DMC Global - Earnings Call - Q4 2024

Executive Summary

• Q4 revenue of $152.4M was flat sequentially and down 12% YoY, while adjusted EBITDA attributable to DMC rose to $10.4M (7.8% margin before NCI), beating management’s guidance ($5–$8M) as operational stabilization offset end-market weakness.
• GAAP diluted EPS was $(0.17); adjusted diluted EPS was $0.09, aided by lower SG&A and improved segment profitability at DynaEnergetics and NobelClad versus Q3; non-GAAP adds primarily reflected strategic review and restructuring costs.
• Guidance: Q1 2025 sales $146–$154M and adjusted EBITDA (attributable) $8–$11M imply roughly flat activity versus Q4 as management monitors tariff policy and macro uncertainty in construction and energy markets.
• Strategic/backdrop: DMC extended Arcadia put obligation to no earlier than Sep-2026 (deleveraging optionality). In Feb-2025, the Board rejected Steel Connect’s $10.18/share proposal as undervaluing the turnaround and cyclical upside; Q4 results exceeded the high end of guidance, reinforcing stabilization.

What Went Well and What Went Wrong

• What Went Well

  • Q4 outperformed guidance: revenue $152.4M vs guide $138–$148M; adjusted EBITDA (attributable) $10.4M vs guide $5–$8M, driven by stabilization across all three businesses and better execution.
  • DynaEnergetics margin recovery: adjusted EBITDA improved to $5.1M (8.0% margin) from $0.4M (0.6%) in Q3 as Q3-specific inventory/bad-debt charges rolled off and cost actions took hold.
  • NobelClad posted its second-best quarterly sales in a decade; strong shipments and sustained 20%+ EBITDA margin underscore resilient industrial demand despite backlog drawdown.
  • Management quote: “Fourth quarter sales of $152.4 million and adjusted EBITDA… of $10.4 million both exceeded our guidance… reflecting the progress we made to stabilize our 2 largest businesses while executing on several self-help initiatives.” — Interim CEO Jim O’Leary.

• What Went Wrong

  • Arcadia exposure to luxury residential: net sales down 11% YoY and margin compression due to fixed cost absorption in high-end residential products; gross margin fell to 22.4% vs 27.8% in Q4’23.
  • DynaEnergetics top-line pressure: sales down 9% q/q and 15% y/y on North America pricing and seasonal completion slowdown; margins remain below prior-year levels.
  • Backlog at NobelClad fell to $49M from $59M as robust Q4 shipments outpaced bookings; tariff-related competitiveness risks flagged for U.S. fabricators in Q&A.

Transcript

Operator (participant)

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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. 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.

Geoff High (VP of Investor Relations)

Hello and welcome to DMC Global's fourth quarter conference call. Presenting today are DMC Global'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 Global 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.

With that, I'll turn the call over to Jim O'Leary. Jim?

James O'Leary (Interim CEO)

Thanks, Geoff, and thanks to everyone for joining us for today's call. DMC's 2024 fourth quarter was a solid finish to a challenging year. 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. At Arcadia, our architectural building products business, fourth-quarter sales were $60.3 million, up 4% sequentially and down 11% versus the same quarter last year. Sales of commercial exterior products, which generate approximately three-quarters of Arcadia's revenue, showed modest sequential and year-over-year growth. The sales decline versus last year's fourth quarter was principally due to soft demand for custom residential windows and doors focused on luxury price points.

Jim Schladen, who we recently recruited back as President of Arcadia, is implementing a back-to-basics plan that includes right-sizing our cost structure to match market realities while evaluating certain underperforming product offerings that serve principally high-end residential customers. We're refocusing on Arcadia's core commercial operations, which represented the vast majority of the sales and EBITDA at Arcadia when the original acquisition was made in 2021. While we're continuing the operating initiatives introduced recently, Arcadia's principal focus under Jim will be reinvigorating its commercial efforts while right-sizing areas, notably in the custom residential operations. At DynaEnergetics, our energy products business, fourth quarter sales of $63.7 million were down 9% sequentially, reflecting a seasonal slowdown and unconventional onshore well completions.

In response to market realities and to ensure we continue to have the best product on the market, DynaEnergetics focused on two key initiatives designed to enhance product reliability and improve overall competitiveness during the end of 2024. The first was the introduction of Dyna's next generation DynaStage system. The latest model has been value re-engineered to use less raw material and be significantly more compact than the prior system. It delivers a further improvement in downhole reliability, which was already the best in the industry. The process of converting customers to the new system is complete, and the feedback has been positive so far. Second, DynaEnergetics finished the first phase of automating product assembly operations at its Bloom, Texas manufacturing center. Phase two should be complete in the second quarter, and this initiative will reduce operating expenses, improve product reliability by further minimizing human error.

Finally, at NobelClad, our composite metal business reported fourth quarter sales of $28.4 million, which was its second strongest top-line performance in more than 10 years. Robust fourth quarter shipments were not offset by new orders, leading to a sequential decline in order backlog. However, NobelClad has recently seen a pickup in its product inquiries from its core downstream energy market and is focused on converting as many of those as possible into firm orders and backlog. Now, stepping back for a moment from a broader strategic perspective, the number one concern many of our shareholders correctly raised when I took over last November was the risk created by the Arcadia put-call arrangement, which could have subjected us to either an impending liquidity issue or significant equity dilution. To address this issue, we proactively pursued and reached an agreement with our Arcadia joint venture partners in December.

