Q4 2024 DMC Global Inc Earnings Call
Speaker Change: Greetings and welcome to the DMC Global fourth quarter earnings call. At this time all participants are in a listen-only mode. A question and answer session will follow the formal presentation.
Speaker Change: A webcast replay of today's presentation will be available at our web site. Shortly after the conclusion of this call.
Speaker Change: With that I'll turn the call over to Jim Oleary, Jim.
Jim Oleary: Thanks, Jeff and thanks, everyone for joining us for today's call.
Jim Oleary: EMC 2020 for fourth quarter was a solid finish to a challenging year.
Jim Oleary: Fourth quarter sales of $152 $4 million and adjusted EBITDA attributable to DMC of $10 $4 million, both exceeded our guidance range, reflecting the progress we made to stabilize our two largest businesses while executing on several self help initiatives.
Jim Oleary: At Arcadia architectural building products business fourth quarter sales was $63 million up 4% sequentially and down 11% versus the same quarter last year.
Jim Oleary: Sales of commercial exterior products, which generate approximately three quarters of our daily as revenue showed modest sequential and year over year growth.
Jim Oleary: Sales declined versus last year's fourth quarter was principally due to soft demand for custom residential windows and doors focus on luxury price points.
Jim Oleary: Jim Slater, who we recently recruited back as president of Arcadia is implementing our back to basics plan that includes right sizing our cost structure match market realities, while evaluating certain underperforming product offerings that serve principally high end residential customers.
Jim Oleary: We are refocusing, our Octavius core commercial operation, which represented the vast majority of the sales and EBITDA at Arcadia. When the original acquisition was made in 2021.
Jim Oleary: While we are continuing the operating initiatives introduced recently Arcadia as principal focus under Jim will be reimbursed reinvigorating its commercial efforts, while right sizing areas, notably in the custom residential operations.
<unk>, our energy products business fourth quarter sales of $63 $7 million were down 9% sequentially, reflecting a seasonal slowdown in the unconventional onshore well completions.
Jim Oleary: In response to market realities and to ensure we continue to have the best product on the market <unk> is focused on two key initiatives designed to enhance product reliability and improve overall competitiveness competitiveness during the end of 2024.
The first was the introduction of Diana's next day next generation diner stage system.
Jim Oleary: Latest model has been value engineered to use less raw material and be significantly more compact and the prior system.
Jim Oleary: It delivers a further improvement in downhole reliability, which was already the best in the industry.
Jim Oleary: The process of converting customers to the new system is complete and the feedback has been positive so far.
Jim Oleary: Second <unk> finished the first phase of automating product Assembly operations that is Blum, Texas manufacturing Center.
Jim Oleary: Phase two should be complete in the second quarter and this initiative will reduce operating expenses improve product reliability by further minimizing human error.
Jim Oleary: And finally at Novo glad our composite metal business.
Jim Oleary: Reported fourth quarter sales of $28 4 million, which was the second strongest topline performance and more than 10 years.
Jim Oleary: Robust fourth quarter shipments were not offset by new waters, leading to a sequential decline in order backlog. However, noble glad has recently seen a pickup in its product enquiries from its down from its core downstream energy market and its focus on converting as many of those as possible and the firm orders and backlog.
Jim Oleary: Now stepping back for a moment from a broader strategic perspective.
Jim Oleary: One concern many of our shareholders correctly right. When I took over last November was the risk created by the Arcadia, a put call arrangement, which could have subjects that are either in a manner, and then ending liquidity issue or significant equity dilution.
Jim Oleary: To address this issue, we proactively pursued and reached an agreement with Arcadia joint venture partners in December.
Jim Oleary: This agreement extended the majority of this obligation until September of 2026 as the earliest date, our joint venture partners and exercise their put option.
Jim Oleary: This extension provides us with significant optionality to reduce debt with a singular focus on free cash flow.
Jim Oleary: We're exploring other more favorable refinancing alternatives.
Jim Oleary: The steps, we've taken to stabilize and strengthen our businesses are positioned DMC for improved performance going forward when our core cyclical end markets improve.
Eric: I'll now turn it over to Eric for a closer look at the fourth quarter and our guidance for the first quarter.
Eric: Thank you Jim I'll start with a look at fourth quarter profitability.
Consolidated adjusted EBITDA attributable to DMC was $10 $4 million.
Eric: Inclusive of the Arcadia Noncontrolling interest adjusted EBITDA was 11 $9 million, while adjusted EBITDA margin was seven 8% up sequentially from four 6% in the third quarter and down from 13, 4% in the prior year fourth quarter.
