Q2 2020 DMC Global Inc Earnings Call
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Good day, ladies and gentlemen, and welcome to the DMC Club <unk> second quarter 2020 earnings Conference call.
All lines have been placed under listen only mode and the part will be open for your questions and comments following the presentation.
At this time it it's my pleasure to turn the floor richer host Mr., Jeff Hi, VP of Investor Relations, Sir the floor is yours.
Hello, and welcome to the M.C. second quarter conference call presenting today, our president and CEO, Kevin long and CFO, Mike today.
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.
Subject to risks and uncertainties that are disclosed in our filings with the FCC.
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 have become a true because of subsequent events.
The webcast replay of todays call will be available at E.M.C. Global Dot 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'll now turn the call over to Kevin long Kevin.
Thank you Jeff.
Second quarter was marked by very challenging conditions in our primary energy markets.
<unk> 19 pandemic led to a collapse in oil and gas demand.
Corresponding slowdown it well completion activity.
In the United States completions dropped by 70% versus last year second quarter.
It's created a difficult environment for dine energetics oilfield products business, which saw many customers stop well completion activity all together.
Other companies use to slow down to work through backlogs.
Current shaded perforating component inventory.
The slowdown has been challenging however, it is enabling dynamic jet extra work more closely with several of the industry's leading operators and service companies.
Many of which are transitioning from field assembly components to our factory assemble performance a shirt perforating systems.
Customers that have completed this transit transition are achieving significant improvements in operating efficiency.
Also reducing their investments in assembly personnel and related infrastructure.
We also benefited from just in time delivery of the industry's most reliable and best performing perforating systems.
Oh significantly reducing their investments in working capital.
We continue to focus on DMC is long term business strategy as exemplified by our sustained investments in innovation technology and product development.
These investments enable dynaenergetics to make several new additions to its product portfolio.
These include a new generation up the I used to intrinsically safe initiating system.
Which now enables deployment in about 200 perforating systems in a single Ron.
Do you have sacco, which is the first factory assemble perforating system for the emerging re Frac barkat.
And finally, the patent pending D.S. micro set India, liberate or two products that expand our well completion product offering and increased dine energetics addressable market by more than 20%.
Do you have to micro said is used to set the plug that isolates an individual stage in a well well do you have to liberate or is it realistic released tool that enables the service company to disengage from the perforating strength.
Frac designs are growing and complexity and dine energetics, expanding portfolio perforating systems, and well completions tools is enabling completion engineers to tailor their well designs for theres the surrounding rock formations and reservoirs.
No clad our composite metals business delivered second quarter results that met our expectations and included a modest increase in order backlog.
The business continues to expand the applications sports composite metals and is pursuing a wider range of order opportunities in both the downstream petrochemical sector and new end markets.
Well no applied is experiencing certain cobot related project delays quoting activity remains healthy and its long term prospects are stronger than ever.
We discussed in our last call that we have reduced our activity based costs that are manufacturing sites to match much lower demand levels.
Over the past six years, we significantly reduced our manufacturing footprint.
Modernized our facilities.
Which enabled us to act quickly to reduce costs.
Limited the magnitude of restructuring charges this year.
We have a highly efficient business model with the capability and capital one place to deliver on our long term strategy.
We don't anticipate further cost reductions are meaningful restructuring charges.
Our enhanced financial strength is reflected in our balance sheet as well as the improvement in our net cash position, which increased to $4.5 million at the end of the second quarter from $2.9 million at the ended the first quarter.
DMC has a highly efficient asset light business model and differentiated proven strategies for both Dynaenergetics and noble class.
We are cautiously optimistic the second quarter will represent the low point to the downturn for dine energetics.
However, it will take several months for the industry to work through a series of fundamental challenges included.
<unk> related demand weakness strain balance sheets and.
And then additional inventory overhang.
We expect to see consolidation in and attrition in the industry, which will result in a healthier market made up a few were stronger companies.
With our strong business fundamentals, we are confident DMC will be one of them.
I'll now turn the call over to Mike for a review of our second quarter financial performance Mike.
