Q4 2022 DMC Global Inc Earnings Call
Good day, everyone and welcome to the DMC Global fourth quarter earnings call.
At this time, all participants have been placed on a listen only mode and the floor will be opened 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 Investor Relations.
Sir the floor is yours.
Hello, and welcome to Dmc's fourth quarter conference call presenting today are co Ceos, David all of this and Mike Cuda I'd.
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 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.
<unk> cast 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 now turn the call over to David All of this David Thank.
Thank you Jess and thank you for joining us on today's call for those of you who are familiar with my background I've been a member of <unk> Board of directors since 2013.
Served as chairman of the board for the past five years.
In the decade I've been affiliated with the company DMC has never been stronger than it is today.
Our strategy is sound and our three asset light manufacturing businesses are leaders in their respective markets. Both in terms of market share and profitability.
Leadership positions were built on the differentiated products and services offered by our businesses.
And the culture of innovation that permeates our organization.
2022 was a milestone year for DMC and included record consolidated sales adjusted EBITDA that exceeds our forecast and several strategic accomplishments at Arcadia, Dynameter genetics and novel class.
As we entered 2023, our primary objective is to improve returns for DMC stakeholders.
We have sharpened our focus on operational excellence and are making strategic investment decisions that we believe will generate the strongest returns for the company.
Our highest near term priorities are to accelerate the integration of Arcadia and expand its manufacturing capability strengthened.
Strengthen the profitability of dine energetics.
Ensure the commercial success of noble clients, new products and improved <unk> cash flow through targeted cost reductions and more effective capital working capital management.
On January 20th we announced Eric Walter was joining <unk> as our new Chief Financial Officer is with US today and will officially assume the CFO role next Tuesday.
Eric joins us from Jacobs, where he was CFO of the Companys largest division.
He spent the past month working closely with Mike and our finance team.
It's already clear that he is an excellent fit with the <unk> people and culture.
We are excited to have him as part of the team.
I'll now turn the call over to Mike for a review of our operations and financial performance.
Mike Thanks, David maybe you also want to welcome Eric and the month. We've worked together. He has already made important contributions to the finance and leadership organizations. It is clear. He is an outstanding initial addition to the DMC team.
As David noted 2022 was marked by important achievements across EMC and each of our businesses delivered a strong finish to the year.
Our dine energetics full year unit sales of the fully integrated DS perforating system, where more than 40% higher than the prior full year record established in 2019.
The accomplishment reflects strong demand from north American well completion industry improved efficiencies and expanded capacity at our blood and Texas manufacturing facility and outstanding execution by our teams in North America and Germany.
Diane Energetics reported a 10% sequential sales increase during the fourth quarter period, often marked by year end slowdown.
The dining or that its strongest quarterly sales performance since the second quarter of 2019.
The sales growth reflects the recent addition of three large customers in North America and continued strong demand in dine energetics International markets.
Diana Energetics fourth quarter gross margin was up eight percentage points versus the year ago fourth quarter, but below our objectives. The shortfall was principally due to inventory write offs and reserves.
We believe a series of planned process improvements combined with the introduction of three new premium products improved product mix and expected price increases will collectively improve margins, so low 30% range during 2023.
<unk> is an outstanding business that is transform North America as well perforating industry.
We intend to make it even stronger by maintaining our investments in technology product innovation and improved support for our customers.
Arcadia, our architectural building products business had a solid first year as a DMC company full year sales were up 25% versus 2021 and fourth quarter sales increased 31% versus the comparable quarter in 2021, the improvements in both periods were driven by price.
Increases implemented to address higher raw material costs.
As we have previously discussed a spike in aluminum prices during the first half of 2022 led to second half gross margins that were below historic averages as Arcadia as price increases lag the increases in raw material costs.
At our Canadian commercial division, which generates approximately 85% of our <unk> sales most of the remaining high price aluminum inventory shift during the fourth quarter.
At Arcadia custom, which serves the high end residential market.
Orders that were quoted before price increases went into effect, we will continue to ship out of backlog into the second half of 2023.
As these inventory and pricing issues abate, we expect our Katy is margins will trend back to historic levels throughout 2023.
Our <unk> commercial and high end residential businesses are both reporting healthy demand and strong order backlogs are primary objective. During 2023 is to better address this demand through improved operating efficiencies and increase capacity.
The first phase of Arcadia as new ERP system is scheduled to go live in the second quarter. We believe increased painting capacity will be in place by the end of the year.
Our <unk> business is seeing an anticipated pickup in order activity order backlog increased 16% sequentially during the fourth quarter and now stands at a 10 year high of $55 5 million.
