DMC Global Inc. (NASDAQ:BOOM) Q3 2023 Earnings Call Transcript
DMC Global Inc. (NASDAQ:BOOM) Q3 2023 Earnings Call Transcript November 5, 2023
Operator: Greetings and welcome to the DMC Global Third Quarter Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Geoff High, Vice President of Investor Relations. Thank you, Geoff. You may begin.
Geoff High: Hello and welcome to DMC's third quarter conference call. Presenting today are DMC's Chief Executive Officer, Mike Kuta; 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 today's date and are subject to risks and uncertainties that are disclosed in our filings with the SEC. Our business is subject to certain risks that could cause actual results to differ materially from those anticipated in our forward-looking statements. DMC assumes no obligation to update forward-looking statements that become untrue because of subsequent events. Today's earnings release and a related presentation on our third quarter performance are available on the Investor page of our website, located at dmcglobal.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 Michael Kuta. Mike?
Mike Kuta: Good afternoon, everyone. DMC's third quarter was marked by both strategic accomplishments and operational challenges. We reported consolidated sales of $172 million, flat versus last year's third quarter and below our prior forecasts. Sales at Arcadia, our building products business, were $72 million, down 11% year-over-year. Steady customer activity at Arcadia's primary regional service centers, as well as healthy sales at its ultra-high-end residential business, were offset by pricing pressure associated with lower raw material costs, soft demand for commercial interior products, and a brief operational slowdown related to the transition to a new ERP system. DynaEnergetics, our energy products business, reported sales of $73 million, up 4% year-over-year, but down 14% sequentially.
The US drilling and completion industry idled additional rigs and frac crews during the quarter, and the Energy Information Administration reported a 10% sequential decline in US well completions. Dyna's US sales also were impacted by customer project delays late in the quarter. Soft sales in the US were partially offset by continued strong demand at Dyna's international business, which expects to deliver record full-year sales in 2023. Sales in NobelClad, our composite metals business, improved 18% to $28 million versus last year's third quarter. NobelClad's results reflect outstanding execution on a demanding petrochemical project, as well as continued strong demand for pressure vessel plates and specialized transition joints. NobelClad ended the third quarter with an order backlog of $61 million versus $64 million at the end of the second quarter.
Rolling 12-month bookings were $111 million, up sequentially from $108 million, and the book-to-bill ratio was 1.1. Our consolidated third quarter adjusted EBITDA attributable to DMC was $25 million or 14.3% of sales, and was within our forecasted range, despite the lower-than-expected sales. DMC's long-term focus is to position each of its businesses to deliver adjusted EBITDA margins of 20% or greater. Our businesses are structuring their operations and making the necessary investments to achieve these objectives on a consistent basis. At Arcadia, additional paint capacity, a new ERP system, and a series of operational enhancements and growth initiatives are expected to drive long-term improvements in sales and profitability. In the North American oil and gas market, where Dyna generates approximately 85% of its sales, we expect continued consolidation by leading operators will sharpen the completion industry's focus on safety, technology, and efficiency.
Dyna, which had a challenging third quarter, has taken a number of steps to streamline its cost structure and will incur roughly $1 million in associated onetime expenses during the fourth quarter. These cost reductions are expected to result in approximately $3 million in annualized savings. Dyna also is implementing a series of operational excellence initiatives designed to enhance the safety, quality, and reliability of its perforating systems. These initiatives include greater use of automation throughout Dyna's manufacturing and assembly facilities. NobelClad is focused on expanding the market for its DetaPipe and Cylindra product lines and is pursuing emerging opportunities in lithium and hydrogen production. We expect 2024 will be another strong year at NobelClad.
As Eric will discuss in a moment, much improved free cash flow led to further improvements in our financial position during the third quarter. I remain encouraged by the strengths of our differentiated manufacturing businesses and our prospects for profitable long-term growth. DMC's achievements would not be possible without the efforts of our talented workforce and I want to acknowledge all of our employees for their hard work and dedication. I also want to thank our customers for their loyalty. With that, I'll turn the call over to Eric for a closer look at our third quarter financial results and our guidance for the fourth quarter. Eric?
