DMC Global Inc. Q4 FY2024 earnings call

Management Statement and Operational Highlights

• Arcadia: Recruited Jim Schladen as President to implement a back-to-basics plan, rightsize cost structure, evaluate underperforming high-end residential offerings, and refocus on core commercial operations.
• DynaEnergetics: Introduced next-generation DynaStage system with positive feedback, completed first phase of automation at Blum, Texas, with phase 2 to complete in Q2 2025 to reduce expenses and improve reliability.
• NobelClad: Focused on converting product inquiries from core downstream energy market into firm orders and backlog.
• Strategic Move: Extended Arcadia put-call arrangement maturity to September 2026 to address liquidity risk.
• Incentive Programs: Modified to prioritize absolute EBITDA improvement and free cash flow generation.

Segment Performance

• Arcadia (Architectural Building Products): Fourth quarter sales were $60.3 million, up 4% sequentially and down 11% year-over-year. Commercial exterior products, which generate approximately three quarters of Arcadia's revenue, showed modest sequential and year-over-year growth. Adjusted EBITDA attributable to DMC was $2.2 million.
• DynaEnergetics (Energy Products): Fourth quarter sales were $63.7 million, down 9% sequentially. Introduced next-generation DynaStage system and completed first phase of automating product assembly operations. Adjusted EBITDA was $5.1 million.
• NobelClad (Composite Metal): Fourth quarter sales were $28.4 million, its second strongest top line performance in more than 10 years. Backlog declined sequentially but inquiries from core downstream energy market picked up. Adjusted EBITDA was $5.8 million.

Guidance

• Anticipates first quarter sales to be in the range of $146 million to $154 million and adjusted EBITDA attributable to DMC to be in the range of $8 million to $11 million, flat vs Q4 2024.
• Closely monitoring evolving U.S. and reciprocal tariff policies and will provide updates when appropriate.

Risks

• Tariffs in Dyna's North American market and Arcadia's commercial construction market create uncertainty.
• NobelClad impacted by U.S. fabricators' potential loss of competitiveness due to tariffs, which could affect NobelClad's business.

Question and Answer

Q: 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. [Operator Instructions]. Please note, this conference is being recorded. I will now turn the conference over to your host, Geoff High, Vice President of Investor Relations. Thank you. You may begin.

A: Hello, and welcome to DMC's fourth quarter conference call. Presenting today are DMC's interim CEO, Jim O'Leary; 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 fourth quarter performance are available on the Investors 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 turn the call over to Jim O'Leary. Jim?

Q: 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 to finishing operations that you discussed on the last call? And how does this fit into the new back-to-basics approach that you discussed, Jim?

A: I don't. The back-to-basics approach is more about rightsizing the cost structure, rightsizing the residential operations that have gotten a bit too large. That's separate and distinct from some of the supply chain initiatives which are part of the everyday ethos. Most of what Jim is working on now is really reinvigorating the commercial culture, which he was absolutely topnotch at when he was here. That was one of the underlying attractive things about the business when it was acquired by DMC in 2021, rightsizing the cost structure. Our ambitions probably got a little bit ahead of what we 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. Our aspirations for the residential business, and it's a custom residential business, which means it's very high touch, very high cost to serve, and getting that to the levels that the company wants to aspire to is probably not realistic in the short term. So Jim has appropriately rightsized it around what our aspirations can and should be for the next couple of years. And I mean, that's really the back-to-basics reference in there.

Q: 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 tailwinds that you're going to see from the rebuild in L.A.? Just assuming that, that would be more of the high-end residential.

A: Well, 75% of the business is commercial. So I don't know if that's consistent with what you're referencing, Kate. But in L.A., everywhere where there's been an impacted area, there's a strip mall, there are storefronts, there are areas that our principal product in the bread and butter of Arcadia is going to have utility and value going forward. On the high-end residential side, particularly the product that while we're rightsizing, 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., this is a 10-plus year rebuilding product -- project, and it will start with things that we've supplied and do supply every day in some of the more populated areas where commercial buildings have every bit been as impacted as residential. And we've got a nice residential business that will be there when the houses are rebuilt. So...

Q: Okay. And then if I can just squeeze one last one in here. Some really good momentum on NobelClad for this quarter, but you talked about the backlog coming down a bit. I understand it's against the difficult comp. But what's the level of confidence that you can carry on the momentum within that segment in the next few quarters?

A: Yes. So with NobelClad, it's a backlog-driven business. So we have pretty good transparency going into the first quarter or so of the year. And even though the backlog has come down, we feel pretty confident that the numbers that we put up before will be able to 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 is wrestling with, and that could make them being the fabricators, less competitive and would potentially impact NobelClad. So we're still working through all of that as it relates to the tariff impact on NobelClad, but the backlog that they have right now still remains strong and we feel good about the start of the year.

Q: Thanks. Good afternoon, everybody. A couple for me. I think the first is, it seems like the U.S. pressure pumping business is going to be kind of flattish year-over-year. Like we're kind of hearing activity levels pretty flat, maybe completion activity in general stages, et cetera. How do you perform in that environment if you agree with that environment? And what would that mean for what margins could do in Dyna as the year progresses?

A: Well, I mean, Stephen, you just repeated what the same conference call, the same press releases we read. It's the same thing we hear from our customers is that, flattish 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. We recognized last year was a really tough year. We've done the value engineering exercise referenced in there. We're trying to take out the appropriate number of people and variable costs to be responsive to that. And right now, margins for the company as a whole are high-single-digits. Until the market itself picks up, I wouldn't expect much higher than that.

Q: Okay. And my second question is maybe a little harder, maybe harder to answer. But when we think about the -- and I'm not going to ask you for sort of valuation. 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 are under-earning, what they would do on a normalized basis. Can you give us a sense for where you think Dyna and Arcadia EBITDA margin should be? Like, in your view, kind of at the mid-cycle given sort of the backdrop of the competitive landscape?

