Q3 2022 DMC Global Inc Earnings Call
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Good afternoon, ladies and gentlemen, and welcome to the DMC Global third quarter earnings call. At this time, all participants have been placed on a listen only mode and we will open the floor for your questions and comments. After the presentation. It is now my pleasure to turn the floor over to your host Geoff High Vice President of Investor Relations.
Sir the floor is yours.
Hello, and welcome to Dmc's third quarter conference call presenting today are president and CEO , Kevin long and CFO , Mike Cuda.
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 todays 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.
A webcast replay of today's call will be available at DMC Global Dot com. After the call. In addition, a telephone replay will be available approximately two hours after the call.
Details for listening to the replay are available in today's news release and with that I'll turn the call over to Kevin Kevin.
Good afternoon, and thank you for joining us for our review of Dmc's third quarter financial results.
Our third quarter sales and profitability were above our guidance, reflecting continued strong demand within the end markets served by our three asset light manufacturing businesses.
Consolidated third quarter sales were a record.
$174 $5 million, which were up 5% from the second quarter and up 160% from the third quarter last year.
Excluding $80 7 million in revenues from our Korea, and which we acquired a 60% controlling interest last December .
Third quarter sales increased 5% sequentially and 40% versus the third quarter of 2021.
The growth reflects stronger sales that dynamic <unk>, our energy products business, which is benefiting from healthy activity in the global wealth completion industry.
<unk> third quarter sales were $70 4 million.
Up 4% sequentially and up 59% versus last year's third quarter.
The safety performance and efficiency of Diamond energetics fully integrated DS.
Perforating system continued to drive increased adoption by North America's exploration and production companies and service providers.
This year <unk> has already surpassed the 1 million unit Mark for shipments of its factory assembled performance assured DS perforating systems.
It's the first time 1 billion units have been shipped in a single year since the product was launched in 2015.
The on time delivery rate of these systems is 90, 993%.
And they were deployed by our customers as a success rate of 99 nine.
98%, which we're very proud of.
The systems also we're deployed without a single safety incident, and the seven year commercial history of the DFS system.
We have shipped nearly 4 million units without a reported safety issue.
Arcadia architectural building products business.
<unk> third quarter sales of $87 million.
Up 6% sequentially.
And up 24% versus pro forma sales in last year's third quarter.
The improvement reflects higher selling prices, which were implemented to offset a sharp increase in aluminum costs earlier in the year.
Aluminum prices actually rose faster than our <unk> increased prices for its products.
Additionally, some third quarter orders that shipped out of backlog were quoted before the price increases took effect.
Buying these factors reduced our <unk> gross margin to 30% from 34% in the second quarter and 36% in last year's third quarter.
We expect it will take another quarter for the balance of the high price aluminum inventory to move through our <unk> service centers.
At which time, we expect gross.
Gross margin will return to normalized levels in the low to mid 30% range.
Demand for our commercial products, and our <unk> western and southwestern U S territories remains healthy.
In our <unk> commercial team is working on booking a diverse collection of projects that include hotels educational facilities and casinos.
Our Katy is also investing in resources to support future growth.
We've been working on the implementation of a new enterprise resource planning system since the beginning of the year.
In addition, our <unk> hired sales and manufacturing personnel adds new service centers in Dallas and Houston too.
Two large markets that we believe will fuel strong long term growth.
Arcadia custom, which serves the high end residential market.
Also is reporting strong demand and is working through a large order backlog.
It is adding production capacity at its Tucson, Arizona facility and investing in sales and marketing resources.
That will create demand for its differentiated product offering.
Third quarter sales at <unk>, our composite metals business were $23 4 million.
Up 7% sequentially and up 2% versus last year's third quarter.
Global clouds, Rolling 12 month bookings increased to 97 $7 million up from $92 5 million at the end of the second quarter.
Order backlog increased to $48 million from $46 $8 billion in the prior quarter.