Thanks, Kevin second quarter sales were $43.2 million down, 41% sequentially and down 61% versus last year's second quarter.
Dynaenergetics reported second quarter sales of $23.6 million down 56% sequentially in a decline of 73% versus the same quarter last year.
As Kevin mentioned the decline reflects abrupt downturn in unconventional well completion activity in North America.
Sales and know about side were $19.6 million down, 4% sequentially and down 12% versus last year's second quarter.
Consolidated gross margin in the second quarter was 15% down from 33% from the first quarter 2020, and down from 38% second quarter 2019.
The decline primarily relates to the 73% year over year sales decline. It died energetics, which was also impacted by lower selling prices and inventory reserves of $1.6 million.
Dynaenergetics reported second quarter gross margin of 8% versus 37% 2021st quarter and 41% in last year's second quarter.
The magnitude of Dynaenergetics sales declined led to the significant under absorption of fixed overhead and research and development expenses.
Low capacity utilization of Dynaenergetics manufacturing facilities also result in excess capacity charge of $2 million or 10 cents per diluted share.
As mentioned Dynaenergetics also recorded inventory reserves of $1.6 million or nine cents per diluted share.
No clad reported second quarter gross margin of 25%.
Versus 25%, the first quarter and 26% in the year ago second quarter.
[laughter].
Looking at her second quarter expenses consolidated SGN is $12.2 million, which includes $800000 is bad debt expense.
Slide 27% versus both the first quarter in here, though second quarter.
We reported consolidated adjusted operating loss of $5.9 million, which includes a $2 million an excess capacity charges inventory reserves at $1.6 million at $800000 in bad debt expense.
The adjusted operating loss excludes $2 million in restructuring charges, primarily related to asset impairments and wind down expenses in Siberia.
Adjusted operating income in 2019 second quarter was $25 million.
Second quarter adjusted net loss is $4.4 million were 29 cents per diluted share versus adjusted net income of $17.6 million were $1.17 cents per diluted share in last year's second quarter.
Adjusted EBITDA loss was $1.8 million versus a positive $11.3 million in the first quarter net positive $29 million in last year's second quarter.
Dynaenergetics reported second quarter, adjusted EBITDA loss of $3.3 million, while Nobelclad reported adjusted EBITDA of $3.1 million.
We amended our credit facility in the second quarter and further strengthen our financial position. We ended the second quarter net cash of $4.5 million as compared with net cash of $2.9 million at the end of the first quarter and our $50 million revolving credit facility was undrawn and fully available.
Cash and cash equivalents at the end of the quarter were $17.2 million total debt at June Thirtyth was $12.7 million and our debt to adjusted EBITDA leverage ratio was 0.3.
Looking at guidance there remains a lot of uncertainty in or end markets due to co. The 19 with that we do want to provide our best estimates for third quarter financial performance as we see it now.
Should our outlook change materially we will let you know.
Third quarter sales are expected to be in a range of 45 million to $50 million versus the $43.2 million reported in the 2022nd quarter.
At the business level Dynaenergetics is expected to report sales in a range of 27 million to $30 million versus the $23.6 million reported in the second quarter. While Nobelclad sales are expected in a range of 18 million to $20 million versus the $19.6 million support in the 2022nd quarter.
Consolidated gross margin is expected in a range of 20% to 24%.
Versus 15.3% in the second quarter expected sequential improvement is due to anticipated nonrecurrence of the excess capacity charges and inventory reserves at Dynaenergetics.
Third quarter, selling general and administrative expenses expected range of 11 million to $11.5 million versus the $12.2 million reported last quarter, well amortization expense is expected to be approximately $350000.
Interest expense is expected to be in a range of 150000 to $200000.
Adjusted EBITDA is expected in a range of 1.5 million to $4 million versus negative $1.8 million into 2022nd quarter.
We expect ended the third quarter net neutral to slightly positive net cash position and minimal to zero borrowings on our $50 million revolving credit facility.
Third quarter capital expenditures are expected in a range of 2 million to $3 million.
