Q3 2024 DMC Global Inc Earnings Call
Hello, welcome to the show.
Speaker Change: Greetings and welcome to the DMC Global Third Quarter Ernest Call. At this time, all participants on a listen only mode. A question and answer session will follow the formal presentation. If anyone's required operator assistance, please press star zero on your telephone keypad.
Speaker Change: As you might know, this conference is being recorded. It is not my pleasure to introduce your host, Geoff High, Vice President of Investigation. Thank you, you may begin.
Geoff High: Hello and welcome to DMC's third quarter conference call. Presenting today our DMC's Executive Chairman James Alirie, CEO Michael Kuta and CFO Eric Walter.
Geoff High: I'd like to remind everyone that matters discussed during this call may include forward-looking statements that are based on our estimates, projections, and assumptions as of today's date and our subject to risks and uncertainties that are disclosed in our filings with the SEC.
Geoff High: A business is subject to certain risks that could cause actual results to different materialy from those anticipated in our forward-looking statements.
Geoff High: DMC assumes no obligation to update forward-looking statements that become untrue because of subsequent events.
Today's earnings release in a related presentation on our third quarter performance are available on the investors page of our website located at DMCGlobal.com.
Geoff High: 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 Jim O'Leary. Jim?
Jim O'Leary: Thank you, Geoff and thanks to everybody for joining us today.
Jim O'Leary: I've been on the board for a little under a year now and this Jeff mentioned I was recently appointed as Executive Chairman.
Jim O'Leary: My first official board meeting was when the strategic process was announced, so I'm very familiar with all the activity associated with it. And over the last few months I've had an opportunity to engage with many of our shareholders, so I have a good chance for how you're feeling and what you're thinking.
Speaker Change: I've been associated with industrial building and manufacturing products businesses for about 40 years. Most often serving as a VCEO or CFO, a public-trained company.
Speaker Change: and most relevant experiences with a publicly traded company called K-Donfall Operation, which was a diverse, diverse, light industrial manufacturer. It went through a number of strategic assessments similar to what the MC has been dealing with over the past 10 months.
Ultimately, my board and I concluded that a sale to a strategic peer was the best outcome in what was a highly successful transaction at the time.
For the past 10 years I've been a director or advisor to several publicly traded companies including Builders FirstSource, the company's largest distributor of value-added building products and services.
Speaker Change: I've also worked in the private equity space, focused primarily on mid-cap industrial companies as either a director, advisor, or executive.
Speaker Change: As we announced two weeks ago, we've concluded the strategic review process on Dyna Energetics and Novoclad.
Speaker Change: The key takeaway is that we're not interested in selling excellent businesses for less than what we believe they're worth.
Speaker Change: Dyna Energetics in particular was challenged by very choppy and volatile conditions in the oil field services space and we concluded that now is not the right time to try to maximize the value of that business.
Speaker Change: I'll now turn it over to Michael for an update on the third quarter.
Michael Kuta: Thank you, Jim. BMC's third-quarter sales were $152.4 million, down 11% from both the second quarter and last year's third quarter. The declines reflect weakness in the U.S. construction and energy services industries.
Michael Kuta: Adjusted EBITDA attributable to DMC was 5.7 million dollars or approximately four percent of sales.
Speaker Change: As previously reported, Adjusted EBITDA reflects about $5 million in bad debt and inventory charges at DynEnergetics and lower fixed cost absorption at both Arcadia and DynEnergetics.
Speaker Change: Arcadia, our architectural building products business, reported third quarter sales of $57.8 million, down 17% sequentially and down 19% versus the third quarter last year.
Speaker Change: Arcadia's third quarter adjusted EBITDA margin was 5.8% down from 17.8% in the second quarter in 18.8% year-over-year.
Speaker Change: The decline principally reflects lower fixed cost absorption on reduced sales.
Speaker Change: Persistently high interest rates have negatively affected sales to Arcadia's high-end luxury home market and also slowed commercial construction activity in several Arcadia's regional markets.
Speaker Change: Arcadia's third quarter is also impacted by supply chain disruptions that limited product availability.
