DMC Global Q1 2023 Earnings Call Transcript

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May 4, 2023

There are 7 speakers on the call.

Operator

Greetings. Welcome to the DMC Global First Quarter Earnings Call. At this time, all participants are in a listen only mode. Question and answer session will follow the formal presentation. Please note this conference is being recorded.

Operator

I will now turn the conference over to your host, Jeff High. You may begin.

Speaker 1

Hello, and welcome to DMC's Q1 conference call. Presenting today are interim Co CEOs, David Aldis and Mike Cuda and Chief Financial Officer, Eric Walther. 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 Today's earnings release and a related presentation on our Q1 performance Are available on the Investors page of our website located at dmcglobal.com.

Speaker 1

A webcast replay of today's presentation will be available at our website shortly after the conclusion of this call. And with that, I'll now turn the call over to David Aldis. David? Good afternoon, and thank you for joining us for today's call. The positive momentum we carried at

Speaker 2

the end of 2022 continued into 2023. Despite a variety of macroeconomic concerns, DMC delivered record 1st quarter sales of $184,000,000 as well as improved profitability. Our performance was driven by strong demand for the innovative products developed by our 3 differentiated manufacturing businesses, each of which reported solid top line results and sequential margin expansion. The Q1 also was marked by progress on many of the strategic initiatives we laid out at the beginning of the year. At Arcadia, our Architectural Building Products segment, a series of business integration and capacity expansion initiatives are gaining momentum.

Speaker 2

DynaEnergetics, our energy products business, achieved record sales of its flagship DynaStage Perforating System as well as improved operational efficiencies. NobelClad, our composite metals business, increased its Order backlog to a 10 year high and is benefiting from healthy end use markets and growing demand. And at DMC, our financial strength is improving, and we have a clear path toward much lower SG and A expense and improved free cash flow. I'll turn the call over to Mike for a closer look at our Q1 performance, and then Eric will review our financial results and second quarter guidance.

Speaker 1

Mike? Thanks, David. Q1 was indeed an encouraging start to the year in each of our businesses. Arcadia delivered 1st quarter sales of $80,000,000 the 2nd best quarterly performance in Arcadia's history. Sales were up 8% sequentially and 18% year over year.

Speaker 1

The sequential increase principally reflects higher volumes versus The holiday shortened 4th quarter, while the year over year growth resulted from price increases to address inflation on raw materials. Arcadia reported strong demand in many of its commercial construction markets across the Western and Southwestern United States. Activity was particularly healthy in the industrial construction, medical, education and hospitality sectors. We also saw steady activity in the high end residential market, which is served by Arcadia Custom Business. Under the direction of Jamie Chilcough, who was appointed President of Arcadia in January, the business is making meaningful headway on its efforts to strengthen operating efficiencies and expand manufacturing capabilities.

Speaker 1

The first phase of an ERP implementation is nearly complete and we expect to increase painting capacity by the end of the year. These initiatives are vital to Arcadia's future growth and we are encouraged by the continued progress. 1st quarter sales at DynaEnergetics $82,000,000 up 6% sequentially and 68% versus last year's Q1. The growth reflects strong demand in Dyna's core North American onshore market, where our customers well completion programs remain very active. Unit sales of Dyna's flagship DynaStage Perforating Systems, which are designed for the unconventional oil and gas market, Reached a new high watermark for the 11th consecutive quarter.

Speaker 1

This achievement reflects the strength of our manufacturing and assembly operations in Germany and Texas, as well as outstanding execution by Dyna's employees. International demand at Dyna was also strong and accounted for approximately 13 Which include more efficient manufacturing processes, streamlined product designs and introduction of premium perforating systems Designed for specialized downhole applications. 2 next generation DynaStage systems designed for oriented perforating are currently in field trials And the results to date have been encouraging. The business plans to commercialize these products later this year. Dyna concluded 2 patent cases during the Q1, collectively accounted for approximately $3,000,000 in first quarter SG and A expense.

