Q1 2024 DMC Global Inc Earnings Call

Presentation

Operator

Greetings, and welcome to the DMC Global first quarter earnings release and conference call. At this time, all participants are in a listen only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Geoff High Vice President of IR. Thank you. You may begin.

Hello and welcome to DMC's First Quarter Conference Call. Presenting today are DETMCCEO. Michael Kuchta and Chief Financial Officer, Eric Walter.
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. Today's release and the related presentation on our first quarter performance are available on the Investors page of our website located at DMC, global.com. We are a webcast replay of today's presentation will be available at our website shortly after the conclusion of this call.
With that, I'll now turn the call over to Michael Kuchta.

Operator

Michael?

Hello, and thank you for joining us for today's call DMC's first quarter financial results included consolidated sales of 167 million, down 9% from the first quarter a year ago. This decrease was largely due to soft demand and lower pricing at Arcadia products.
Our Architectural Building Products business, our key US sales of 61.9 million were down 23% compared with the year ago first quarter, we noted during our last earnings call that Arcadia was experiencing a slow start to the year due to weak market conditions in the western and southwestern United States demand declined further in March, particularly for short-cycle orders at several of our large regional service centers as well as for our ultra high end residential products. The weakness in our short-cycle commercial business aligns with the Architectural Billings Index, which is a leading indicator for commercial construction activity. March was the 14th consecutive month. The ABI. declined nationally in the Western U.S. index fell sharply during last year's third quarter. Since the ABI. tends to lead nonresidential construction by nine to 12 months. We believe we are now seeing the impact of that decline. We are seeing signs of improving activity at Arcadia as commercial division's backlog for long-cycle projects has increased in the past month and quoting activity for both large projects and short cycle orders is picking up. Based on these indicators, we expect to see sequential quarterly improvements in sales and earnings in the coming quarters.
Dynaenergetics, our oilfield products business reported first quarter sales of $78.1 million, up 4% sequentially and down 5% versus last year's first quarter. International demand remained healthy and in North America unit sales of our industry-leading DynaStage system were again at record levels. North American sales also benefited from increased demand for our premium oriented perforating systems. Dana continues to execute on a series of operational excellence and cost reduction programs are designed to mitigate pricing pressure in North America. These initiatives are expected to strengthen margins during the back half of the year and include automating certain manufacturing and assembly processes and streamlining product designs.
Nobelclad, our composite metals business reported sales of $26.8 million, up 22% from the same quarter last year. Earlier this week, NobelClad received a $19 million order from an international petrochemical customer. This represents the largest order in NobelClad history and involves the production of clad plates that will be used to fabricate heat exchangers reactors and associated equipment for a petrochemical facility being built in Asia. Nobelclad expects to ship the majority of the order during 2025, NobelClad has made significant progress expanding manufacturing capacity for Solyndra cryogenic transition joints. Demand for Solyndra from the liquefied natural gas industry remains strong and NobelClad commercial team is tracking more than 90 global LNG projects that have either been announced or in the planning phases. While the first quarter sales shortfall at Arcadia products was disappointing, we remain confident its differentiated business model, strong brand and the growth strategy we are executing as markets recover. We believe Arcadia is well positioned to benefit. Cmc's financial strength continues to grow and is benefiting from our improved free cash flow and our aggressive efforts delever our balance sheet. We're also making progress in our review of strategic alternatives for DynaEnergetics and NobelClad as we seek to unlock shareholder value. It is too early to discuss the details of our efforts, but we look forward to providing an update in the coming months.
I'll now turn the call over to Eric for a closer look at our first quarter financial performance and a review of our guidance. Eric?