Speaker Change: We recently named Chris Skokis as our new interim president at Arcadia.
Speaker Change: He brings an extensive background in lean manufacturing, operational excellence, and improving plant productivity. His immediate focus is on strengthening sourcing and supply chain functions, improving sales, inventory, and operations planning processes, and more effectively leveraging Arcadia's ERP system.
Speaker Change: We also are reviewing certain product lines that have not consistently met our profitability targets.
Speaker Change: Dyne Energetics, our energy products business, reported third quarter sales of $69.7 million, down 9% sequentially and down 5% versus last year's third quarter.
Speaker Change: Dina's adjusted EBITDA in the third quarter was roughly break-even and adjusted EBITDA margin was just under 1%.
Speaker Change: The results included the previously mentioned $5 million in bad debt and inventory charges, as well as lower margin customer mix and a continued decline in U.S. onshore well completions.
Speaker Change: According to the EIA, completions were down 6% sequentially and were off 13% versus the third quarter last year.
Speaker Change: Dyna is implementing several margin improvement initiatives and has completed the first phase of automating its DynaStage assembly operations in Blum, Texas. Phase 2 is scheduled for completion early next year. A next-generation version of Dyna's flagship DynaStage system is also expected to enhance margins beginning in early 2025.
Speaker Change: Sales at Nobel Flat, our composite metals business, were $24.9 million, flat versus the second quarter and down 10% year-over-year. Adjusted EBITDA margin improved to 23.2%, reflecting a favorable project mix.
Speaker Change: Nobelclad ended the third quarter with an order backlog of 59 million dollars versus 63.9 million at the end of the second quarter. Rolling 12-month bookings were 103.9 million dollars and book-to-bill ratio was 0.96.
Speaker Change: Now I'll turn the call over to Eric for some additional financial information and a look at guidance. Eric?
Eric Walter: Thanks, Michael. Third quarter SG&A was $28 million, or 18.5% of net sales, compared with $29 million, or 16.7% of sales, in the third quarter last year.
Eric Walter: It's important to note that SG&A included approximately 3 million of bad debt charges at Dinah. Excluding these charges, third quarter SG&A would have been approximately $25 million or 16.5% of net sales.
Speaker Change: Third quarter adjusted net loss attributable to DMC was $9.6 million, while adjusted EPS attributable to DMC was negative 49 cents.
Speaker Change: With respect to liquidity, we ended the third quarter with cash and cash equivalents of approximately $15 million.
Speaker Change: Total debt, inclusive of debt issuance costs, was approximately $74 million, and net debt was roughly $60 million.
Speaker Change: Our debt-to-adjusted EBITDA leverage ratio was 1.18, which remains well below our covenant threshold of 3.0.
Speaker Change: On a pro forma net debt basis, after subtracting cash, our leverage ratio at the end of the third quarter was 0.96.
Speaker Change: Given the significant volatility and uncertainty in our energy and construction markets, we've decided to limit our quarterly financial guidance to consolidated sales and adjusted EBITDA.
Speaker Change: For the fourth quarter, we expect consolidated sales to be in a range of $138 million to $148 million.
Speaker Change: While adjusted EBITDA, attributable to DMC is expected in a range of five million to eight million dollars.
Speaker Change: The expected sequential sales decline principally reflects the challenging market conditions and seasonality at Dyna Energetics in Arcadia.
Speaker Change: The impact of high interest rates on luxury home sales and the related impact of lower fixed cost absorption in some of our factories.
Speaker Change: Principally, those supporting certain high-end residential products are expected to negatively impact Arcadia's 4-quarter performance.
Speaker Change: With that, we're ready to take any questions from our analysts. Operator?
Speaker Change: Thank you. We will now be conducting a question and answer session.
Speaker Change: If you would like to ask a question, please press star 1 on your telephone keypad.
Speaker Change: A confirmation tone will indicate your line is in the question queue.
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Speaker Change: One moment, please, as we poll for questions.
Speaker Change: And our first question comes from the line of Stephen Agingaro with Stiefel. Please proceed with your question. Thanks, good evening everybody.
Speaker Change: Thank you.