Speaker 1

We expect quarterly litigation costs will decline significantly year over year. Another quarter of strong bookings improved NobelClad's book to bill ratio to 1.2 and elevated its order backlog to $60,000,000 The improved booking should result in a step up in NobelClad's quarterly sales performance beginning in the second quarter. Global activity in NobelClad's core petrochemical and downstream energy markets remain strong and the business continues to pursue promising opportunities in a variety of secondary industrial markets. DMC's 1st quarter SG and A expense of $39,000,000 included the previously mentioned $3,000,000 of litigation expense at Dyna as well as approximately $6,000,000 in CEO transition costs And related accelerated stock vesting. In our last call, we said we expect to exit 2023 at an SG and A run rate of approximately $30,000,000 It is now appears we will close to or below that level in the second quarter.

Speaker 1

We ended the 1st quarter with a debt To adjusted EBITDA leverage ratio of less than 1.5x, down from 1.7x at the end of the 4th quarter and 2.9x at the end of last year's Q1. Across DMC, we're seeing the benefits of a company wide effort To improve operating efficiencies, advance our technology and product development programs and invest in initiatives that deliver strong returns. We are confident these programs will further strengthen the competitive advantages of our businesses and drive improved earnings and cash flow performance during the balance of 2023. I'll now turn the call over to Eric for a view of our Q1 financial results and a look at 2nd quarter guidance. Eric?

Speaker 3

Thanks, Mike. As David noted earlier, DMC delivered record consolidated first quarter sales of $184,000,000 which was up 5% sequentially and 33% versus last year's Q1. Consolidated gross margin was 28%, up 2 50 basis points from the 4th quarter As all businesses experienced sequential margin expansion, gross margin improved 170 basis points versus the year ago Q1, as gains at DynaEnergetics and NobelClad more than offset year over year margin compression At Arcadia. Just as a reminder, 2022 was a volatile year for oil prices And this placed downward pressure on Arcadia's gross margin during the second half of twenty twenty two. Arcadia's margins began to recover during the Q1 and we believe this trend will continue during the Q2.

Speaker 3

1st quarter consolidated adjusted EBITDA attributable to DMC was $20,000,000 up 3% sequentially and up over 90% year over year. Inclusive of the Arcadia non controlling interest, Consolidated adjusted EBITDA was $24,000,000 As a percentage of sales, Total adjusted EBITDA was 13%, which reflects an improvement of 40 basis points versus the Q4 of 2022 And an increase of 2.30 basis points compared with the prior year Q1. Arcadia reported 1st quarter adjusted EBITDA of $10,000,000 of which $6,000,000 60% was attributable to DMC. Arcadia's adjusted EBITDA margin expanded over 3.40 basis points versus the Q4 of 2022, but contracted by 380 basis points compared with the prior year Q1. As mentioned earlier, Arcadia's gross margin began an upward recovery during the Q1, but has not quite yet returned to the levels reported in the first half of twenty twenty two.

Speaker 3

Diner reported 1st quarter adjusted EBITDA of $15,000,000 or 18% of sales. Adjusted EBITDA margin declined 40 basis points sequentially, but improved over 7.40 basis points versus the prior year. Dyna's 1st quarter results Included the previously mentioned patent litigation costs, which reduced adjusted EBITDA margin by 3.30 basis points. Novoclad reported adjusted EBITDA of $3,000,000 or approximately 15% of sales. A mix shift to higher margin products expanded adjusted EBITDA margin by 40 basis points sequentially and 7 70 basis points year over year.

