DMC Global Q3 2023 Earnings Call Transcript

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November 2, 2023

There are 8 speakers on the call.

Operator

Greetings, and welcome to the DMC Global Third Quarter Earnings Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jeff High, Vice President of Investor Relations.

Operator

Thank you, Jeff. You may begin.

Speaker 1

Hello, and welcome to DMC's Q3 conference call. Presenting today are DMC's Chief Executive Officer, Mike Cuda 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 Today's earnings release and a related presentation on our Q3 performance are available on the Investor page of our website located at dmcglobal.com. A webcast replay of today's presentation will be available at our website shortly after the conclusion of this And with that, I'll now turn the call over to Michael Cuda.

Speaker 1

Mike?

Speaker 2

Good afternoon, everyone. DMC's Q3 was marked by both strategic accomplishments and operational challenges. We reported consolidated sales of $172,000,000 flat versus last year's Q3 and below our prior forecasts. Sales at Arcadia, our building products business were $72,000,000 down 11% year over year. Steady customer activity at Arcadia's primary regional service centers, as well as healthy sales at its ultra high end residential business We're offset by pricing pressure associated with lower raw material costs, soft demand for commercial interior products and a brief operational Slow down related to the transition to a new ERP system.

Speaker 2

DynaEnergetics, our energy products business reported sales of $73,000,000 up 4% year over year, but down 14% sequentially. The U. S. Drilling and completions Industry idled additional rigs and frac crews during the quarter and the Energy Information Administration reported a 10% sequential decline in U. S.

Speaker 2

Well completions. Dyna's U. S. Sales also were impacted by customer project delays late in the quarter. Soft sales in the U.

Speaker 2

S. Were partially Continued strong demand at Dyna's international business, which expects to deliver record full year sales in 2023. Sales in NobelClad, our Composite Metals business improved 18% to $28,000,000 versus last year's Q3. NobelClad's results reflect outstanding execution on a demanding petrochemical project as well as continued strong demand for pressure vessel plates and specialized transition joints. NobelClad ended the 3rd quarter with an order backlog of $61,000,000 versus $64,000,000 at the end of the second quarter.

Speaker 2

Rolling 12 month bookings were $111,000,000 up sequentially from $108,000,000 and the book to bill ratio was 1.1. Our consolidated 3rd quarter adjusted EBITDA attributable to DMC was $25,000,000 or 14.3 percent of sales and was within our forecasted range despite the lower than expected sales. EMC's long term focus is to achieve these objectives on a consistent basis. At Arcadia, additional paint capacity, a new ERP system and a series of operational enhancements and growth initiatives are expected to drive long term improvements in sales and profitability. In the North American oil and gas market, where Dyna generates approximately 85% of its sales, we expect continued consolidation by leading operators We'll sharpen the completion industry's focus on safety, technology and efficiency.

Speaker 2

China, which had Challenging third quarter has taken a number of steps to streamline its cost structure and will incur roughly $1,000,000 in associated one time expenses during the Q4. These cost reductions are expected to result in approximately $3,000,000 in annualized savings. Dyna also is implementing a series of operational excellence initiatives and assembly facilities. NobelClad is focused on expanding the market for its data pipe and Solyndra product lines and is pursuing emerging opportunities in lithium and hydrogen production. We expect 2024 will be another strong year at NobelClad.

Speaker 2

As Eric will discuss in a moment, much improved free cash flow led to further improvements in our financial position during the Q3. I remain encouraged by the strengths of our differentiated manufacturing businesses and our prospects for profitable long term growth. DNC's achievements would not be possible without the efforts of our talented workforce. I want to acknowledge all of our employees for their hard work and dedication. I also want to thank our customers for their loyalty.

Speaker 2

With that, I'll turn the call over to Eric for a closer look at our Q3 financial results Our guidance for the Q4. Eric?

Speaker 3

Thanks, Mike. As previously mentioned, our consolidated 3rd quarter Sales were $172,000,000 down 1% from the Q3 last year. Consolidated gross margin was 30.6%, up 110 basis points from our 2022 Q3 due to a more favorable project mix at NobelClad combined with margin recovery at Arcadia. Our 3rd quarter SG and A expense of $29,000,000 was 16.7 percent of sales, down from 17.5% in the Q3 of last year, driven mostly by lower litigation expense at Dyna. 3rd quarter adjusted EBITDA attributable to DMC increased by 13% year over year to $25,000,000 The improvement was primarily driven by higher sales and gross margin at NobelClad.

Speaker 3

Inclusive of the Arcadia non controlling interest, Consolidated adjusted EBITDA was $30,000,000 or 17.4 percent of sales, up 220 basis points versus the prior year quarter. At the business level, Arcadia reported 3rd quarter adjusted EBITDA Up $13,000,000 of which $8,000,000 or 60% was attributable to DMC. Compared with the prior year, Arcadia's adjusted EBITDA rose 11% and expanded 3.90 basis points as a percentage of sales. While Arcadia's pricing has moderated this year, aluminum costs have declined at a faster pace and contributed to the recovery in EBITDA margin. Dyna reported 3rd quarter adjusted EBITDA of $13,000,000 or 17.2 percent of sales.

Speaker 3

Lower absorption of manufacturing overhead costs and a less favorable customer mix led to a sequential and year over year margin contraction. NobelClad reported adjusted EBITDA of $6,000,000 which was 23.1 percent of sales and up 8 50 basis points compared to the Q3 of 2022. EBITDA margin improved due to a more favorable project mix, Better absorption of fixed manufacturing overhead costs and lower SG and A. Adjusted net income attributable to DMC was $10,000,000 during the Q3 of 2023. Adjusted EPS attributable to DMC was $0.50 Up over 40% compared to last year's Q3.

Speaker 3

Underlying improvements in gross margin and SG and A more than offset relatively Sales performance year over year. During the quarter, DMC generated free cash flow of $22,000,000 which was the highest quarterly level since 2019 and was up from $17,000,000 in last year's Q3. We use this year's Q3 free cash flow primarily for principal payments on our long term debt, distributions to our Arcadia joint venture partner And an investment in marketable securities, which will be used as part of our deleveraging efforts. In terms of liquidity, we ended the 3rd quarter with Cash and marketable securities of $36,000,000 and had no amounts outstanding under our $50,000,000 revolver. Our debt to adjusted EBITDA leverage ratio was 1.26 at the end of the 3rd quarter, which was well below our covenant threshold of 3 point and represents the 7th consecutive quarter of deleveraging the balance sheet.

Speaker 3

On a pro form a net debt basis, After subtracting cash and marketable securities, our leverage ratio was 0.89

Speaker 4

at the

Speaker 3

end of the 3rd quarter. Now turning to Q4 guidance. Consolidated sales are expected in a range of $170,000,000 to $180,000,000 Versus the $172,000,000 reported last quarter, we anticipate Arcadia's 4th quarter sales volume to be relatively flat sequentially. DiaNet expects to maintain its share in its core North American markets, but does anticipate overall activity levels will remain soft due in part to year end seasonality. NobelClad sales are expected to accelerate sequentially as the business benefits from delivery of key projects already in its backlog.

Speaker 3

Consolidated gross margin is expected in a range of 28% to 30 Compared with the 30.6% in the 3rd quarter. Gross margin at Arcadia and Dyna is expected to be relatively flat quarter over quarter, While NobelClad's gross margin will moderate based on project mix. Consolidated 4th quarter SG and A expense is expected to range from $28,000,000 to $29,000,000 versus the $29,000,000 reported in the 3rd quarter. 4th quarter adjusted EBITDA attributable to DMC is expected to be in a range of $20,000,000 to $24,000,000 versus $25,000,000 In the Q3. Finally, we expect 4th quarter capital expenditures will be in a range of $8,000,000 to $10,000,000 With that, we're ready to take any questions.

Speaker 3

Operator?

Operator

Thank you. We will now be conducting a question and answer One moment please while we poll for questions. Thank you. Our first question is from Gerry Sweeney with ROTH Capital Partners. Please proceed with your question.

Speaker 4

Good afternoon, Mike, Eric and Jeff. Thanks for taking my call.

Speaker 2

Hi, Jerry. Hey, Jerry.

Speaker 4

Starting with Arcadia, can you break out You have the service center work, which I think for lack of better term that sticks that go to a lot of sort of storefronts different and Pedestal type operations of buildings, ultra high end and then the interior commercial interiors. It sounded like the commercial interior business was slow, but I wanted to see how that compared with the other two businesses. Were the Two businesses in line. Was it entirely commercial or interiors? Just want to dig in a little deeper on that front.

Speaker 2

Yes. Thanks, Jerry. So the commercial interiors, which is our smallest business, we see that within Arcadia. That's in a valley right now, at least the work that we're seeing with commercial interior build out. The commercial exteriors business has been relatively, I'd call it, Flat, resilient, seeing a little bit of softening in some of the longer cycle projects, but the Short cycle projects, which there's a lot of diversification in our end markets there It's holding up pretty well.

Speaker 4

Got it. And Wanted to talk about, you've been at capacity in that business, and you also have You've added areas like Houston and Dallas and for these are my words, not yours, maybe underserved because of capacity issues. You're adding paint Capacity to sort of expand that. How do we look at some of the maybe little softness on the longer projects Versus short cycle versus adding capacity and sort of maybe investing in new locations. How does that all come together in terms of growth and opportunities?

Speaker 2

Yes. In the West Coast, we're definitely in a bit of a softer market. You look at the ABI readings, sub 45, but there's still a lot of opportunity in a lot of our markets where we're still seeing some strength. So we're moving around some of the project business into Some of our service centers that might be seeing a little less activity and pushing on the gas pedal on areas where Activity remains strong. So I think that if we go into a softer market, I think there's going to be an opportunity to drive the top line at still favorable margins.

Speaker 2

So at this Paint capacity that we're putting in place, we've done some industrial engineering there. We've got more of the paint capacity we can put in by mid next This year, I think we're going to be able to sell it through.

Speaker 4

Got it. And then Just last question on Acadia. How much was sort of the ERP how much did the ERP implementation impact the quarter? Yes.

Speaker 3

Yes, Jerry, so we probably lost 2 to 3 days With our service center or short cycle business and that unfortunately were canceled orders, so they're not going to come into Q4. So When you think about the impact to Q3 revenues, that was as meaningful of an impact as the other Two drivers that we talked about.

Speaker 4

Got it. So a third or third? Got it. One question on time and I don't want to monopolize this, but I think you said completions IEA or EIA were down 10%. I You were down 14%.

Speaker 4

In this market, obviously things have slowed down. Everybody's looking at 2024 expectations, completions were Are we sort of in this market where similar market for the Q3, maybe even the Q4 that was similar to a couple of years ago where Everybody knows the benefits of Dyna. It's a premium product, but they've got crews and they're sort of idling them a little bit. There's No sense in paying up for the benefit that Dyna brings when there's a little bit of softness and they have capacity. Is that what we're potentially seeing?

Speaker 2

Yes. I think, Jerry, what we're seeing is we just finished a pretty strong October. And I think we'll see some seasonality at the end of the year. So I think Dyna is going to look In the Q4, maybe similar to the Q3, that's in our guidance. Eric, you can speak to that.

Speaker 2

But I think some of the initiatives we're taking in DynaEnergetics are really going to drive results also as we go into 'twenty four, and I think we'll see The better of a market as well. Yes.

Speaker 3

And I think just to augment what Mike said, so some of the softness in Q3 was due to some projects So we're pushed out. We believe that those projects are going to materialize in Q4. So while the top line may be relatively flat, We haven't lost that business. It just skipped out 1 quarter.

Speaker 4

Got it. That's helpful too. Okay. I'll jump back in line. Thank you.

Speaker 2

Thanks, Jerry.

Operator

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

Speaker 5

Thanks. Good afternoon, everybody. I guess a couple for me. A couple on the Dyna side. The first Just around what you're seeing from a pricing perspective now versus couple of months ago and any expectations going forward?

Speaker 2

Yes. So we cited sales down, absorption, Customer and pricing mix. So you've seen a little bit more pressure on price with the market down 10 Hopefully, we're going to see pricing stabilize here. And I think going into 'twenty four, We'll see where things shake out, but I would think that we'd be in a pretty stable pricing environment.

Speaker 5

Okay. Thank you. And when we think about what has gone on in the U. S. Land side and particularly The pressure pumpers have consolidated.

Speaker 5

You got 4 holding a lot of the capacity. More of them have their own internal wireline capacity. Is that how should we think about the Integration of wireline and frac within 1 MC, the impact it has on you, is it positive? Is it negative? Is it neutral?

Speaker 5

Is there Any read throughs from that?

Speaker 2

Yes. I think the frac and wireline is just very focused The basics, right, quality on time delivery, delivering the best tech in the industry. And if We can do that and continue to do that. I think we're going to be okay there.

Speaker 5

All right. And then just one final one. When we think about the quarter, the 3rd quarter results And as we lead into the next quarter and the next year, how do we think about incremental margins or margin trajectory In Arcadia and Dyna, as you get into 2020, we're kind of assuming some level of recovery in tracking deflation activity next year. But as you get growth in the businesses, is there a way to kind of think about the incremental margin Contribution or margin trajectory in those two businesses?

Speaker 2

Yes, I'll start and Eric will finish. I think with Arcadia, It's a pretty high variable cost type business. So we're going to we're in the right zip code now from a margin standpoint. We should Probably be operating in that area for Q4 and beyond. DynaEnergetics, a bit more absorption impact there.

Speaker 2

We've got a lot of projects that we're doing To drive margin from an internal standpoint, and we've cited some of them, but lean initiatives, automation, We've done some cost reductions as well. So we think we can drive margin, continue to drive margin Into 2024, probably flat Q3 to Q4, but we got a lot of Things that are in the kind of in our project plan for 2024 to Continue to drive margins, things that are under our control.

Speaker 3

Yes. The only thing I would add to what Mike said is that For Dyna, the focus really is going to be more on their EBITDA margins as opposed to the gross margins. Gross margins will always be important. But Some of the initiatives that Mike pointed to around SG and A control, they're really going to manifest themselves in the EBITDA margin line as opposed to gross margin. And We continue to believe that this is a 20% plus EBITDA margin business and want to make sure that we put in these initiatives so that we not only get back to that, but we Stay there.

Speaker 5

Okay. Thanks. I'll get back in the line here. Thank you.

Operator

Thank you. Our next question is from Katie Flacher with KeyBanc Capital Markets. Please proceed with your question.

Speaker 6

Hi, good afternoon. I'm on for Ken Newman today. Hi. I wanted to talk a little bit about your capital allocation. So free cash flow is pretty strong in the quarter.

Speaker 6

Can you just talk about expectations for free cash flow generation going forward and then what some of your capital allocation priorities would be?

Speaker 3

Yes. Thanks for the question. So for Q4 and what I would say going into 2024, we're really trying to drive the businesses that have a higher free cash flow conversion. So if you did the math for Q3, we would be up around 70%. Not sure that we can do that every quarter, but typically in the second half of the year because of seasonality, we tend to be around that range.

Speaker 3

So In Q4, we would be looking to be up in that ballpark as well. And then going forward into next year, a lot of the things that Mike talking about earlier when he answered the question about initiatives. They have a P and L impact, but they also have a cash flow impact as well, whether it's Reducing SG and A or driving higher inventory turns. So we would look to try to build on that momentum and make sure that we can keep the conversion at a higher rate. And in terms of how we allocate the capital, We are looking to continue to deliver the balance sheet, so that's going to be one area.