Stephen Agingaro: Hi, how are you? So there's two things for me. The first is kind of big picture and the other one's more macro. But I think at a high level, so we've seen a lot of turnover, right, at Arcadia, Dyna, the board.
Speaker Change: And I'm trying to understand, maybe you could help.
Speaker Change: How much of the change is related to either performance or the direction of the company?
Speaker Change: or maybe how much of the performance is related to leadership versus the market. I'm trying to kind of figure out, is this market, is it leadership and is that why leadership is changing and or leaving?
Speaker Change: Stephen, this is Jim O'Leary. I'll answer that. Nice to meet you. The answer is yes, but I couldn't give you specific percentages. Let's start with the market.
Speaker Change: Absolutely, the markets played a lot to do with Dyna Energetics.
Speaker Change: We talked specifically about that as having a lot to do with why that process was halted.
Speaker Change: And if you look at every one of...
Speaker Change: peers, competitors, people in this space, particularly the much more noteworthy
Speaker Change: the Schlumberger's Baker uses, Halliburton's.
Speaker Change: Crack holiday in the back half of the year, and if you look at this year, it really is a tale of two halves. First half of the year, not too terrible. Second half, much more challenged, reliant a lot more on international business. So, the market for Dyna should not be a surprise to anybody.
Speaker Change: The market for Arcadia, and this is where, when I said the answer is yes.
Speaker Change: Is it leadership? Is it leadership from the absolute top down? We announced a couple of weeks ago that we wrote off $142 million of goodwill. That's not a rousing testament to we're doing a spectacular job, and we know that.
Speaker Change: The market conditions, though, I'll tell you, and I spend...
Speaker Change: probably mentioned that I most of my time as CEO has been in industrial products companies like DMC. Most of the time I spent in the last decade and probably over the last four decades is in the building space.
Speaker Change: If you look at Gentleman Numbers that were released today, if you look at Delightful Like Businesses with Apogee, which is doing a great job on its self-help initiatives.
Speaker Change: But when you look at the businesses that are comparable to ours, no question, they're not really doing that much better, a little better. But the self-help initiatives on margin and some of the things that we're just starting, they are doing better on. So I'd say the market has had a lot to do with it.
Speaker Change: When you pay a lot for a business that hasn't performed as Arcadia has not,
Speaker Change: You know, that's a reflection on us from the top down. Now, the leadership points that you made, the board got it. We made a change at the chairman level. We've had some retirements in the past couple of months.
Speaker Change: And at Arcadia, you know, we made a change and we put in a guy who is immensely qualified at all the things that, when we talk about some of the self-help initiatives on supply chain, on lean manufacturing, on basic capacitization,
Speaker Change: Chris's background, the thing that caught my eye in looking at him was he spent
Speaker Change: probably most of his career at a company called Cooper Industries and the commercial lighting division and in terms of manufacturing prowess
Speaker Change: and all the things that...
Speaker Change: To be candid, a family company like Arcadia really didn't have a robust skill set at.
Speaker Change: That's the right guy to fill in a lot of those gaps right now. So, the answer is yes, market had a lot to do with it. You combine market with the fact we paid a very robust price.
Speaker Change: At probably the top of the market for Arcadia, but we're not hiding from that. I mean, that's why we wrote off 142 million dollars of goodwill
Speaker Change: and we've begun to make the changes that I think in the prepared remarks I mentioned I've been on the board for about 10 months I've gotten to know a lot of our major shareholders you know exactly what they're thinking know what they expect from us and our job is to do better full stop
Speaker Change: Great. No, that's great, Cole. I appreciate that answer. Thank you. And the other one I had, and then I'll get back in line here, but the other one I had was,
Speaker Change: When we think about the fourth quarter, and I appreciate not wanting to sort of break down into segments, but
Speaker Change: The domestic pressure pumping business and you know budget exhaustion Holidays, etc. Everybody seems to be suggesting that's kind of like a low double-digit decline in that business
Speaker Change: And I'm sort of trying to triangulate here, but I would think noble clouds flattish So is the rest of it Arcadia? Is that how we should be thinking about it or is Dinah worse than that for other reasons I'm missing?
