Greetings, and welcome to the DMC Global First Quarter Earnings Release and Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Geoff High, Vice President of IR. Thank you, Geoff. You may begin. .

Hello, and welcome to DMC's first quarter conference call. Presenting today are DMC 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 release and a related presentation on our first 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..

With that, I'll now turn the call over to Michael Kuta.

Michael?.

Hello, and thank you for joining us for today's call. DMC's first quarter financial results included consolidated sales of $167 million, down 9% from the first quarter a year ago. This decrease was largely due to soft demand and lower pricing at Arcadia products, our architectural building products business.

Arcadia sales of $61.9 million were down 23% compared with the year ago first quarter..

We noted during our last earnings call that Arcadia was experiencing a slow start to the year due to weak market conditions in the Western and Southwestern United States. Demand declined further in March, particularly for short-cycle orders at several of our large regional service centers as well as for our ultra high-end residential products.

The weakness in our short-cycle commercial business aligns with the Architectural Billings Index, which is a leading indicator for commercial construction activity. March was the 14th consecutive monthly ABI decline nationally. In the Western U.S., the index fell sharply during last year's third quarter.

Since the ABI tends to lead nonresidential construction by 9 to 12 months, we believe we are now seeing the impact of that decline. .

We are seeing signs of improving activity at Arcadia's commercial divisions. The backlog for long-cycle projects has increased in the past month and quoting activity for both large projects and short-cycle orders is picking up. Based on these indicators, we expect to see sequential quarterly improvements in sales and earnings in the coming quarters..

DynaEnergetics, our oilfield products business, reported first quarter sales of $78.1 million, up 4% sequentially and down 5% versus last year's first quarter. International demand remained healthy, and in North America, unit sales of our industry-leading DynaStage system were again at record levels.

North American sales also benefited from increased demand for our premium oriented perforating systems..

Dyna continues to execute on a series of operational excellence, and cost reduction programs are designed to mitigate pricing pressure in North America. These initiatives are expected to strengthen margins during the back half of the year and include automating certain manufacturing and assembly processes and streamlining product designs..

NobelClad, our composite metals business, reported sales of $26.8 million, up 22% from the same quarter last year. Earlier this week, NobelClad received a $19 million order from an international petrochemical customer.

This represents the largest order in NobelClad's history and involves the production of clad plates that will be used to fabricate heat exchangers, reactors and associated equipment for a petrochemical facility being built in Asia. NobelClad expects to ship the majority of the order during 2025..

NobelClad has made significant progress expanding manufacturing capacity for its Cylindra cryogenic transition joints. Demand for Cylindra from the liquefied natural gas industry remains strong, and NobelClad's commercial team is tracking more than 90 global LNG projects that have either been announced or in the planning phases..

While the first quarter sales shortfall of Arcadia products was disappointing, we remain confident in its differentiated business model, strong brand and the growth strategy we are executing. As its markets recover, we believe Arcadia is well positioned to benefit..

DMC's financial strength continues to grow and is benefiting from our improved free cash flow and our aggressive efforts to delever our balance sheet. We are also making progress in our review of strategic alternatives for DynaEnergetics and NobelClad as we seek to unlock shareholder value.

It is too early to discuss the details of our efforts, but we look forward to providing an update in the coming months..

I'll now turn the call over to Eric for a closer look at our first quarter financial performance and a review of our guidance.

Eric?.

Thanks, Michael. Our consolidated first quarter sales were $167 million, down 9% from the first quarter last year. Consolidated gross margin was 25.4%, down from 28.3% in the 2023 first quarter due primarily to industry consolidation at Dyna, which was partially offset by a more favorable project mix at NobelClad..

Excluding onetime expenses, our first quarter SG&A expense was $28 million or 16.9% of net sales, down approximately 120 basis points from the first quarter of last year. The improvement was driven primarily by lower litigation expenses at Dyna, which were partially offset by a $500,000 bad debt charge also at Dyna..