Eric: The year over year decline relates to the previously mentioned drop in sales of our <unk> premium residential windows and doors products.
Eric: Arcadia reported fourth quarter, adjusted EBITDA attributable to DMC at $2 $2 million.
Eric: Adjusted EBITDA before non controlling interest allocation was $3 $7 million or six 2% of sales up from five 8% in the third quarter and down from 13, 6% in the prior year fourth quarter.
Speaker Change: Diana reported fourth quarter, adjusted EBITDA of $5 $1 million.
Speaker Change: Adjusted EBITDA margin was 8% up from breakeven margin in third quarter, which was impacted by inventory and bad debt charges.
Speaker Change: And down from 12, 3% in the 2023 fourth quarter.
Speaker Change: <unk> reported fourth quarter, adjusted EBITDA of $5 $8 million with adjusted EBITDA margin of 26%.
Speaker Change: Down from 23, 2% in the third quarter and 24, 7% in the prior year fourth quarter.
Speaker Change: The decline was due to a less favorable project mix.
Speaker Change: Fourth quarter SG&A expense was 16, 5% of sales down sequentially from 18, 5% in the third quarter and up from two 6% in the 2023 fourth quarter.
Speaker Change: It should be noted that SG&A in the third quarter included approximately $3 $5 million of bad debt expense at Diana Energetics.
Speaker Change: Fourth quarter adjusted net income attributable to D&C was $1.8 million, while adjusted EPS attributable to DMC was nine cents.
Speaker Change: With respect to liquidity, we ended the fourth quarter with cash and cash equivalents of approximately $14 million.
Speaker Change: Total debt inclusive of debt issuance costs was approximately $71 million and net debt was roughly $57 million.
Speaker Change: Our debt to adjusted EBITDA leverage ratio was 1.35, 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 1.09.
Speaker Change: And now onto guidance.
Speaker Change: In light of current activity levels and the recent backdrop of uncertainty created by tariffs and Diana's North American market as well as Arcadia as primary commercial construction market.
Speaker Change: We're anticipating first quarter sales and adjusted EBITDA to be relatively flat versus the 2020 for fourth quarter.
Speaker Change: We expect first quarter consolidated sales to be in a range of $146 million to $154 million and we anticipate adjusted EBITDA attributable to DMC to be in a range of 8 million to $11 million.
Speaker Change: I should note that we're closely monitoring of all the U S and reciprocal tariff policies and will provide any updates when appropriate.
Jim: Now I'll turn the call back to Jim for some additional comments.
Thanks, Eric.
Speaker Change: <unk> 24 was an extraordinarily challenging year for DMC on many fronts. However, we made significant progress in several areas that will position us well going forward.
Speaker Change: Most importantly, we extended the looming maturity created by the Arcadia, but providing us with the time required to generate additional cash flow and reset our capital structure, while we continue to improve our businesses.
Speaker Change: Supporting this undertaking we've made important modifications to our incentive programs to prioritize absolute EBITDA improvement and free cash flow generation above any other metrics.
Speaker Change: Organizationally at Arcadia, we were able to recruit Jim slate and back to reset the commercial culture, bringing them back to basics approach to our operations and positioning us to take full advantage of the opportunities. We expect will emerge as areas of greater Los Angeles impacted by the recent wildfires are rebuilt.
Speaker Change: Yes.
Operationally, while we can't do much to influence the imposition of tariffs with a macro economic impact. They may have we can do something about our underlying cost structure to ensure we capture more of every marginal dollar.
Speaker Change: Notably at Diana Energetics are product reengineering efforts and introducing automation at our largest manufacturing facility will dramatically improve our positioning both in difficult environments, such as 2024, and what we hope will be an improved regulatory political and economic backdrop for oil service.
Speaker Change: Companies going forward.
Speaker Change: Now I only I'd like to thank our employees around the world for their contributions and loyalty during a very challenging year.
Also we'd like to thank our shareholders for their patience and support over this recent difficult Erik.
Speaker Change: We appreciate that you always have other places to invest and we're committed to finding ways to maximize value on your behalf.
Speaker Change: And now with that operator, we'd be glad to take any questions.
Speaker Change: Thank you and.
Speaker Change: And at this time well conduct our question and answer session. If you would like to ask a question press star one on your telephone keypad.
Speaker Change: A confirmation tone will indicate that your line is in the question queue. You May Press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
Speaker Change: Alright.
Speaker Change: Thank you.
Speaker Change: And our first question comes from Kate Fleischer with Keybanc capital markets. Please state your question.