Speaker Change: I think Arcadia is the wild card.
Speaker Change: you know, maybe a narrative that we, and when I say we, in the building space everybody thinks high-end is insulated.
Speaker Change: My end is not insulated from anything there's a always a timing issue, but you know eventually interest rates catch up with with
Speaker Change: even the high-end custom niches. So we've been very conservative there. We, and it's littered throughout the press release, but the discussion on residential, the discussion on factory absorption, when you're a very project-driven business,
Speaker Change: When you sell things that are very high priced
Speaker Change: and they drop off and I think until after the end.
Speaker Change: I don't want to, I haven't heard the Geldwin call yet and I know other companies I'm associated with are going to have their calls, you know, soon.
Speaker Change: The election interest rates, there's a lot of uncertainty, probably more than I remember in recent, certainly in recent years, maybe in the recent decades.
Speaker Change: swirling around housing, which had a great bump from COVID, but now has been in a holding pattern for a while because of affordability. I think I'm kind of rambling on getting to the point of...
Speaker Change: probably a disproportionate impact you should expect from Arcadia, and that's where we're focusing our efforts on getting it fixed. And Stephen, Dyna is, I'd say, following the market, generally, for your comments, so in that range.
Speaker Change: Great. No, thank you. Thank you both. That's helpful.
Speaker Change: You're welcome, Steven. Thanks.
Speaker Change: Thank you. Our next question comes from the line of Jerry Sweeney with Roth Capital Partners LLC. Please proceed with your question.
Jerry Sweeney: Good afternoon, everyone. Thanks for taking my call.
Speaker Change: Thank you.
Jerry Sweeney: I was hoping maybe we could discuss a little bit more about the work they want to do at Arcadia to improve operations.
Speaker Change: and then maybe a subset to that question.
Speaker Change: You know are the systems in place
Speaker Change: to manage that. You talked about the ERP explicitly leveraging that, but just curious if all the systems are in place and then to, you know, go into a little bit more detail on, you know, maybe where some of the low-hanging fruit is or what have you and, you know, what's the path forward on that front?
Speaker Change: I'm going to turn it over to Mike on some of the specific initiatives that he and Chris have been
Speaker Change: initiating, accelerating, and I think pushing forward with the right skill sets for really the first time since the acquisition.
Speaker Change: A macro comment which I think, again, we might have underestimated and certainly contributed to the Goodwill write-off.
Speaker Change: We bought a family business.
Speaker Change: We bought a family business that had excellent commercial people.
Speaker Change: They understood pricing. They understood their markets.
Speaker Change: They had the right titles, the right org charts, the right people that, you know, at first blush looked like they'd be able to handle the amount of change that comes with being a public company.
Speaker Change: and the digestion issues around ERP, putting in compliance around being a public company, making sure you've got not just people who have the title VP of supply chain, but actually know what that means, particularly in a post COVID environment.
Speaker Change: We underestimated the challenges there.
Speaker Change: A couple of, you know, we took a few calls after our last press release and, you know, to me, these are things that are simple to diagnose, easy to spot.
Speaker Change: not really wildly difficult to fix if you have people with the right skill set, but take time and you know putting the ERP system on with the aggressiveness of the implementation
Speaker Change: Dealing with upgrading people happens with every family company acquisition I've ever seen
Speaker Change: and really dealing with just
Speaker Change: Are the robustness of the systems and the people exactly what you think in a family company?
Speaker Change: The answer was no, and that led to the write-off. We've spotted, diagnosed, have fixes in for all of them.
Speaker Change: takes a little bit of time, you'd feel a lot better if it was at a time when, you know, elections behind us, whatever, whichever party puts in place is going to help me put a little bit more wind in the sails of the housing market more broadly and construction.
Speaker Change: And, you know, interest rates being a little bit lower would help the high-end residential market.
Speaker Change: That said, while it would be nice to have the wind in our sails, we recognize we don't.
Speaker Change: So we've got initiatives underway that are very specifically targeted to some of the things we probably could have been a little bit more respectful from the get-go on.
Speaker Change: Mike, you want to talk about some of the specific initiatives?