The outlook at <unk> continues to improve and we are beginning to see several of the large industrial projects global climate has been pursuing moved to the award phase.
We made significant progress during the third quarter and I'd like to thank dmc's employees for.
And for their continued hard work and commitment to the company.
DMC is well positioned to deliver long term growth.
Improved returns for our shareholders and opportunities for our employees now.
Now I'll turn the call over to the call over to Mike for a review of our third quarter financial results and a look at fourth quarter guidance Mike.
Thanks, Kevin quickly recapping, our top line results third quarter sales were $174 $5 million up 5% versus this year's second quarter.
Our <unk> third quarter sales were $80 $7 million up 6% sequentially.
<unk> reported third quarter sales of $74 million up 4% sequentially.
And energetics, North American sales increased 6% sequentially, while international sales decreased 5% sequentially.
Sales at Nobel Cloud were $23 4 million up 7% sequentially.
Consolidated gross margin in the third quarter was 29% down from 31% in the second quarter and up from 25% in last year's third quarter.
Third quarter gross margin reflected an expected dip in gross margin at Arcadia, resulting from the recent volatility in aluminum prices.
The gross margin improvement compared to last year's third quarter reflects higher sales volume on fixed manufacturing overhead expenses at dine energetics.
As Kevin mentioned, our <unk> third quarter gross margin was 30% down from 34% in the second quarter.
<unk> reported third quarter gross margin of 30% flat versus the second quarter and up from the 22% in last year's third quarter.
The margin improvement from last year, primarily relates to the impact of higher sales volume.
Fixed manufacturing overhead expenses.
<unk> third quarter gross margin was 27% versus 28% in the second quarter and 30% in year ago third quarter, primarily due to a less favorable project mix and the impact of the prior year Cares Act credits prospectively.
Looking at our third quarter expenses consolidated SG&A was $30 5 million.
And included $12 9 million.
G&A from Arcadia.
<unk> to $15 3 million in the same quarter last year.
The year over year increase also was attributable to higher variable incentive compensation.
The exploration of employee retention credits and implementation costs associated with a new enterprise resource planning system at Nobel flat.
We reported consolidated operating income of $13 4 million.
Third quarter adjusted net income attributable with EMC was $6 7 million.
Or <unk> 35 per diluted share.
Versus adjusted net income of $403000 or <unk> <unk> per diluted share in last year's third quarter.
Adjusted EBITDA attributable to D&C was $21 8 million.
Versus $5 8 million in last year's third quarter.
Arcadia reported third quarter, adjusted EBITDA attributable to EMC of $7 2 million.
<unk> reported third quarter, adjusted EBITDA of $13 9 million.
While <unk> reported adjusted EBITDA of $3 4 million.
We ended the third quarter with cash of $18 5 million versus cash of $30 8 million at December 31, 2021.
The decrease was driven by a build in working capital principal payments on long term debt and quarterly cash distributions to our <unk> joint venture partner.
The working capital increase primarily reflects higher required inventory levels of diner energetics due to increased sales volume and at Arcadia from higher input prices and increase lead times.
Our total outstanding share count is now $19 5 million.
Looking at guidance.
Fourth quarter sales were expected to be in a range of 158 million to $168 million versus the $174 5 million.
Reported in the 2022 third quarter.
At the business level Arcadia is expected to report sales in a range of $70 million to $75 million.
Versus the $87 million reported in the third quarter with.
The sequential decline primarily relates to the anticipated impact of seasonality.
Don Energetics, Diane Energetics is expected to report sales in a range of $68 million to $72 million versus the $74 million reported in the third quarter.
Nobel <unk> sales are expected in a range of 20 million to $21 million versus the $23 4 million in the 2022 third quarter.
Consolidated gross margin is expected to range of 27% to 29% versus 29% in the third quarter.
Fourth quarter gross margin is expected to be impacted by a less favorable project mix at novo flat and selling through higher priced aluminum inventory at Arcadia.