The business is seeing strong demand from the liquefied natural gas industry for its new Solyndra cryogenic transition joints and also is tracking a number of large orders that are moving closer to the vendor selection phase. We believe know about flat is well positioned to participate in these projects and are increasingly encouraged by its growth.
Aspects.
And now for review of our fourth quarter financial performance.
Quickly recapping our top line results fourth quarter sales were $175 1 million.
Flat with this year's third quarter, but up 36% year over year and on a pro forma basis.
All businesses reported strong top line growth compared with the fourth quarter of 2021.
Our <unk> fourth quarter sales were $74 4 million.
Down, 8% sequentially, but up 31% compared to the prior year pro forma sales.
The decline from the third quarter was driven by the anticipated impacts of seasonality and maintenance, while the year over year growth was primarily due to higher average selling prices, which were implemented to address inflation on key raw materials.
Dino Energetics reported fourth quarter sales of $77 $6 million.
Up 10% sequentially, driven by North American market demand.
Compared with the prior year quarter sales grew over 50% driven by a 56% growth and dinette stage system units sold and a modest price increase in North America.
Sales at Nobel <unk> were $23 $1 million slightly down sequentially, but up 9% year over year.
The growth versus the prior year was driven by an increase in average selling price to offset higher raw material costs.
Consolidated gross margin in the fourth quarter was 26% down from the 29% in the third quarter as all businesses experienced margin compression.
We expect quarterly margins will improve incrementally throughout 2023.
On a pro forma basis gross margin increased from 23% last year as gains from the dine energetics and know about glad businesses more than offset margin compression from Arcadia.
Looking at our fourth quarter expenses consolidated SG&A was $36 million, which was flat with the previous quarter and up $5 7 million.
Compared with the pro forma fourth quarter in 2021.
The year over year increase was attributable to higher investments in public company expenses at Arcadia people related costs to support growth as well as stock based compensation and travel expenses.
We reported consolidated operating income of $10 6 million fourth quarter. Adjusted net income attributable to <unk> was $4 3 million or <unk> 22 per diluted share versus adjusted net income of $6 7 million or <unk> 35 per diluted share in last year's third quarter.
Adjusted EBITDA attributable to <unk> was $19 6 million, which was down 10% sequentially, but up over 150% compared to the prior year quarter on a pro forma basis.
Arcadia reported fourth quarter, adjusted EBITDA of $7 1 million.
Of which $4 3 million or 60% was attributable to DMC.
Energetics reported fourth quarter, adjusted EBITDA of $14 4 million, which.
<unk>, 4% growth quarter over quarter and over 260% growth year over year.
<unk> reported adjusted EBITDA of $3 $4 million, which.
Which was flat sequentially and up 60% compared to the fourth quarter of 2021.
We ended the fourth quarter with cash of $25 1 million versus cash of $38 million.
At December 31, 2021.
D&C generated free cash flow of $26 $4 million that was used to fund principal payments on our long term debt associated with the <unk> acquisition and distributions to our <unk> joint venture partner.
Our debt to adjusted EBITDA leverage ratio at December 31, 2022 was 169, well below the covenant threshold of three to five.
Our total weighted average share count is now $19 4 million.
Looking at guidance first quarter sales are expected to be in a range of 168 million to $178 million.
Versus the $175 1 million reported in the 2020 to fourth quarter.
At the business level Arcadia is expected to report sales in a range of $70 million to $75 million.
Versus the $74 4 million reported in the fourth quarter.
Dine Energetics is expected to report sales in a range of $78 million to $82 million.
Compared to the $77 6 million reported in the fourth quarter.
Nobel <unk> sales are expected to be in the range of 20 million to $21 million versus $23 1 million in the 2020 to fourth quarter.
Consolidated gross margin is expected in a range of 27% to 28% compared with 26% in the fourth quarter.
First quarter gross margin is expected to improve sequentially at both dine energetics and Arcadia, while Novo Plaid is anticipated to be impacted by a less favorable project mix.
First quarter, selling general and administrative expense is expected in a range of 32 million to $33 million versus the $36 million reported in the 2022 fourth quarter.
First quarter guidance on SG&A expense includes approximately $2 million of patent litigation expense of dine energetics, but excludes approximately $1 5 million of costs related to the resignation of the former DMC CEO .
We expect our SG&A run rate will be below $30 million per quarter by the end of the year, excluding onetime expenses and will also decline as a percent of sales.
First quarter amortization and depreciation expense are expected to be approximately $5 8 million and $3 8 million respectively.
The sequential increase reflects cmc's accounting methodology of amortizing the Arcadia customer relationship intangible it's.