Speaker 3

But we're also Putting CapEx back into the business. So for Arcadia, Mike mentioned the paint line where we're going to be looking to do some Industrial Engineering, we're also going to be looking at making some investments in the anodizing area as well, which will help broaden margins for the Arcadia business. And for Dyna, it's going to be mainly focused on a lot of the internal initiatives around automation and trying to make sure that We can produce our products as efficiently as possible, which should also have an impact on sustainable quality levels. So I think in terms of where we want to be from a cash flow standpoint, we had a good Q3. We want to make sure that that's not just a one time Type of performance, but we can continue that going forward.

Speaker 3

And then in terms of the allocation, we're going to be looking to continue to delever, But also reinvesting back in the business with some of these important initiatives.

Speaker 6

Okay, great. That's helpful. And then on the well completions, do you guys have any sort of I don't know, it's difficult, in this type of environment, but any sort of view In terms of where those are headed, as we kind of close out the year and go into 2024?

Speaker 2

Yes. I think that what you're going to see is pretty steady through the end of the year, probably Some seasonality at the end of the year with budget exhaustion, and I think then you're going to see a pickup in 2024.

Speaker 6

Okay. And then, just one last one, switching to Arcadia here. Can you give a little bit more detail about The ERP system, like how much capacity that can add, maybe any impacts on costs or margins would be helpful?

Speaker 3

Yes. So the ERP system probably wouldn't add any capacity, but what it's going to allow us to do is to have better controls and better visibility into data. And so the first one is probably pretty self explanatory. But the second one, what we mean by that is We think that it's going to prevent any type of margin leakage between changes in aluminum costs and our ability Pass that through to customers. But another benefit that we're really excited about is it should also allow us to be more efficient from an inventory turn standpoint.

Speaker 3

So if you think about our business model, we've got a hub and satellite type of structure. With this new ERP system, we're going to have a better understanding of Where that inventory is, how it's turning at the different satellites and how we can transfer it from maybe one satellite where it's moving slower into another one where Moving faster. So we're excited about that and we're just in the early days of going through the implementation, but

Speaker 2

Thanks, Katie.

Operator

Our next question is from Shawn Mitchell with Daniel Energy Partners. Please proceed with your question.

Speaker 7

Hi, guys. Thanks for taking the question. This obviously revolves around Dyna, but you mentioned earlier in the call that The larger, I think M and A will sharpen the focus of some of these companies on safety. And then you also talked about for the quarter just having a less favorable Customer mix.

Operator

Can you is there any way

Speaker 7

you can kind of help us understand just the customer mix today? And obviously, I think where it's going is probably favorable, with these kind of larger companies doing bigger deals and I tend to agree with you, they will focus more Safety. But where are you today and kind of is it heavier on the private side today and that's why we saw A little bit more kind of downward pressure in the quarter or is it give us a little color around the customer mix today and maybe where you think it's going?

Speaker 2

Yes. I mean, if we rewind A year or 2 years ago, it was probably a heavier mix on the private side. It's shifted more towards the Public side, if you are talking about the E and Ps or end users. From From a customer standpoint, we feel aligned with the best in terms of end users as well as Service companies, and so I think that this is something that's going to play to our favor, especially we deliver on the And I say safety, I say quality, delivery, field service and technology, particularly as the market moves more towards oriented systems. So, I think that's all going to work well for us.

Operator

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

Speaker 5

Thanks. Just one quick one. Do you have any preliminary I know it's early preliminary thoughts on 2024 CapEx?

Speaker 3

I think, right now, Stephen, for modeling purposes, I would assume something that's Pretty close to the guidance that we've given for 2023. There may be a little bit of an increase for some of the discrete projects that we talked about earlier For, anodizing, etcetera, but the run rate that we have this year is probably going to be very similar to that run rate next year.

Operator

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

Speaker 2

Thank you again for joining us today. We remain highly focused on driving performance of DMC's businesses. Our objective is to strengthen our profitability and cash flow and drive improved value for our shareholders. We appreciate your continued interest in DMC. Look forward to speaking with you after the Q4.

Speaker 2

Take care.

Operator

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

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