DMC Global Inc. (NASDAQ:BOOM) Q1 2023 Earnings Call Transcript May 6, 2023

Operator: Greetings. Welcome to the DMC Global First Quarter Earnings Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Geoff High. You may begin.

Geoff High: Hello, and welcome to DMC’s first quarter conference call. Presenting today are Interim Co-CEOs, David Aldous and Mike 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 earnings 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. And with that, I’ll now turn the call over to David Aldous. David?

David Aldous: Good afternoon and thank you for joining us for today’s call. The positive momentum we carried at the end of 2022 continued into 2023. Despite a variety of macroeconomic concerns, DMC delivered record first quarter sales of $184 million as well as improved profitability. Our performance was driven by strong demand for the innovative products developed by our three differentiated manufacturing businesses, each of which reported solid top line results and sequential margin expansion. The first quarter 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.

DynaEnergetics, our energy products business achieved record sales of its flagship DynaStage perforating systems 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 towards much lower SG&A expense and improved free cash flow. I’ll turn the call over to Mike for a closer look at our first quarter performance, and then Eric will review our financial results and second quarter guidance. Mike?

Mike Kuta: Thanks David. Q1 was indeed an encouraging start to the year at each of our businesses. Arcadia delivered first quarter sales of $80 million, the second best quarterly performance in Arcadia’s history. Sales were up 8% sequentially and 18% year-over-year. The sequential increase principally reflects higher volumes versus the holiday shortened fourth 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 our Arcadia Custom business.

Under the direction of Jamie Chilcoff, who is appointed President of Arcadia in January, the business is making meaningful headway on its efforts to strengthen operating efficiencies and expand manufacturing capabilities. 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. First quarter sales at DynaEnergetics were $82 million, up 6% sequentially and 68% versus last year’s first quarter. 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.

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% of their first quarter sales. Dyna is making encouraging progress on its margin expansion initiatives, which include more efficient manufacturing processes, streamlined product designs and introduction of premium perforating systems designed for specialized downhaul applications. Two 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 two patent cases during the first quarter, which collectively accounted for approximately $3 million in first quarter SG&A expense.

We expect quarterly litigation costs will decline significantly during the balance of the year. NobelClad reported first quarter sales of $22 million, down 5% sequentially and flat year-over-year. Another quarter of strong bookings and proved NobelClad’s book-to-bill ratio to 1.2 and elevated its order backlog to $60 million. The improved bookings 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 first quarter SG&A expense of $39 million included the previously mentioned $3 million of litigation expense at Dyna as well as approximately $6 million in CEO transition costs and related accelerated stock vesting.

In our last call, we said we expected to exit 2023 at an SG&A run rate of approximately $30 million. It is now appears we’ll close to or below that level in the second quarter. We ended the first quarter with a debt-to-adjusted EBITDA leverage ratio of less than 1.5x, down from 1.7x at the end of the fourth quarter and 2.9x at the end of last year’s first quarter. 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 review of our first quarter financial results and a look at second quarter guidance. Eric?

Eric Walter: Thanks Mike. As David noted earlier, DMC delivered record consolidated first quarter sales of $184 million, which was up 5% sequentially and 33% versus last year’s first quarter. Consolidated gross margin was 28%, up 250 basis points from the fourth quarter as all businesses experienced sequential margin expansion. Gross margin improved 170 basis points versus the year-ago first quarter 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 aluminum prices, and this placed downward pressure on Arcadia’s gross margin during the second half of 2022. Arcadia’s margins began to recover during the first quarter, and we believe this trend will continue during the second quarter.

