DMC Global Q2 2023 Earnings Call Transcript

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August 8, 2023

There are 8 speakers on the call.

Operator

Good day, everyone, and welcome to today's DMC Global Second Quarter Earnings Call. At this time, all participants are in a listen only mode. Later, you will have the opportunity to ask questions during the question and answer session. Please note this call may be recorded and I will be standing by should you need any assistance. It is now my pleasure to turn the conference over to Jeff High.

Speaker 1

Hello, and welcome to DMC's 2nd quarter conference call. Presenting today are DMC Chairman, David Aldis 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 risks that Forward looking statements that become untrue because of subsequent events. Today's earnings release and a related presentation on the second quarter are available on our Investors page at dmcglobal.com.

Speaker 1

A webcast replay of today's presentation will be available at our Web And with that, I'll now turn the call over to David Aldis. David?

Speaker 2

Thank you, Jeff. Good afternoon, and thank you for joining us for today's call. I'd like to begin by congratulating Michael Kuta on his appointment as President, CEO Of DMC, I've had the pleasure of working with Mike for nearly a decade while serving on DMC's Board. And for the past 7 months, we have jointly led DMC as co CEOs. Mike is a strategic thinker and proven leader, And he has a deep understanding of DMC and its businesses.

Speaker 2

He has also earned the respect and support of our employees, Customers and Board, I'm confident he will thrive in his role as CEO, and I look forward to supporting him as he leads DMC into its next chapter. Our CEO search process involved extensive interviews with several highly qualified candidates, and I want to thank each of them for their time they spent with us And their interest in DMC. Our Board also has been actively interviewing candidates for an open director position, And we announced yesterday that Ooma Cinnaticone has been appointed to the DMC Board. Ooma has spent more than 30 years in C suites And Board level roles and brings extensive experience developing and implementing corporate and financial strategy, And we look forward to her contributions. I want to thank my fellow directors for their time and thoughtful consideration of the candidates for both the CEO and director positions.

Speaker 2

With that, I'll turn the call over to Mike.

Speaker 3

Thank you for the kind words, David. I thoroughly enjoyed working together this year and Appreciated your valuable insight and perspective. I look forward to the continued collaboration with you and the Board as we pursue a very promising future for DMC. Turning to our results. D and C delivered record sales and earnings for the Q2 and our 3 manufacturing businesses made important progress On the operational and financial initiatives we established at the beginning of the year, Arcadia, our Architectural Building Products segment, Reported 2nd quarter sales of $79,000,000 which were comparable to the Q1 and up 4% versus the year ago 2nd quarter.

Speaker 3

Arcadia's commercial business saw steady demand across its markets in the Western and Southwestern United States. A notable project that entered Arcadia's backlog during the quarter It's the first phase of a large mixed use development in Southern California that makes extensive use of glass and architectural framing. The final project will combine more than 460 residential units with extensive retail and commercial space. Arcadia Custom, which serves the nation's high end residential market, also reported steady customer activity and much improved operational execution. Arcadia sold through the remainder of its high cost aluminum inventory, which has been a drag on margins during the past three quarters.

Speaker 3

The completion of this process helped drive adjusted EBITDA margin to 21%, up from 13% in the Q1. Arcadia recently completed its transition to a new ERP system. I'm very pleased by how smoothly the conversion went. The system should significantly improve Arcadia's business processes and productivity and will enhance the buying experience for Arcadia's customers. DynaEnergetics, our energy products business delivered sales of $85,000,000 the 2nd best quarterly performance in Dyna's history.

Speaker 3

The results were up 3% sequentially and 26% versus last year's Q2 and reflects strong second quarter demand in both North American and international markets. Unit sales of Dyna's fully integrated DynaStage perforating system were another quarterly record. We expect full year unit sales will surpass the 1,000,000 unit mark later this month. This would 2 months earlier than when Dyna reached the 1,000,000 unit mark last year. Gravity 2.0 is the most recent addition to the DynaStage product family And is being well received by customers that are incorporating oriented perforating into their well designs.

Speaker 3

Gravity is the most compact oriented perforating on the market and requires no configuration at the well site. As Eric will discuss in a moment, Dyna's profitability improved markedly in the 2nd quarter, reflecting the impact of several margin enhancement initiatives implemented at the beginning of the year. NobelClad, our composite metals business delivered 2nd quarter sales of $25,000,000 up 12% sequentially And 13% year over year. A very favorable project mix helped drive NobelClad's adjusted EBITDA margin to 22%. Strong second quarter bookings increased NobelClad's order backlog to $64,000,000 improved its rolling 12 month bookings $108,000,000 We expect the 3rd quarter will represent another period of double digit sequential sales growth at NobelClad.