With that we are ready to take any questions operator.
Thank you, ladies and gentlemen, if you have a question or comment it a star one on your touched on telephone.
Our one for any questions or comments at this time.
Well take our first question from Tommy mode with Stephens. Your line is open. Please go ahead.
Good afternoon, and thanks for taking my question.
Good afternoon Tommy.
Kevin you mentioned that management's currently and dialogue with several operators and service companies.
In terms of they're seeking to transition away from field assembly and and toward.
Your platform.
Could you tell US are these current customers that are leaning in to pre assembled.
Opportunity that you might bring to them or are these new customers entirely and how far along would you say these some of these discussions are.
Sure.
Tommy is both existing customers in new customers.
There's a small group of customers, who have moved to our business model completely.
And in there seem to benefit of the just in time delivery of our complete factory assembled systems.
Some of the other.
People, who did not transfer completely.
Or are considering moving to our systems.
One of the things that they're seeing in this downturn as they they got trapped in investing in the assembly in inventory in operations to make perforating guns, which quite frankly, we can do better.
And they don't want to be in that position again.
Particularly in a tight volatile and short cycled market.
So we're getting a lot of interest from new companies.
There are people that we haven't done extensive amount of work with in the past to move to our business model and so why revenue was low there's a significant amount of onboarding of new customers and going deeper with some existing customers.
That's very helpful, Kevin and a related.
Question, if we look at your third quarter guidance for the done Energetics segment.
Implies a significant sequential improvement so I just I wondered if embedded in there is an assumption for some big conversions.
Regarding the customers. We just described or is that more just driven on the industry outlook core or visibility you have.
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Its.
It's based on what we see and people that were currently either selling two or onboarding.
I will say I think it one of the things that the the market is experiencing is.
Yeah.
First quarter in a 19 it was a.
25% to 30% systems market.
70% of the market was.
Own it driven.
And there's a lot of component inventory in the marketplace.
Particularly on metal parts and and hardware.
That.
Is currently the industry needs to work through and our customers and potential new customers are working through.
Kind of a mountain of existing inventory before they fully converted to the systems.
We expect.
That inventory.
It's going to take a quarter or to probably two quarters at the current rate to two to work through.
So we really don't see.
A meaningful pick up until well into next year, but we are seeing.
A slight increase in activity in the in the third quarter.
Okay. Thank thank you very much and if I could just sneak one final question.
Dynaenergetics.
This is a business that you have positioned to have the primarily variable cost structure.
And since you completed the facility and Blom. This past couple these past couple of quarters. It really been the first.
Big down draft to stress that model so to speak.
So if we look at the.
Decrementals in the second quarter.
Just as an example.
You've got the inventory reserve and the excess capacity charge, there kind of noise in there, but if you appears through those would you characterize the the operation is performing as you expected when you when you build the facility in Blom analogy positioned it over the past couple of years or is there still some more wood to chop in turn.
As of.
Streamlining the cost structure.
Yeah, we're very.
Pleased with the performance of that facility and business our cost structure and.
Yeah, we we have brought our cost structure in line over a five to seven year period of time in terms of Bert.
Estriol footprint, if you will.
And you know when this downturn yet in.
In March really beginning in March we brought our activity cost.
Structure into line.
No direct labor and indirect variable labor.
But the efficiencies actually had improved.
At our Bluffton facility and at.
This level of activity, we've actually insourced some components that we would have outsourced previously.
And that should give us an uplift to our margins as.
It is right now, although it's hard to see with all the noise.
But it will continue to do that in and a stronger market. We're very pleased with.
The quality of our leadership team and that our employees and what they've accomplished.
Thank you, Kevin I will turn it back.
Get on with Star one if you have a question or comment well go next to Stephen Chin Garrido at Stifel. Your line is open.
Thanks, Good afternoon gentlemen.
Good afternoon.
Oh, I guess two two things.
One.
I just wanted to start with the Dynaenergetics because in the U.S. I mean, obviously it was a pretty steep sequential drop oh.