It's important to note that the amortization will be more front end weighted and not straight line additional detail on future estimates of amortization can be found in the 10-K financial statements with notes.
Interest expense is expected to be $2 2 million in the first quarter and our annualized effective tax rate is forecast to be 28% and 30% for the full year.
First quarter adjusted EBITDA attributable to <unk> is expected to be in a range of $17 million to $21 million versus $19 6 million in the 2020 to fourth quarter.
Capital expenditures are expected in the range of $4 million to $6 million.
Full year capital expenditures are expected to be approximately $20 million will include investments in our JD is ERP system and painting capacity.
With that we're ready to take any questions operator.
Certainly at this time, we'll be conducting a question and answer session.
If you have any questions or comments. Please press star one on your phone at this time we.
We do ask Manuel posing your question. Please pickup your handset if you're listening on speaker phone to provide optimum sound quality.
Once again, if you have any questions or comments. Please press star one on your phone.
Your first question is coming from Steven Chin Garo from Stifel. Your line is live.
Thanks, and good afternoon everybody.
Hello.
Hi.
If you don't mind, starting with can you talk about.
What you're seeing.
And the Dawn energetics business.
We've been hearing and seeing how the rig count plateauing in.
Gas markets are sloppy can you just give us a sense for I mean, your first quarter guidance seems seems pretty solid, but I'm just curious what what youre seeing in.
In conversations with customers and if there is any.
Expectation in your in your guidance as far as market share gains are concerned.
Yes, I mean, Steven Thanks for your question.
We're seeing a strong.
Start to the year.
So January has been a strong month and that carried into <unk>.
February as I noted in my comments, we've seen some.
New customers come on board and its adopting the diner stage system.
So we feel we feel pretty good about the about the first quarter.
Yes, Jamie if I could just add I think at a macro level.
Forecast for crude crude oil production are certainly going to be strong in 2023, and if you look at the IEA reports or the EIA reports they are all up.
A million barrels a day so it's.
It's a pretty strong indicator.
Sure.
The medium term.
Prospects on crude.
As you know there is softness in the gas side.
Gas prices coming down and thats somewhat seasonal as well but.
We still see strong.
Strong strong demand in the marketplace.
Thanks.
Just one more thing on that how does pricing have you.
It seemed like there was you are gaining some traction I think last time, we spoke or are you seeing anything.
Positive on the pricing front right now.
I mean pricing is pretty stable right now I mean, I would say that.
No.
We've got a couple of fronts, where we think we can.
Improved margin, we're working on new products that are going to go into the market kind of these two <unk> of some of our.
Specialty gun systems.
In particular oriented gun systems.
So we've got some.
New design features there that I think theyre going to win in the marketplace. I think we're going to see some favorable product mix some operational efficiencies.
And we'll take we'll take a look at price.
As well and hit those opportunities where we are.
Where we see them. So I think it's a combination of those factors that are going to.
Keep our margins.
Marching more here are below Q4.
And guidance that's.
Essentially.
Implies 30% for Q1, but I think we're going to March up from their Q2 to Q4.
Okay, great. Thank you.
Thanks, David.
Thank you. Your next question is coming from Gerry Sweeney from Roth Capital. Your line is live.
Good afternoon, David Mike, Jeff Thanks for taking my call.
Zero eight Gary.
Just a follow up on diner energetic and then I'll move over to the Arcadia, but.
You did mentioned a few customer wins our customers.
Onboarding the product.
How does the pipeline of customers look like how much opportunity do you see out there.
What's the feel that youre getting on.
On that front.
Jerry one thing I definitely want to mention is that where we're really.
Winning is with a lot of our existing customers.
And so.
What we're seeing is we.
We believe we've got the best.
<unk> an excellent partner so.
We're seeing our service partners.
When on the weight on the Frac side and so.
That's a big driver so some of the market share comes through adoption, but more of that actually comes through existing partnerships that we have.
Got it its a wallet share to some degree.
Switching gears to Arkady.
Revenue I think it was up 31%.
Specifically highlighted volumes.
Just curious.
Volumes price curious I mean, what happened with volumes is there for you.
Both constrained in the near term until you get.
Some efficiencies in place.
Just curious.
How we've looked at that in the near term.
Yes for the most part I mean, you see Q3 was the high watermark and Arcadia at $81 million.
So that's that's probably the constraint point.
Q4, dipped a little bit to 74, four and we had some seasonality shutdown for.
Maintenance.
We've got a we've got to unlock capacity there and we've got plans to do so.
As I mentioned in my comments, we're putting in.
A paint line and I think thats going to.
Unlock some of that capacity and ability to grow.
Got it and then.
ERP.
