Geoff High - Pfeiffer High Investor Relations Kevin Longe - President and CEO Mike Kuta - Chief Financial Officer Rick Santa - Senior Vice President, Business Development..

Edward Marshall - Sidoti & Company Avinash Kant - D.A. Davidson & Company Robert Connors - Stifel Dan Whalen - Topeka Capital Markets.

Greetings. And welcome to the Dynamic Materials Corporation 2014 Third 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, Geoff High of Pfeiffer High Investor Relations. Thank you. You may now begin..

Thank you, [Shea] (ph). Good afternoon. And welcome to DMC's third quarter conference call. With us today are President and CEO, Kevin Longe; Chief Financial Officer, Mike Kuta; and Rick Santa, Senior Vice President of Business Development.

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

And with that, I’ll now turn the call over to Kevin Longe.

Kevin?.

Thanks, Geoff, and good afternoon, everyone. Our third quarter sales came in at $51.9 million, down slightly from the $52.3 million we reported in last years third quarter. I should note, these results exclude sales contributions from our former AMK Technical Services businesses, which we’ve sold on October 1st to Air Industries for $6.8 million.

That transaction reflects the ongoing steps we are taking to streamline the company and strengthen our two primary businesses, NobelClad and DynaEnergetics. Third quarter gross margin came in at 29%, which was at the high-end of our forecasted range. The decline versus last year is 31% was largely due to lower sales volumes at our NobelClad business.

NobelClad saw a modest increase in both its backlog and book-to-bill ration, but it’s still waiting for a meaningful pick up in capital spending within its global end markets. In the meantime, NobelClad management team has been working to enhance its manufacturing capabilities and simplify its operational structure.

I will provide more detail on these efforts in the moment. Third quarter income from continuing operation was $2.5 million or $0.18 per diluted share versus $3.4 million or $0.24 per diluted share in last years third quarter. Adjusted EBITDA was $7.7 million, as compared with $8.8 million in the third quarter last year.

DynaEnergetics delivered another solid quarter with sales improving 29% to $28.3 million versus last years third quarter. Gross margin came in at 36% versus 35% in the third quarter last year and the business reported adjusted EBITDA of $5.5 million, up from $3.1 million a year ago.

Customer adoption of the DynaSelect switch detonator continues to expand and we believe this reflects the willingness by customers to invest in technologies that bring improve safety and reliability to the well completion program. When DynaSelect was launched last year, sales during the first several months went largely to a single leading customer.

By the end of this year’s third quarter orders were coming from a variety of additional oilfield services companies. DynaEnergetics also reported sales growth across several other product lines, including shaped charges and detonating cord. From a geographic perspective, demand was strongest in North America and the Middle East.

To meet growing demand, we are proceeding with the addition of the second shift at our shaped charged facility in Blum, Texas and are moving closer to production testing at our new facility in Tyumen, Siberia. Commercial production in Tyumen is slightly behind schedule due to the lengthy process of obtaining equipment import licenses.

We expect the facility will be up and running in the first quarter. Of course, the outlook for oil prices is top of mind in our industry. At this point, we have received no indications from customers a plan to cut spending due to the pullback in oil prices. While we monitor the macro environment, DynaEnergetics is focused on the areas it can control.

It’s continues to strength its product portfolio with new offerings such as the DynaStage pre-assembled gun system, we told you about last quarter. It is also enhancing a supply chain and distribution platform. Collectively, we believe these efforts will lead to continued growth at DynaEnergetics during 2015.

Third quarter sales at NobelClad were $23.6 million, down from $30.4 million in the year ago quarter. Gross margin was 21% versus 28% last year and adjusted EBITDA was $3.6 million, down from $7.1 million. As I mentioned earlier, capital spending in NobelClad’s end-markets remain sluggish.

While NobelClad’s sales team continues to track a wide variety of projects, end-users have been slow to release orders. As we monitor the markets for an improvement in activity, we also are taking steps to strengthen the operations of what is already a well run business.

Last week we signed an agreement to purchase a $14 million manufacturing facility in the Siegerland region of Germany. The plant was constructed six years ago as an advanced manufacturing center to wind turbines. It has seen limited use today and we are acquiring it at an attractive price when compare to the cost to build new.

The facility strengthens our European manufacturing capabilities and enhances our abilities to produce and handle the large plates require to address the commercial plate industry which we are targeting as a new market area. We expect the plant will be operational by next year’s second quarter.

And following the restructuring of other European operations, we anticipate it will generate roughly $2 million a year in annual after-tax savings.