Fourth quarter, selling general and administrative expense is expected in the range of 31% to $32 million.
Versus the $35 million reported in the 2022 third quarter.
Amortization expense is expected to be approximately $3 7 million.
The remaining value assigned Arcadia has acquired backlog was fully amortized during the third quarter.
Fourth quarter depreciation expense is expected to be $3 7 million.
And interest expense is expected to be $2 4 million.
Fourth quarter adjusted EBITDA attributable to EMC is expected to be in the range of 15 million to $18 million versus $21 8 million in the 2022 third quarter <unk>.
Capital expenditures are expected in a range of 6 million to $7 million.
With that we're ready to take any questions operator.
Thank you ladies and gentlemen, the floor is now open for questions. If you have any questions or comments. Please indicate so by pressing star one on your Touchtone phone.
Star two will remove you from the queue should your question be answered and lastly, while posing your question. Please pickup your handset if listening on speaker phone to provide optimum sound quality. Please.
Please hold while we poll for questions.
Once again Thats Star one if you have a question or comment.
And the first question is coming from Cameron Lochridge with Stephens. Your line is live.
Hey, good afternoon, guys. Thanks for taking my questions.
Yes, good afternoon Kamran.
Yes.
Kevin I wanted to start on Arcadia, and the geographic expansion efforts you outlined when you.
Purchased the business.
Back in last December could you just comment on how that is progressing.
Share your latest thoughts on the efforts there and any specifics around market Youre most excited about.
The geographical expansion, primarily was Houston and Dallas, where over the last 18 months, we've opened up two new.
Satellite facilities to serve the local market.
And I believe they are moving in a healthy direction and we see them as growth opportunities.
As we move forward.
That's great great great to hear thank you, Kevin and then maybe flip it to Don Energetics thinking about the.
Gross margins here at 29% up nicely.
On a on a year over year basis, but perhaps a little shy of the 30% target we had come to expect heading into the fourth quarter could you just maybe share your thoughts around pricing and what needs to happen for us to get to that 30% plus range that we had we had discussed.
Now there are two factors.
That.
Will positively impact the gross margin as we move forward from where it is today.
In the second half of this year, primarily we've been working through what was slow moving inventory on our books for the last couple of years.
And in a strong market, we were able to move that through.
Albeit at a lower price lower gross profit.
The underlying gross profit of the existing sales is stronger and we will see that.
As we get go into the fourth quarter and exit the fourth quarter.
Pricing is.
As an iterative process.
We've seen.
Some good price movement throughout the year however.
We have.
Practice, where our best customers get our best practices and our best customers have also.
Increase there.
Purchases from us and have a larger share of our overall business. So the gross margin has moved a little bit slower.
In terms of its increased because of the customer mix.
However, as we go into the new year and and.
Further into what we think will be.
A decent market for the.
Energy area.
We'd expect to see the growth.
In pricing accelerated in the first half of the year.
Hey camera that Cameron this is Mike just to note too.
For the nine months were at 29% we finished for the third quarter at 30% margin and dine energetics and our our guidance currently contemplates low $30. So call. It in that 31, 32% range for that energetic so we see that marching up.
Got it thank you Michael.
I missed that but I appreciate it and thanks for the answers guys I'll turn it back.
Okay. The next question is coming from Ken Newman with Keybanc capital markets. Your line is live.
Hey, guys nice quarter.
Thank you Ken.
Okay.
Assume that the expectation for pricing is going to be.
Relatively stable, if not higher depending on where costco in the fourth quarter. So.
Maybe give us a little bit more color on seasonally what what's the typical seasonality from a volume standpoint in Arcadia three two to four two and just how much of that of that of that gap as being covered by higher pricing and is there a risk that maybe the fourth quarter guidance as potentially to can.
Serve it or if you have to raise prices more.