Speaker Change: Yeah, Jerry, so a couple things that we're working on.
Mike: with the team relate to supply chain and sourcing so we can do a better job.
Speaker Change: on both supply chain sourcing and planning.
Speaker Change: as well as S&OP processes. So one of the gaps we have there is demand planning and knowing what we need when we need it. So that was, you know, some of my comments around the supply chain disruption. So we've got
Speaker Change: programs we're putting in place there, working on.
Speaker Change: You know, the other thing is there's some, there's the other item in the back end of our business is there's some improvements we can certainly make in our finishing operations. So.
Speaker Change: And a lot of that gets to, you get your supply chain demodeled and you've got to get scheduling right and finishing up. So, a lot of work we're doing on that to improve lead times on time and in full. Deliveries to customers, making sure we've got shelves stocked with product.
Speaker Change: making progress but a ways a ways to go. So there's good things happening but it's going to take some time as Jim mentioned to sort that out.
Speaker Change: And sort of maybe as a follow-up.
Speaker Change: How much of the headwind is maybe high-end residential being weak?
Speaker Change: versus maybe this bread-and-butter commercial business. I'm not sure exactly where that stands.
Speaker Change: versus even...
Speaker Change: some operational blocking and tackling.
Speaker Change: You have this.
Speaker Change: I shouldn't guess but I will and then I'll let Mike correct me that the
Speaker Change: The absorption issues, again,
Speaker Change: Very high margin, high-priced product, manufactured in batches.
Speaker Change: and discrete factories, that has a lot to do with the shortfall. That comes back quickly, or we take other steps to remediate it. It has a disproportionate impact on EBITDA and gross margin. And when you look at the contribution margins from that type of product,
Speaker Change: You know, that really tells the story, and please don't ask what the contribution margins are. We don't want to get into the habit of giving that out, but disproportionately, it's probably the high-end residential piece.
Speaker Change: Jim, I think you, I mean, you covered it exactly as it is. Yeah, absorption, given the factory footprint and, you know, where we've got product coming from and at what price points, absorption had a disproportionate impact on this quarter story in particular. And our guidance, by the way.
Speaker Change: One more, per se, on the high-end residential, yes.
Jim O'Leary: Just curious, maybe in the past, and I
Speaker Change: There wasn't as much marketing or effort put behind building the backlog in the high-end residential, obviously.
Speaker Change: You know, I do get higher interest rates or higher interest rates, right? There's a cost there.
Speaker Change: but how much is that, is my viewpoint potentially correct or is some truth or validity to it that it's not only interest rates but maybe even some focus on sales marketing and growing that business?
Speaker Change: Yeah, Jerry, you're on the right thread. I think what would happen to us several years ago as we build up...
Speaker Change: and the eighteen-month range. On the high-end residential, you have to be in a sixteen to twenty-week lead time.
Speaker Change: You know until you take that back walk from 18 months to 16 to 20 weeks
Speaker Change: You know, customers are interested only in getting the orders they have, sitting out there and getting those fulfilled.
Speaker Change: and less interested in helping you to build a backlog through that process. So, we're definitely in a valley from that standpoint, and it's reflected, as Jim said, in our absorption on residential. And Jerry,
Speaker Change: in a family business. I work with a lot of sponsors. I've in past lives bought a lot of family businesses. There's a lot of things that look like they function absolutely pristinely until you stress test them and you know what Mike just described
Speaker Change: You know, when you start to have a hole in your order backlog, when you're not really, when customer service isn't aging, getting the right data, there's a lot of really basic stuff that, as I said, easy to spot.
Speaker Change: I wouldn't say quick fixes, but easy fixes require the right people.
Speaker Change: Some of these things, I think they would have caught us anyway because of the interest rate environment. And remember, our business is really, really project-driven.
Speaker Change: and every business that I see in the building space from the other things I do. If you're project-driven right now, you've got really...
Speaker Change: Tough times. I don't know. Again, I haven't seen Geldwins. I know a couple of the builders are coming out. But even at the very high end, you know, if you think Toll Brothers is a high-end builder.