Thanks, Michael. Our consolidated first quarter sales were 167 million, down 9% from the first quarter last year. Consolidated gross margin was 25.4%, down from 28.3% in the 2023 first quarter due primarily to industry consolidation at Dyna, which was partially offset by a more favorable project mix at NobelClad. Excluding one-time expenses, our first quarter SG&A expense was $28 million or 16.9% of net sales, down approximately 120 basis points from the first quarter of last year. The improvement was driven primarily by lower litigation expenses at Dyna, which were partially offset by a $500,000 bad debt charge. Also at Dyna, first quarter adjusted EBITDA attributable to DMT was $16.7 million compared with 20 million in the prior year quarter. The decline was driven by lower sales at Arcadia and the previously mentioned gross margin contraction at Dyna, inclusive of the Arcadia noncontrolling interests, consolidated adjusted EBITDA was $19 million or 11.4% of sales compared with 13.2% of sales in the prior year quarter. At the business level, Arcadia reported first quarter adjusted EBITDA of approximately $6 million or 9.5% of sales, of which $3.5 million or 60% was attributable to DMC Arcadis adjusted EBITDA declined 44% year over year, due mostly to lower sales that Michael explained earlier. Dina reported first quarter adjusted EBITDA of $10.5 million or 13.5% of sales, which was lower than the prior year quarter due to a decline in average selling price compared to with the fourth quarter, Diners adjusted EBITDA improved 13% due to a higher volume of DynaStage units and lower SG&A. Nobelclad reported adjusted EBITDA of almost $6 million, which was 21.9% of sales compared with 15.3% of sales in the first quarter of 2023. Ebitda margin improved due to a more favorable project mix and better absorption of fixed manufacturing overhead costs.

First quarter.

Adjusted net income attributable to DMC was 4.2 million, while adjusted EPS attributable to DMC was $0.21 versus $0.32 in last year's first quarter. During the quarter, DMC generated free cash flow of $10.5 million, which was more than double the prior year quarter. We used this year's first quarter free cash flow, primarily for voluntarily delevering on our debt and distributions to our Acadian joint venture partner.
In terms of liquidity, we ended the first quarter with cash of approximately $20 million and debt of $90 million. We ended the first quarter with a debt to adjusted EBITDA leverage ratio of 1.0, which was well below our covenant threshold of 3.0 and represents the ninth quarter in a row that we have delevered on a pro forma net debt basis after subtracting cash, our leverage ratio was 0.77 at the end of the first quarter.
Now turning to guidance for the second quarter of 2020 for consolidated sales are expected in a range of 161 to $171 million. We expect activity in Arcadia as primary markets to remain soft in the second quarter, while activity in Dana's North American markets is expected to remain relatively flat versus the first quarter second quarter. Adjusted EBITDA attributable to DMC is expected to be in a range of $14 million to $17 million. Arcadia EBITDA margins are forecasted to improve from the first quarter due to stronger volumes and lower SG&A at Dyna. We anticipate EBITDA margins will remain relatively flat quarter over quarter, while NobelClad EBITDA margins are expected to moderate due to a less favorable project mix.
With that, we're ready to take any questions from our analysts. Operator?

Question and Answer Session

Operator

Thank you. We'll now be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two. If you'd like to remove your question from the queue For participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions.
Thank you. Our first question is from Ken Newman with KeyBanc Capital Markets. Please proceed with your question.
Guys, thanks for taking the questions.

I can either maybe just starting with Arcadia, Michael or Eric, could you just size the revenue that went through the short-cycle channel versus the project related sales that you're expecting? Hoping you can help us bridge your comments on this idea of segment sales sequentially improving in coming quarters?
Yes. Thanks, Ken. So what we've seen is a decline in a couple of our regional branches or service centers for our short cycle work, we call it our storefront business. And so those are regional branches, service centers. That's about 50% to 60% of our sales. That track with general commercial construction activity and the rest of our businesses, a project base, whether it's on the commercial side or the resi side. So and our project business, it's exposed to a broader range of end markets. So that's where you're seeing more government, civic education and things like that featured in our earnings deck. So they don't necessarily line up as much with the with the short cycle, our business. And so what we're seeing is we saw quite a bit of a dip in the back half of the first quarter, and we're seeing improved, I'd say, significantly improved quoting lunch short cycle currently. And we've got some good project business we see coming through as well. So we think we got it. And I think we're in the Valley right now, Ken.

Operator

Okay.

So it did the transitory on the short-cycle Arcadia side on the volumes.