Yeah again, I mean, a lot of what we're doing is shipping out of that that backlog, where it's already been price.
So.
We think there's going to be a significant flywheel.
Affect again in the first half as far as your comment around the seasonality, we're talking seven seven days for the for the holidays and so we're just kind of looking at less.
Days to shift in Arcadia for the fourth quarter.
It's not any demand destruction that we're seeing in the marketplace. It's strictly the holiday season, that's why we guided 70 to 75 versus the 87.
Yeah, and I'll add to that can that we typically take a week at the end of the quarter and.
For holidays between Christmas and new years.
We're we're doing inventories and and that's impacting the revenues.
Got it that's helpful.
You know we've heard from.
A few other I won't call them perfect comps, but a few other building product peers, and others, who have exposure to commercial non-residential projects that there have been some modest delays mostly on supply chain.
You may be a touchdown interested in the answer just now but I'm curious if you have any color or just on conversations with your customers regarding commercial monrose.
We haven't seen a slowdown in the order input except for.
Lead time related issues associated with our backlog.
And you know there's.
Significant amount of uncertainty probably more in the back half of 2023.
24, but we feel reasonably strong about.
The western market, United States of the United States for.
Herschel business and and the markets in which we have our satellites.
Okay.
Maybe one more and I know this is just a longer term type of question, but you know just given where you've seen the demand for dynaenergetics this quarter.
And your expectations for better margins.
And then kind of comparing that's what we're seeing in the macro for well completion activity in which seems to be still some.
Some hold backs on Capex budget I mean do you have.
Maybe just some color on on customer conversations on where they're looking for well completion activity as a as we entered 2023.
Most of the customers that we're talking to if not all of them are looking at a strong.
Exit to the year and start to the new year.
And so.
We continue to see probably a good market.
For most of 2023.
And our volume.
It is actually picking up we had a record shipments of our D. S.
Perforating systems in the month of October .
So if we feel pretty good about it.
Very good thank you.
Mhm.
Okay. The next question is coming from Alec Shamelle Huffer with Stifel, Alex and your line is life.
Hi, Good afternoon, everyone can hear me okay.
Yes.
Excellent congrats on the corner.
I was curious if you can just provide some color and how you're seeing the the competitive landscape involved with the integrated purpose systems versus components versus machine shops, assembling products and just just kind of your thoughts around what you're seeing in that space.
We're seeing more and more of the market <unk> towards the integrated system.
And.
And that's both provided by ourselves and there are some of the machine shops that are if.
If you will provided providing a factory assemble system.
Of components that they purchase from.
Other companies as well as make themselves and so it's moving to more of a product supply the system supplied.
From a components supply business.
To the service company.
Understood.
Yeah.
And and you know.
We were having a good year, we believe that we're picking up market share.
Is it.
Driven by the performance of our products, but also the performance of the company on having the fully integrated system, where we take full responsibility for the performance of.
The perforating system and that's different than a lot of the machine shops and also.
What's driving our revenue in our market share growth is our ability to deliver on time as well as the performance and safety of our equipment.
Understood understood. Thanks for the color, there and kind of shifting gears, a little bit too Arcadia.
Moving forward and that his business have you seen any impact from rising interest rates on demand and I guess to that affect how do you see that evolving through the next several quarters, just gonna where interest rates have moved.
But we.
We would expect building activity, but the higher interest rates.
As a broad market just slow down.
And I know that the residential market is already reporting nationally the broaden residential market a slowdown.
We have not seen a slowdown in the high end luxury home market for residential and.
And I believe the the commercial market tends to lag.
The residential market.
And we haven't seen a slowdown yet, but we would expect.
There will be a slower market in the in the back half of the year and into 2024.
However, we have been.
Our order input has been greater than our capability and so and.
In some respects, we we feel that we will not.
Mirror the market as much because of the demand for products and the territory's in which we serve.
Got it got it that's that's all on my and thanks for the color.