Speaker 3

Our 2nd quarter SG and A expense was $29,000,000 down $10,000,000 sequentially. We are closely managing our cost and expect quarterly SG and A will remain below $30,000,000 through the balance of the year. We also reduced our debt to adjusted EBITDA leverage ratio to 1.3x from 2.5x at the end of last year's Q2. I'm very encouraged by the progress we've made during the first half of twenty twenty three. As we chart our path forward, our focus is on delivering growth, improved cash flow and stronger returns for our stakeholders.

Speaker 3

With that, I'll turn the call over to Eric for a closer look at our Q2 financial results and our guidance for the Q3. Eric?

Speaker 4

Thanks, Mike. DMC delivered record second quarter sales of $189,000,000 which was up 2% sequentially and 14% versus last year's Q2. Gross margin was 33%, Up 450 basis points from the Q1 and 140 basis points from last year's Q2. All DMC businesses achieved gross margin expansion during the quarter. Our 2nd quarter SG and A expense $29,000,000 was 15% of sales, down from 18% of sales in the Q2 last year.

Speaker 4

2nd quarter adjusted EBITDA attributable to DMC was $32,000,000 up nearly 60% sequentially and over 40% year over year. Inclusive of the Arcadia non controlling interest, consolidated adjusted EBITDA was $38,000,000 As As a percentage of sales, total adjusted EBITDA was a very healthy 20%. Arcadia reported 2nd quarter adjusted EBITDA of $16,000,000 of which $10,000,000 or 60% was attributable to D and C. Arcadia's adjusted EBITDA margin was down 50 basis points versus the prior year 2nd quarter, but expanded 780 basis points sequentially. As Mike noted, Arcadia's margin was compressed During the prior three quarters, due to last year's sharp escalation in the cost of aluminum, which is a key raw material in Arcadia's products, Arcadia's 2nd quarter improvement in EBITDA margin reflects its effort to recover pricing after selling through the balance of its high cost inventory.

Speaker 4

Diner reported 2nd quarter adjusted EBITDA of $19,000,000 or 23% of sales. Adjusted EBITDA margin improved 480 basis points sequentially, driven by a combination of lower litigation costs, Greater absorption of manufacturing overhead, new product designs and a higher margin product mix. Adjusted EBITDA margin expanded 330 basis points versus the prior year 2nd quarter. NobelClad reported adjusted EBITDA of $5,000,000 or approximately 22% of sales. A mix of higher margin projects increased adjusted EBITDA margin by 6.50 basis points sequentially and 6.20 basis points year over year.

Speaker 4

2nd quarter adjusted net income attributable to DMC Was $14,000,000 or $0.72 per diluted share, up from $6,000,000 or $0.32 per diluted share in this year's Q1 and up from $6,000,000 or $0.29 per diluted share in last year's Q2. During the quarter, DMC generated Free cash flow of $9,000,000 which compares with $2,000,000 in the Q2 of 2022. We used our cash flow primarily for principal payments on our long term debt, distributions to our Arcadia joint venture partner and an investment in marketable securities. In terms of liquidity, we ended the 2nd quarter with cash and marketable securities of $21,000,000 and had no amounts outstanding under our $50,000,000 revolver. As Mike mentioned, our leverage ratio was 1.3x at the end of the second quarter, which was well below the covenant threshold of 3x And represents the 6th consecutive quarter of deleveraging the balance sheet.

Speaker 4

Highlighting our 3rd quarter guidance, which is detailed in our news release. We expect consolidated sales in a range of $178,000,000 to $188,000,000 Versus the $189,000,000 reported last quarter. We anticipate Arcadia will experience Some downward pricing pressure during the Q3 on relatively stable volume. Dyna expects activity levels In its core North American market to soften a bit in the second half of the year based on lower well completion activity. However, Dyna does expect to maintain its market share in advance of the next upcycle.

Speaker 4

NobelClad expects a sequential sales increase of approximately 20% in the 3rd quarter as it delivers key projects from its order backlog. Consolidated gross margin is expected in a range of 29% to 30% compared with the 33% in the 2nd quarter. Consolidated SG and A expense is expected to range from $28,000,000 to $30,000,000 3rd quarter adjusted EBITDA attributable to D and C is expected in a range of $24,000,000 to $27,000,000 And finally, we expect 2nd quarter capital expenditures will be in a range of $5,000,000 to $7,000,000 While full year CapEx should be in a range of $18,000,000 to $20,000,000 With that, we're ready to take any questions. Operator?