Speaker 3

Adjusted consolidated adjusted net income attributable to DMC With $6,000,000 during the Q1 of 2023 or $0.32 per diluted share, Compared with last year's Q1 loss of $3,000,000 or negative $0.16 per diluted share. During the quarter, DMC generated free cash flow of $5,000,000 which compares with negative Free cash flow of $6,000,000 in the Q1 of 2022. It's important to note that DMC typically has lower free cash flow conversion In the Q1 of the year due to seasonality, the free cash flow in the Q1 of 2023 Was used primarily for principal payments on our long term debt associated with the Arcadia acquisition And included an additional $2,500,000 debt prepayment as well as distributions to our Arcadia joint venture partner. In terms of liquidity, we ended the Q1 with cash of $20,000,000 and available capacity Under our revolving loan of $50,000,000 our debt to adjusted EBITDA leverage ratio was 1.47 At the end of the Q1, which represents the 5th consecutive quarter of deleveraging the balance sheet and was well below The covenant threshold of 3.25. Now turning to 2nd quarter guidance.

Speaker 3

Consolidated sales are expected to be in a range of $177,000,000 to $187,000,000 versus the $184,000,000 reported last quarter. At the business level, Arcadia is Expected to report sales in a range of $75,000,000 to $80,000,000 versus the $80,000,000 reported in the Q1. We anticipate that activity in our commercial and residential markets will remain relatively steady quarter over quarter. Dyna sales are anticipated to be between $78,000,000 to $82,000,000 compared to the $82,000,000 reported in the Q1. While demand continues to be robust, we believe activity in North America will be flat in the second quarter.

Speaker 3

Our focus during the Q2 will be on maintaining our market share and advancing our margin expansion initiatives. NobelClad sales are expected in a range of $24,000,000 to $25,000,000 versus the $22,000,000 Reported in the Q1. Consolidated gross margin is expected in a range of 29% to 30% compared with the 28% in the Q1. 2nd quarter gross margin is expected to improve sequentially at both DynaEnergetics In Arcadia, while NobelClad's margins will likely be impacted by a less favorable project mix. 2nd quarter consolidated SG and A expense is expected to range from $29,000,000 to $31,000,000 Excluding any remaining CEO transition costs versus the $39,000,000 reported in the Q1, We expect our SG and A run rate will continue to decline as a percentage of sales.

Speaker 3

2nd quarter adjusted EBITDA attributable to DMC is expected to be in a range of $23,000,000 to $26,000,000 versus $20,000,000 in the Q1. Finally, we expect 2nd quarter capital expenditures will be in a range of $4,000,000 to $6,000,000 while full year CapEx is expected to be approximately $20,000,000 With that, we're ready to take any questions. Operator?

Operator

At this time, we will be conducting a question and answer session. A confirmation tone will indicate your lines in the question Our first question comes from the line of Gerry Sweeney with ROTH Capital. Please proceed with your question.

Speaker 4

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

Operator

Hi, Jerry. Hi, Jerry. Hi, Jerry.

Speaker 4

I want to start on DynaEnergetics. Eric touched upon it in the guidance, but obviously record units, I think, for maybe 11th quarter or Record units, I think previous commentary on in with 4th quarter results where you added customers, just you've been taking wild share. But on top of that, My sense was frac spreads were sort of picking up in the second half of Q1. I just want to get a little bit more thoughts behind the guidance on Dyna, why flat quarter to quarter With in particular, with frac spreads picking up, it look like at the in the second half of the quarter, Q1, and look like carrying Yes.

Speaker 1

Jerry, this is Mike. We see frac spreads flattening Right now and fairly level in the second quarter versus the Q1 overall and with an Expectation that we'll see that ramp back up in the back half of the year in 3rd and 4th quarters.

Speaker 4

Do you mind what's driving the expectation of the ramp in the second half?

Speaker 1

I think it's really demand driven by our end markets and that's what our customers and end markets are Reporting that there is an expectation of a flatness in Q2 with a step up in the back half.

Speaker 4

Okay. And then just to stand with Dyna, just to confirm there was $3,100,000 of litigation Thanks, and Daina. I know you have not been backing that out in previous quarters, but I also know I think the litigation expense in this quarter Was higher because of the actual court case. But on top of that, you're making a big effort to bring those costs down. That was those costs were included in the EBITDA margins, correct, that 18% change?