The NobelClad’s management team in Europe is in discussion with local staff representatives and social partners to develop a consolidation and restructuring plan, which we expect will result in restructuring charges of $3 million to $5 million over the next two quarters.

Once our consolidation is complete and the plant is operational, NobelClad’s manufacturing strengths and its ability to serve customers throughout Europe to Middle East and Africa will be significantly improved. With that, I will turn the call over to Mike for additional color on our financial performance.

Mike?.

Thanks, Kevin, and good afternoon, everyone. I will start by providing some detail on our expenses. G&A for the third quarter came in at $5.5 million or 11% of sales, versus $5.7 million or 11% of sales in the third quarter last year.

Selling expense increased to $4.6 million, or 9% of sales from $3.7 million, or 7% of sales on last year’s third quarter. The increase principally reflects higher salaries, benefits and payroll taxes, investments in distribution centers to service DynaEnergetics North America market, as well as increased commission expense.

With respect to our balance sheet, we saw continued improvement in our overall financial condition versus the end of 2013. Cash and cash equivalents at September 30 were $14.9 million, up from $10.6 million at the end of last year. We ended the quarter with working capital of $82.3 million, up from $72.1 million at December 31.

Current liabilities declined to $24.1 million from $31.6 million and total liabilities were $60.7 million, down from $67.8 million at the end of last year. We closed the quarter with net debt of $11.1 million versus $18.7 million at the end of 2013. Turning to cash flow.

For the nine months period we generated net cash from operating activities of $15.8 million versus $30.5 million in the nine months period last year. The decline was primarily due to a $15.4 million net increase in working capital during this year’s nine months period.

Increased investment in working capital reflects higher sales of DynaEnergetics as well as timing of accounts payable and prepayment from all materials of favorable pricing. We generated free cash flow during the third quarter of $12.6 million, which brings year-to-date free cash flow to $9.3 million.

With respect to guidance we now expect full year sales for 2014 will be down slightly to up 2% versus the $202.1 million we reported in 2013, which of course excludes the AMK Technical Services. We previously expected sales to be flat to up 4% versus last year.

Our expectations for full year gross margins are unchanged at 29% to 30% versus 29% in 2013. We expect our blended effective tax rate for fiscal 2014 will be from 30% to 32%, up from a previously expected range of 29% to 30%.

The higher range relates to the full year impact of a non-cash valuation allowance against certain deferred tax assets, primarily associated with our German cladding operations. $716,000 of this was recorded in the third quarter. We believe we will recapture these deferred tax benefits as a result of our European consolidation program.

For the fourth quarter, we expect sales will be up 4% to 6% versus the $49.3 million we reported in last year’s fourth quarter, excluding AMK. Our gross margin is expected to be in the range of 28% to 29% versus the 26% we reported in last year’s fourth quarter.

Our after-tax gain on the sale of AMK is expected to be $850,000 to $950,000 and will be realized in the fourth quarter as well. In addition, we expect approximately $1.5 million to $3 million of the NobelClad’s European restructuring expenses will be recorded in the fourth quarter.

We expect SG&A expense during the fourth quarter will be approximately $10.5 million as we previously stated, our anticipated growth should drive down SG&A expense as a percentage of sales beginning next year. Fourth quarter amortization expense should be approximately $1.4 million while interest expense is expected to be approximately $150,000.

With that, I believe we are now ready to take any questions.

Shay?.

Thank you. (Operator Instructions) Our first question comes from Edward Marshall from Sidoti & Company..

Hey guys. Good afternoon..

Yeah. Hi Ed..

Hi Ed..

So, I wanted to start with -- first, I wanted to know if you -- I guess the Q is just published but is there reconciliation in that for the AMK per quarter? I noticed that you adjusted for the third quarter of last year.

But as we kind of look at the fourth quarter year-over-year comp, I don’t know that I caught a reconciliation of the discontinued ops?.

The fourth quarter is not in the Q, just the third quarter year-to-date and third quarter..

So as of now, the only thing we really have is kind of the sales run rate minus AMK of $49.3 million, I guess is what you are saying..

Correct..

Okay. So if I look at the pro forma numbers and I kind of look at -- and remove the valuation allowance, I remove the gains from foreign currency.

It looks like there is an additional $0.05 incremental to EPS, is that about right? I guess maybe another way of asking, what’s the effective tax rate in the quarter?.

Give us a second, Ed..

Yeah. Sure..

The effective tax rate for the quarter was 33.1%, Ed and that does reflect a valuation allowance charge of $716,000 that was taken in the third quarter..