Operator

And we'll take our first question from Gerry Sweeney with ROTH Capital. Your line is open.

Speaker 5

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

Speaker 3

Hi, Jerry. Hi, Jerry.

Speaker 5

So Mike, first of all, congratulations. It was a nice press release to see you on a Monday morning. Again, congratulations. Well deserved.

Speaker 3

Thank you, Jerry.

Speaker 5

Just jumping right into the questions. With Arcadia, maybe would you be able to dig in a little deeper, right? So we have we know higher aluminum costs. There is a lot of activity there as well. I'm just curious as to what is sort of maybe equilibrium on margins as you work through some of the Higher aluminum costs, they get through the system.

Speaker 5

I'm not sure if they were all the way through the system in the quarter or partially. And where would margins ideally

Speaker 3

Yes. So we Jerry, we recovered margin loss in Q2 and probably the was quicker than expected from a guidance standpoint. I think from a longer term, we would think low 30s. So probably in that 31, 32 type zip code.

Speaker 5

Got you. And then also, obviously, we got a couple of things going on here, right? First of all, great quarter. We're seeing deleveraging. Diana is doing great.

Speaker 5

And then you also had this Arcadia call next year. How do we look at but you also have Some really nice growth opportunities with Arcadia in markets that you're just starting to look at or starting to penetrate, right? Houston, Dallas, How do we look at a balance of deleveraging versus growth opportunities over the next 12 to 18 months?

Speaker 3

Yes. So first of all, we feel like we've got a very clear and strong path on the put call. And but definitely we know that that's out there. So we're going to balance the growth side with The investment on the Arcadia side, we do feel very bullish about generating cash flow The remainder of this year and into 2024. So we feel pretty optimistic that we're going to be able to balance that pretty well and be able to invest In Arcadia, continuing with investments this year to put paint capacity in place and next year to put A second leg of capacity and continue on in 2024 with investing in that And also making some investments in Dyna NobelClip.

Speaker 5

Yes. And just maybe

Speaker 4

one this is Eric. One thing to add to that is, when we go through the capital allocation process, the first question So we ask is, what are the businesses need to support their growth? And we start with that and make sure that we can fund that. And then with excess cash, we use it for the delevering So we feel pretty comfortable that everything that Dyna has got ahead of themselves in terms of paint capacity and other longer term objectives That we're going to be able to fund that, but also use additional cash that we're throwing off from the other businesses to get through the delevering process.

Speaker 3

I think lastly, Jerry, that would yes, lastly, Jerry, I mean, what some of the things we're looking at in terms Of CapEx, our big impact, but lower CapEx. So

Speaker 5

Got it. And then one quick question on dine and I'll jump back in queue. Obviously, great quarter. It sounds as So that maybe at least 3Q, well you said second half would slow down, but my sense was things maybe it Slow going into the end of 2Q into 3Q, but there's also this feeling that at some point activities first that pick up. What's your feeling maybe next this quarter, Q4?

Speaker 5

And then is that a accurate sort of assessment of What we're seeing with the market maybe into next year?

Speaker 3

Yes. So we're projecting a Softer Q3, that's reflected in our guidance. We think that Q4 could be a bit soft as well, maybe a bit better than Q3. But as we look forward into 2024, I think it's going to be a really nice setup for 2024 and a nice recovery off of 2H23. So we're feeling pretty optimistic looking through The Q3 here into the Q4 in 2024 were set up nicely.

Speaker 5

Got it. Okay. I appreciate it and congrats on several fronts there. Thanks. Thank you.

Operator

Our next question comes from Ken Newman with KeyBanc Capital Markets. Your line is open.

Speaker 6

Hi, guys.

Speaker 4

Hi, Ken. Hi, Ken.

Speaker 6

Hi, Mike, congrats on the appointment. Well earned.

Speaker 3

Thank

Speaker 6

you. So maybe just getting started here, I want to circle back to Arcadia. Thanks for the color on the longer term gross margin Profile there, understand there's been a lot of moving pieces, but I guess on the revenue line for this quarter, can you just clarify How much of that revenue growth was from price versus volumes?

Speaker 3

We think from Q1 to Q2 sequentially, it's probably flattish on both fronts and year over year, Eric.

Speaker 4

Yes, year over year it's going to be primarily pricing because as we've talked about in other calls, the business is fairly constrained from a volume standpoint. So So any type of fluctuation until we can add in this tank capacity going to primarily be pricing?

Speaker 6

Yes. So As I think about, I know you're kind of putting in the new paint capacity today and I think Talk a little bit about further capacity expansions in 2024. If volumes are flattish through the back half And pricing is kind of moderating on some of these raw material costs. Just how do you think About the impact to gross margins for that segment as we think about 3Q and 4Q?

