Geoff High - IR Kevin Longe - President and CEO Mike Kuta - CFO.

Gerry Sweeney - Boenning & Scattergood Edward Marshall Jr. - Sidoti & Company Avinash Kant - D.A. Davidson & Co. Robert Connors - Stifel Nicolaus & Co..

Greetings, and welcome to Dynamic Materials Corporation 2014 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.

I would now like to turn the conference over to your host, Geoff High. Thank you, Geoff. You may now begin..

Thank you, Mike. 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 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 dynamicmaterials.com after the call. In addition, a telephone replay will be made available beginning approximately two hours after the conclusion of the call. Details for listening to today’s replay or webcast are available in today’s news release.

And with that I will now turn the call over to Kevin Longe..

Thanks Jeff and good afternoon everyone. Our second quarter sales of $53.6 million were in line with our expectations and represented a 12% top line improvement over the first quarter. Second quarter gross margin was 30% flat versus the first quarter.

The revenue increase over the first quarter was largely due to the continued growth of our oil field products business which delivered a 17% sequential sales increase to a quarterly record of $27 million.

Gross margin at oil field products was strong at 36% but down sequentially from 41% in the first quarter, which benefited from very favorable product mix. For the six months period gross margin at oil field products improved to 38% from 34% in 2013.

DynaEnergetics, the primary component of the oilfield products business continues to benefit from active well completion work by the global oil and gas industry. Their performance has been especially strong in the United States and Canada thanks in large part to demand for our DynaSelect detonator which was introduced in the U.S.

late last year and generated considerable sales volume during the first half of 2014. North America remained DynaEnergetics largest market and given the expansion initiatives outlined by many of our U.S. and Canadian customers we see strong growth prospects in this region for the foreseeable future.

We continue to expand our North American distribution network to more effectively meet customer demand and have opened new distribution centers in Mount Braddock, Pennsylvania, which will serve the Marcellus and Utica shale regions and Bonnyville, Alberta where customers are operating in the -- heavy oil region.

Beyond North America DynaEnergetics is reporting strong sales in the Middle East and is making further inroads in to China’s expanding unconventional oil and gas market. During April DynaEnergetics representatives conducted a two week technical roadshow through China and met with major end users throughout the country’s oil and gas producing regions.

The team came away encouraged by the opportunities to strengthen DynaEnergetics presence in this emerging energy market. This week representatives of a joint venture between Shell and PetroChina are conducting field tests of our [V packs] reactive shake charges in an effort to improve their well stimulation programs.

By demonstrating the superior performance attributes of DynaEnergetics products and technologies, we believe the business could see an acceleration of its expansion strategy in China. Construction of our shaped charge facility in Tyumen, Siberia should be complete by early in the fourth quarter.

Of course we continue to monitor the geopolitical situation in Russia and at this point we are not aware of any developments that would alter our long range strategy there. I mentioned during our last call that DynaEnergetics was preparing to make another major product introduction.

During the recent offshore technology conference in Houston and again at the global petroleum show in Calgary customers got their first look at our new DynaStage product, a disposable gun system delivered pre-assembled and pre-loaded to the well site.

DynaStage is fully customizable for shot density and charge type and because it does not require onsite wiring or loading it improves safety reduces labor costs and eliminates the risk of mis-runs.

The patent pending DynaStage systems combines several components from our perforating product line, including shape charges, detonating cords, and the DynaSelect detonators.

By packaging these products into a single pre-assembled gun we provide customers with a higher level of service while also benefiting from the sale of a comprehensive perforating system versus just individual components.

We are actively educating and training customers on the DynaStage system and expect to commence commercial production in the fourth quarter. I want to note how proud I am of DynaEnergetics research and development team whose efforts and product innovation have positioned DynaEnergetics at the technical forefront of the global perforating industry.

I am also pleased that our increasing investments in research and development are having the desired impact in our product portfolio and sales performance. Our NobelClad business reported second quarter sales of $26.2 million, up 7% sequentially from the first quarter. Gross margin was 25% versus 19% in the first quarter.