First quarter adjusted EBITDA attributable to DMC was $16.7 million compared with $20 million in the prior year quarter. The decline was driven by lower sales at Arcadia and the previously mentioned gross margin contraction at Dyna.

Inclusive of the Arcadia noncontrolling interest, consolidated adjusted EBITDA was $19 million or 11.4% of sales compared with 13.2% of sales in the prior year quarter. At the business level, Arcadia reported first quarter adjusted EBITDA of approximately $6 million or 9.5% of sales, of which $3.5 million or 60% was attributable to DMC.

Arcadia's adjusted EBITDA declined 44% year-over-year due mostly to lower sales that Michael explained earlier. .

Dyna reported first quarter adjusted EBITDA of $10.5 million or 13.5% of sales, which was lower than the prior year quarter due to a decline in average selling price. Compared to -- with the fourth quarter, Dyna's adjusted EBITDA improved 13% due to a higher volume of DynaStage units and lower SG&A. .

NobelClad reported adjusted EBITDA of almost $6 million, which was 21.9% of sales compared with 15.3% of sales in the first quarter of 2023. EBITDA margin improved due to a more favorable project mix and better absorption of fixed manufacturing overhead costs.

First quarter adjusted net income attributable to DMC was $4.2 million, while adjusted EPS attributable to DMC was $0.21 versus $0.32 in last year's first quarter. During the quarter, DMC generated free cash flow of $10.5 million, which was more than double the prior year quarter.

We use this year's first quarter free cash flow primarily for voluntarily delevering on our debt and distributions to our Arcadia joint venture partner..

In terms of liquidity, we ended the first quarter with cash of approximately $20 million and debt of $90 million. We ended the first quarter with a debt to adjusted EBITDA leverage ratio of 1.0, which was well below our covenant threshold of 3.0 and represents the ninth quarter in a row that we have delivered.

On a pro forma net debt basis after subtracting cash, our leverage ratio was 0.77 at the end of the first quarter..

Now turning to guidance for the second quarter of 2024. Consolidated sales are expected in the range of $161 million to $171 million. We expect activity in Arcadia's primary markets to remain soft in the second quarter, while activity in Dyna's North American markets is expected to remain relatively flat versus the first quarter.

Second quarter adjusted EBITDA attributable to DMC is expected to be in a range of $14 million to $17 million. Arcadia EBITDA margins are forecasted to improve from the first quarter due to stronger volumes and lower SG&A.

At Dyna, we anticipate EBITDA margins will remain relatively flat quarter-over-quarter, while NobelClad's EBITDA margins are expected to moderate due to a less favorable project mix..

With that, we're ready to take any questions from our analysts.

Operator?.

[Operator Instructions] Our first question is from Ken Newman with KeyBanc Capital Markets. .

Maybe just starting with Arcadia. Michael or Eric, could you just size the revenue that went through the short-cycle channel versus the project-related sales that you're expecting? Just hoping you can help us bridge your comments on this idea of segment sales sequentially improving in coming quarters. .

Yes. So thanks, Ken. So what we've seen is a decline in a couple of our regional branches or service centers for our short-cycle work. We call that our storefront business. And so those regional branches, service centers, that's about 50% to 60% of our sales that track with general commercial construction activity.

And the rest of our business is project-based whether it's on the commercial side or the resi side..

So -- and our project business, it's exposed to a broader range of end markets. So that's where you're seeing more government, civic, education, things like that featured in our earnings deck. So they don't necessarily wind up as much with the short-cycle business.

And so what we're seeing is we saw quite a bit of a dip in the back half of the first quarter, and we're seeing improved -- I'd say, significantly improved quoting on short cycle currently. And we've got some good project business we see coming through as well. So we think we got to think we're in the valley right now, Ken. .

Okay. So if this is transitory on the short-cycle Arcadia side on the volumes, I know you're bringing on paint capacity later this year.

Just assuming that the volumes stay relatively muted, are there levers that you can pull to mitigate under absorption?.

Yes, absolutely, Ken, and I'd say a couple of things on that. I think we've got a couple of quarters as we march through this current environment. We can certainly push out capacity investments until we see a sustained increase in demand, so we can pull back on CapEx.