Speaker 2

Correct.

Speaker 1

Those were included. And on a go forward basis, Jerry, we expect that to be fairly nominal.

Speaker 4

Fairly nominal, like well less than $1,000,000 a quarter? Yes. Yes. Got it.

Speaker 1

Yes. Well, that's in the morning.

Speaker 4

Yes. That's part of the driver in sort of in Q and I'm assuming that's going to get started with 2Q?

Speaker 3

That's right. Yes. So the impact of the $3,000,000 in Q1 would be roughly a little more than 300 basis points Downward pressure on their Q1. So we have all of that kind of cleaned up and contained in Going forward into Q2, as Mike was mentioning, we think

Speaker 4

that it's going to be

Speaker 3

a pretty clean quarter from a litigation standpoint and The amount of spend should be really de minimis.

Speaker 4

Got it. And then on Arcadia, obviously, Better than I expected. It felt or looks as though you held on to pricing even as some Raw material costs came down or maybe at least raw material costs in the market. I know your inventory levels were a little bit higher. But 1, I want to make sure that was correct.

Speaker 4

But 2, how much capacity does maybe some of the process engineering, The paint and sort of even the ERP adds maybe potentially unit sales as we look into next year. Yes.

Speaker 2

I would say that, first

Speaker 1

of all, Jerry, your premise is correct that volume and price have been fairly resilient And steady, you see in our Q2 guidance a fairly strong guide there, dollars 75,000,000 to $80,000,000 In terms of industrial engineering and capacity from ERP, I think the ERP system is going to provide us with more visibility around data And opportunities to improve our operational efficiencies, opportunities to improve margins where we see Price and margin leaks across our satellites and optimizing the operations there as well as inventory management, which will And the play later in this year, early next year. So I think the ERP is more of a Operational efficiency and margin improvement play. We're making Advancements and progress on our paint capacity as well by adding paint capacity by the end of the year With some industrial engineering, we can probably get another 10% to 15% Out of our capacity at Arcadia.

Speaker 4

Got it. Is that a Fair way to look at it. Let's just say you're sold out today. I mean, you could add 10% to 15% more units next Or is there also an ability to sort of outsource some of this at some point as well?

Speaker 2

Jerry, this is David. We can probably get 10% to 15% out of just industrial engineering and then there's project work that's going to Expand beyond that, but we hope to implement by the end of the year.

Speaker 4

Got it. Okay. I'll jump back in line. I appreciate it, guys.

Operator

Our next question comes from the line of Patrick Ouellet with Stifel. Please proceed with your question.

Speaker 5

Thanks. And hello, everyone. This is Pat on for Steven Gengaro. Thanks for taking the time to answer the questions today.

Speaker 4

If you could talk

Speaker 5

the current pricing trends in the Perforin business. I know last quarter you alluded to sort of these 2.0 versions of the specialty guns and in your remarks mentioned seeking commercialization for these And additionally, the ramping of margins from

Speaker 1

2Q to 4Q, so just curious what you're seeing on this front? Yes. So I think the next gen of our orienting systems are scheduled to launch. We're in field trials now. That's Later this year and that should provide some upward margin Ability for us.

Speaker 1

When you look at our current margins, we hit 30% for the Q1 and we still expect those step up throughout the year. But again, that's more driven by process improvement Within our plants, industrial engineering and design changes in our products, which is included in our next gen. So pricing and so that takes me to pricing. Pricing is relatively stable and flat in the perf market right now.

Speaker 5

Great, great. Thanks. And then just a quick follow-up. Would you mind speaking to the key end markets For the Arcadia business and whether you're seeing a shift towards your own workspace impacting demand?

Speaker 2

Patrick, we've got a number of end use markets there. We've got the commercial product side It has everything from storefronts to projects. We've got interiors, office interiors. We've got Hi, and ResMed. In the commercial side, we're in a number of different markets.