Speaker Change: Hey, good afternoon I'm on for Ken Newman Today, I was wondering if you could start off by talking about some of the supply chain sourcing initiatives and improvements.
Speaker Change: Improvements to finishing operations that you discussed on the last call and how does this fit into the new back to basics approach that you discuss churn.
Speaker Change: The back to basics approach is more about right sizing the cost structure, a right sizing of the residential operations that I've gotten a bit too large.
Speaker Change: That is separate and distinct from some of the supply chain initiatives, which are part of your everyday.
Speaker Change: Everyday so most of what Jim is working on now is really reinvigorating the commercial culture, which he was absolutely top notch at when he was here. It was one of the underlying.
Speaker Change: Attractive things about the business when it was acquired by DMC in 2021.
Speaker Change: Right sizing the cost structure and our ambition is probably got a little bit ahead of what we.
Speaker Change: Should have been willing to pay for at that time, and probably the biggest issue, which we talked about in the press release, we talked about last quarter.
Speaker Change: Our aspirations for the residential business and that's a custom residential business, which means there's very high touch very high cost to serve and getting that to the levels that the company wants aspire to it.
Speaker Change: Not realistic in the short term so Jim has appropriately right sized it around what our aspirations can it should be for the next couple of years.
Speaker Change: And I mean, that's.
Speaker Change: That's really the back to basics are referenced in there.
Speaker Change: Got it and then it sounds like you're transitioning a bit more to focus on the commercial efforts that you talked about before how does that fit in with some of the tailwind that you're going to see from the rebuild and L. A.
Speaker Change: Just assuming that that would be more of the high end residential.
Speaker Change: Well, 75% of the business is commercial so I don't know if that's a.
Speaker Change: And that's consistent with what you're referencing here, but you know in L. A everywhere, where theres been an impacted area, there's a strip mall their storefronts or areas.
Speaker Change: Now, our principal product and the bread and butter of Arcadia.
Speaker Change: It's gonna have utility and value going forward on the high end residential side, particularly the product.
Speaker Change: Well, we're right sizing, we're not taking it out of existence, it's still there and if you listen to the comments coming out of most of the elected officials in L. A.
Speaker Change: This is a 10 plus year rebuilding product project and it'll start with things that we supplied and do supply everyday and some of the more populated areas where commercial buildings are every bit as impacted as residential and you know we've got a nice residential business it'll be there.
Speaker Change: When.
Speaker Change: When the houses are rebuilt so.
Speaker Change: Okay, and then if I can just squeeze one last one in here.
Speaker Change: Some really good momentum on Nobel clad for this quarter.
Speaker Change: You talked about you know the backlog coming down a bit I understand it's against a difficult comp but.
Speaker Change: What's the level of confidence that you can carry on the momentum within that segment in the next few quarters.
Yeah.
Speaker Change: So with Novo clad it's a backlog driven business. So we have pretty good transparency going into the first quarter or so of the year and.
Speaker Change: Even though the backlogs come down and we feel pretty.
Speaker Change: Pretty confident that the numbers that we put out before we'll be able to.
Speaker Change: Keep that same type of momentum, but what I will say, though is that business has a portion of operations that are based in the U S and the U S. Fabricators will be impacted by the tariff that everybody's wrestling with and that could make them than being the fabricators are less competitive and where.
Speaker Change: Good potentially impact Novo class. So we're still working through all of that as it relates to the tariff impact and novo glad but the backlog you have right now still remains strong and we feel good about the start of the year.
Speaker Change: All right. Thanks, I'll pass it on.
Speaker Change: Thank you and our next question comes from Stephen <unk> with Stifel. Please state your question.
Speaker Change: Thanks, Good afternoon everybody.
Speaker Change: A couple for me.
Speaker Change: The first is.
Speaker Change: It seems like.
Speaker Change: The U S pressure pumping business.
Speaker Change: Is gonna be kind of flattish year over year like we're kind of hearing activity levels pretty flat maybe completion active.
Speaker Change: Activity in general stages et cetera, how do you perform.
Speaker Change: In that environment, if you agree with that environment, and what would that mean for what margins could do and diner as the year progresses.
Speaker Change: Well.
Speaker Change: I mean, Steven you just repeated what are the same conference calls the same press releases, we read it's the same thing we hear from a customer or is it.
Laddish is probably optimistic compared to what some of them said most of our margin improvement going forward is going to come from self help initiatives are we recognized last year was a really tough year, we've done the value engineering exercise a reference in there we're trying to take out the appropriate number of people in variable costs.