Though it's coming now in second quarter.
That help with some management of the margins inventory cost of inventory and sort of matching that up.
Yes, so we're breaking that into two phases, we're going through.
No ERP system too.
A full ERP system, so the phase one.
We expect to be done in may and Thats going to give us a lot of visibility.
To our product line product margins and how we sell products across satellite so we'll be able to look at that.
Closed possible price and margin leaks across that business and so we're really excited about getting that in place and then.
Step two which is by the end of 2023.
Is putting in more.
More supply chain management tools, so that gets into planning and scheduling.
And that's where we're going to be able to impact the balance sheet side in the inventory.
More than I think we're going to get more efficient around inventory so.
ERP project and projects, Florida is a big deal.
I think a lot is going to come out of that.
Okay great.
Is it for me so I appreciate it thanks, Mike.
Thank you Jerry.
Thank you. Your next question is coming from and Newman from Keybanc Capital. Your line is live.
Hey, good afternoon guys.
Hi, Jeff Hi, Ken.
I'm curious if you can just talk a little bit more about the inventory write offs and Diana this quarter and maybe provide some color on how youre looking at.
Whether that process you think is flushed out if theres more work to be done on the inventory side and how you look at <unk>.
Inventory build as we move through the quarter or the year I should say.
Yes, Ken I think we in the fourth quarter, we got the year end. So we had some inventory.
Cleanup.
Combination of just.
Putting some reserves in place and doing our year end physical inventory, we think we've got that sorted and cleaned up so.
<unk>.
And a few other small items cost us two points.
In the quarter so.
We're confident that.
We're going to get those two points back pretty quickly here and then for the.
Other reasons mentioned that we can start marching that margin up Q2.
And as far as inventory.
We're seeing.
I think we've seen a lot of the inventory.
<unk> per se.
And Diana Energetics, so we're expecting a.
A better working capital year this year than 2022.
Okay.
To clarify it sounds like pricing in this segment is generally stable.
I heard you right earlier, but.
This is we shouldn't think of this inventory cleanup that you mentioned.
Maybe getting over your skis on.
The environment getting incrementally competitive.
No that's not what that is.
Yes.
Switching over to Arcadia.
I hear you on.
Sequential expectations for improvement in the gross margin there.
How should we think about the SG&A leverage for that segment, specifically as we move through the year, obviously, there's been moving pieces I think on the <unk>.
<unk> side, but anything else that we should be aware of.
No I think that.
We've got some opportunities.
Two.
Work on the SG&A side, I think the operating leverage right there is a bit limited.
Limited because we're nearing.
Capacity on the on the top line, but again, we expect by the end of the year of a paint line and that can get us past.
This level of sales we've been at which is in that 70 to 80 range and Kevin If I could just add I think on the industrial engineering side. There is an opportunity there to get some some shorter term wins on the topline about.
Incremental capacity steps will be more towards the end of the year.
Yes.
And then last one from me David.
You started the call off in your prepared remarks with those three goals accelerating the integration of Arcadia, strengthening the margins and Diana and add more effective working capital management.
Where what's the easy fruit to pick right now and did.
If you had to choose.
First rank those three initiatives where is the <unk>.
Primary priority.
Right now in terms of the biggest bang for the Buck.
Well I think let me start Mike.
We will.
The big cared for US was working on margin both of dining in the Arcadia side and I think we've got solutions as Mike highlighted on operational efficiencies new products premium products product mix and pricing on the diner side.
Obviously, the raw material side.
On our Katy has already happened, we don't think we're going to see aluminum prices up at a buck a rebound anytime soon we could be wrong, but we think that theyre relatively stable at this point.
And so we think that the.
The business opportunity there is to get back to historical margins.
And incrementally increase capacity.
I'm.
I'm, sorry, just one more clarification here when I speak about those.
Goals.
Is there anything incremental that you are spending relative to what we've been told I mean I know these are always kind of been the objective here over the longer term, but is there anything incremental here that's changing.
Relative to the fourth quarter.
On how you achieve those in a quicker capacity.
There is nothing from a from a call it a SG&A or capex that you need to build in thats not already covered in our guidance. If that's the question you're asking Ken and in fact that are in our guidance Youll see from an SG&A standpoint that.
We're going to have a higher Q1 level, but then we're going to be sub we expect to be sub $30 million run rate Q2 to Q4. So this is just executing on our existing.
Initiatives in there isn't there's not there's not a.
Capital slowed their SG&A slug, that's not in these numbers.
Understood. Thanks.
Thank you thank you Ken.
Thank you. Your next question is coming from Samir Patel from escalated capital Your line is live.
