DMC Global Inc. Q1 2023 Earnings Call
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Greetings and welcome to the DMC Global first quarter earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
Please note this conference is being recorded.
Now I'll turn the conference over to your host Geoff High you may begin.
Hello, and welcome to Dmc's first quarter conference call presenting today are interim co Ceos, David all of this and Mike Cuda, 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 todays date and are subject to risks and uncertainties that are disclosed in our filings with the SEC are.
Our business is subject to certain risks that could cause actual results to differ materially from those anticipated in our forward looking statements.
<unk> assumes no obligation to update forward looking statements that become untrue because of subsequent events.
Today's earnings release and related presentation on our first quarter performance are available on the investors page of our website located at DMC Global Dot 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 All of this David.
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 DMT 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 topline 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 our Acadia, our architectural building products segment, a series of business integration and capacity expansion initiatives.
Are gaining momentum.
Dine energetics, our energy products business achieved record sales of its flagship Dinas stage perforating system as well as improved operational efficiencies.
Novo cloud our composite metals business increased its order backlog to a 10 year high and is benefiting from healthy end use markets and growing demand.
D M C. Our financial strength is improving and we have a clear path toward 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.
Thanks, David Q1 was indeed, an encouraging start to the year each of our businesses Arcadia delivered first quarter sales of $80 million. The second best quarterly performance in Arcadia as history sale.
Sales were up 8% sequentially and 18% year over year the sequential.
It'll 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 Acadia custom business.
Under the direction of Jamie Chilled Cox, who was 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.
<unk> are vital to Arcadia as future growth and we are encouraged by the continued progress.
First quarter sales are dine in energetics were $82 million up 6% sequentially and 68% versus last year's first quarter. The.
The growth reflects strong demand in dana's core North American onshore market, where our customers well completion programs remain very active.
Unit sales of Diana's flagship Diana's stage 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 in Texas as well as outstanding execution by Diana's employees.
International demand and Dino was also strong and accounted for approximately 13% of their first quarter sales.
China is making encouraging progress on its margin expansion initiatives, which include more efficient manufacturing processes streamline product designs and introduction of premium perforating systems designed for specialized downhole applications.
Two next generation dining stage 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.
Daina 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.
No about cloud reported first quarter sales of $22 million down, 5% sequentially and flat year over year.
Another quarter of strong bookings improved know about platts book to Bill ratio to one point to an elevated its order backlog to $60 million the.
The improved bookings should result in a step up in Nobel clad quarterly sales performance beginning in the second quarter.
Global activity and Nobel clad score petrochemical and downstream energy markets remained 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 Diana 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, and 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 one and a half X down from 1.7 acts at the end of the fourth quarter and $2 nine acts at the end of last year's first quarter.
Across the M. C. 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 review of our first quarter financial results and a look at second quarter guidance Eric.
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.
Holidayed gross margin was 28%.
250 basis points from the fourth quarter, it's all businesses experienced sequential margin expansion.
Gross margin improved 170 basis points versus the year ago first quarter as gains at dining energetics and novo clad more than offset year over year margin compression at Arcadia.
Just as a reminder, 2022 was a volatile year further in prices.
And this place downward pressure on Arcadia as gross margin during the second half of 2022.
Arcadia as 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 Noncontrolling interest.
Solidago 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.
Our katie'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 as 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.
Diner 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.
China's first quarter results included the previously mentioned patent litigation costs, which reduced adjusted EBITDA margin by 330 basis points.
Novo clad reported adjusted EBITDA of $3 million or approximately 15% of sales.
Mix shift to higher margin products expanded adjusted EBITDA margin by 40 basis points sequentially, and 770 basis points year over year.
Adjusted consolidated adjusted net income attributable to D. M. C was $6 million during the first quarter of 2023.
Or 32 cents per diluted share.
Compared with last year's first quarter loss of $3 million or negative <unk> 16 cents 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 Arkady acquisition <unk>.
And included an additional $2 5 million dollar debt prepayment as well as distributions to our India joint venture partner.
In terms of liquidity, we ended the first quarter with cash of $20 million in 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.
China 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.
Novo cloud 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 dine energetics and Arcadia, well Novo class 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 cost.
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.
At this time, we'll be conducting a question and answer session. She would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
You May press star two if she would like to remove your question from the queue.
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Our first question comes from the line of Gerry Sweeney with Roth Capital. Please proceed with your question.
