DMC Global Q2 2024 Earnings Call Transcript

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August 1, 2024

There are 7 speakers on the call.

Operator

Greetings, and welcome to the DMC Global Second 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, VP of IR.

Operator

Thank you. You may begin.

Speaker 1

Hello, and welcome to DMC's 2nd quarter conference call. Presenting today are DMC's CEO, Michael Kuta 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 earnings release and a related presentation on our second quarter 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. And with that, I'll turn the call over to Michael Cuda. Michael?

Speaker 2

Hello, and thank you for joining us today. DMC reported 2nd quarter sales of $171,200,000 and adjusted EBITDA attributable to D and C of $19,400,000 Our results represent a sequential rebound versus the Q1 and were achieved despite continued weakness in our primary construction and energy products markets. The results also were above the high end of our guidance range. Arcadia, our building products business, was a key driver in our improved financial performance reporting 2nd quarter sales of $69,700,000 and gross margin of 33.2%. Gross margin was up 600 basis points from the Q1.

Speaker 2

In the comparable quarter last year, Arcadia's gross profit was 34.7%, which was their best margin performance since we acquired the business in December 2021. Arcadia's 2nd quarter adjusted EBITDA margin was 17.8% versus 9.5% in the 1st quarter and 20.8% in the year ago 2nd quarter. The results reflect management's focus on improving operational efficiencies and streamlining Arcadia's cost structure. A successful effort to debottleneck finishing operations has improved Arcadia's capacity and the business is working to further strengthen its customer service and lead times. DynaEnergetics, our energy products business, reported 2nd quarter sales of $76,200,000 down 2% sequentially and down 10% versus last year's Q2.

Speaker 2

Adjusted EBITDA margin was 11.5%, down from 13.5% in the Q1 and 23% in the year ago Q2. This year's 2nd quarter results reflect lower sales volumes and softer pricing in North America as well as a $500,000 bad debt expense. Well completions in Dyna's core U. S. Onshore market declined in 5 of the 1st 6 months of the year and the number of Dyna has taken steps to align its cost structure with anticipated demand.

Speaker 2

Recent cost reductions coupled with previously discussed automation and product enhancement initiatives are expected to improve Dyna's EBITDA margins during the back half of the year. In the 4th quarter, sales and margin should benefit from an expected increase in international product sales. Sales Metals Business were $25,200,000 which is up 2% versus the year ago quarter and down 6% sequentially. Adjusted EBITDA margin was a strong 22.7% and benefited from favorable delivery timing and project mix. NobelClad's 2nd quarter order backlog of $64,000,000 was up over 20% sequentially and reflects the impact of the record petrochemical order we discussed during our last call.

Speaker 2

DMC's Board of Directors continues to evaluate a range of strategic options to unlock shareholder value. We will issue an update when appropriate. I'm encouraged by the progress made by DMC's businesses during the Q2. We want to thank our employees for their commitment Q2 financial performance and a review of our Q3 guidance. Eric?

Speaker 3

Thanks, Michael. Consolidated second quarter sales were $171,000,000 up 3% sequentially and down 9% from last year's Q2, which was one of D and C's strongest historical quarters. Consolidated gross margin was 27.1%, up sequentially from the 25.4% and down from 32.8% in last year's Q2. As Michael noted, the sequential improvement reflects a strong margin recovery at Arcadia versus the Q1. The decline versus last year's 2nd quarter reflects lower sales and margin at DynaEnergetics.

Speaker 3

2nd quarter SG and A was approximately $27,000,000 or 15.8 percent of net sales versus $29,000,000 or 15.5 percent of sales in the Q2 last year. Lower outside service expenses across all DMC businesses drove the reduction. Inclusive of the Arcadia non controlling interest, consolidated 2nd quarter adjusted EBITDA margin was 14.3 percent of sales, up from 11.4% in the 1st quarter and down from 20.3% in the year ago 2nd quarter. 2nd quarter adjusted net income attributable to DMC was $5,700,000 while adjusted EPS attributable to DMC was 0 $0.29 With respect to liquidity, we ended the 2nd quarter with cash and cash equivalents of $15,000,000 total debt inclusive of debt issuance costs of $84,000,000 and net debt of $70,000,000 Our debt to adjusted EBITDA leverage ratio of 1.1 at the end of the second quarter remained well below our covenant threshold of 3.0. On a pro form a net debt basis, after subtracting cash, our leverage ratio was 0.92 at the end of the second quarter.

Speaker 3

Now turning to guidance for the Q3 of 2024. Consolidated sales are expected in a range of 1 dollars to $168,000,000 We expect activity in Arcadia's primary markets to remain unique in the 3rd quarter, while activity in China's primary North American markets is expected to soften versus the 2nd quarter. NobelClad sales are expected to be comparable to the 2nd quarter. 3rd quarter adjusted EBITDA attributable to DMC is expected in a range of $15,000,000 to $18,000,000 Arcadia's adjusted EBITDA margin is expected to moderate versus the Q2 due to less absorption of overhead expenses on lower sales. While we expect Dyna will improve modestly due to cost reductions and operational initiatives.

