second half, again, we probably be intuitive of multiple calls, but long lead time projects, 5, 6, 7 years, are you just seeing increasing coating activity for a specific projects or are they saying "hey, it's really coming," not to be -- well, I heard cautiously optimistic before and its may not play through but just interested in what's driving the confidence?

Yes. I would say we are still in that cautiously optimistic range. This is a long cycle business. It's a marathon versus a sprint. And the headwinds that it is based over an extended period of time, first, the financial crisis and the pull back on investments in these long-term projects. Then, we started to see the a pick-up in the EPC backlogs and then we hit the drop and oil and gas pricing, which petrochemical is about 75% of that market, 70% to 75% of that market. And then, they have also been hit significantly with low metal pricing which has come down over the last ten years. And so, they have had a lot of headwinds and we were improving our optimism on that business through the end of 2014. And then, the backlog started to fall in the EPC companies. And so ultimately we need to see those backlogs increase. We have an index that we track that is down 25% or so since the end of 2014. And we are hoping that's starting to flatten out and turn the other way. And so, this business will be a modest business around its current operating performance for this year and its really driven by a couple of large projects that either -- that when they fall we will change the outlook for a given quarter in a given year. And we are expecting that to start showing up in the fourth quarter -- third and fourth quarter.

Got it. And then, finally, how much was the Indian tender last year, I mean not to -- that was a several million dollar deal, correct?

It was 3.5.

$3.5 million and it's quite frankly -- its…

Lower quality business?

Yes. It's not going to be missed this year. We are happy to fill our capacity with what we feel as better quality business for us right now.

And I think more importantly, I think just from telegraph industry that's a $3.5 million or $3.3 million that you are not going to miss that's already being backfilled by better business. I mean…

Correct.

So, okay. Perfect. That's all. Thank you.

Thank you. This does conclude the question-and-answer session. I would like to turn the floor back over to Mr. Longe for any closing comments.

Thank you everybody for joining us today. And we continue to appreciate your interest in our company. And we look forward to talking with you after the end of Q2.

Thank you. This concludes our conference today. Thank you, again, for your participation. You may disconnect your lines at this time.