And I think there's a lot of operational initiatives we're in the middle of where we can save from a cost standpoint and drive EBITDA north from here off of Q1. So we've got some projects in the works there. So -- and then in any event from a capacity standpoint, there are outside sources that we can leverage as our volume picks up. .

Okay. Maybe just switching to the other segments.

I mean what's the confidence level in the 2Q revenue guide beyond Arcadia, maybe for Dyna specifically? And what are you kind of assuming or expecting at the lower end of the range as it relates to levels of conservatism?.

I mean what we're seeing in Dyna's market is fairly stable, steady activity. And so I think we see Q2 as maybe modestly soft or flattish. I'll say that we had a pretty decent April. We also had a pretty decent April in Arcadia as well.

But in Dyna, we're just seeing pretty steady activity levels right now, and that's what we see in the front-view mirror. .

Got it. Maybe I'll ask one more, and I'll jump back in line.

The -- do you have a view for gross margins across all the segments as we move through the back half of the year?.

I think you're going to see consistency in Arcadia as well as NobelClad, and DynaEnergetics, we expect some improvements there with some of the automation projects and things we're doing not only in our plant but also the new products that we're putting in the marketplace. And it's not as much new products but new product design, I would say. .

Our next question is from Stephen Gengaro with Stifel. .

The -- on the DynaEnergetics side, can you talk about the cost out initiatives and just kind of how we should think about margin progression as we move through the next couple of quarters?.

Yes. I think Eric can -- you can speak to the margin progression, which I think is relatively flat in our guidance. Most of the initiatives that we have that I'll speak to are in progress right now, for the most part, on track. And we'll have those in place at the end of the year..

I think the biggest item on our list or a couple of large items on our list is, one, automating our assembly in our Blum facility. So that's going to improve our cost base. That's going to improve our quality. And so I think we're going to see benefits from that.

We've also got some projects on where we think we can purchase better from a supply chain management standpoint, how we can pull together purchases of metal. So we think there's quite a bit of savings in there..

And then a lot of them are just, I'd call it, smaller projects as we execute on a more operational excellence program in DynaEnergetics. And then maybe another big one, I want to make sure I don't forget this, is on the product, product design. So we're doing a lot to take metal out of our products, and taking metal out takes out quite a bit of cost.

So -- and that's enabled by our design and how we package our perforating systems together.

So maybe, Eric, can you talk a little bit about the margin progression?.

Yes. So Stephen, these initiatives, as Michael mentioned, are being implemented right now. We're probably not going to get a full year benefit this year.

But what we would expect is, when you get into the second half of the year, that there's going to be probably 100 to 150 basis points at EBITDA margin level, so should take us up to the mid-teens from an impact standpoint. .

Got you. Okay. Good.

And then the other one on Dyna is given what's going on in the market and kind of assuming that maybe the rig count seems to be flattish from these levels for the next -- let's say, through year-end, what's the driver of that? I mean is it just kind of -- should we think about it as following the rig count and completion activity? Or is there longer laterals or some technology that maybe can bump the top line as well?.

I'd probably think about it as more steady, stable now. One of the key ways we win is with our customers. And so our customers that we're aligned with, our key is delivering technology at the well site, quality service delivery and then partnering with the right customers and how they're performing with the E&P.

So I think we're aligned with the right customers there..

So I think probably stable to steady. And we tend to outperform the market there, so we feel pretty good about, even in a flat rig count environment, we're doing what we can do to control our destiny here. .

Got it. Great. And just one final quick one. Are -- any guess -- well, not guess. But I guess one is any guess on kind of where your share stands? And just not a guess.

What's the current pricing environment look like for the perf business?.

So share, we're -- we've been in that, I think, 25%-ish, maybe a bit north of 25%. We kind of bounce between 25% and 30%. And the pricing environment kind of remains as is. It's been a fairly challenged environment over the last couple of -- I'd say, a couple of years quite frankly. But I think it's relatively stable pricing right now. .