Speaker 3

Adjusted EBITDA margin at NobelClad is expected to decline sequentially 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 The first question is from Gerry Sweeney from ROTH Capital Partners. Please go ahead.

Speaker 4

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

Speaker 2

Good afternoon.

Speaker 4

Question, sorry, not feeling well, but revenue at Acadia was ahead of forecast and obviously gross margins, you executed extremely well on that front. Can you give us a little bit more detail on maybe some of the operational efficiencies and cost out reductions that you implemented in the segment to drive those margins? And are they sustainable?

Speaker 2

Yes. Thanks, Jerry. So what we've been doing is doing some cost outs, really streamlining the organization, getting more efficient, in particular, in our finishing operations. So our finishing the heartbeat of our organization. So that's what enables our customer service model.

Speaker 2

So everything goes through finishing, whether it's paint, anodizing, all material runs through there. So the organization has really worked hard to debottleneck those ops, increase finishing capacity throughput. And so that's driving real productivity improvements in the business and enabling the front end of the business.

Speaker 4

Got it. And then maybe this one for Eric. Cash flow was, I think, flat essentially in the quarter. Maybe what's driving free cash flow in the quarter and then projections for the remainder of the year? Obviously, the cash flow there's puts and takes on that front, but just interested on that.

Speaker 3

Yes. Thanks, Jerry. Yes, for the Q2, the free cash flow performance was really a function of timing and some one time items. We had a prepaid purchase of explosives to secure our supply within Dyna. There was the timing of some customer advances in the NobelClad business moving from Q2 into Q3.

Speaker 3

And then we had some higher cash taxes in the quarter. And when you add all of those up, that had an impact, a negative impact cash flow of about $10,000,000 in Q2. So going forward, to answer the second part of your question, we think that there is an opportunity to take out the some networking capital out of the Dyna business given where we think activity levels will materialize in the second half of the year and also the opportunity to sharpen our pencil also at Arcadia. So we're looking to be finishing the year with a debt position of, call it $65,000,000 to $70,000,000 and using the cash flow we generate in the second half of the year to continue to pay down and deliver that debt. So we feel good about where we're going to be going, but had some headwinds unfortunately in the Q2 that were one time in nature.

Speaker 4

Got it. Okay. I'm going to jump back in queue. Thanks.

Operator

The next question is from Stephen Gengaro from Stifel. Please go ahead.

Speaker 5

Thanks. Good afternoon, everybody.

Speaker 2

Hey, Stephen.

Speaker 5

Hey, Stephen. Hey, Stephen. So two things for me. The first, can you talk about the DynaEnergetics business a bit more and just kind of a, the competitive landscape and what you're seeing kind of from a potential growth of that business relative to kind of completion activity, whether it's market share or completion intensity? How should we be thinking about that as we look at the next couple of quarters?

Speaker 2

Yes, I think generally we'll move with the market. When you think about sequentially Q2 versus Q1, when you look at completions, rig count or frac spreads, those were generally down in the 4% range, which tracked DynaNAM performance. So I think that's probably the way to look at it. And our guidance reflects that softness in Q3 in Diana. I think so that I mean the competitive dynamics are fairly steady I would say and pricing continues to be a challenge.

Speaker 2

But we've got quite a bit of quite a few initiatives in place to offset these impacts and also reflected in our guidance. So the OpExcellence initiatives we're working on cost takeout, that's going to continue into the second half of the year. And some of that on the product design side is going to take hold in 2025. So whatever the market is doing, we feel pretty good about controlling what we can control from a cost standpoint, as well as from a competitive standpoint in our differentiation and that remains. So, but I think that's the way to think about Dine as we move forward.

Speaker 2

Maybe the last thing I'd say is that we're seeing healthy international activity and we see a pickup, a bump in Q4. So we should exit the year pretty strong on the international front in Q4, which will offset some of the softness in North America.

Speaker 5

Okay. That's helpful. And then I think the other question I had was just kind of around the Arcadia, the perm call option in Arcadia. And I think there's a little confusion out there like the people I talked to that whether it's like a snapshot in time like in December or whether this thing kind of rolls forward and what's the timing on when a decision on either party's part has to be made on the put call option on Arcadia and how does that mechanically work?

Speaker 2

Yes. So the foot call first becomes exercisable at the end of December of this year, but that does not mean that anyone is compelled to exercise us being exercising the call or minority partner exercising the put. So there's nothing that's compelling anybody to do that.

Speaker 5

But is it like a one time event or does it roll like how long do you have to exercise the option? How long is it a day, a week, a year? Like how does that work?

Speaker 2

It quite frankly continues on in perpetuity to the extent that neither party exercises the put for the call.

Speaker 5

Got you. Okay, great. Thanks. I'll get back in line. That's very helpful.

Speaker 2

Thank you, Stephen.

Operator

The next question is from Ken Newman from KeyBanc Capital Markets.

Speaker 6

You're expecting revenue down sequentially here from Q2. I know you're not ready to give Q4 guidance or anything, but I'm curious about what the customers are kind of saying in terms of longer term visibility and how they're kind of thinking about stabilization or timing of stabilization within that market specifically?

