DMC Global Inc. (NASDAQ:BOOM) Q1 2024 Earnings Call Transcript May 5, 2024

DMC Global Inc. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings, and welcome to the DMC Global First Quarter Earnings Release and Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Geoff High, Vice President of IR. Thank you, Geoff. You may begin.

Geoff High: Hello, and welcome to DMC’s first quarter conference call. Presenting today are DMC 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. Today’s release and a related presentation on our first 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. With that, I’ll now turn the call over to Michael Kuta. Michael?

Michael Kuta: Hello and thank you for joining us for today’s call. DMC’s first quarter financial results included consolidated sales of $167 million, down 9% from the first quarter 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 $61.9 million were down 23% compared with the year ago first quarter. 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. 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 monthly ABI decline nationally. In the Western U.S., the index fell sharply during last year’s third quarter. Since the ABI tends to lead nonresidential 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 first quarter sales of $78.1 million, up 4% sequentially and down 5% versus last year’s first quarter. 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. NobelClad, our composite metals business, reported sales of $26.8 million, up 22% from the same quarter last year.

Earlier this week, NobelClad received a $19 million 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 Cylindra cryogenic transition joints. Demand for Cylindra 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. While the first quarter 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. DMC’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 are also making progress in our review 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. I’ll now turn the call over to Eric for a closer look at our first quarter financial performance and a review of our guidance. Eric?

Eric Walter: Thanks, Michael. Our consolidated first quarter sales were $167 million, down 9% from the first quarter last year. Consolidated gross margin was 25.4%, down from 28.3% in the 2023 first quarter due primarily to industry consolidation at Dyna, which was partially offset by a more favorable project mix at NobelClad. Excluding onetime expenses, our first quarter SG&A expense was $28 million or 16.9% of net sales, down approximately 120 basis points from the first quarter 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. First quarter adjusted EBITDA attributable to DMC was $16.7 million compared with $20 million 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 million or 11.4% of sales compared with 13.2% of sales in the prior year quarter. At the business level, Arcadia reported first quarter adjusted EBITDA of approximately $6 million or 9.5% of sales, of which $3.5 million or 60% was attributable to DMC. Arcadia’s adjusted EBITDA declined 44% year-over-year due mostly to lower sales that Michael explained earlier. Dyna reported first quarter adjusted EBITDA of $10.5 million or 13.5% of sales, which was lower than the prior year quarter due to a decline in average selling price. Compared to – with the fourth quarter, Dyna’s adjusted EBITDA improved 13% due to a higher volume of DynaStage units and lower SG&A.

NobelClad reported adjusted EBITDA of almost $6 million, which was 21.9% of sales compared with 15.3% of sales in the first quarter of 2023. EBITDA margin improved due to a more favorable project mix and better absorption of fixed manufacturing overhead costs. First quarter adjusted net income attributable to DMC was $4.2 million, while adjusted EPS attributable to DMC was $0.21 versus $0.32 in last year’s first quarter. During the quarter, DMC generated free cash flow of $10.5 million, which was more than double the prior year quarter. We use this year’s first quarter 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 first quarter with cash of approximately $20 million and debt of $90 million.

We ended the first quarter with a debt to adjusted EBITDA leverage ratio of 1.0, which was well below our covenant threshold of 3.0 and represents the ninth quarter in a row that we have delivered. On a proforma 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 second quarter of 2024. Consolidated sales are expected in the range of $161 million to $171 million. We expect activity in Arcadia’s primary markets to remain soft in the second quarter, while activity in Dyna’s North American markets is expected to remain relatively flat versus the first quarter. Second quarter adjusted EBITDA attributable to DMC is expected to be in a range of $14 million to $17 million.

Arcadia EBITDA margins are forecasted to improve from the first quarter due to stronger volumes and lower SG&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?

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