Speaker Change: To be responsive to that.
Speaker Change: And you know right now margins for the company as a whole or high single digits.
Speaker Change: Until the market itself picks up I wouldn't expect much higher than that.
Speaker Change: Okay.
And my second question.
Speaker Change: Yes.
Speaker Change: Maybe maybe a little harder, maybe maybe harder to answer but when we think about the.
Speaker Change: And I'm not going to ask you for sort of evaluation, but when you think about the bids for your business from the third party.
And we think about kind of how you react to it.
It certainly implies that you think your businesses or under earning what they would do on a normalized basis can you can you give us a sense for where you think Diana and Arcadia.
Speaker Change: EBITDA margin should be like in your view kind of at the mid cycle, given sort of the backdrop of the competitive landscape.
Speaker Change: On the last call I'm pretty sure I said, our business like Arcadia should probably be mid teens EBITDA margins certainly can over under earn based on the cycle.
Speaker Change: Oh, well, we all with diner getting to low double digit EBITDA margins as aspirational, but certainly possible mid to high point of the cycle.
Speaker Change: And let me ask you.
Speaker Change: A question on bids and valuation.
Speaker Change: When the stock goes down and it's at a cyclical low is that when you recommended.
Speaker Change: What.
Speaker Change: Thank you recommend.
Speaker Change: Yeah.
Speaker Change: No I'm not.
Speaker Change: I'm, not saying I'm, not saying you shouldn't say, yes, I'm just I'm just sort of.
Speaker Change: Without asking you what you think your businesses are worth I'm, just trying to get a sense for where you think what do you think they should earn at the middle of a cycle, yes, yes, no and we're particularly Diana I mean last year. If you look it sounds like you follow the commentary most of the people that are.
Speaker Change: Our adjacent to above us.
Speaker Change: General universe as far as as far as Diana Energetics.
Speaker Change: It is a challenging year activity was down is that consolidation of some of our our principal end markets and we responded with all the things you do when that happens around the cost side and the case of Arcadia, I think they over commitment to residential particularly.
Speaker Change: That was self inflicted for sure. We've course corrected we had turnover there point.
Speaker Change: Pointed out by our analysts and some of our investors. We've course corrected there brought back the Guy who had run the business successfully for a couple of decades and I'm not can't.
Speaker Change: Can't put a value on the business. That's our that's the job you guys do well, but we.
Speaker Change: We think as you pointed out mid cycle the margins should be about what I suggested noble glad very much project specific but no reason to think those margins declined materially at any point and you average them out and it should be.
Speaker Change: Yeah, appreciably better than whereas the down part of the cycle last year was.
Great. Thanks, and then just one quick one I don't know if you want to come on this or not but you gave <unk> guidance are there any big moving pieces between the segments. I mean, you kind of suggested.
Speaker Change: The overall guide, but is there any any big moving pieces, we should think about between the three segments sequentially.
Speaker Change: No.
Speaker Change: I've got a short history with the company, but you know there's a lot of other parts in the building space I'm associated with their other industrial companies I've, Minnesota.
Speaker Change: This is about as uncertain of time because of the tariffs as I've seen in awhile and it's not just the impact of the tariffs, which the market will have to bear the impact it has on demand Eric gave up.
Speaker Change: Exactly right answer about noble clad in incoming orders and a general level of activity you know when you're not sure about the overall pricing environment, if you're not sure about tariffs if you're not sure about the impact.
Speaker Change: On economic conditions, you just don't know so we may see that for a couple of weeks couple of months slight.
Speaker Change: Certainly like some of our peers.
Speaker Change: You probably don't follow a gel when there was a pretty good dissertation about high end Windows high end aluminum windows apogee on the framing systems, probably about the closest comp to two hours.
Speaker Change: And that line of business and again you hit on all the right all the right bullet points for the dine energetics business. So it's a there's a lot of uncertainty well. We can do is focus on the self help initiatives I do like the back to basics approach no mistaking at Arcadia, and we think it will pay dividends.
Speaker Change: Great. Thank you for all the details.
Stephen: Now you're welcome Stephen Thank you.
Speaker Change: Our next question comes from Gerry Sweeney with Roth Capital Partners. Please state your question.
Gerry Sweeney: Good afternoon, gentlemen, thanks for taking my call.
Jim Oleary: Hey, Jerry.
Jim Oleary: So I just a lot of my questions have been ads asked but I'm. Just curious if you could give a little bit more details on the right sizing at Arcadia specifically.
Jim Oleary: I believe you said it was a little bit self inflicted but how much of a drag or was the retail high end retail business and.