NobelClad closed the second quarter with an order backlog of $40 million, up 12% versus the end of the first quarter. Perhaps more encouraging is that order opportunities also expanded during the quarter and include a broad spectrum of projects in the oil and gas and chemical markets.

We talked during our last call about the many projects being planned for the U.S. chemical markets and it appears activity is also picking up in the domestic downstream energy sector.

An industry report issued recently by GlobalData projected that approximately $4 billion will be invested in new domestic oil and gas refining capacity between 2014 and 2020. And much of the spending will be directed toward relatively small geographically dispersed projects.

This is consistent with the types of opportunities NobelClad is seeing in the U.S. refining space. Approximately 40% of the projects at NobelClad are International and like DynaEnergetics the business is seeing promising developments in China.

The NobelClad team at our office in Shanghai recently booked two orders, one from the power generation market and other in natural gas processing. These orders are direct results of the sales and marketing presence we established in China last year.

Under the direction of NobelClad’s President, Jeff Nicole the global sales team is placing much greater focus on clad metal end users and the engineering and construction companies that serve them.

While NobelClad’s direct customers are typically fabricators, we believe that the end users particularly in the chemical and energy space will benefit from our expertise in cladding applications to material science to specify our products early in the project’s design and material selection phase.

As I noted in today’s earnings release our free cash flow during the first half of 2014 was below our performance objectives. This was primarily the result of investments we have made in near-term growth and we expect to achieve our cash flow objectives for the full fiscal year. With that I will turn the call over to Mike Kuta.

Mike?.

Thanks Kevin and good afternoon everyone. As Kevin noted second quarter sales came in at $53.6 million, which was down 7% from last year’s second quarter and within our forecast range. Second quarter gross margin was 30% flat versus the second quarter of last year and also in line with our forecast.

Operating income was $4 million versus $6 million in last year’s second quarter while net income came in at $2.9 million or $0.21 per share versus net income of $3.4 million or $0.25 per share in Q2 of last year. Adjusted EBITDA was $8.6 million versus $9.7 million in the 2013 second quarter.

Our balance sheet at the end of the second quarter included cash and cash equivalents of $8.7 million, working capital of $80.3 million and a current ratio of 4.4 to 1. Current liabilities were $23.9 million and total liabilities were $65.3 million. We closed the quarter with net debt of $23.1 million and stockholders' equity of $176.6 million.

Looking at expenses G&A came in at $5.9 million or 11% of sales versus $5.2 million or 9% of sales in the second quarter of last year. The change was attributable to a $356,000 non-cash increase in stock-based compensation expenses as well as higher salaries benefits and pay role taxes.

The increase in stock-based compensation was largely due to a higher stock price when shares were issued this year versus in 2013 and changes in vesting for certain participants. It’s worth noting that our full year stock based compensation expense is expected to be in line with recent years.

The higher salaries benefits and pay roll taxes were driven by the addition of resources including the corporate business development organization to support our growth initiatives. Selling expense increased to $4.8 million, or 9% of sales from $4.3 million, or 8% of sales on last year’s second quarter.

The increase principally reflects higher commission from increased sales in the regions in which we don’t have a captive sales force. DynaEnergetics also have higher cost from opening the two new distribution centers Kevin referenced earlier.

Cash flow from operations was $691,000 for the six months period versus $15.4 million in the same period last year. The decline was due to a $15.7 million net increase in working capital.

This increase resulted from a short-term inventory build of DynaEnergetics DynaSelect detonators pre-payments for raw materials with long lead times but also favorable pricing and timing of payables. As Kevin noted we expect a significant improvement in cash flow during the balance of the year.

Turning to guidance we are maintaining our prior full year forecast for revenue which we expect will be flat to up 4% versus last year’s $209.6 million.

Our gross margin guidance is now 29% to 30% versus the prior forecast of 29% to 31% and our blended effective tax rate is still expected to range from 29% to 30% based on our projected full year pretax income. For the third quarter we expect sales will be up 1% to 3% from the $54.3 million we reported in last year’s third quarter.

We expect gross margin will be in the range of 27% to 29% versus the 31% we reported in the year-ago third quarter. The expected decline in third quarter gross margin reflects anticipated results of NobelClad which is forecasting a different sales and less favorable product mix. Both sales and product mix are expected to improve in the fourth quarter.

Given the near term investments we are making in the organization to drive in support growth of both DynaEnergetics and NobelClad we expect SG&A expenses during the third and fourth quarters will be consistent with the $10.7 million reported in the second quarter. We expect SG&A expenses will decline as a percentage of revenue beginning next year.

Third quarter amortization expense should be approximately $1.6 million while interest expense is expected to approximately $150,000. With that I believe we are now ready to take any questions.

Operator?.

Thank you. (Operator Instructions). Thank you. Our first question comes from the line of Gerry Sweeney. Please proceed..

Good afternoon, guys..

Yeah, hi Gerry..

Hi, Gerry..

Want to start off on NobelClad, could you give a little bit of details, maybe statistics in terms of what you are seeing on potential orders, I think quoting activity up x% versus years past, just to get a feel for how that is moving along..

I think Gerry it’s consistent with, I think in some previous calls we said that our quoting activity is up about 20% in terms of the projects that we are looking at. We are seeing that [strength] but I don’t have the current percentage to say that it’s much different than that..

Okay..

But we -- if we are starting to see a lot of quotes we are just anxious for when they turn to orders. .

I understand. And then I mean in China first time, I think a little bit there you actually mentioned the international side and a couple of orders coming through from China.

Any qualitative underlying positives going on there, is this part of that order activity or if any details on that?.

Yeah, I think we are actually very excited about the orders that we have received and quite frankly I think we are close to getting another order from China.

And it’s the direct result of the office and the people that we put in Shanghai where I believe our office is up to four possibly five people and we began this office, I want to say in May of 2013 and so there has been a lot of education and training and development and expenses in terms of joint sales calls from people from North America and Europe travelling with our China team.

And I am pretty excited about the people that we have come on board as part of our team and also equally excited about how our broader global organization is interfacing with them. And what’s really gratifying is we are now local in China with our sales and our technical expertise.

In the past it was people getting on the plane and going there and you are going to have limited growth by doing that. And so we are committed to China for the long run and the first step of building out our business there was to get a strong sales and marketing experience in our industry with feet on the ground in the region..

Okay, and then the focus that you mentioned earlier in the call about shipping to the end users versus the fabricators.

You know what drove that and maybe some details on the potential the how it’s been received?.

It’s we have only spend time with the end users and engineers and so I think it’s more of a change in emphasis then it is a new effort all together and it came about primarily as a result of moving to one global organization in NobelClad in 2013 as you are aware we united what were regional businesses under a common brand name, NobelClad and we also put in place a common management incentive program for the global business and this year what we have done is we have created a technical marketing and application group that’s supporting application development in the sales of our products globally and creating more of a pull through demand from the end users and engineers.

And in the past this was more individually driven rather than collectively driven by the organization and it’s meant to reinforce our business on a long-term basis and we have taken the approach that as the largest in the explosion clad metal working and also the only company with a global footprint that it’s our responsibility as a business to drive the demand for our products and the benefits of those products by making end users and engineers aware of them..

Okay, thanks.

Switching gears a little bit to the Oilfield Products, did you have the Indian tender in the second quarter?.

We had half of the Indian tender in the second quarter..

Okay..

From a shipment standpoint.

And as you are aware the Indian tender is a competitive bid, primarily shaped charges and guns which are lower margin then some of our other products and the balance of that order will ship and it was really more of a technical reason on approvals that it didn’t ship in the second quarter but it will be out early in the third quarter..

So that’s the $3.2 million was sort of what it’s been in the past and I guess similar again this year?.

Yeah..

Okay..

And actually Mike just wrote me a note saying it shipped. .

Okay, because I was looking as a margin, I mean I see here obviously I knew the Indian tender had a little bit lower margins but so, we -- does that, the half of it shipping in Q3 sort of it effects the margin a little bit in that business as well because I was a little surprised I guess by some of the gross margin coming down in the guidance for next quarter.

I imagine some -- a little bit of its from that Indian tender but it sounds like NobelClad will be pretty weak in the third quarter?.

NobelClad will be weak in the third quarter and more probably similar to how they were in the first quarter of this year..

Okay, got it..

And but from a margin standpoint if you don’t mind me stepping back a little bit to DynaEnergetics to Oilfield services we are very excited about the investments that we have made.

We have increased our spending in R&D significantly over the last couple of years and we are starting to see the results of that in the new products that are coming out and those new products are carrying higher margins for us and better value and use for our customers and it’s really the emphasis of our company to focus on value and we are not interested in growing our business at the sake of margin..

Got it, no I -- I mean even on revenue side I mean the Oilfield Products had a nice uptick second-half, that’s half of the Indian tender over the Q1 and….

Yes and I think if you look at the first-half of the year in terms of the gross margin that’s more representative of where we are going as a business..

Okay, I’ll jump back in the queue. I am taking up too much time. Thank you..

Thank you. And the next question comes from the line of Edward Marshall. Please proceed..

Good evening..

Yeah, hi, Ed..

How are you guys doing? So I wanted to first lets clarify the Indian tender this is the first year where you are splitting out the tender which used to ship in two quarters over four, isn’t that correct?.

Yeah, it used to ship in the first or second quarter. Now it seems to be in the second and third quarter..

Okay so just a shift in cadence throughout the year..

Yes. .

Okay..

And I believe in ‘12 it shipped in the first quarter and ‘13 it shipped in the second quarter and now half of it’s in the second, half of it’s in the third..

Okay. So as we talk about DynaEnergetics how was the development going for you in Texas.

How -- where would you say maybe from a utilization standpoint what the sell through? And can you parse out maybe the increase you saw in 2Q, was -- how much of that was shipped from your Texas facility or at least a portion of through the Texas facility?.

I don’t how offhand much of the increase but I can share with you that the facility is operating at full capacity on a single shift which is in the 45,000 plus or minus shaped charges monthly and we are currently in the process of hiring people to go on the second shift, first of all they got to go through the training but the second shift will begin production in the fourth quarter of this year..

Did you say you are operating at full capacity at a full second shift or you are adding a second shift, I’m sorry?.

We are adding a second shift and we are at full capacity on a single shift right now..

Okay. Now you operate, I guess for you operate several facilities in North America that all share components that also need lump facility.

Are there any holdups or is there any kind of jams in the systems that you can see that would derail kind of your progress in -- shaped charges for -- is there any backlog backlog that will push you back?.

I don’t we don’t anticipate any delays or any difficulties at this point. It’s been operating since November of last year and we have been careful because of the nature of the products not too put the foot on the accelerator too fast with that and that we developed right safety culture in the organization.

So we have been quite pleased and it’s actually been a relatively flawless start-up of the new facility for us. It’s really effectively and efficiently ramping up that second shift..

I guess my question is surrounding -- and system is kind of words I was looking for but I guess to broaden that question a bit is there any need for additional capital that you would put in the system at least in North America I know you are spending some in Siberia?.

Yeah, I don’t see that other than annual capital expenditures, but not significantly for the next 12 or 18 months..

And then DynaStage gun system are there orders for that yet or they testing only customers necessarily testing that out?.

We are going through the approval process for handling the explosives and completed gun systems in our two manufacturing locations that we will be assembling based in North America and we have got some initial two initial orders and customers that we are going to be working with on them that are sizable customers and quite frankly we have introduced it.

We are walking before we run and making sure that we can meet the needs of our customers as they can switch over to this system because it does change some of the things that they do on their end..

Now you said two big customers, can I make inferences to who they might be? Is it -- are they competitors as well?.

No, they’re not to us..

I see, okay. Is there any federal regulations with shipping and I think this is what the development of this product was to circle back any kind of shipment of explosives et cetera.

Has there have been -- have you checked with federal government to make sure that it’s okay to ship et cetera, I am sure you have, is there any approval regulations that need to come down the pipeline before you can actually start shipping?.

There are but we are very familiar with the approval agencies and the two locations that we are going to be assembling these guns we handle explosives today and ship explosives today and there will be our Mount Pradic facility in Western Pennsylvania to serve the Middle and Eastern half of the U.S. and our Texas our Blum facility..

And last question with the DynaSelect gun are there patents associated with this that protect you from say competition and how significant is this in the shield I don’t think anybody sells actual systems to the market at this point?.

We with the step-up in our research and development efforts we have also committed stepped-up our commitment to protecting our intellectual property and we have three patents pending applications filed that we are pretty excited about. .

So you are suggesting the product wouldn’t be able to be duplicated by a competitor..

Not easily..

Perfect, thanks guys..

Thanks Ed..

Thank you. And the next question comes from the line of Avinash Kant. Please proceed..

Good afternoon Kevin, Mike and Jeff..

Yeah, hi, Avinash..

So, maybe I miss this one but I think you gave gross margin numbers for both the segments the Oilfield and exposition flat for the quarter.

Can you give it for the quarter and the first half and also compare it with the last year’s quarter Q2 and the first-half of last year do you have those numbers?.

Yes. Yeah, so for Avinash for the second quarter for NobelClad the gross margin number was 25% and for the year-to-date period that was 22%. .

And what was it last year’s Q2 and first half of...

The Q2 number was 26% and roughly 24% for the year-to-date period..

Okay..

And then on Oilfield….

Yes..

The Q2 gross margin percentage was 36%, 38% for the year-to-date period Q2 last year was 34% and 34% for the year-to-date period..

Perfect.

Now you did talk about some weakness in clad although if I look at the booking of the explosion clad side looks like you did see some pick-up in bookings what were the components of the pick-up bookings, was it just the Chinese booking part that was additional or you see this as a trend or is it just the one-time pick-up that may not be there in Q3?.

The two orders in China were small orders and so it really was a broader order base than just the China projects and it was a significant pickup in the second quarter of the base in the first quarter in terms of bookings. And we are hopeful that this -- we’re cautiously optimistic that this will be a trend.

Having said that the other difficulty at this time of the year because of the long lead time on the clad projects that we are not going to see the benefit of the bookings in the second half of this year in terms of revenue unless they come in, in the next 60 days or so. .

Right, right but just the bookings alone, barring the timing have you -- do you expect to see a pick-up in the bookings especially based on what you have seen in Q3 thus far, does it look like you’ll be running ahead of the Q2 bookings run rate or you will be kind of missing that..

I don’t want to anticipate that but I’ll say that the quoting activity continues to remain strong and where we have -- not had as good as the first of all is when those orders that we are quoting or when the projects turn to orders. .

And then I was talking of the oilfield side, Kevin, of course if you are going to be at Q1 levels in the explosion clad, we can just do the math and the guidance still indicates those two, I would say a 10% or so sequential improvement in the oilfield business.

Is that what you are expecting and then should we expect continuous improvement into Q4 or how do you see the rest of the year tracking at the oilfield?.

I think we -- the oilfield is performing at our expectations and it ties back to our original guidance for this year which was flat to up 4% and obviously the oilfield products is growing at a greater rate than that. And so we actually also forecasted a decline in NobelClad and both businesses seem to be performing within our expectations. .

Then the oilfield is running much better than that..

Much better than the forecast for the whole company for the 2014, yes, which was our expectation. .

So then asking it this way, if you were to -- given what you are talking about Q3, and if you look at the oilfield somewhere you could be -- we are clearly talking north of $30 million or $30.5 million in revenues in oilfields, what kind of utilization rate would you be at, at that point and since how much expansion can you think you can have on revenue jump there?.

I am not sure that I understand the question. .

If you look at your guidance for Q3 and look at the oilfield business alone, you just had a record quarter in the oilfield business, right. And you will be kind of up again, close to 10% or so sequentially in Q3.

So what I’m trying to figure out is at that level of revenues what kind of utilization rates you will be at in the oilfield business?.

Oh, utilization rate. We are pretty much close to capacity in shaped charges. We have built up inventory on our DynaSelect products which should cover us through the end of the year plus the current production rate. And we have plenty of capacity on gun systems.

So and the focal point in the fourth quarter is the second shift on shaped charges in Blum and the start-up of our Tyumen, Siberia facility. And the Tyumen, Siberia facility will take pressure off our European facility for shaped charges.

And I think you made a point previously that we don’t expect significant capital needs in the next 12 to 18 months even at these growth rates..

Okay, and final question in terms of -- of course you are not giving guidance in 2015.

But you did say that after Q4 on an SG&A basis point of view line item at least you see -- as a percentage basis they should start to decline, by -- and as you grow your business in -- if you were to grow what kind of margins you can see -- think you can get to given that you’ll have the two new facilities come up?.

Yeah, we are not ready to speak to 2015 at this point. We are expecting growth in leverage against the SG&A and the investments we are making in SG&A but not ready to speak about anything beyond our current year run rate on SG&A, Avinash. .

Perfect, thanks so much..

Thank you and the next question comes from the line of Robert Connors with Stifel. Please proceed..

Good evening guys.

How are you?.

Fine Robert, welcome..

Thank you.

I was just wondering on the mix of RFPs or quoting activity at NobelClad, if I think you gave a little bit of color on domestic versus international, am I correct that it’s about 40% international versus domestic?.

In terms of the projects that we are quoting yes..

And can you give a breakdown as far as what’s the break up oil and gas versus chemicals versus refining? Any color on that..

I don’t have the breakout in front of me. The -- we will say that about 65% to 70% of our projects are petrochemical oil and gas and chemical. I don’t have the -- they typically run above half and half. And I think that there has been an increase on the downstream side over the last couple of quarters.

It wasn’t there as strong over say the last 1.5 years or so. So the reports that we talked about earlier kind of jives with what the sales team has seen from the downstream side. .

Okay, and then when you look at it and you guys have pretty good sense on what you can capture versus what the role bonders can do little bit cheaper, or where they are more competitive, are you finding that the clad welding jobs are starting to pick up or is it just the overall market starting to pick-up?.

We are seeing pretty much overall market picking and we are starting to see some price increases on metals. However they are limited and that’s an indication to us that we are starting to see stronger economic activity. .

Okay, and then can you give me a sense of the sequential inventory build, how much was due to the pre-buying or inventory build of the cladding materials as well as the DynaSelect. I am just trying to get a sense, ex those items what inventory levels did and if you are making any room or working down some of the inventory levels..

Yeah, if we -- when we look at the Dyna oilfield products which is primarily DynaEnergetics, the majority of the sales in that area was related to two things, it was half of the Indian tender and the other half would be DynaSelect and DynaStage products or materials.

And that was -- they were up about $5 million combined year-to -- since the end of the year. And the balance on that would be the prebuy in the local side of it..

The balance of the year-to-date inventory build..

Yes..

Okay, great thanks for taking my questions. .

Thank you..

(Operator Instructions). .

Mike I think we are ready to wrap it up..

Okay, you guys would like to proceed with any closing comments?.

Just I’d like to thank everybody for joining us on today’s call and for your continued interest in our company. And we look forward to speaking with you again at the end of the third quarter. .

Thank you very much. This concludes today's teleconference. You may all disconnect your lines at this time. And we thank you all for your participation..