Okay. I want to ask about the gross margin guidance for 4Q. I noticed that you are adding roughly what it is, $2 million to $5 million of restructuring expense.

Does that -- is there a component of that, that’s included in your guidance for the fourth quarter gross margin?.

That’s not included in the gross margin guidance.

Excuse me?.

The $1.5 million to $3 million?.

Yeah, $1.5 million to $3 million is not in the gross margin guidance..

Okay. And then, I kind of want to talk about the restructuring if I could. I mean, it’s going to cost you, I guess you said $3.5 million total. So you are going to get a $2 million incremental benefit annually. I just wanted to kind of discuss maybe what those savings might be for you.

Is it deployment costs, is it operational efficiencies, all of the above, maybe you can kind of just elaborate a little bit on what you anticipate saving by the move?.

Yeah. First of all, the primary reason for acquiring the facility was to increase our capability. It moves us closer to the material suppliers in Germany.

But it enabled us to handle the same size of plates that we can handle in our Mount Braddock facility, both at the shooting site and processing, which opens up a new area that we’ve been focusing on which is pipe. And we’re working with several large pipe manufacturers hopefully that we will expect to see volume from in the future.

The cost savings come from three areas. It’s material cost savings, mostly reflected in great -- freight on steel. Let me correct that. It’s freight on steel..

Did you pay the freight or did your customer pay freight ultimately? I guess, they ultimately pay for that, but who pays for the freight.

Is it pass-through or is it kind of component of the price quote?.

It could go either way depending on how we quoted but what we’re really talking about is incoming raw material versus outgoing freight. And so this moves us closer for large plate production to incoming raw material, which we pay for.

And there is also factory overhead and personnel savings by combining large plate productions in Germany and focusing our French facility on specialty products. So it’s really playing to the strength of the two locations..

I see. Is there disadvantage for you to service from non-product to parts of the Europe and you know these larger sized plates and the Middle East or is this….

It is primarily based on access to raw materials. A lot of the pipe supply and lot of the projects that we work on in that region often have material requirements that are build around the German field suppliers.

And so if we are doing it at Mount Braddock, we would actually increase the incoming cost for the raw material and significantly lengthen the lead time in order to serve customers..

And that freight cost of the incoming raw material, Ed, could be 15% to even 20% of the sales value of these orders. So it certainly negate a big portion of profit we earn on both sides of projects..

Last question, I guess then on this topic would be over the last, let’s say, 12 months or so.

And this is going to be probably difficult for you to answer but how many of these projects have you quote -- potentially have the opportunity to quote upon that you are kind of absent in the market because you couldn’t produce or at least hit the -- take a lead times necessary?.

I’m shooting from the hip on this..

Okay..

I know of three to four projects that we’re just going to meet the lead time or the cost margin, that’s required in order to be profitable. But I’ll have better information for you next time on it..

Okay.

Three to four projects, I guess average projects are $2 million to $3 million?.

Both of the pipe projects are even larger than that..

Okay. Excellent. Thanks guys. I really appreciate it..

Sure..

Thanks Ed..

Thank you. Our next question comes from Avinash Kant from D.A. Davidson & Company..

Good afternoon everyone..

Yeah. Hi Avinash..

Hi Avinash..

Hi guys. So a few questions, the first one is on just in the terms of the full year or the guidance for Q4 that you have right now compared to what you have previously. It is coming down but where is the short fall. Like if you would have to talk over this segment, we understand AMK but even beyond that it looks like the numbers have come down.

So where was the shortfall?.

It’s entirely coming from AMK. Not AMK, NobelClad, excuse me. And NobelClad is if you look at the previous guidance and just year-to-date performance, the majority of our fall off in operating income is directly related to the contribution margin times the revenue at NobelClad.

DynaEnergetics is having a very successful year and has increasing momentum, and NobelClad is just we’ve seen stabilize, but we haven’t seen the uplift that we’re expecting yet in it..

So in terms of DynaEnergetics, so your expectations that you had at the end of Q2 came through and even after Q3, have you seen any particular weakness in the space of all this oil prices coming down and everything?.

No. I’ve actually talked with our team this morning and the activity is still very strong for us..

And now also coming back to the answer that you gave, Kevin, like, you are talking about weakness coming from NobelClad and then in terms that’s the area where you are actually spending capacity.

So what would that you see that you are willing to take this $14 million of expand capacity on the NobelClad side?.

$14 million..

$14..