And I know you're bringing on a later this year just assuming that the volumes stay relatively muted, are there levers that you can pull to mitigate underabsorption?
Yes, absolutely, Ken. I'd say a couple of things on on that. I think we've got a couple of quarters as we as we march through this current environment, we can certainly push out capacity investments. Do we see a sustained increase in demand? So we can pull back on CapEx. And I think there's there's a lot of operational initiatives were middle of where we can we can save from a cost standpoint and drive EBITDA north from here off of Curon. So we've got some projects in the works there. So and then in any event from a from a capacity standpoint, there are there outside sources that we can leverage as our as our volume picks up.
Okay.

Operator

Maybe just switching to the other segment.

I mean, what's the confidence level in the 2Q revenue guide beyond Arcadia and maybe for Dana specifically, what are you kind of assuming or expecting at the lower end of the range as it relates to it levels of conservatism?
I mean what we're seeing in that diagnose market is fairly stable, steady activity. And so I think we see Q2 is maybe modestly softer, flattish. I'll say that we had a pretty decent April. We also had a pretty decent April and Arcadia as well. But in Dana, we're just seeing pretty pretty steady activity levels right now. And that's what we see in the front view mirror Maybe I'll ask one more. I'll jump back in line here. Do you have a view for gross margins across all the segments as we move through the half of the year I think you're going to see consistency in Arcadia as well as NobelClad and DynaEnergetics. We expect some improvements there with some of the automation projects and things we're doing not only in our plant, but also to be new products that we're putting in the marketplace. And <unk>, it's not as much on new products, but new product design, I would say, well, I'll get back in line.
Thanks, Kent.

Operator

Thank you. Our next question is from Stephen Gengaro with Stifel. Please proceed with your question.

And thanks. Good afternoon, everybody. We are tough on the DynaEnergetics side, can you talk about B, the cost, our initiatives and just kind of how we should think about margin progression as we move through the next couple of quarters?

Yes, I think Eric, and you can speak to the margin progression, which I think is relatively flat in our guidance. Most of the initiatives that we have that all speak to are in progress right now for the most part on track, and we'll have those in place at the end of the year. I think that I think the biggest item on our list or a couple of large items on our list is one automating our assembly in our Blum facility. So that's going to improve our cost base that's going to improve our quality. And so I think we're going to see benefits from that. We've also got some projects on where we think we can purchase better from a supply chain management standpoint, how we can pull together purchases of metal. So we think there's a quite a bit of savings in there. And then a lot of them are just I'd call it smaller on projects as we execute on a more operational excellence program in DynaEnergetics.
And then maybe another big one, I want to make sure I don't forget this is on the product product design. So we're doing a lot too take metal out of our products and taking metal out takes out quite a bit of cost. So and that's enabled by our design and how we package our perforating systems together. So maybe Eric can talk a little bit about the margin progression.

Operator

Yes.

So Stephen, these initiatives, as Michael mentioned, are being implemented, right now we're probably not going to get a full year benefit this year. But what we would expect is when you get into the second half of the year that there's going to be probably 100 to 150 basis points of EBITDA margin level. So should take us up to the yes, the mid 10s from an impact standpoint.

Operator

Gotcha. Okay, good. Thank you.

And then the other one on Diamond is it is given what's going on in the market and kind of assuming that maybe the rig count seems to be flattish from these from these levels for the last, let's say, three year end? And what's the driver of that? I mean, is it just kind of a should we think about it as falling rig count and completion activity? Or is there longer laterals or some technology that maybe can can bump the top line as well?

I'd probably think about it as more steady, stable now, you know, one of the key ways we win is with our customers and we and so our customers that were aligned with, you know, our key is delivering technology at the wellsite from a quality service delivery and then partnering with the right customers and how they're performing with the E & P. So I think we're aligned with the right customers there. So I think probably stable to steady and we tend to outperform the market there. So we are we feel pretty good about, you know, even in a flat rig count environment. We're doing what we can do to control our destiny here.
Got it.

Operator

Great.

And just one final quick one or two. Any guess on rough nat gas. But I guess one is any guess on kind of where your share stands and and just not, I guess, where's what's the current pricing environment look like for the Perth business.