A: On the last call, I'm pretty sure I said a business like Arcadia should probably be mid-teens EBITDA margins, certainly can over or underearn based on the cycle. I think where we are with Dyna, getting to low double-digit EBITDA margins is aspirational, but certainly possible, mid- to high point of the cycle. And let me ask you a question on bids and valuations. When a stock goes down and it's at a cyclical low, is that when you recommended get bought?

Q: No, no. I'm not saying you should have said yes to anything. I'm just sort of -- without asking you what you think your businesses are worth, I'm just trying to get a sense of where you think -- what do you think they should earn at the middle of the cycle.

A: Yes. Yes. And we're -- particularly Dyna, I mean last year, if you look -- and it sounds like you follow the commentary of most of the people that are adjacent to, above us in our general universe as far as DynaEnergetics. It was a challenging year. Activity was down. We've had consolidation in some of our principal end markets. And we responded with all the things you do when that happens on the cost side. And in the case of Arcadia, I think the overcommitment to residential, particularly that was self-inflicted for sure. We've of course, corrected. We had turnover there, 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 can't put a value on the business. That's the job you guys do well. But -- we think as you pointed out, mid-cycle, the margins should be about what I suggested. NobelClad, very much project specific, but no reason to think those margins decline materially at any point. And you average them out, and it should be appreciably better than where the down part of the cycle last year was.

Q: Great. Thanks. And then just one quick one. I don't know if you want to comment on this or not, but you gave 1Q guidance. Are there any big moving pieces between the segments? I mean, you kind of suggested the overall drivers. Is there any big moving pieces we should think about between the three segments sequentially?

A: No. And this is -- I've got a short history of the company, but there's a lot of other parts in the building space I'm associated with. There are other industrial companies I have been -- this is about as uncertain time because of the tariffs, as I've seen in a while. And it's not just the impact of the tariffs which the market will have to bear. It's the impact it has on demand. Eric gave the exactly right answer about NobelClad and incoming orders and general level of activity. 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 on economic conditions, you just don't order. So we may see that for a couple of weeks, a couple of months like -- certainly, like some of our peers have, but you probably don't follow JELD-WEN. There was a pretty good dissertation about high-end windows, high-end aluminum windows. Apogee on the framing system is probably about the closest comp to Arcadia in that line of business. And again, you hit on all the right bullet points for the DynaEnergetics business. So it's -- there's a lot of uncertainty. What we can do is focus on the self-help initiatives. I do like the back to basics approach Jim is taking in Arcadia, and we think it will pay dividends.

Q: Good afternoon gentlemen. Thanks for taking my call.

A: [Indiscernible].

Q: So I just -- a lot of my questions have been asked, but just curious if you could give a little bit more details on the rightsizing at Arcadia. Specifically, I believe you said it was a little bit self-inflected, but how much of a drag were -- are was the retail -- high-end retail business? And is that in the rearview mirror? Or is that going to take a little bit more time to work through the income statement?

A: In the rear view mirror. Most of that was absorption. You had a pretty steep drop-off in volume. You're still carrying -- I'll give you a round number, but this is pretty close to the actual numbers. North of 100, maybe it's 100 to 120 FTEs. We've downsized that to less than 20% to 30% of that by not having all that fixed overhead in a facility where the volume dropped off pretty substantially. And again, I personally am always skeptical about custom businesses in the building products space because they're high touch, they're high cost to serve. I certainly have never had any success doing it. And I think it is worth a read to hear what JELD-WEN and others, of Masonites actually out there publicly anymore. But anywhere where you look at custom businesses, it is the interest rate environment, it is the affordability issue. It is the push for affordability at every price point. That impacted us, and it was more of a surprise than it should have been during last year, but we've taken all the right steps. That is behind us on an EBITDA basis. If we decided to downsize further at some point, you think about lease costs and things that are fixed within a step function perspective. But we're not there yet because I think a lot of the product -- and again, this wouldn't impact your model, but anecdotally, it's worth knowing. We probably lost a few orders in L.A. of that product line, the first -- when the fires in L.A. started because we had windows going out to homes that unfortunately are gone. That as the rebuilding starts as -- not just the rebuilding for the home sites that we were shipping to, but all the other people who unfortunately were affected, hopefully that multiplies and we're able to help the rebuilding effort and doing a way that's beneficial to our shareholders. But that's -- again, that's anecdotal, but I think directionally suggest that keeping the custom window operation, particularly the thermal steel operations 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 well as the step forward type things you do on an outright, and an outright exit, that's always available. We just don't think it's necessary today.

Q: Understood. Then Switching gears a little bit, just maybe for Eric, a little -- but what about balance sheet, working capital? Is there an opportunity on that front, less inventory DynaEnergetics and Arcadia as we go through this year to free up some more cash?

A: Yes, 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 in 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 to overuse the term, getting back to basics in terms of how we manage AR and inventory 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 look at our Q4 numbers, we did have some improvement there from a networking capital standpoint. I mean there's going to be some seasonality going forward as you go from quarter-to-quarter, but we'd like to take that momentum and improve upon it this year.

Q: All right. That's it from me guys. Thanks. Appreciate it.

A: Thank you, Gerry.

Q: Okay. Operator, thank you very much. And again, I said it in the prepared remarks, but can't -- can't hurt to say it again. For all 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 places to go with your money. We're committed to doing better and getting this -- we got it stabilized. I believe we've got it going in the right direction. And for the next 1.5 years, two years, our #1 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 -- you know very clearly and crisply what we're focused on going forward. So thanks for your time and have a great rest of your day. Thank you.

A: This concludes today's conference. All parties may disconnect. Have a great day.