First quarter consolidated adjusted EBITDA attributable to DMC was $20 million, up 3% sequentially and up over 90% year-over-year. Inclusive of the Arcadia non-controlling interest, consolidated adjusted EBITDA was $24 million. As a percentage of sales, total adjusted EBITDA was 13%, which reflects an improvement of 40 basis points versus the fourth quarter of 2022 and an increase of 230 basis points compared with the prior-year first quarter. Arcadia reported first quarter adjusted EBITDA of $10 million, of which $6 million or 60% was attributable to DMC. Arcadia’s adjusted EBITDA margin expanded over 340 basis points versus the fourth quarter of 2022, but contracted by 380 basis points compared with the prior-year first quarter. As mentioned earlier, Arcadia’s gross margin began an upward recovery during the first quarter, but has not quite yet returned to the levels reported in the first half of 2022.

Dyna reported first quarter adjusted EBITDA of $15 million or 18% of sales. Adjusted EBITDA margin declined 40 basis points sequentially, but improved over 740 basis points versus the prior year. Dyna’s first quarter results included the previously mentioned patent litigation costs, which reduced adjusted EBITDA margin by 330 basis points. NobelClad reported adjusted EBITDA of $3 million or approximately 15% of sales, a mix-shift to higher-margin products expanded adjusted EBITDA margin by 40 basis points sequentially and 770 basis points year-over-year. Consolidated adjusted net income attributable to DMC was $6 million during the first quarter of 2023 or $0.32 per diluted share compared with last year’s first quarter loss of $3 million or negative $0.16 per diluted share.

During the quarter, DMC generated free cash flow of $5 million, which compares with negative free cash flow of $6 million in the first quarter of 2022. It’s important to note that DMC typically has lower free cash flow conversion in the first quarter of the year due to seasonality. The free cash flow in the first quarter of 2023 was used primarily for principal payments on our long-term debt associated with the Arcadia acquisition and included an additional $2.5 million debt prepayment as well as distributions to our Arcadia joint venture partner. In terms of liquidity, we ended the first quarter with cash of $20 million and available capacity under our revolving loan of $50 million. Our debt-to-adjusted EBITDA leverage ratio was 1.47 at the end of the first quarter, which represents the fifth consecutive quarter of deleveraging the balance sheet and was well below the covenant threshold of 3.25.

Now turning to second quarter guidance; consolidated sales are expected to be in a range of $177 million to $187 million versus the $184 million reported last quarter. At the business level, Arcadia is expected to report sales in a range of $75 million to $80 million versus the $80 million reported in the first quarter. 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 million to $82 million compared to the $82 million reported in the first quarter. While demand continues to be robust, we believe activity in North America will be flat in the second quarter. Our focus during the second quarter will be on maintaining our market share and advancing our margin expansion initiatives.

NobelClad sales are expected in a range of $24 million to $25 million versus the $22 million reported in the first quarter. Consolidated gross margin is expected in a range of 29% to 30% compared with the 28% in the first quarter. Second quarter gross margin is expected to improve sequentially at both DynaEnergetics and Arcadia, while NobelClad’s margins will likely be impacted by a less favorable project mix. Second quarter consolidated SG&A expense is expected to range from $29 million to $31 million, excluding any remaining CEO transition costs versus the $39 million reported in the first quarter. We expect our SG&A run rate will continue to decline as a percentage of sales. Second quarter adjusted EBITDA attributable to DMC is expected to be in a range of $23 million to $26 million versus $20 million in the first quarter.

Finally, we expect second quarter capital expenditures will be in a range of $4 million to $6 million, while full year CapEx is expected to be approximately $20 million. With that we’re ready to take any questions. Operator?

Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Gerry Sweeney with ROTH Capital. Please proceed with your question.

Operator: Our next question comes from the line of Patrick Ouellette with Stifel. Please proceed with your question.

Operator: [Operator Instructions] Our next question comes from the line of Ken Newman with Keybanc Capital Markets. Please proceed with your question.

Operator: And we have reached the end of the question-and-answer session. I’ll now turn the call back over to David Aldous for closing remarks.

David Aldous: Thank you, again for participating in today’s call. We’re encouraged by the progress DMC and its businesses made during the first quarter 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 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 second quarter. Take care.

Operator: This concludes today’s conference, and you may disconnect your line at this time. Thank you for your participation.