Speaker 4

Yes. So I think the gross margins will moderate from Q2 levels because There is going to be some pricing pressure that we're going to see in some of the select markets. We do think that the volumes are going to be Relatively stable based on what our backlog is right now and what we can see out over the next, call it, 60 to 90 days. The paint capacity is going to be strategic for us. We think that that's going to be something that Beginning at the end of this year and going into 2024, it's going to be adding upwards to 10% top line capacity for Arcadia, and that's going to be really transformational for the business.

Speaker 4

It will be the first time in a long time that we've actually been able to grow volumes. So as that increases going into next year, it could also increase the amount of Absorption of manufacturing overhead, which could help gross margins in 2024, but we think for the balance of this year, it's going to be relatively flat Volumes.

Speaker 6

Understood. And then just kind of moving this is kind of a general across all of the businesses, but we have heard about from other industrials this earnings season that Some impact about supply chains normalizing and maybe some customer inventories, Destocking inventories as those kind of normalize. Curious if you're seeing that impact at all across any of the 3 businesses or if that's kind of being Something of a near term washpoint for you at this point?

Speaker 3

Ken, we don't see that as a Significant issue. When you think about our 2 largest businesses, Arcadia and Diana, they're pretty short cycle quick turn. Our customers don't have a lot of inventory, right? A lot of that business is sort of, I'd say, hand to mouth, right? And so I don't I just don't see an impact a customer destocking impact in our results, our guidance or in our future.

Speaker 6

Roger that. Appreciate it. Thanks.

Speaker 3

Thank you, Ken.

Operator

And We'll take our next question from Sean Mitchell with Daniel Energy Partners. Your line is open.

Speaker 6

Hey, guys. Thanks for taking Question obviously, my question will revolve around Dyna more than anything. But just kind of could you talk a little bit more about the margin enhancements You're working on within Dyna. I know you had some litigation expense in Q1 that you didn't have in Q2, but just margin enhancement in Dyna. And then the second one would be, given DS Gravity 2.0, is the customer mix changing at all?

Speaker 6

And can you talk about How the conversations are going around the DS Gravity 2.0?

Speaker 3

Yes. So, a couple of questions there. I think the first one, we've got operational initiatives in our plants, OpExcellence Initiatives that we're working on margin and that gets into not just our plants, but in our products as well And how we're streamlining those. So that's contributing to the margin. From a Gravity 2.0 standpoint, self orienting systems, that's One that we're starting to get some traction around in customer interest.

Speaker 3

That's a Product that could from a mix standpoint also help our margins as well and something that could be 10% to 15% and upwards of 20 I mean, we are seeing as we move from Q2 to Q3, As mentioned, we're seeing a bit of a softer market. There will be some absorption impact in Q3 and customer mix Impacting our results, but we expect a pretty resilient, if not strong Q3 as we move forward.

Speaker 6

Got it. Thank you, guys.

Speaker 3

Thank you, Sean.

Operator

And we'll take our next question from Alex Schiefelhofer with Stifel. Your line is open.

Speaker 7

Hi, good afternoon, everyone and Michael congrats again So just kind of Honing in again on DynaEnergetics. So clearly with how the quarter performed, it was very strong relative to what completion activities have been doing. Can you just talk about the competitive landscape and what you're seeing on the market share side? And I know I think you said during your prepared remarks, You're going to be approaching 1,000,000 unit sales sometime in the next month or so. And I guess just how the volume outlook looks for the Remaining of the year and maybe even in 4Q if you have any color there?

Speaker 3

Yes. So from a competitive intensity standpoint, We think that there's high competitive intensity here, but we think with our value prop in DynaEnergetics, the market leader, We're trending up on share and that's in part due to our customers and our customers' customers. So we've got great customers that we partner with that are leading the charge on this. And so I think that's a big part of the Q2 tick up and I think the resilience you're seeing in Q3.

Speaker 7

Great. Thank you. And I'll turn it back.

Speaker 6

Thank you.

Operator

And it appears we have no further questions at this time. I'll now turn the program back to Michael Cuda for closing remarks.

Speaker 3

Thank you again for joining us today. The progress we've made this year to strengthen and grow DMC reflects the exceptional effort of our employees. I want to sincerely thank them for their commitment to the company. I also want to thank our customers for their loyalty, our Board of Directors for their continued Support. We look forward to speaking with you again soon.

Speaker 3

Take care.

Operator

This does conclude today's program. Thank you for your participation and you may disconnect at any

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Earnings Conference Call
DMC Global Q2 2023
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