You know in your Q, you broke out kind of a U.S. piece and it looked it looked pretty severe well I think about the.
The market share position and how you're sort of approaching that right now and obviously it seems like people are buying more components of the very short term, but how do you expect.
The I.
I mean, the market demand will do is going to do but how do you expect your share kind to evolve over the next.
Two to six quarters, assuming we started to get a recovery in a market and and you think you'll get back to kind of that.
Sort of positive momentum on that front any kind of color you could add around that would be helpful.
Yeah, I think I think first of all it it's in in this second quarter.
Hi.
You know probably safe to say and its expected on our part in it in a market that.
Basically collapse over 45 day period of time from from March to April.
And Theres, a significant amount of component inventory in suspension, if you will in the market.
That.
In a in a lot of either manufacturers or service companies.
Even though our systems perform better.
Then then then a field assembled system it wasn't about performance and it wasn't about cost it was about a selling through the inventory that people had on their books.
Turning that inventory into cash.
And and and so with with.
A market that had very little demand.
And a lot of people wanting to turn inventory into cash.
Pricing in the second quarter was very difficult is very difficult even going into the third quarter.
And we're not chasing that and so in a down market with but that kind of scenario our market share of of.
Systems going down the wells has declined probably decline.
You know markedly.
And that's okay.
We're focused on the medium to long term.
The the prices, which those systems are being sold is not sustainable you'll see that in margins of companies.
As they begin to report it won't be replenished.
In the value of our systems.
We'll really be seeing coming out of this downturn.
Because we they're safer they're more reliable they performed better.
They also require you where people that are well site theres going to be fewer people at a low site.
And and it takes the working capital and costs all off the service company.
And it puts it on to our books and so.
We.
How relatively high inventory for what demand is right now.
And.
Our inventory, we're not trying to turn into cash because of the strength of our balance sheet and.
I guess just as a first time in my career as I can say that we're saving that inventory for Sunny day.
And and.
And because they're good systems and they perform and.
Will give on this quarter, we'll probably give on the next quarter two is.
As the.
As the inventory in suspension works its way through the industry.
But the value proposition for our customers of factory assemble performance or shirt systems has never been stronger.
And it is.
It is a this downturn as highlighted that.
For people, who have converted to our systems because they think it's they're not stopped working through inventory, but that just in time delivery model.
So I think we'd like there mark.
I do expect their market share to read recover and actually go past, where we were at the beginning of this downturn.
Okay, and then when you mentioned component inventory.
He is that just.
A function.
The normal component demand and just the overall activity just falling off a cliff and create so even two quarters ago. There were components being sold to people have is still something at the well site and just because demand fell. So fast you had this inventory in the channel is that were caused yet.
Yeah, Yeah, you know it's in 15 16, it took a two years for the activity to declined 70% completions.
Just a 45 days.
And Oh.
Yeah, most companies had.
Material on order assist.
Systems on order.
For a market that was different than the mark that it turned out to be in the second quarter and for the balance of this year.
And there's just a flywheel effect of.
That inventory coming in lower demand, it's going to take a while the work through.
And and so there's a lot of.
No.
There's been a lot of talk about systems.
But we are had been the primary supplier of systems to the market.
And.
In the market is still been 70% 70 plus percent a component business with field assembly of perforating guns, and so theres a lot of.
Cats and dogs, if you will have manufacturers of hardware and the him and just a small group.
Explosive manufacturers and some of their product lines.
Systems that they talked about.
We're fully mature.
And and market ready.
For this year and so in this downturn happens.
The hardware companies are scrambling to sell through their inventory.
And as you know some of our leading customers have have.
Backed off of.
The system focus and have been selling shape charges in components into a a declining price market.
And quite frankly.
That's probably put some of them further behind for for coming out of the downturn.
Which again I'll go back to feeling pretty good about where we're going to be bring to market starts to recover.
Thank you just one more and I'll pass it on beep.
Looking at your Q, there was a big spike in sales in India a.
Like 4.7 million versus almost zero last as far as that because I can see.
Zero market opportunity there, what's what's driving that.