Hi, Good afternoon, David Mike, Eric and Jeff Thanks for taking my call.
Hey, Gerry Gerry here.
I wanted to start on energetics, Eric touched upon it in the guidance, but obviously record units I think probably maybe 11th quarter or.
Record units I think previous commentary on and with fourth quarter results for you at a customer's.
Wallet share, but on top of that.
My sense was frac spreads for sort of.
Picking up in the second half of Q1.
Just wanted to get a little bit more thoughts behind the guidance on Diana why flat quarter to quarter with.
In particular with Frac spreads picking up it looks like it would be.
In the second half of the quarter Q1, and look like carrying over into a into Q2.
Yeah, Hey, Gerry this is Mike we see Frac spreads are flattening out right now and fairly level and are in the second quarter.
Versus the first quarter overall, and with an expectation that we'll see that ramp back up in the back half of the year in third and fourth quarters.
You mine.
What that's driving the expectation of the ramp in the second half.
I think you said, it's really demand.
Driven by our end markets and that's what our customers and end markets are reporting that are there's an expectation of a.
Flatness in Q2 with a step up in our in the back half.
Okay, and then just staying with Diana just to confirm there was there was $3 1 million of litigation expense and Diana.
I know you have not been backing that out in previous quarters, but I also know I think there is litigation expense in this quarter.
It was higher because those are the actual court case.
But on top of that you are making a big effort to bring those costs down that was those costs were included in the.
EBITDA margins correct that 18% true.
Correct. Those were included and on a go forward basis.
We expect that to be fairly nominal.
Fairly nominal.
Well less than a million Bucks a quarter, yes, yes, yes got it yes.
And the more of it.
That's part of the driver in sort of in that and.
I'm, assuming that's kind of started with you too.
That's right yeah. So the impact of the $3 million in Q1 would be roughly little more than 300 basis point downward pressure on their first quarter. So we have all of that kind of cleaned up and contained in Q1 going forward into Q2 as Mike was mentioning.
Janine.
Think that it's going to be pretty clean quarter from a litigation standpoint, and they're now spend should be really de minimis.
Got it and then on our Arcadia obviously.
Better than I expected I.
Is that it felt it looks as though you held onto pricing even as some.
Material costs came down or maybe at least raw material costs in the market I know your inventory levels were a little bit higher but.
Well I don't want to make sure that was correct, but to how much capacity does maybe some of the process engineering at the paint and sort of even ERP adds maybe potentially unit sales as we look into next year.
Yeah, I would say that first of all Gerry your premise is correct that volume and price have been fairly resilient and steady we see in our Q2 guidance.
A fairly strong guide there 75 million to 80 million.
Millions of dollars in terms of our industrial engineering and capacity from ERP.
ERP system is going to provide us with more visibility around data.
And opportunities to improve our operational efficiencies.
Opportunities to improve our margins, where we see a price and margin leaks across our satellites and optimizing the operations there as well as inventory management, which will come into play later in this year early next.
And next year. So I think the ERP is as more of our operational efficiency and margin improvement.
Play we.
We're making advancements.
Advancements and progress on our peak capacity as well by adding a paint capacity by the end of the year with some industrial engineering, we can probably get another 10% to 15%.
Out of our capacity.
Arcadia.
Is that a fair way to look at it let's just say you're sold out today I mean, you could add.
10, 15% next year or is there also an ability to sort of outsource some of this at some point as well.
Gary This is David I think we can we can probably get 10 to 15 per cent out of just our industrial engineering and then there's a project work that's going to extend beyond that but we hope to implement by the end of the year.
Got it okay.
I'll jump back in line I appreciate it guys. Thanks, a lot and ice cream.
Okay.
Our next question comes from the line of Patrick.
Stifel. Please proceed with your questions.
Thanks, and lager on message Pat on for Stephen Genk Arrow. Thanks for taking the time to answer the questions today.
I don't know if you could talk.
The car pricing trends in the perforating business.
I know last quarter, you alluded to sort of these two pointed out versions of the specialty guns.
And in your remarks, you mentioned seeking commercialization for these <unk>.
And additionally, the ramping of margins from <unk> to <unk>. So just curious what you're seeing on that truck.
Yeah. So I think the next Gen. AV are orienting systems are scheduled to launch we're in field trials now. That's later this year and that should provide.
Some upward margin.
The ability for us when.
When you when you look at our current margins are we.
You hit 30% for the first quarter and we still expect those to step up throughout the year.