It's.
Once again, if there are any remaining questions or comments. Please indicate so by pressing star one up next we have samir to tell with.
<unk> excuse.
Excuse me one moment.
American heroes.
I can yes, I was just waiting for you to finish her pronounce the name my fault for choosing a weird business name, So hey, hey, guys How's it going.
Hi, Samir.
So I don't really have a question about operating resolved, it's more kind of a big picture platform question for you to answer if you look at the practice stock over the past, let's call. It late June it's been hurting at or below levels that it did through all of Covid, you know, including the day when oil prices were very famously negative 30.
$7 or whatever they reached so I just kind of wanted to give you the opportunity to.
Maybe <unk> take a step back from the quarter, Andrew Crap, you know what do you think that the market is misunderstanding about your story right is it is it. They think that for example are Katie is more cyclical that is is that they think that you know the oil patch of having a evaporate next year and they're gonna go back to not making profit. So just an open ended question. If you if you have anything to opine about.
Thanks.
Shamir. This is this is Jeff and.
Certainly, we're we're disappointed as well I think we're seeing.
As our story has changed we're also seeing a transition or in our shareholder base and there have been the departure.
Of a couple of large shareholders I will say that the interest level that we've seen.
From new perspective holders I don't think we've seen at this high in an awfully long time and I think we're good.
Going through a transition.
And I think.
I think we all believe that what's going to dictate our performance in our valuation is going to be execution and and.
And how we perform and.
As Kevin said, we're confident and where we're headed and and in our strategy.
And that's.
That's going to be reflected in our share price.
Add to that Samir that it.
We're having a record shipments in Dynaenergetics, we've got.
Great project business coming in Unknowable class.
We're very pleased with.
Arcadia.
The management team.
The employees the markets they serve.
They've got a very strong backlog.
You can see that the performance of the company is improving.
Second half of the year stronger than the first half of the year, we expect that to continue.
And.
The stock price will will catch up.
As soon as others recognize the value.
Right now I understand I've just been scratching my head cause obviously, you keep reporting pretty strong results. So thanks I appreciate your time.
Thank you.
Okay next we have 10 Newman with Keybanc capital markets can your lines life.
Hey, Thanks to start had one last quick follow up question here, which was around the wrap around pricing benefits.
Maybe into into the 2023 given.
What's been.
Pretty aggressive price increases across the three segments Arcadian, especially.
Any color on what that carryover benefit looks like for 2023 is that like a low to mid single digit contributor.
Yeah, I mean, what I would say is.
We're guiding 2729 on the gross margin line.
For the fourth quarter.
Spec that to be 30.
And plus 30 in.
As we as we enter 2023 on a consolidated basis. Thank the biggest contributor to that's gonna be Arcadia, followed by dynamic jokes.
Yeah, and Arcadia will be the.
Inventory working its way through the system.
At at.
At the pricing that that we have and hopefully can hold.
And on the dining energetic side.
They've they've done well with volume and cost improvements customer mix kind of mass.
Mast the success that they've had selling prices and we'd expect the selling prices to also strengthen and the first half of the year.
And not only just to capture some of inflation that we've had but also to go to margin improvement and we view our company is is.
Longer term basis medium to longer term basis.
<unk> kind of gross.
Profit kind of business.
Got it thank you.
Mmm.
Okay. If there any final questions. Please indicate so now by pressing star one.
Okay. There are no further questions in queue I'd like to turn the floor back to Kevin long for closing remarks.
Oh, Thank you everybody for joining us for today's call and you're interested in our company.
It's hard to believe that I'm going to say that we're going to talk to you in the new year as we finished the fourth quarter.
And begin a new year for the company and.
Please have a safe and joyful holiday.
Holidays. Thank you.
Thank you ladies and gentlemen, this does conclude today's conference call. You may disconnect. Your phone lines at this time and have a wonderful day. Thank you for your participation.
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