Eric Walter: Thanks Mike. As previously mentioned, our consolidated third quarter sales were $172 million, down 1% from the third quarter last year. Consolidated gross margin was 30.6%, up 110 basis points from our 2022 third quarter, due to a more favorable project mix at NobelClad combined with margin recovery at Arcadia. Our third quarter SG&A expense of $29 million was 16.7% of sales, down from 17.5% in the third quarter of last year, driven mostly by lower litigation expense at Dyna. Third quarter adjusted EBITDA attributable to DMC increased by 13% year-over-year to $25 million. The improvement was primarily driven by higher sales and gross margin at NobelClad. Inclusive of the Arcadia non-controlling interest, consolidated adjusted EBITDA was $30 million, or 17.4% of sales, up 220 basis points versus the prior year quarter.
At the business level, Arcadia reported third quarter adjusted EBITDA of $13 million, of which $8 million, or 60%, was attributable to DMC. Compared with the prior year, Arcadia's adjusted EBITDA rose 11% and expanded 390 basis points as a percentage of sales. While Arcadia's pricing has moderated this year, aluminum costs have declined at a faster pace and contributed to the recovery in EBITDA margin. Dyna reported third quarter adjusted EBITDA of $13 million or 17.2% of sales. Lower absorption of manufacturing overhead costs and a less favorable customer mix led to a sequential and year-over-year margin contraction. NobelClad reported adjusted EBITDA of $6 million, which was 23.1% of sales and up 850 basis points compared to the third quarter of 2022.
EBITDA margin improved due to a more favorable project mix, better absorption of fixed manufacturing overhead costs, and lower SG&A. Adjusted net income attributable to DMC was $10 million during the third quarter of 2023. Adjusted EPS attributable to DMC was $0.50, up over 40% compared to last year's third quarter. Underlying improvements in gross margin and SG&A more than offset relatively flat sales performance year-over-year. During the quarter, DMC generated free cash flow of $22 million, which was the highest quarterly level since 2019, and was up from $17 million in last year's third quarter. We used this year's third quarter free cash flow primarily for principal payments on our long-term debt, distributions to our Arcadia joint venture partner, and an investment in marketable securities, which will be used as part of our deleveraging efforts.
In terms of liquidity, we ended the third quarter with cash and marketable securities of $36 million and had no amounts outstanding under our $50 million revolver. Our debt to adjusted EBITDA leverage ratio was 1.26 at the end of the third quarter, which was well below our covenant threshold of 3.0 and represents the seventh consecutive quarter of deleveraging the balance sheet. On a pro forma net debt basis, after subtracting cash and marketable securities, our leverage ratio was 0.89 at the end of the third quarter. Now, turning to fourth quarter guidance. Consolidated sales are expected in a range of $170 million to $180 million versus the $172 million reported last quarter. We anticipate Arcadia's fourth quarter sales volume to be relatively flat sequentially.
Dyna expects to maintain its share in its core North American markets, but does anticipate overall activity levels will remain soft, due in part to year-end seasonality. NobelClad sales are expected to accelerate sequentially as the business benefits from delivery of key projects already in its backlog. Consolidated gross margin is expected in a range of 28% to 30% compared with the 30.6% in the third quarter. Gross margin at Arcadia and Dyna is expected to be relatively flat quarter-over-quarter, while NobelClad's gross margin will moderate based on project mix. Consolidated fourth quarter SG&A expense is expected to range from $28 million to $29 million versus the $29 million reported in the third quarter. Fourth quarter adjusted EBITDA attributable to DMC is expected to be in a range of $20 million to $24 million versus $25 million in the third quarter.
Finally, we expect fourth quarter capital expenditures will be in a range of $8 million to $10 million. With that, we're ready to take any questions. Operator?
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