DMC Global Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 2, 2024

There are 7 speakers on the call.

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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jeff High, Vice President of IR.

Operator

Thank you, Jeff. You may begin.

Speaker 1

Hello, and welcome to DMC's Q1 conference call. Presenting today are DMC's CEO, Michael 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 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.

Speaker 1

Today's release and a related presentation on our Q1 performance are available on the Investors 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 call. With that, I'll now turn the call over to Michael Cuda. Michael? Hello, and thank

Speaker 2

you for joining us for today's call. D and C's Q1 financial results included consolidated sales of $167,000,000 down 9% from the Q1 a year ago. This decrease was largely due to soft demand and lower pricing at Arcadia Products, our Architectural Building Products business. Arcadia sales of $61,900,000 were down 23% compared with the year ago Q1. 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.

Speaker 2

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, the index fell sharply during last year's Q3.

Speaker 2

Since the ABI tends to lead non residential construction by 9 to 12 months, we believe we are now seeing the impact of that decline. We are seeing signs of improving activity at Arcadia's commercial divisions. The 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 1st quarter sales of $78,100,000 up 4% sequentially and down 5% versus last year's Q1.

Speaker 2

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. Dyna 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. NobelClatter Composite Metals business reported sales of $26,800,000 up 22% from the same quarter last year.

Speaker 2

Earlier this week, NobelClad received a $19,000,000 order from an international petrochemical customer. This represents the largest order in NobelClad's 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 its Solyndra cryogenic transition joints. Demand for Solyndra from the liquefied natural gas industry remains strong and NobelClad's commercial team is tracking more than 90 global LNG projects that have either been announced or in the planning phases.

Speaker 2

While the Q1 sales shortfall of Arcadia Products was disappointing, we remain confident in its differentiated business model, strong brand and the growth strategy we are executing. As its markets recover, we believe Arcadia is well positioned to benefit. EMC's financial strength continues to grow and is benefiting from our improved free cash flow and our aggressive efforts to delever our balance sheet. We're also making progress in our view 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.

Speaker 2

I'll now turn the call over to Eric for a closer look at our Q1 financial performance and a review of our guidance. Eric?

Speaker 3

Thanks, Michael. Our consolidated first quarter sales were $167,000,000 down 9% from the Q1 last year. Consolidated gross margin was 25.4%, down from 28.3% in the 2023 Q1, due primarily to industry consolidation at Dyna, which was partially offset by a more favorable project mix in NobelClad. Excluding one time expenses, our first quarter SG and A expense was $28,000,000 or 16.9 percent of net sales, down approximately 120 basis points from the Q1 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.

Speaker 3

1st quarter adjusted EBITDA attributable to DMT was $16,700,000 compared with $20,000,000 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 non controlling interest, consolidated adjusted EBITDA was $19,000,000 or 11.4 percent of sales compared with 13.2% of sales in the prior year quarter. At the business level, Arcadia reported 1st quarter adjusted EBITDA of approximately $6,000,000 or 9.5 percent of sales, of which $3,500,000 or 60 percent was attributable to DMC. Arcadia's adjusted EBITDA declined 44% year over year due mostly to lower sales that Michael explained earlier.

Speaker 3

Diner reported 1st quarter adjusted EBITDA of $10,500,000 or 13.5 percent of sales, which was lower than the prior year quarter due to a decline in average selling price. Compared with the 4th quarter, Dyna's adjusted EBITDA improved 13% due to a higher volume of DynaStage units and lower SG and A. NobelClad reported adjusted EBITDA of almost $6,000,000 which was 21.9% of sales compared with 15.3 percent of sales in the Q1 of 2023. EBITDA margin improved due to a more favorable project mix and better absorption of fixed manufacturing overhead costs. 1st quarter adjusted net income attributable to DMC was $4,200,000 while adjusted EPS attributable to DMC was $0.21 versus $0.32 in last year's Q1.

Speaker 3

During the quarter, DMC generated free cash flow of $10,500,000 which was more than double the prior year quarter. We use this year's Q1 free cash flow primarily for voluntarily delevering on our debt and distributions to our Arcadia joint venture partner. In terms of liquidity, we ended the Q1 with cash of approximately $20,000,000 and debt of $90,000,000 We ended the Q1 with a debt to adjusted EBITDA leverage ratio of 1.0, which was well below our covenant threshold of 3.0 and represents the 9th quarter in a row that we have delivered. On a pro form a 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 Q2 of 2024.