Speaker 2

I think that we've got a couple of I mean just looking at the indicators out there and that we all look at whether it's ABI in the West at 43 Spot 1 or the Dodge Momentum Index which points towards some favorable end markets, but once again driven by very kind of specific markets like data centers, non resi starts. So I mean you see all the same data that we do from a customer perspective. I think we're seeing it's going to be soft markets for a couple of quarters here as we go out into the year. I think the good and in particular when you look at our Q2, we're pretty resilient. We're seeing obviously our exposure to diverse end markets, our bookings are relatively consistent and quoting activity has been good.

Speaker 2

But there's folks citing interest rates that are pushing projects out. So look, I think we've got a couple more quarters softness, but I do think our guidance, we guided in Q2 64% to 68%. Q3 is another 64% to 68% because that's sort of what the market is serving up. What we're doing though is the things that we can control and we're talking about improving and I feel confident that we're going to do that the and I feel confident that we're going to do that the remainder of this year for whatever the market serves up.

Speaker 6

That's helpful. I guess as a follow on to that, I mean with the cost and the cost out in place for Arcadia, I mean is there a way that we should think about normalized operating leverage as the volume stabilize? Obviously, I know it's going to be very dependent on what the volumes do, but how do we think about incremental, decremental margins with this new cost kind of platform that you're on?

Speaker 2

Yes. Incremental decrementals are material margin is probably in the call it 45 ish percent range. And then when you think about it's not a high fixed cost business, there's a larger labor component. So I think incremental or decremental margins are probably between, call it 35% 40%, Eric, would you concur with that? Yes.

Speaker 6

Yes. That's helpful.

Speaker 2

But the incremental I'm sorry, Ken, just real quick. The incremental and decrementals just aren't they're not significantly higher than our gross margin percent in that, call it, 33% range, right?

Speaker 4

Right.

Speaker 6

Right. Okay. Maybe one more if you squeeze it in. You talked about project mix headwinds, I think, on NobelClad. I know it's a smaller part of your business, but just can you just talk about how persistent that mix headwind could be beyond this quarter as you think about the backlog of activity there?

Speaker 2

Yes. So we see a dip in Q3, but a very strong Q4. And quite frankly, not obviously providing guidance on 25%, but pretty bullish on 25%. And I think they're seeing shaping up that 2025 be a really good year.

Speaker 6

Very helpful. Thanks guys.

Speaker 2

Thanks Ken.

Operator

The next question is from Stephen Gengaro from Stifel. Please go ahead.

Speaker 5

Thanks. Just a quick follow-up. Obviously, Michael, I'm not sure you can comment on this, but I'll ask it. When you think about the structure of the company and what you're looking at doing with the DynaSight, is there any thought to pulling back on that either permanently or temporarily given kind of what the market's like on the buyer side?

Speaker 2

Yes. Stephen, I would just say that we're in the throes of strategic alternatives and there's a lot of things on the table, okay. So a lot of different things that we're evaluating, so broad scope.

Speaker 5

Okay. Is there any way to think about how you balance the maybe creating more of a pure play business versus valuation on pieces you might want to sell?

Speaker 2

Can you rephrase or clarify the question?

Speaker 5

I guess the more direct way to say is, would you take a lower price on something just to get rid of it, to make a cleaner, less a cleaner business that is left to run?

Speaker 2

Yes. The viewpoint is, again, we're looking at a wide range of options to maximize shareholder value and so that's maximizing shareholder value is the key.

Speaker 5

Got you. Okay. That makes sense. Thanks.

Speaker 2

Thank you, Stephen.

Operator

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

Speaker 2

Thanks again for joining us today. We appreciate your interest in DMC and look forward to our next update. Take care.

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Key Takeaways

  • DMC reported second quarter sales of $171.2 million and adjusted EBITDA of $19.4 million, marking a sequential rebound that exceeded the high end of guidance despite ongoing weakness in core markets.
  • The Arcadia building products segment drove margin recovery with Q2 sales of $69.7 million, a 33.2% gross margin (up 600 bps sequentially) and a 17.8% adjusted EBITDA margin through operational efficiencies and debottlenecked finishing operations.
  • DynaEnergetics energy products delivered Q2 sales of $76.2 million (down 2% sequentially) with an 11.5% adjusted EBITDA margin impacted by lower volumes, softer North American pricing and a $0.5 million bad debt expense; cost reductions and automation initiatives aim to boost margins in H2, with an international sales lift expected in Q4.
  • The Metals business posted Q2 sales of $25.2 million and a 22.7% adjusted EBITDA margin, while NobelClad’s order backlog grew to $64 million (up over 20% sequentially) led by a record petrochemical order.
  • For Q3, DMC projects sales of $160 million–$168 million and adjusted EBITDA of $15 million–$18 million, anticipating softer Arcadia margins on lower overhead absorption, modest DynaEnergetics margin improvement, and a sequential decline at NobelClad due to project mix, as the Board reviews strategic options to unlock shareholder value.
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