DMC Global Inc. (NASDAQ:BOOM) Q4 2023 Earnings Call Transcript February 24, 2024
DMC Global Inc. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings. Welcome to the DMC Global Fourth Quarter and Full Year 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] I will now turn the conference over to your host, Geoff High, VP of Investor Relations. You may begin.
Geoff High: Hello, and welcome to DMC's fourth quarter conference call. Presenting today are DMC's CEO, Michael 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 related presentation on our fourth quarter performance are available on the Investors page of our website site 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?
Michael Kuta: Hello, and thank you for joining us for today's call. Our 2023 fourth quarter closed out a pivotal year for DMC. Full year accomplishments included new records for several key financial metrics, including sales, adjusted EBITDA and free cash flow. We also made key additions to DMC's leadership team and Board of Directors. We enhanced the operating strategies at our three business units while also reducing costs across the organization. And we initiated a detailed review of our portfolio strategy as we seek to unlock long-term value for DMC stakeholders. Looking at the fourth quarter, our manufacturing businesses reported varying conditions in their industrial end markets. Arcadia, which serves the commercial and high-end residential building products market, reported a 9% year-over-year sales decline, which is due principally to lower aluminum prices.
During the quarter, Arcadia completed the first phase of a paint capacity expansion, a key strategic objective. A second expansion is planned for the back half of this year. Current market conditions have led to a soft start to the year at Arcadia, but we believe results will improve throughout the balance of 2024. DynaEnergetics, our oilfield products business, reported another strong quarter in its international markets. This solidified a new full year record for international sales, which were up 28% versus 2022. In Dyna's North American market, fourth quarter unit sales of our flagship DynaStage system increased 4% sequentially. However, customer consolidation led to pricing pressure, reducing our overall EBITDA margins to 12.3%. Automation and operational excellence initiatives coming online in 2024 should improve Dyna's profitability.
In addition, we expect new premium product offerings will support our margin improvement efforts. Dyna is working to ramp up production of its new Gravity 2.0 perforating system, which is the lightest, most compact, self-orienting system on the market and is generating strong end user demand. NobelClad, our composite metals business, delivered another outstanding quarter. Sales were up 33% year-over-year, and adjusted EBITDA margins came in at approximately 25%, reflecting a very favorable project mix. NobelClad continues to benefit from healthy activity in its global end markets. It is also capitalizing on strong demand and improved production capabilities for its Cylindra Cryogenic Transition Joints. Last month, we formally announced our intent to simplify the DMC portfolio as part of a broader effort to enhance shareholder value.
An aerial view of an energy refinery, with massive tanks and piping defining the landscape.
We are pursuing separate strategic alternatives for DynaEnergetics and NobelClad with the help of our financial advisers. By streamlining our portfolio, we can sharpen our focus on the growth and profitability of Arcadia which benefits from a strong brand, a differentiated business model and a large addressable market. We've also strengthened our capital structure and improved our financial flexibility as we embark on a broad range of growth opportunities at Arcadia. I'm excited about DMC's strategic direction and encouraged by our prospects for long-range growth. I'll now turn the call over to Eric for a closer look at our fourth quarter financial results and a review of our guidance. Eric?
Eric Walter: Thanks, Mike. Our consolidated fourth quarter sales were $174 million, which was relatively flat with the fourth quarter last year. Gross -- consolidated gross margin was 26.1%, up 30 basis points from our 2022 fourth quarter due to a more favorable project mix at NobelClad, combined with margin recovery at Arcadia. Our fourth quarter SG&A expense of $27 million was 15.6% of sales, down from 17.5% in the fourth quarter of last year, driven mostly by lower litigation expenses and IT consulting fees at Dyna and Arcadia, respectively. It's important to note that our 2023 fourth quarter SG&A expense also includes $1 million of bad debt expense. Fourth quarter adjusted EBITDA, attributable to DMC, remained flat year-over-year at $20 million as improvements in NobelClad and Arcadia offset a decline at Dyna.
Inclusive of the Arcadia non-controlling interest, consolidated adjusted EBITDA was $23 million or 13.4% of sales, up 60 basis points versus the prior year quarter. At the business level, Arcadia reported fourth quarter adjusted EBITDA of $9 million, of which $5 million or 60% was attributable to DMC. Compared with the prior year, Arcadia's adjusted EBITDA rose 29% and expanded 400 basis points as a percentage of sales. Arcadia's product pricing declined at a slower pace than the drop in aluminum costs, while SG&A also declined through lower ERP consulting fees and other miscellaneous costs. Dyna reported fourth quarter adjusted EBITDA of $9 million or 12.3% of sales. Less favorable customer mix and lower absorption of manufacturing overhead costs led to a sequential and year-over-year margin traction.
NobelClad reported adjusted EBITDA of $8 million, which was 24.7% of sales and up 990 basis points compared to the fourth quarter of 2022. EBITDA margin improved due to a more favorable project mix and better absorption of fixed manufacturing overhead costs. Adjusted net income attributable to DMC was $5 million during the fourth quarter of 2023. Adjusted EPS attributable to DMC was $0.26, up 18% compared to last year's fourth quarter. During the quarter, DMC generated free cash flow of $15 million, which was an improvement of over 10% compared with the prior year quarter. We used fourth 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.
I should note that in this year's first quarter, we used our investments in marketable securities for de-levering, following the closing of our new $300 million senior secured credit facility. In terms of liquidity, we ended the fourth quarter with cash and marketable securities of $44 million and had no amounts outstanding under our $50 million revolver. Our debt to adjusted EBITDA leverage ratio was 1.25 at the end of the fourth quarter, which was well below our covenant threshold of 3.0. On a pro forma net debt basis, after subtracting cash and marketable securities, our leverage ratio was 0.78 at the end of the fourth quarter, which represents the eighth quarter in a row that we have de-levered. Now turning to guidance for the first quarter of 2024.
Consolidated sales are expected in the range of $168 million to $178 million. As Mike mentioned, we expect market conditions in the first quarter to be soft in Arcadia's key markets, while the activity level in Dyna's North American markets are expected to slightly improve. First quarter adjusted EBITDA attributable to DMC is expected to be in the range of $15 million to $20 million. Arcadia and NobelClad's EBITDA margins are expected to moderate to levels similar to the prior year first quarter. At Dyna, where we believe sequential comparisons are more relevant, we anticipate EBITDA margins will improve versus the fourth quarter due to higher sales volumes and lower bad debt expense. With that, we're ready to take any questions from our analysts.