Speaker 2

Some of those are Non cyclical airports, healthcare, those kinds of things, some of them are countercyclical, institutional applications, schools, Dorms, libraries, government offices as well as those that are typical commercial. So we cover the gamut of those And the fact that we're in so many markets, some of which are non cyclical, some of which are countercyclical, Helps us be robust and resilient through the cycle.

Speaker 5

Great. Okay, thanks. I think more of what I'm looking for is whether the shift To that work from home space is impacting the demand in any of those key end markets.

Speaker 1

If anything, we see more opportunities on our commercial interiors as folks downsize their offices. It's Certainly an opportunity for us. So if anything, we see that is more of an opportunity on the upside than the downside.

Speaker 5

Okay, great. Thanks for clarifying that for me and I'll turn it back.

Operator

Our next question comes from the line of Ken Newman with KeyBanc Capital Markets. Please proceed with your question.

Speaker 6

Hey, guys.

Speaker 2

Hi, Ken. Hi, Ken.

Speaker 4

Hi. Sorry

Speaker 6

if I missed this, But did you give any color on what price added to the top line in Arcadia for the quarter? I know you mentioned there was really strong realization. Would also be helpful to hear what you're expecting for price in 2Q?

Speaker 1

When you look at Q2 versus Q1, I think there is a bit of a negative price mix Impact the volumes fairly resilient. Pricing from Q4 to Q1 It's probably relatively flat. We've been chasing raw materials up as aluminum has Come down that pricing is essentially flattered.

Speaker 6

Okay. So just I guess to clarify, Help me square that with gross margins coming up sequentially in the business. Is that just a function of the pricing maybe flat to maybe a little bit down on a year over year basis? Is that just Higher volume absorption or is there anything else in there

Speaker 1

that we should be aware of? Yes, it's not necessarily absorption. We've increased price to chase raw materials up and now we're flushing those higher costs from raw materials Through our income statement, so peak raw materials that happened in early to mid-twenty 22 where we're carrying 6 to 7 months of inventory are now flushing through our income statement. So essentially pricing is flat, but raw material costs are down.

Speaker 3

Yes. Ken, this is Eric. Just to augment what Mike said. So when you look at the improvement moving from Q4 to Q1, Majority of that's going to be burning through that higher cost aluminum inventory that we have, and we're expecting that We need another quarter to fully get through all of that.

Speaker 6

Okay. And then maybe I guess for a longer term perspective, I mean, is once you get through that, how do you view the run rate gross Margin potential for Arcadia on a normalized basis granted I know that visibility is kind of all over the place now?

Speaker 1

Yes. After everything settles out with raw material pricing shipping out, Our backlog in our custom residential business, our exit rate this year should be more In the low 30s and return to historical norms for the Arcadia business.

Speaker 4

Got it. Just one quick follow-up

Speaker 6

here. Any color just on what you're seeing from a lead times Perspective from your suppliers in any of the businesses, I think we've heard from other industrials throughout earnings season that supply chains are getting better and Others are seeing customers essentially destocking inventories, right, because they don't need as much Buffer inventory. Do you have any similar impact? Or are there any expectations or signs of Customers taking less inventory now that supply chains and lead times are getting better?

Speaker 1

We're seeing supply chains and lead times get better. But in our quick turn smaller storefront, smaller project business, there's not a lot of inventory in the system with our customers. So we don't see a significant impact there, but the supply

Operator

And we have reached the end of the question and answer session. I'll now turn the call back over to David Aldis for closing remarks.

Speaker 2

Thank you again for participating in today's call. We're encouraged by the progress DMC and its businesses made during the Q1 and are optimistic about our prospects for continued strong performance and improved free cash flow generation. Our accomplishments would not be possible without the dedication of our employees, and I want to sincerely thank them for their contributions. I I would also like to thank our customers for their continued loyalty. We look forward to speaking with many of you during our upcoming investor visits And after our Q2, take care.

Operator

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

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DMC Global Q1 2023
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