Jim Oleary: Is that in the rearview mirror or is that going to take a little bit more time to walk through the income statement.
Jim Oleary: And remember most of that was.
Absorption.
Jim Oleary: Pretty steep drop off in volume, you're still carrying it out I'll.
Jim Oleary: I'll give you a round number but this is pretty close to the actual numbers nor.
Jim Oleary: North of 100, and maybe it's 100 to 120, Ftes, we downsize that too.
Jim Oleary: Less than $20 to 30% of that.
Jim Oleary: By not having all of that fixed overhead and a facility where the volume dropped off pretty substantially and I got that.
Jim Oleary: I personally I'm always skeptical about custom businesses in the building product space, because they're high touch the high cost to serve I certainly have never had any success doing it.
Jim Oleary: And I think it is.
Speaker Change: Worth a read through here with gel win and others.
Speaker Change: Masonite is actually out there publicly anymore, but anywhere where you look at our custom businesses. It is the interest rate environment. It is the affordability issue.
Speaker Change: It is the push for for affordability at every price point that impacted us and it was more of a surprise and it showed a bedroom.
Speaker Change: During last year, but we've taken all the right steps.
Speaker Change: That is behind us on an EBIT and EBITDA basis, if we decided to downsize further at some point you are you think about lease costs and things that are fixed within a step function perspective, but we're not there yet because I think you know a lot of the product and again at this wouldn't impact your model, but anecdotally it's worth.
Speaker Change: Worth knowing what we probably lost a few orders in L. A are of that product line. The first you know in the fire and Allied started because we had window is going out to homes that unfortunately.
Speaker Change: Oh God.
Speaker Change: That has the rebuilding starts as not just a rebuilding for the home side. So we were shipping too, but all the other people who unfortunately were affected you know hopefully that multiplies and we're able to help the rebuilding effort.
Speaker Change: Due in a way that is beneficial to our shareholders, but that that's you know again, that's anecdotal, but I think directionally.
Speaker Change: Suggests that keeping the custom window operation, particularly the thermal steel operations, who will pay dividends over the next many years and if it doesn't there's really not a lot we would do different on the EBIT and EBITDA basis as far as you know the step four type things you do on an outright an outright exit that's always avail.
Speaker Change: But we just don't think it's necessary today.
Speaker Change: Understood and then switching gears a little bit this maybe for Erik a little but what about balance sheet working capital is there an opportunity on that front less inventory dynamic headaches and Arcadia as we go through this year and free up some more cash.
Erik: Yeah, absolutely as Jim mentioned in his prepared remarks, we've got two metrics that we're really focused on across all the businesses absolute EBITDA growth and free cash flow generation and so part of the free cash flow generation is getting more efficient in terms of how we manage working capital and we think that there's opportunities across all the businesses, particularly.
Speaker Change: Really.
Speaker Change: Yeah, and Arcadia. So when we think about 2025, we think that the free cash flow conversion that we've had historically, we think we can improve upon that but it's really kind of I guess ever use the term getting back to basics in terms of how we manage a are in inventory.
Speaker Change: And being thoughtful about that so that is absolutely an area, where we're focused and one that we expect to see some improvement in and if you looked at our Q4 numbers. We did have some improvement there.
Speaker Change: From a net working capital standpoint, I mean, theres going to be some seasonality going forward.
Speaker Change: You go from quarter to quarter, but we'd like to take that momentum and improve upon it this year.
Speaker Change: Got it alright, that's it for me guys. Thanks I appreciate it.
Gerry Sweeney: Thank you Gerry Thanks Gerry.
Gerry Sweeney: There are no further questions at this time I will hand, the floor over to Jim Oleary for closing remarks.
Gerry Sweeney: Okay.
Speaker Change: Operator, thank you very much and again I said it in the prepared remarks, but can't.
Gerry Sweeney: Can't hurt to say it again.
Gerry Sweeney: All of our employees last year was a tough year, but we appreciate your patience your loyalty hard work for all our shareholders last year was a tough year. We appreciate you hanging in there you always have other other places to go with your money.
Gerry Sweeney: We're committed to doing better and getting this we gotta stabilized I believe we've got it going in the right direction and for the next.
Gerry Sweeney: Yeah, and a half two years, our number one priority is free cash flow our 10th priority is free cash flow and every number in between is free cash flow and debt repayment. So I E. You know very clearly and crisp way, what where are what we're focused on going forward. So thanks for your time and.
Have a great rest of your day. Thank you.
Speaker Change: This concludes today's conference all parties may disconnect have a great day.