This agreement extended the maturity of this obligation until September of 2026, as the earliest date our joint venture partners can exercise their put option. This extension provides us with significant optionality to reduce debt with a singular focus on free cash flow while exploring other more favorable refinancing alternatives. The steps we've taken to stabilize and strengthen our businesses have positioned DMC Global for improved performance going forward when our core cyclical end markets improve. I'll now turn it over to Eric for a closer look at the fourth quarter and our guidance for the first quarter.

Eric Walter (CFO)

Thank you, Jim. I'll start with a look at fourth quarter profitability. Consolidated adjusted EBITDA attributable to DMC was $10.4 million. Inclusive of the Arcadia non-controlling interest, adjusted EBITDA was $11.9 million, while adjusted EBITDA margin was 7.8%, up sequentially from 4.6% in the third quarter and down from 13.4% in the prior year fourth quarter. The year-over-year decline relates to the previously mentioned drop in sales of Arcadia's premium residential windows and doors products. Arcadia reported fourth quarter adjusted EBITDA attributable to DMC of $2.2 million. Adjusted EBITDA before non-controlling interest allocation was $3.7 million, or 6.2% of sales, up from 5.8% in the third quarter and down from 13.6% in the prior year fourth quarter. Dyna reported fourth quarter adjusted EBITDA of $5.1 million.

Adjusted EBITDA margin was 8%, up from break-even margin in third quarter, which was impacted by inventory and bad debt charges, and down from 12.3% in the 2023 fourth quarter. NobelClad reported fourth-quarter adjusted EBITDA of $5.8 million, with adjusted EBITDA margin of 20.6%, down from 23.2% in the third quarter and 24.7% in the prior year fourth quarter. The decline was due to a less favorable project mix. Fourth-quarter SG&A expense was 16.5% of sales, down sequentially from 18.5% in the third quarter and up from 18.6% in the 2023 fourth quarter. It should be noted that SG&A in the third quarter included approximately $3.5 million of bad debt expense at DynaEnergetics. Fourth-quarter adjusted net income attributable to DMC was $1.8 million, while adjusted EPS attributable to DMC was $0.09.

With respect to liquidity, we ended the fourth quarter with cash and cash equivalents of approximately $14 million. Total debt, inclusive of debt issuance costs, was approximately $71 million, and net debt was roughly $57 million. Our debt-to-adjusted EBITDA leverage ratio was 1.35, which remains well below our covenant threshold of 3.0. On a pro forma net debt basis after subtracting cash, our leverage ratio at the end of the third quarter was 1.09. Now on to guidance. In light of current activity levels and the recent backdrop of uncertainty created by tariffs in Dyna's North American market, as well as Arcadia's primary commercial construction market, we are anticipating first quarter sales and adjusted EBITDA to be relatively flat versus the 2024 fourth quarter.

We expect first quarter consolidated sales to be in a range of $146-$154 million, and we anticipate adjusted EBITDA attributable to DMC to be in a range of $8 million-$11 million. I should note that we're closely monitoring evolving U.S. and reciprocal tariff policies and will provide any updates when appropriate. Now I'll turn the call back to Jim for some additional comments.

James O'Leary (Interim CEO)

Thanks, Eric. 2024 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. Most importantly, we extended the looming maturity created by the Arcadia put, providing us with the time required to generate additional cash flow and reset our capital structure while we continue to improve our businesses. 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. Organizationally, at Arcadia, we were able to recruit Jim Schladen back to reset the commercial culture, bringing a 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.

Operationally, while we can't do much to influence the imposition of tariffs or the macroeconomic impact they may have, we can do something about our underlying cost structure to ensure we capture more of every marginal dollar. Notably, at DynaEnergetics, our product re-engineering efforts and the introduction of 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 companies going forward. Now, finally, 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 period. We appreciate that you always have other places to invest and we're committed to finding ways to maximize value on your behalf.

Now, with that, operator, we'd be glad to take any questions.

Operator (participant)

Thank you. At this time, we'll conduct our question-and-answer session. If you would like to ask a question, press star one on your telephone keypad. 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. Thank you. Our first question comes from Katie Fleischer with KeyBank Capital Markets. Please state your question.

Katie Fleisher (Associate Research Analyst)

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. How does this fit into the new back-to-basics approach that you discussed, Jim?

James O'Leary (Interim CEO)

The back-to-basics approach is more about right-sizing the cost structure, right-sizing the residential operations that had gotten a bit too large. That is 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 top-notch at when he was here. That was one of the underlying attractive things about the business when it was acquired by DMC in 2021. Right-sizing the cost structure. Our ambitions probably got a little bit ahead of what we should have been willing to pay for at that time. Probably the biggest issue, which we talked about in the press release, we talked about last quarter, are aspirations for the residential business. It is a custom residential business, which means it is very high touch, very high cost to serve.