Hey, guys, Mike I, just had a quick clarifying question on the.
The SG&A guidance. So you said in Q1, it's going to be 32 to 33, but you also called out 2 million I think litigation charges included in that figure and then you said that for the balance of the year.
<unk> had below 30%, that's excluding one time items and so I wasn't sure if litigation was a onetime item.
That would not be kind of a material difference. So maybe you could just.
A clarification on that.
Yes, so thanks Samir this.
That we're going to have some ongoing.
Litigation costs, I'm, not calling that one time, what I am saying is one time is the.
Departure costs.
Restructuring associated with the departure of the CEO and so.
We're going to decrease our legal run rate we were at about seven.
Right around $7 million and legal litigation I should say run rate over the last couple of years, and we see that coming down.
Several million dollars, we see that coming down call it.
$3 million were just seeing it in Q1, because we the DHT.
Trial.
Okay that makes sense and as a follow up there is that a relatively.
<unk> continued to default model Arkady I, just want to clarify that SG&A figure. So is that something you think you can hold mix over the next couple of years, even if you continue to grow the businesses or do you think that bigger needs to grow.
I'm, sorry to support revenue growth.
Yes, so what I would say is that.
I'd transition the discussion into kind of SG&A as a percent of sales.
And I would say that when we're looking at.
No.
18.
Percent SG&A as a percent of sales for full year 2022.
That's a number we want to get the.
16, 517 range, we want to take a point and a half off of that and get more operating leverage off of our spend.
Okay makes sense, thanks for the color.
Hi.
Thank you thank you Samir.
Thank you once again, everyone. If you have any remaining questions or comments. Please press star then one on your phone.
Your next question is coming from Steven Chin Garo from Stifel. Your line is live.
Thanks, gentlemen.
For me the first.
Just from a modeling perspective.
How should we think about working capital in 2023, I'm trying to think about the components of free cash flow in <unk>.
Guidance you could you could.
Give us would be helpful.
Yes, so without getting into the line items.
The way I think about 2023, and our goals is that we want to be in that.
Onex to one two buybacks range.
Exiting two.
2023.
And and so what that means is.
That we're generating.
Probably cash from operations and that 70.
$60 million to $70 million range, you see our capex guidance of $20 million, So thats, probably thats free cash flow of.
Call It $50 million, we have JV partner distributions of $15 million and then you put the rest against the debt, which would be 15 and principal payments.
Call it 10% to 20, and prepayments and that gets us in that one one quarter rack. So I wouldn't talk about it just more broadly in terms of our <unk>.
Cash flow free cash flow goals.
Okay great.
And the other one.
I'm not sure. If you can if you can address this.
Maybe I'll ask it is.
How are you guys viewing the cost benefit analysis of continuing.
On the.
On the lawsuits for IP infringement versus basically about the IRR on these on these lawsuits and how do you. How do you think about that and is there any.
Is there any shift in the way.
<unk> thinking about it.
New leadership.
Thanks, Steve and Great question.
We clearly have a product leadership strategy and as that and being the innovation leaders, we're going to continue to invest in new products and.
And continue to lead the market in.
Kind of a mini evolution revolution of how perforating gets done so that's a space we continue to want to lead in and expect to meet them.
Continued investment we need to protect our intellectual property. So we will pursue that with trade secrets and patents and.
As appropriate with litigation I think we.
We see.
We see the need to do that on occasion, but I think we're going to be.
Maybe a little more discrete and discretionary on.
On litigation going forward, we expect the spend to come down as a result of that there are key elements.
Of our technology that we will continue to fight for and continue to litigate on but as we look at the horizon, we see.
We see the need to do that coming down.
Great No that's good color I appreciate it.
Thank you that concludes our Q&A session I will now hand, the conference back to David <unk> for closing remarks. Please go ahead.
Thank you Matthew and thank you Jeff.
Thanks to all of you for joining us today on today's call DMC has been businesses have started 2023 with considerable momentum and a clear path forward Don Energetics, the technology leader in the perforating industry has established with products the capability the capacity and the strategy to maintain its growth.
And improve its profitability.
Arcadia is build a compelling business model and broad product portfolio and we are investing in the systems and capacity that should improve profitability.
And enable long term growth.
<unk> investments in products and application development of led to a significant pickup in bookings and an encouraging long range outlook.
Given the strength of our businesses and end markets. We believe DMC is well positioned to deliver improvements and returns for our shareholders I want to acknowledge our employees for their hard work and dedication.
Thank our shareholders for their continued support of BMC. Thank you stay safe and take care.
Yes.
Thank you everyone. This concludes today's event you may disconnect at this time and have a wonderful day.
You for your participation.