Speaker Change: Even they're buying down interest rates, you know, and the areas of building that are doing well tend to be where builders can buy down rates
Speaker Change: You've got robust commercial activity, which is a lot less robust than it was when we bought the company.
Speaker Change: And, you know, that coupled with, you know, the visibility in the systems to see where you've got gaps in production, the project business is dropping off, are all things we've got to improve. Won't happen overnight, but we've got them diagnosed and we're bringing in the right people.
Speaker Change: That's it for me. I do appreciate the candidness, so thank you.
Speaker Change: No, you're welcome. Thank you.
Speaker Change: Thank you. Our next question comes from the line of Ken Newman with Key Bank Capital Markets. Please proceed with your question.
Ken Newman: Hey, good evening guys. Thanks for taking the question.
Speaker Change: Thank you.
Ken Newman: Hey there, maybe just to start off, maybe just provide a little bit of color just on how the quarter progressed in Arcadia Just how quickly did the demand start to start to fall off there? Was this really kind of back end loaded in September and then It'd be helpful to you know If you could give us any sense on how the businesses are trending through October relative to September end
Speaker Change: Yeah, so Ken, I think the business through this last quarter, I think it's pretty fairly level in terms of the demand, the bookings, and what we saw come across in shipments.
Speaker Change: I'm not ready to talk details about Q4, but we started to see that come across in the third quarter.
Speaker Change: Okay.
Speaker Change: Thank you.
Ken Newman: Maybe switching over to the restructuring actions you're taking. One, I thought there was already an ERP implementation already in place at Arcadia. When you talk about the sourcing initiatives, what's involved with that?
Ken Newman: is there any way to size the cash cost that's going to be associated with some of these restructuring actions you're taking and how long you expect that payback to be?
Speaker Change: These are additions. We haven't talked specifically about any restructuring but you know certainly everything's on the table when you have results like we've had but there's nothing that we're specifically announcing. All the additions are top grading, upgrading people.
Speaker Change: You're 100% correct. We've talked about ERP in the past, but it certainly could have gone smoother. And really holding people accountable and getting some additional resources are in. The cash costs, it's kind of part of doing business.
Speaker Change: when you're top grading and adding people like in the case of Chris. Chris is replacing a guy that we let go who had a comparable salary so it's not a it's not a huge incremental cost that we put a payback on.
Speaker Change: Okay, maybe I'll ask one more. You know, obviously, we just put in some incremental pain capacity here in this past year, and I'm curious if you think, you know, obviously not well-timed relative to the market that we were seeing, but...
Speaker Change: Is there a way to kind of help size how much of that overcapacity was potentially an impact in this quarter? And how do you think about what are the what are the first steps to try to kind of right size the revenue planning process from here?
Speaker Change: Yeah, the, uh...
Speaker Change: Paying capacity had nothing to do with the overcapacity. That was all in the residential business.
Speaker Change: where, again, specific hot.
Speaker Change: High price, high margin projects that are done in batch, all the absorption issues or most of the absorption issues.
Speaker Change: were there. The paint capacity, to the best of my knowledge, had nothing to do with it. Mike? Yeah, and what we did when we added a bit of capacity, it was through industrial engineering. So the industrial engineering isn't creating absorption or capacity challenges at this time.
Speaker Change: got it okay that's very helpful I appreciate it
Speaker Change: You're welcome. Thank you.
Speaker Change: Thank you and we have reached the end of the question and answer session. I would now like to turn the floor back to Michael Kuta for closing remarks.
Michael Kuta: Thanks for joining everyone. Thanks for joining the call today. Everyone look forward to talking to you next quarter.
Michael Kuta: And just to add one thing, Stephen asked a really good question at the beginning, and it pointed, but deservedly pointed. We get the fact that not just the market, the goodwill issue is our issue, we own it.
Speaker Change: Some of the turnover that Stephen appropriately pointed out is because of issues that we've taken ownership of, we've listened to our shareholders, we're taking action on, and not hiding from, but obviously not proud of, but we're going to get these things fixed.
Speaker Change: We know we're here to get the share price up and to work for you guys, and that's what we're committed to doing every day. So thanks for your patience.
Speaker Change: And thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
Speaker Change: [music]