But I should be thinking about.
We should we investigating a bit more.
There's a kind of an annual requirement and a tender that's that's.
Put out.
By certain countries in this case India.
And and we were awarded that project in that project shipped in.
Q2.
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It was more pronounced you can see it now from a more pronounced standpoint, but it's been there in previous years. So its a.
I would view it is.
Kind of an annual event, sometimes when we went and sometimes we don't.
But it just was more mark this year in terms of our performance.
And so does that does that mean that your baseline U.S. business, probably rises at a faster percentage in your guidance suggest in the next quarter, because that's not a recurring item.
Yes, it does and and and it also means that our international business was very strong in the second quarter for for Dynaenergetics and.
In which but also highlight the faster drop offs in dynaenergetics in the second quarter.
By choice by design, because we're not chasing the low price business.
Great. Thank you. Thanks for your answers I appreciate it.
And one final reminder, ladies and gentlemen, and a star one if you had a question or comment we will move next to tailor.
Tudor Pickering Holt your line is open.
Hey, good afternoon, and thank you Kevin I wanted to Peel back the on in a little bit more on Dinah and some of the.
Moving pieces as it relates to sales in Q2, and what the Q3 guidance would imply so if we take the midpoint for Q3, you're guiding to basically get 20% sequential improvement at the top line and it sounds like some of these chunky or lumpy international pieces will fall off so so.
Inferences that the U.S., probably improves greater than that 20% and I wonder what.
You have a view on what underlying completions activity in the U.S. might do sequentially in Q3 that underpinning that guidance.
Yes.
I think that there's probably a little bit of a stronger pickup there for us with some of the projects. We're working on then the underlying.
Completion activity that activity a taylor.
We did see a pick up and a slight pickup in June and a slight pickup in July over what April may timeframe.
Timeframe was and so.
I think that.
Part of it is a pickup in the third quarter versus the second and part of it is just to pick up with some of the customers that were working with it or.
Yeah, we're working with him a little bit deeper on some of their completion projects.
Okay. Okay got it and my follow up is related to cash flow over the back half working capital came back or as a source of cash here in Q2.
Think about the back half.
I think most of the Q2 working capital was was the receivables collections, but.
With Dyna starting to pick back up in the back half a I imagine that receivables.
Collection dynamic is going to start reversing at the same time you talked in one of the prior responses about how you still have a bunch of inventory on the balance sheet. So just curious how those two factors there will play into whether you might get any cash out of working capital in the back half the year.
Yeah, I'll I'll I would expect is in the.
Well have you had to pointed out because I do expect the receivables to go up slightly inventory to come down.
Because ours, our inventory is high but we'll sell through some of these systems.
And in our selling through them and we're hoping to to.
Breakeven, if you will or for better at at the.
Income line operating income line.
And and so.
You know, we expect to be neutral from a cash standpoint for the quarter, but Mike you, Yeah, I mean and really what it is if you look at our cash neutral to slightly positive Taylor.
We're saying a million at 4 million in EBITDA in $2 million to $3 million and capex that pretty much gets us to.
Flattish working capital.
Receivables and inventory offsetting.
Okay got it that's all for me. Thanks, Thanks for the answers.
Yeah. Thanks Sandler.
With no other questions holding I would now like to turn the call back to Dan seek level CEO Mr., Kevin long for any additional or closing remark.
Thank you everybody. We appreciate your interest in the company Oh, we have entered the second half a 2020 with a highly efficient operating structure a portfolio of differentiated technologies and products.
A strong balance sheet and a talented workforce.
Strategy is sound and I'm confident we will emerge from the downturn in even stronger company.
I want to thank DMC employees, who have done an exceptional job during a very challenging period. Our teams around the world have worked hard to keep themselves in their co workers say, while also effectively addressing the needs of our customers I sincerely appreciate their continued effort and dedication everybody's stays.
Okay, and we look forward to talking to you next after the end of the next quarter. Thank you.
Ladies and gentlemen, I will conclude today's call. We thank you for your participation you may disconnect at this time and have a great hey.
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