Our next question is from Gerry Sweeney with ROTH Capital Partners. .

Just sticking with Arcadia. Obviously, I think that was a little bit [indiscernible]. It sounds like there was some, I guess, weakness at the storefront level. But I'm curious if anyone is -- the competitors are maybe adjusting some of their strategy or anything happening on that [indiscernible] after you.

Or is this just strictly a lower investment market?.

Gerry, great question. I don't think it's competitive pressure as much as it is really the backdrop in the commercial business, which we see improving. So we don't see any competitors doing anything different. But I think there's a second item, which is we also saw a slowdown in our ultra high-end resi division..

And so we've done a lot of work in that business, which was, I'd say, not a mature business. It was a small piece of the overall Arcadia. And we've done a lot of work to really improve the back end in terms of our operations, reducing lead times.

So we see that business, I think, hit a valley in the first quarter, particularly at the end of the first quarter.

So with all of these improvements in place, we're driving the front end of the business now, and there's a lot we're doing to add rigor to our sales processes and what we're doing on the front end in terms of close rates, pipeline, dealer performance. So we think that business is going to track favorably as we start moving through the year.

So really, we're kind of seeing a double whammy on the commercial storefront side as well as on residential. But it's more market related and specific also to our residential business than customer. .

Got it. .

Or competitor. .

Do you know how much of that storefront business is new build versus like replacement type business? Or is that just hard to gauge because it's -- you have trucks lining up there just taking "sticks" every day.

You may not [indiscernible] curious if you have -- is it a new build or replacement or too hard to tell?.

It's too hard to tell right now. We're actually getting a lot of good visibility now out of our ERP system. We're not there on that yet, Gerry. Hopefully, in the coming months, quarters, we can start talking a little bit more about that. But it's certainly a mix of new build and repair and remodel. .

Got you. And then speaking to the ERP system. I did a quick -- aluminum prices actually looked like they kind of spiked a little bit through April [ past ]. There's been a little bit of mismatch between sort of inventory coming out, product going out with the ERP system, right? Any concern there? Or we sort of move beyond that or... .

I don't see any concern there. There's a tick up there in aluminum. Hopefully, we might even be able to capture some margin there. So I don't think anything to be concerned about. Maybe even a little bit upside there as we kind of move through the year. .

Yes. And Gerry, what I'd say, just to add to that, I think we've got more visibility into how those aluminum costs move through our production system versus where we were this time last year. So I think we're going to have a much better handle on how we can handle those cost increases and pass this on to customers in a timely manner. .

And then one last question. I'll jump back the line. You mentioned you could pull back on CapEx, but there was paint line but there was anodizing as well. And anodizing was margin accretive or positive to margins, however you want to say it.

Are you sticking with that? Or has that changed with the CapEx on that front?.

Yes. I mean that was going to be back-end loaded in 2024 anyway, so we're evaluating that. There's different opportunities and sources we're looking at there. So I don't think right now, with where the market's at, we're leaving a lot of money on the table here. So we're continuing to evaluate that, Gerry. .

Yes. And I think what we would do, as we evaluate it, is to look for how we can get the highest ROI. So is it spending the CapEx and bringing those capabilities in-house? Or is it actually looking at outsourcing some of this capacity to a third party.

Where there may be some overcapacity in the industry, we might be able to get a better return that way. So that's going to be part of the analysis. And at the end of the day, we'll determine what we do based on the return we get from the different approaches. .

Got you. And on that front -- I mean, that -- on that front. There's not a -- what's the lead time on adding anodizing rate? So theoretically, if you get a better return outsourcing, at least for a year or 2, you could always go back to anodizing later [ and things ] change.

Is that fair?.

Yes. We could -- I mean, you could put it -- we could put something like that in, in a couple of quarters if we needed to. So not -- yes, not something that is -- it's not a multiyear project. .

There are no further questions at this time. I would like to turn the floor back over to Michael Kuta for closing comments. .

Thanks for joining our call today. I look forward to discussing Q2 results and progress on strategic initiatives in early August. Thank you. .

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation..