Q2 2023 DMC Global Inc Earnings Call

Yeah, that's on hold.

Patients continue to standby.

[music].

Yes.

[music].

Good day, everyone and welcome to today's.

Global second quarter earnings call at this time, all participants are in a listen only mode. Later, you will have the opportunity to ask questions. During the question answer session.

To ask a question at any time.

And one on your telephone keypad.

By yourself or Lucky Star and two okay.

Yeah.

Thank you Jeff Good afternoon, and thank you for joining us for today's call I'd like to begin by congratulating Michael Cuda on his appointment as president and CEO of BMC.

I've had the pleasure of working with Mike for nearly a decade, while serving on <unk> Board.

For the past seven months, we have jointly led BMC as co Ceos.

Mike is a strategic thinker and proven leader and he has a deep understanding of DMC and its businesses.

He has also earned the respect and support of our employees customers and board I am confident we will thrive in his role as CEO and I look forward to supporting him as he leads DMC into its next chapter.

CEO search at <unk>.

Ross that's involved extensive interviews with several highly qualified candidates and I want to thank each of them for their time, they spent with us and their interest in BMC.

Our board also has been actively interviewing candidates for an open director position.

Now just yesterday.

Semantic cone has been appointed to the BMC Board spent.

Spent more than 30 years and C suite and board level roles and brings extensive experience developing and implementing corporate and financial strategy and we look forward to her contributions.

I want to thank my fellow directors for their time and thoughtful consideration of our candidates for both the CEO and director positions with that I'll turn the call over to Mike.

Thank you for your kind words, David I've thoroughly enjoyed working together this year and have appreciated your valuable insight and perspective, we look forward to continued collaboration with you and the board as we pursue a very promising future for DMC.

Turning to our results.

We delivered record sales and earnings for the second quarter and our three manufacturing businesses made important progress on the operational and financial initiatives, we established at the beginning of the year.

R R.

Architectural building products segment.

Second quarter sales of $79 million, which was comparable to the first quarter and up 4% versus the year ago second quarter.

Our Canadian commercial business saw steady demand across six markets in the western and southwestern United States. A notable project entered our previous backlog during the quarter as the first phase of a large mixed use development in southern California that makes extensive use of glass and architectural framing.

Final project will combine more than 460 residential units with extensive retail and commercial space.

Our carrier customers are served through.

The nation's high end residential market also reported steady customer activity and not through operational execution.

Acadia say through the remainder of its high cost aluminum inventory, which has been a drag on margins during the past three quarters.

<unk> of this process helped drive adjusted EBITDA margin to 21% up from 13% in the first quarter.

<unk> recently completed its transition to a new ERP system and very pleased by how smoothly the conversion of our.

Systems should significantly improve our key business processes and productivity enhanced.

And the buying experience for our previous customers.

<unk> energy products business delivered sales of $45 million, the second best quarterly performance in diners history.

The results were up 3% sequentially and 26% versus last year's second quarter.

Strong second quarter demand in both North American and international markets.

Unit sales of <unk> fully integrated Thynnus stage perforating system or another quarterly record.

Full year unit sales will surpass the 1 million unit Mark.

Later this month.

It could be approximately two months earlier than when diner reach the 1 million unit Mark last year.

Graffiti now as the most recent addition to the guidance based product family.

And well received by customers that are incorporating oriented perforating employees exercise.

Gravity is the most compact oriented perforating system on the market and requires no configuration at the well site.

As Eric will discuss in a moment.

Operability improved markedly in the second quarter, reflecting the impact of several margin enhancement initiatives implemented at the beginning of the year.

Mobile side, our composite metals business delivered second quarter sales of $25 million up 12% sequentially and 13% year over year.

Very favorable project mix helped drive adjusted EBITDA margin to 22%.

Strong second quarter bookings increased Nobel Prize order backlog to $64 million.

<unk> improved its rolling 12 months bookings to our financings.

Yes.

We expect the third quarter will represent another period of double double digit sequential sales growth at Melville class.

Our second quarter, SG&A expense was $29 million down $10 million sequentially.

Closely managing our cost structure and expect according to SG&A.

The remaining below $30 million through the balance of the year.

We also reduced our debt to adjusted EBITDA leverage ratio to one <unk>.

<unk> from two five X at the end of last year's second quarter.

I'm very encouraged by the progress we made during the first half of 2023 as we chart. Our path forward. Our focus is on delivering improved cash flow and stronger returns for our stakeholders.

With that I'll turn the call over to Eric for a closer look at our second quarter financial results and our guidance for the first quarter.

Thanks, Mike.

We delivered record second quarter sales of $182 million.

Which is up 2% sequentially.

8% versus last year's second quarter.

Gross margin was 33% up 450 basis points from the first quarter and 140 basis points from last year's second quarter.

Of the two businesses achieved gross margin expansion during the quarter.

Our second quarter SG&A expense of $29 million was 15% of sales down from 18% of sales.

Second quarter of last year.

Second quarter, adjusted EBITDA attributable to DTC was $32 million.

Nearly 60% sequentially and over 30% year over year.

<unk> non controlling interest.

Consolidated adjusted EBITDA was $38 million.

As a percentage of sales total adjusted EBITDA with a very healthy 20%.

Our January reported second quarter, adjusted EBITDA of $16 million.

Of which $10 million or 16% was attributable to DMC.

Our <unk> adjusted EBIT margin was down 50 basis points versus the prior year's second quarter, but expanded 780 basis points sequentially.

As Mike noted our stable margins compressed during the prior three quarters due to last year's sharp escalation in the cost of aluminum.

It is a key raw material in our previous products.

Our previous second quarter improvement in EBITDA margin reflects its efforts to recover pricing.

We create a balance at a high cost inventory.

The annual reported second quarter, adjusted EBITDA of $19 million or <unk>.

3% of sales.

Adjusted EBITDA margin improved 480 basis points sequentially, driven by a combination of lower litigation costs.

Absorption of manufacturing overhead.

New product design.

Higher margin product mix.

Adjusted EBITDA margin expanded 330 basis points versus the prior year second quarter.

<unk> reported adjusted EBITDA of $5 million.

Proximately, 22% of sales.

Mix of higher margin contracts decreased adjusted EBIT margin by 650 basis points sequentially, and 620 basis points year over year.

Second quarter, adjusted net income attributable to D&C with $14 million or 70 272.

Diluted share.

Upfront $6 million.

There are 32 per diluted share in this year's first quarter.

And up from $6 million.

29.

Diluted share in last year's second quarter.

During the quarter D&C generated free cash flow of $90 million, which compares with $2 million in the second quarter of 2022.

We reduced our cash flow primarily for principal payments on our long term debt distributions to our joint venture partner.

Investments in marketable securities.

In terms of liquidity, we ended the second quarter with cash and marketable securities of $29 million.

Had no amounts outstanding under our $50 million revolver.

As Mike mentioned, our leverage ratio was one three times at the end of the second quarter, which was well below the covenant threshold of three times.

Represents the fifth consecutive quarter of deleveraging the balance sheet.

Highlighting our third quarter guidance, which is detailed in our news release.

We expect consolidated sales in the range of $178 million to $188 million versus the $189 million reported last quarter.

We anticipate our caveat experienced some downward pricing pressure during the fourth quarter and relatively stable.

And I expect activity levels in its core north American market to soften a bit in the second half of the year based on lower well completion activity.

However, it does expect to maintain its market share in advance of the next up cycle.

Nevertheless, I would expect a sequential sales increase of approximately 20% in the third quarter as we delivered key projects for mature backlog.

Consolidated gross margin is expected in a range of 29% to 30% compared with the 33% in the second quarter.

Consolidated SG&A expense is expected to range from $28 million to $30 million.

Third quarter adjusted EBITDA attributable to D&C is expected in a range of $24 million to $27 million.

And finally, we expect second quarter capital expenditures.

The new range of $5 million to $7 million, while full year capex should be the range of $18 million to $20 million.

With that the revenue taking questions operator.

At this time.

Ask the question.

And finally on retail.

Thank you Pat.

Maybe.

My question, Scott and Keene.

Once again.

Okay.

And Brian .

And we'll take our first question from Jason Zhang.

Your line is open.

Good afternoon, David and Jeff Thanks for taking the call.

Okay very good.

So Mike first of all congratulations.

Yes, Nice press releases on a Monday morning, Okay. Congratulations messages.

Thank you Dave.

Just jumping right into your questions.

So with that caveat.

David would you be able to dig in a little people right. So we have we know have higher aluminum costs.

<unk>.

There is a lot of activity there as well I'm just curious as to what is sort of maybe equilibrium and margins as you work through some of the higher aluminum costs to get through the system I'm not sure.

Through the system in the quarter or partially.

Where would sort of margins ideally sort of fall out longer term.

Yes, Jerry we will recover.

Margin gain.

In February we were recovering quicker than expected from a guidance standpoint.

Thank you no longer.

Immediately.

So probably.

And that 31 32 type Zip code.

Gotcha.

And then also obviously.

We've got a couple of things wrong.

First of all great quarter, we're seeing deleveraging.

Thomas <unk> growth and then you also have the subsidy a put call next year, how do we look at.

You also have.

Some really nice growth opportunities with activity and marketing just starting to look at it we're starting to penetrate like Houston balanced how do we look at it down.

Deleveraging versus growth opportunity growth opportunities over the next 12 to 18 months.

Yes, so first of all we do.

We've got a very clear and strong path.

But definitely we know that that's out there so we're going to balance.

On the growth side.

Yes.

Reinvestment.

So we feel very bullish about generating cash flow.

End of this year and into 2020.

We feel pretty optimistic that we're going to be able to balance out pretty well and be able to invest.

And obviously, we are continuing to grow.

Investments of this year.

Putting capacity in place in the next year.

Second vital capacity and continue on income.

Yes.

Investing in our business and also making some investments in that I know about that.

Yes.

Anything to add to that is when you go through.

The capital allocation process. The first question you ask is one of the bill.

Obviously, we need to support that growth.

Sorry about that and ensure that we can see that even with excess cash we need for the gathering contract. So.

This represents everything that John has got ahead of itself in terms of.

RP capacity, another one or two injectors and alleviate some of that also need additional cash to return the business to get through the development process.

Exactly.

Lastly, Jerry and then some.

Of the.

Similar things were looking at in terms of Capex, a big impact.

But the lower Capex.

Got it and then one quick question on dynamic jump back in queue.

Obviously, a great quarter it sounds as though that may be at least three teams. When you said second half of a slowdown but not.

And our sense was things, maybe it's slow going into the end of <unk>, but.

Also with strong client.

Client activity picked.

Picked up.

What's your feeling maybe much this quarter fourth quarter and then plateau.

A accurate sort of assessment.

Assuming that the market may be into next year.

Okay.

Getting a softer Q3, that's reflected in our guidance, we think that Q4 could be a bit softer as well, maybe maybe a bit better than in Q3.

Going forward into 2022, I think it's going to be a really nice setup.

For 2024, and a nice recovery of teenage 22, So we'll see.

I am pretty optimistic looking through that.

Third quarter here into the fourth quarter of 2024 were setup nicely.

Got it okay.

Sure.

Congrats on some of the company.

Okay.

Our next question comes from Ken Newman with Keybanc.

What markets Youre line is open.

Yes.

Okay.

Hi, My congrats on the appointment.

Thank you.

So maybe putting 30 year.

I wanted to get back to a caveat. Thanks for the color on the longer term gross margin.

Profile there.

And if you're making a lot of moving pieces, but I guess on those.

Revenue lines for this quarter can you just clarify how much of that revenue growth is from price versus volume.

When we say Q1 Q2.

Im sure we established products on both fronts.

And year over year.

Yeah year over year, it's going to be primarily pricing.

<unk> talked about on other calls.

It is fairly constrained environment.

Savings from fluctuation in so we can add anything to that.

Primarily through pricing.

Yes.

So as I speak about.

Okay.

We're kind of putting in the UK capacity today and could you talk a little bit about.

For the capacity expansion for.

With volume.

Flattish in the back half and pricing.

Pricing is kind of moderating some of these.

Raw material costs or how do you think about the impact too.

Gross margins for that segment, if we think about the Q4 two.

Yes.

Our gross margin.

Our moderated from Q2 levels.

It's going to be some pricing pressure that youre going to see some in select markets. We do think that the volumes are going to be relatively stable based on what our backlog looks right now and where we can see out over the next 60 to 90 days.

Yes.

So he is going to be strategic for us, we think that that's going to continue that.

Given the timing of this year and going into 2020 can be adding upwards spreads 10% top line capacity.

<unk> for the business really the first time in a long time, we've actually been able to grow volumes. So as that increases going into next year. We can also increase the amount.

Absorbs manufacturing overhead, which could help crystallize for us.

For the balance of this year is going to be relatively flat.

Yes.

Understood.

And then moving.

Have a general question across all the businesses, but what we have heard about another industrials this earning season.

And some impact about supply chain normalizing.

Ladies and customer inventory.

Customers Destocking inventory reserves kind of normalized.

You're seeing that impacted all the property into businesses that kind of thing.

Something of a near term basketball.

Yes.

Okay.

We get to that.

Significant issue when you think about our two largest businesses Acadian, they're pretty short cycle.

Our customers don't have a lot of inventory write a lot of that business is sort of run the math.

Okay.

I, just don't see an impact of customer Destocking impact.

And our results and guidance in the future.

Okay.

Roger that appreciate it thanks.

Thank you Kevin.

As a reminder, the question.

Pardon me.

Maybe a question to start.

Our next question from Sam Mitchell Energy partners.

Okay.

Hey, guys. Thanks for taking the question.

My question will revolve around data eliminating.

And then anything purchased could you talk a little bit more about the margin enhancements, we're working on with them by now I know you.

We've had some litigation expense in Q1, and then that in Q2, but this margin enhancement on China and then the second only be given Dx gravity too narrow.

Is it customer mix changing at all can you talk about kind of how the conversations are going around.

It will be.

Gravity to point out.

Okay.

And I think the first thing.

We've got operational initiatives.

Opex.

Initiatives that we're working on margin in that just under 9%.

And our products as well.

On average three nine days.

So that's what's contributing to the margin.

Tom.

As Bradley <unk> systems.

Yes.

One that we are starting to get some traction around and customer interest.

As you know that's a product that could from a mix standpoint also.

Yes.

Margins as well and something that could be 10 to 15.

It's 40% of our business.

Four basis.

The RFP.

As we move from Q2 to Q3.

And as you mentioned, we're seeing a bit of a SaaS market.

As a result.

<unk>.

And customer mix impact.

Impacting our results, but we expect that strong.

Strong Q3, as we move forward.

Thank you guys.

Thank you John .

As a reminder.

And one quick question could you maybe just talk to the key putting stock into.

Well take our next question from Alex.

Your line is open.

Hi, good afternoon, everyone and Michael Congrats again on the appointment of again, you can see that on a Monday.

Yes.

Excellent.

Just kind of holding in again and got energetic six clearly with the publicly.

Very strong relative to the completion activity.

Can you just talk about the competitive landscape than we've seen in the market share side.

I think you said during your prepared remarks, you're going to be approaching a million unit sales.

I mean, the next months.

So I guess, just having volume outlook.

The remainder of the year maybe into <unk>.

Any color there.

So I'd say from a competitive intensity campaign.

We think that.

There is a high competitive intensity here, but we think that our value prop and Don energetics the market leader.

The awards were trending up that share and that's in part due to.

Our customers in.

Customers customers. So we've got.

Great great customers that we partner with.

Leading the charge on that so.

That's a big part of the rescue to kick off.

<unk> seen in Q2.

Okay.

Great. Thank you and I'll turn it back.

In this case, we have no further questions at this time I'll now turn the conference back to Michael for closing remarks.

Thank you again for joining us today the progress we've made this year to strengthen the DMC reflects exceptional effort of our employees.

Considering.

I think for the company ultimately, thank our customers for their loyalty our board.

The directors for their continued support we look forward to speaking with you again soon take care.

This does conclude today's conference. Thank you for your participation.

Okay.

[music].