It’s -- we see an increase capability in order to handle these large plates for a market that we’ve targeted to grow the application for explosion clad. And so we’re investing in the capability after spending a couple of years from a technology and market development standpoint to work with the different pipe applications.

We don’t expect the pipe applications to turn on over night. But what we get out of this facility is we’re buying the facility for roughly $0.50 to $0.60 on the dollar. That increases our capability and it lowers our annual operating cost and so it’s a win-win situation for us..

So it looks like it was kind of an opportunity that came across and you’re capitalizing on that?.

We had -- we were looking to consolidate our large plate manufacturing and we knew we needed to solve the ability to handle large plates. And so we went out looking to see what kind of facilities was available in the marketplace and we found almost a purpose built facility within 10 kilometers of our existing facility in Germany.

And so it was -- we were purposely looking for a facility and we’re very fortunate that we had one that, was right in our backyard..

Okay.

But do you have any indications for pipe orders already from your customers?.

No..

Okay.

And final question, what should we expect the tax rate for Q4 to be?.

So the tax rate for the fourth quarter Avinash is similar to the full year. I would use 30% to 32% as well..

Thanks so much, Michael..

Yeah. Okay..

Thank you. Our next question comes from Robert Connors from Stifel..

Good evening, guys.

How are you?.

Hi, Robert. Welcome..

Hi, Robert..

Last quarter you gave us an update just on the NobelClad proposal activity.

It sounds like you may have softened a little bit versus 20% year-over-year last quarter? Just wondering to get an update on proposal bidding activity for NobelClad, as well as domestic versus international and oil and gas mix?.

Okay. I don’t know I have all of that with me. The inquiries have been fairly strong and are consistent with the last quarter. We’re seeing -- looking at our top sheet and we were stronger in Europe right now in terms of the level of cording activity new projects that we see.

We’ve seen a slight softening in the Americas, but we’re still on that 15% to 20% up over the prior year. And I don’t have a breakout of petrochemical, but petrochemical is on average 65% to70% of the projects that we are cladding..

Okay. That’s helpful.

And just wondering if you can give an update just on the initiatives to build up some of the relationships with the contracting community, just an update on that?.

Were the end-markets that we talked about last time?.

Yeah, I believe last time we’ve talked, it was internal initiative to build up some of the relationships with some of the engineering and construction companies.

Just wondering how that’s going?.

It’s actually going well in addition to the facility that we are talking about in Europe. The facility is really following an increased investment in that business on marketing and sales resources. We’ve strengthened both of those areas.

And I can’t tell you exactly how much the expense in front of customers as a group, but we’ve focused a team that does the end-user and front-end engineering work.

That’s really more longer term in duration in terms of the projects that they are pursuing, while most of the sales team focuses on working with the fabricators and the path of the longer-term work sometimes get crowded out by the work that we do with at the fabricators.

And so we are investing quite a bit right now in the end-user and front-end selling, but that’s a long process. The projects that they are working on take time and I can’t give you the full impact of it yet..

And then I guess I could squeeze in one more just on the tight fabrication work you are perusing.

Can you give us sort of a flavor? I mean is it offshore? Is it upstream work? Is it downstream, or just all encompassing?.

I think it’s upstream and it would include some offshore..

Okay.

And any particular base in or basically serving the whole Europe after Middle East?.

Yeah, very international in scope..

Okay. Great. Thank you..

Thank you. Our next question comes from [Doug Ziyer from Dynamic Materials] (ph)..

Okay. I think you guys know I am from Hartland..

Yeah, we do..

Hey, Doug..

Just a little bit more of a discussion regarding the NobelClad you mentioned and the inquiries are still really fairly strong and consistent with the last quarter, but capital spending is still a bit low. There is a very long lead time for these.

When do you think we can get to that inflection point where the supporting activity and orders now turn into revenue, how far out is that?.

Well, we think that '15 will be a modest increase in revenue for DMC and NobelClad -- or excuse me for NobelClad and primarily the '16, '17, '18 kind of timeframe. As you mentioned, these are long gestation period projects.

There is an everyday replacement aspect to some of the business, but the new project business, those are long duration projects and we come in late in that process. And so the new project business that we’re working on today we believe are projects that Board’s approved in 2010 and 2011.

And so we really don’t expect a robust market for NobelClad until '16, '17, '18..

Okay. And just one more question about the new facility in Germany. I am missing something.

What is that you are going to be shipping after, is it plate or are you going to be shipping pipe or is both?.