Speaker 3

Consolidated sales are expected in a range of $161,000,000 to $171,000,000 We expect activity in Arcadia's primary markets to remain soft in the Q2, while activity in Dyna's North American markets is expected to remain relatively flat versus the Q1. 2nd quarter adjusted EBITDA attributable to DMC is expected to be in a range of $14,000,000 to $17,000,000 Arcadia EBITDA margins are forecasted to improve from the Q1 due to a stronger volumes and lower SG and A. At Dyna, we anticipate EBITDA margins will remain relatively flat quarter over quarter, while NobelClad's 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?

Operator

Thank you. We will now be conducting a question and answer Our first question is from Ken Newman with KeyBanc Capital Markets. Please proceed with your question.

Speaker 4

Hi, guys. Thanks for taking the question.

Speaker 2

Hi, Ken.

Speaker 4

Hey, there. 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? Just hoping you can help us bridge your comments on this idea of segment sales sequentially improving in coming quarters?

Speaker 2

Yes. So 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 that our storefront business. And so those regional branches, service centers, that's about 50% to 60 percent of our sales that track with general commercial construction activity.

Speaker 2

And then the rest of our business is project based, 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, things like that featured in our earnings deck. So they don't necessarily line up as much with the short cycle 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 on short cycle currently.

Speaker 2

And we've got some good project business we see coming through as well. So we think we got to think we're in the valley right now, Ken.

Speaker 4

Okay. So if this is transitory on the short cycle Arcadia side on the volumes, I know you're bringing on tank capacity later this year. Just assuming that the volumes stay relatively muted, are there levers that you can pull to mitigate under absorption?

Speaker 2

Yes, absolutely, Ken. I'd say a couple of things on that. I think we've got a couple of quarters as we march through this current environment. We can certainly push out capacity investments till we see a sustained increase in demand, so we can pull back on CapEx. And I think there's a lot of operational initiatives we're in middle of where we can save from a cost standpoint and drive EBITDA north from here off of Q1.

Speaker 2

So we've got some projects in the works there. So and then in any event from a capacity standpoint, there are outside sources that we can leverage as our volume picks up.

Speaker 4

Okay. Maybe just switching to the other segments. I mean, what's the confidence level in the 2Q revenue guide beyond Arcadia, maybe for Dyna specifically? And what are you kind of assuming or expecting at the lower end of the range as it relates to levels of conservatism?

Speaker 2

I mean, what we're seeing in Diana's market is fairly stable, steady activity. And so I think we see Q2 as maybe modestly softer, flattish. I'll say that we had a pretty decent April. We also had a pretty decent April in Arcadia as well. But in Dinah, we're just seeing pretty steady activity levels right now.

Speaker 2

And that's what we see in the front view mirror.

Speaker 4

Got it. Maybe I'll ask one more and I'll jump back in line. Do you have a view for gross margins across all segments as we move through the back half of the year?

Speaker 2

I think you're going to see consistency in Arcadia as well as NobelClad. In DynaEnergetics, we expect some improvements there with some of the automation projects and things we're doing not only in our plant, but also the new products that we're putting in the marketplace. And it's not as much new products, but new product design, I would say. Thanks, Ken.

Operator

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

Speaker 5

Thanks. Good afternoon, everybody. The on the DynaEnergetics side, can you talk about the cost out initiatives and just kind of how we should think about margin progression as we move through the next couple of quarters?

Speaker 2

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 I'll 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 the biggest item on our list or a couple of large items on our list is 1, automating our assembly in our Blum facility. So that's going to improve our cost base.

Speaker 2

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 quite a bit of savings in there. And then a lot of them are just, I'd call it smaller projects as we execute on a more operational excellence program in DynaEnergetics.

Speaker 2

And then maybe another big one, I want to make sure I don't forget this is on the product design. So we're doing a lot to 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, you talk a little bit about the margin aggression.

Speaker 3

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 basis points to 150 basis points at the EBITDA margin level. So should take us up to the mid teens from an impact standpoint.

Speaker 5

Got you. Okay, good. Thank you. And then the other one on Dyna is given what's going on in the market and kind of assuming that maybe the rig count seems to be flattish from these levels for the next, let's say, through year end. What's the driver of that?

Speaker 5

I mean, is it just kind of should we think about it as following the rig count and completion activity? Or is there longer laterals or some technology that maybe can bump the top line as well?

Speaker 2

I'd probably think about it as more steady stable now. One of the key ways we win is with our customers and so our customers that we're aligned with, our key is delivering technology at the well site, quality service delivery and then partnering with the right customers and how they're performing with the E and 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 feel pretty good about even in a flat rig count environment, we're doing what we can do to control our destiny here.

Speaker 5

Great. And just one final quick one. Any guess on well, not guess, but I guess one is any guess on kind of where your share stands and just not a guess, what's the current pricing environment look like for the perf business?

Speaker 2

So share, we're we've been in that, I think, 25% -ish, maybe a bit north of 25%. We kind of balance between 25% 30%. And the pricing environment kind of remains as is. It's been a fairly challenged environment over the last couple of I'd say couple of years quite frankly. But I think it's relatively stable pricing right now.

Speaker 5

Okay, great. Thanks for the details.

Speaker 2

Thank you, Stephen.

Operator

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

Speaker 6

Just sticking with Arcadia, obviously, I think that was a little bit more of a sounds like there is some, I guess, weakness at the storefront level. But I'm curious if anyone is the competitors are maybe adjusting some of their strategy or anything happening on that after you or is this just strictly acquire lower investment in the market?

Speaker 2

Jerry, great question. I don't think it's competitive pressure as much as it is really the backdrop in the commercial 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, not a mature business, it was a small piece of the overall Arcadia.

Speaker 2

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, hit a valley in the Q1, particularly at the end of the Q1. 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, pipeline, dealer performance. So we think that business is going to track 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.

Speaker 2

But it's more market related and specific also to our residential business than customer for a competitor.

Speaker 6

Do you know how much of that storefront business is new build versus like replacement type business? Or is that just hard to gauge because it's you have trucks lining up there just taking sticks every day, you may not curious if you have a is it a new build or replacement or it's hard to tell?

Speaker 2

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

Got you. And then speaking

Speaker 6

of the ERP system, I did a quick aluminum prices actually look like they kind of spiked a little bit through April.

Speaker 2

Yes.

Speaker 5

In the

Speaker 6

past, 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 sort of move beyond that?

Speaker 2

I don't see any concern there. There's a tick up there in aluminum. Hopefully, we might even be able to capture some margin there. So I don't think anything to be concerned about, maybe even a little bit outside there as we kind

Speaker 3

of move through the year. Yes. And Jerry, what 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.

Speaker 6

And then one last question, I'll jump back in line. You mentioned you could pull back on CapEx, but there was paint line, but there was anodizing as well and anodizing was margin accretive or positive margins, however you want to say it. Are you sticking with that or has that changed with the CapEx on that front?

Speaker 2

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, we're leaving a lot of money on the table here.

Speaker 2

So we're continuing to evaluate that, Jerry.

Speaker 3

Dan, I think what we would do is we evaluate it is to look for how we can get the highest ROI. So is it spending the CapEx and bringing those capabilities in house or is it actually looking at outsourcing some of this capacity to a 3rd 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.

Speaker 5

Got you. And

Speaker 6

on that front, there's not a what's the lead time on adding anodizing? So theoretically, if you get a better return outsourcing at least for a year or 2, you could always go back to anodizing later if things pick change. Is that fair?

Speaker 2

Yes, we could I mean, you could put it we could put something like that in, in a couple of quarters if we needed to. So not something that is it's not a multiyear project.

Operator

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

Speaker 2

Thanks for joining our call today. I 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.

Powered by Quartr

Key Takeaways

  • Consolidated Q1 sales were $167 million, down 9% year-over-year, driven by a 23% decline at Arcadia, a 5% dip at DynaEnergetics, and a 22% increase at NobelClad.
  • Arcadia Products saw soft demand and lower pricing in the Western U.S., with short-cycle orders weak amid a 14th consecutive month of declining Architectural Billings Index, but backlog and quoting activity are picking up for sequential recovery.
  • DynaEnergetics delivered $78.1 million in Q1 sales (up 4% sequentially) with record DynaStage unit volumes, and is implementing automation, cost-reduction, and product-design initiatives to boost margins in the second half.
  • NobelClad achieved $26.8 million in sales, highlighted by a record $19 million order for petrochemical clad plates in Asia, and is expanding capacity for cryogenic transition joints amid a strong global LNG project pipeline.
  • The company generated $10.5 million in free cash flow, reduced net debt to a 0.77× leverage ratio, and expects Q2 sales of $161–171 million with adjusted EBITDA of $14–17 million.
AI Generated. May Contain Errors.
Earnings Conference Call
DMC Global Q1 2024
00:00 / 00:00