So share where we've been in that I think 25% ish, maybe a bit north of 25%. We kind of balanced between 25% and 30% and the pricing in environment of Pheno kind of remains as is it's been, you know, a fairly challenged environment over the last couple of, I'd say a couple of years quite frankly, but you know, relative I think it's I think it's a relatively stable pricing right now.

Operator

Okay, great.

Thanks for the details.

Thank you, Stephen.

Operator

Thank you. Our next question is from Gerry Sweeney with ROTH Capital Partners. Please proceed with your question.

Good afternoon. Thank you, Jarrod, you're just sticking with Arcadia, obviously, sorry, it sounds like there are some I guess yes. Curious if any one is that competitors may reach?
Yes, or lower.

And Gary, great question. I don't think it's competitive pressure as much as it is really the backdrop in the commercial hub business, which we see improving. So we don't see any competitors doing anything different. But I think there's a second item, which is we also saw a slowdown in our ultra high end resi division. And so we've done a lot of work in that business, which was I'd say, as you know, it is not not a not a mature business. It was a small piece of the over all Arcadia. And we've done a lot of work to really improve the back end in terms of our operations, reducing lead times so we see that business, I think Hidden Valley in the first quarter, particularly at the end of the first quarter. So with all of these improvements in place, we're driving the front end of the business now. And there's a lot we're doing to add rigor to our sales processes and what we're doing on the front end in terms of close rates pipe pipeline dealer perform. And so we think that business is going to attract and favorably as we start moving through the year. So really, we're kind of seeing a double whammy on the commercial storefront side as well as on residential. But it it's more a market related and specific also to our residential business than customer side for our competitor, you know, how much of that storefront business is new build versus?

Operator

Yes, yes, just hard.
Yes.
Is it a new build?

Sorry, it's too hard to tell. Right now. We're actually getting a lot of good visibility now out of our ERP system. We're not there on that yet, Jerry, hopefully in the coming months quarters, we can start talking a little bit more about that, but it's certainly a mix of new build and repair and remodel.

Operator

And then speaking to the ERP, just a quick, yes, aluminum prices actually look like they kind of spiked a little bit through April. The other assets, there's been a little bit of mismatch between sort of inventory coming out product going out with the ERP system, right?

Any concern there or we I don't see any concern there. There's a tick-up there and an aluminum. Hopefully we might be able to capture some margin there. So I don't I I don't think anything to be concerned about maybe even a little bit upside there as we kind of move through the year here.

And here, I'd say just to add to that, I think we've got more visibility into how those aluminum costs move through our production system versus where we were this time last year. So I think we're going to have a much better handle on how we can handle those cost increases and passes on to customers in a timely manner.

Operator

And then one last question. I'll jump back in line. You mentioned yes, there is paint line to put there was anodizing as well and anodizing, was it margin accretive are positive to margins, however, are you sticking with that? Or has that changed through?
Yes, yes.

I mean, that was going to be back-end loaded in 2024 anyway. So we're evaluating that. There's different opportunities and sources we're looking at there. So I don't think right now with where the market's at relieving a lot of money on the table here. So we're up.

We're continuing to evaluate that, Jerry, and I think what we would do as we evaluated is to look for how we can get the highest ROI.
So is it spending the CapEx and bring those capabilities in-house? Or is that actually looking at outsourcing some of this capacity to a third party where there may be some overcapacity in the industry, we might be able to get a better return that way. So that's going to be part of the analysis. And at the end of the day, we'll determine what we do based on the return we get from the different approaches.

Got you.

Operator

And on that front. I mean on that front, there's not a what's the lead time on adding adding anodizing rates or theoretically you get a better return on outsourcing, at least for a year or two?
Yes, change that. Is that fair?

Yes, we could any you could put it. We could put something like that. And in a couple of quarters, if we if we needed to. So I'm not not to again not something that is, you know, it's not a multi-year project.
Right.

Operator

Thanks, lot.

Thank you, Jerry.

Operator

Thank you. There are no further questions at this time, I would like to turn the floor back over to Michael Kuchta for closing comments.

Thanks for joining our call today and look forward to discussing Q2 results and progress on strategic initiatives in early August. Thank you.

Operator

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