But again, that's more driven by you.
Process improvements within our plants industrial engineering and design changes in our product suite, which is included in our Nextgen. So our pricing and so that takes me to pricing pricing is relatively stable.
And flat in the Perth market right now.
Okay.
Okay.
Great Great. Thanks, and then just a quick follow up.
Would you mind speaking to the key end markets for the Arcadia business and whether you're seeing.
A shift towards your own workspace impacting demand.
No Oh, Patrick we've got a number of end use markets. There we've got the commercial products side.
Has everything from storefronts to projects, we've got a we've got interiors office interiors, we've got residential high end residential and the commercial side. We're in a number of different markets. Some of those are non cyclical airports health care in those kinds of things some of them are counter cyclical.
Institutional applications schools.
Storms libraries government offices as well as those that are are a typical commercial so we.
Cover the gamut of those applications and the fact that we're in so many markets some of which are non cyclical some of which are counter cyclical helps us helps us be robust and resilient through the cycle.
Great Okay. Thanks.
Think more of what I'm looking for is you know whether that the shift to that work from home spaces impacting the demand.
Any of those key end markets.
And if anything we see more opportunities on our commercial interiors as folks downsize their offices, it's certainly an opportunity for us. So if anything we see that as more of an opportunity on the upside than the downside.
Okay, great. Thanks for clearing clarifying that for me and I'll turn it back.
Yeah.
And as a reminder, if anyone has any questions you May press star one on your telephone keypad to join the question and answer queue.
Our next question comes from the line of Ken Newman with Keybanc capital markets. Please proceed with your question.
Hey, guys.
Okay I guess.
Hi.
I'm sorry, if I missed this but did you give any color on what <unk> added to the top line and Arcadia for the quarter. I know you mentioned there was really strong realization.
What else would be helpful to hear what you're expecting for pricing through Q.
When you look at Q2 versus you know versus Q1, I think there's a bit of a negative price mix impact, but volumes fairly Brazil.
Brazil, and yet our pricing from.
Q4 to Q1 is probably relatively flat.
You know we've been chasing raw materials up it is as aluminum is.
<unk> come down that pricing is essentially flat.
Okay.
Okay. So just I guess to clarify and help me square that with gross margin coming up sequentially in the business.
Is that just a function of.
But the pricing may be flat to maybe a little bit down on a year over year basis.
Hum.
Higher.
Volume absorption or is there anything else in there that we should be aware of.
Yeah, it's not necessarily absorption, we increased price to chase raw materials up and now we're flushing those higher costs from raw materials through our income statement. So peak raw materials that happened in early to mid 2022, where we're carrying six to seven months of any.
Tory are now flushing through.
Our income statement, so essentially pricing slap, but raw material costs are down.
Yeah, Ken This is Eric just to augment what Mike said, so when you look at the improvement moving from Q4 to Q1.
The majority of that is going to be burning through that higher cost aluminum inventory that we have and were expecting that well need another quarter, that's totally get through all of that.
Okay.
Okay, and then maybe I guess for a longer term perspective, I mean is once you get through that how do you view. The you know the run rate gross margin potential for Arcadia.
On a normalized basis granted you know I know that.
Visibility is kind of all over the place now.
Yeah.
After everything settles out with with raw material pricing shipping out or our backlog.
In our custom residential business, our exit rate this year should be more in the low thirties and returned to historical norms for the Arcadia business.
Got it.
Oh, just one quick follow up here.
Any color just on what Youre seeing from a lead time perspective from your suppliers in any of the businesses I think we've heard from other industrial throughout earnings season that supply chains are getting better and.
Others are seeing Ah Ah.
Customers, essentially destocking inventories right, because they don't need as much buffer inventory.
Do you have any any similar impact or is there any expectations or signs of.
Katherine we're taking less inventory it now that supply chain and lead times are getting better.
We're seeing supply change in lead times get better but in our quick turn you know a smaller store front, a smaller project business, there's not a lot of inventory in the system with our with our customers. So we don't see a significant impact.
But the size of the supply chain certainly has he stopped and east that for us as well.
Okay.
I appreciate it thanks.
Okay.
And we have reached the end of the question and answer session I'll now turn the call back over to David I'll just for closing remarks.
Thank you again for participating in today's call. We're encouraged by the progress D. M. C. N. Its business has 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'd 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.
And this concludes today's conference and you may disconnect your lines at this time.
You for your participation.
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