It’s going to be plate and its going to be basically the larger size plates that we handle at Mount Braddock, which will be looking at combining from our two existing facilities, one in Germany, one in France. And -- but it increases our capability to handle quite larger than what our German facility can handle today.

And they are right near the material suppliers for number of applications that will require the specs of the German materials. And so it’s -- the pipe applications will be going after, will also be plates. They’ll be rolled into pipe or either pipe manufacturers..

Okay. That’s what I was missing. Okay, now I understand. All right thank you very much..

Thank you.

Thank you. Our next question comes from Dan Whalen from Topeka Capital Markets..

Great. Thank you. Apologies if I -- if this is already addressed. I had to jump off from here to there but when you are looking at the $2 million bars and their after tax savings how should we kind of think in terms of a starting point for a time frame.

And what’s kind of the rent process or trajectory from that perspective? And then secondarily encouraging to hear from the pullback on oil prices, you are not really hearing a pull back in orders. But if we do have sustained low oil prices, how long it will be -- does that really take their account flow to your system.

We’ve been hearing from a lot of other people that it’s a several quarter process.

How do you guys envision that?.

I’ll tackle that question. First, I have been here two years and I have seen two valleys, one of the end of 2012 not in terms of oil pricing but in slow down of activity. It happens fairly quick in North America. I think two quarters is probably right.

I will say that one of the things that we’re not as concerned about it than in the sense that the new products that we’re introducing actually improved the operating efficiency around the world both the economics as well as the safety. And in the more competitive pricing environment, it really plays to our product.

And it’s actually better for also most companies to be introducing systems that saves operating cost in a down market. It’s much harder to do that in a strong market. We’re not expecting it to be down but we feel that it’s actually playing into our new product if you will..

Dan, to your first question on the $2 million, we expect the plant to be operational, fully operational in the second quarter of next year. And so we’re modeling the saving for about three quarters next year..

Okay. So beginning in the second quarter through there….

Yes..

Okay. Great, thank you..

Thank you. (Operator Instructions) Our next question is a follow-up from Edward Marshall from Sidoti & Company..

Really quick. You started to touch on this, just in the last line of questioning.

But the DynaSelect products, the new products that’s going on there and by the way when you say DynaSelect switch detonator system, is that the same thing as the DynaStage Gun System?.

No. Not, they are related but one is the component of the other. And I can explain that in a minute if I need to..

I’m familiar with the diagram. I think you have in one of your press release -- one of your presentation. How is the sell-through process going there and how is the customer reception? I mean, this is relatively new and I don’t think that we’ve seen much from that yet.

But I’m just kind of curious as to what’s developing, what can you develop?.

The DynaStage is a product line that really is going to impact DynaEnergetics in 2015. We just introduced it this year dipped and we are putting in the assembly capacity in the U.S. for providing those systems. And primarily what we’ve seen this year is the DynaSelect. And the DynaSelect is up significantly.

We’ve got several customers this year that we didn’t have last year. Last year, we had a developing agreement with one of the leading oilfield service companies. And 100% of our sales were too at one company. This year, we’ve got significant number of orders coming from a broader customer base.

And so we cannot be more pleased with the product and the product is proving itself with tens of thousands of applications out there in the marketplace. And so its cost savings and safety is well documented and it’s helping us to gain the market acceptance that we hoped for..

Is there anyway to quantify the DynaStage system and maybe as a percent of the sales from the segment, and/or maybe the potential growth that you are seeing kind of year-over-year sounds pretty significant..

Yeah. Hang on one second, I will see if we’ve got. Q3. Year-to-date, we’ve sold over $12 million worth of that product, of which it was $4.6 million in Q3. And you may remember, we had a strong Q1 and after Q1 it’s been building..

Okay. And last year’s revenue -- potential revenue or year-to-date maybe through the first nine months in that business or could you just given the year-over-year growth? I’m assuming it’s coming from a very, very low base anyway. .

Yeah. Last year, we really launched in the fourth quarter, right..

Okay. So very little..

Yeah. I don’t quite remember. Maybe, I would just be -- I’ll get to that number but it’s….

Cost in the fourth quarter, I’m assuming there is nothing in the first nine months of the year..

Right..

Okay. Okay. Great. That’s helpful, guys. I really appreciate it..

Thanks Ed..

Thank you. At this time, we have no further questions. I will turn the call back over to Kevin Longe for closing comments..

Okay. As always, thank you for joining us for an update on our performance. And we appreciate your continued interest in our company. And look forward to speaking with you after the end of the fourth quarter. So thank you very much..

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thanks for your participation..