Getting that to the levels that the company once aspired to is probably not realistic in the short term. Jim has appropriately right-sized it around what our aspirations can and should be for the next couple of years. I mean, that's really the back-to-basics reference in there.

Katie Fleisher (Associate Research Analyst)

Got it. 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 Los Angeles, just assuming that that would be more of the high-end residential?

James O'Leary (Interim CEO)

Seventy-five percent of the business is commercial. I do not know if that is consistent with what you are referencing, Katie. In Los Angeles, everywhere where there has been an impacted area, there is a strip mall, there are storefronts, there are areas that our principal product and 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 are right-sizing, we are not taking it out of existence. It is still there. If you listen to the comments coming out of most of the elected officials in Los Angeles, this is a 10-plus year rebuilding project. It will start with things that we have supplied and do supply every day in some of the more populated areas where commercial buildings have every bit been as impacted as residential.

We have a nice residential business that will be there when the houses are rebuilt.

Katie Fleisher (Associate Research Analyst)

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

Eric Walter (CFO)

Yeah. With NobelClad, it's a backlog-driven business. We have pretty good transparency going into the first quarter or so of the year. Even though the backlog has come down, we feel pretty confident that the numbers that we've put up before will be able to keep that same type of momentum. 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. That could make them, them being the fabricators, less competitive and would potentially impact NobelClad. 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.

Katie Fleisher (Associate Research Analyst)

All right. Thanks. I'll pass it on.

Operator (participant)

Thank you. Our next question comes from Stephen Gengaro with Stifel. Please state your question.

Stephen Gengaro (Managing Director)

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. We're kind of hearing activity levels pretty flat, maybe completion activity in general stages, etc. 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?

James O'Leary (Interim CEO)

I mean, Stephen, you just repeated the same conference calls, the same press releases we read. It's the same thing we hear from our customers. It's 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 recognize last year was a really tough year. We've done the value engineering exercise referenced in there, which is trying to take out the appropriate number of people and variable costs to be responsive to that. 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.

Stephen Gengaro (Managing Director)

Okay. My second question is maybe a little harder, maybe harder to answer. When we think about the—and I'm not going to ask you for sort of valuation—when we think about the bids for your business from the third party, and we think about kind of how you've reacted 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 margins should be, in your view, kind of at the mid-cycle, given sort of the backdrop of the competitive landscape?

James O'Leary (Interim CEO)

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 under-earn 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. 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 recommend it get bought? Like you recommend it?

Stephen Gengaro (Managing Director)

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 for where you think what you think they should earn at the middle of the cycle.

James O'Leary (Interim CEO)

Yeah. Yeah. 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. We responded with all the things you do when that happens on the cost side. In the case of Arcadia, I think the overcommitment to residential, particularly, that was self-inflicted for sure. We, of course, corrected. We had turnover there, pointed out by our analysts and some of our investors. We, of course, corrected there, brought back the guy who had run the business successfully for a couple of decades. I can't put a value on the business. That's a job you guys do well.

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. You average them out, and it should be appreciably better than where the down part of the cycle last year was.

Stephen Gengaro (Managing Director)

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

James O'Leary (Interim CEO)

No. This is, I've got a short history with the company, but there's a lot of other parts in the building space I'm associated with. There are other industrial companies I've been associated with. This is about as uncertain a time because of the tariffs as I've seen in a while. 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. We may see that for a couple of weeks, a couple of months, certainly like some of our peers have. 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 systems, probably about the closest comp to Arcadia in that line of business. Again, you hit on all the right bullet points for the DynaEnergetics business. There is 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 at Arcadia, and we think it'll pay dividends.

Stephen Gengaro (Managing Director)

Great. No, thank you for all the details.

James O'Leary (Interim CEO)

You're welcome, Stephen. Thank you.

Operator (participant)

Our next question comes from Gerry Sweeney with Roth Capital Partners. Please state your question.

Gerard Sweeney (Managing Director and Senior Research Analyst)

Good afternoon, gentlemen. Thanks for taking my call.

James O'Leary (Interim CEO)

Hey, Gerry.

Gerard Sweeney (Managing Director and Senior Research Analyst)

A lot of my questions have been asked, but I'm just curious if you could give a little bit more details on the right-sizing at Arcadia. Specifically, I believe you said it was a little bit self-inflicted, but how much of a drag are or was the high-end retail business? Is that in the rearview mirror, or is that going to take a little bit more time to work through the income statement?

James O'Leary (Interim CEO)

In the rearview 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 100-120 FTEs. We downsized that to less than 20-30% of that by not having all that fixed overhead in a facility where the volume dropped off pretty substantially. I personally am always skeptical about custom businesses in the building product space because they're high touch. They're high cost to serve. I certainly have never had any success doing it. I think it is worth a read to hear what JELD-WEN and others—I don't know if Masonite's 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. We have 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. We are not there yet because I think a lot of the product—and again, this would not impact your model, but anecdotally, it is worth knowing—we probably lost a few orders in Los Angeles of that product line the first when the fires in Los Angeles 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 do it in a way that's beneficial to our shareholders. That is anecdotal, but I think directionally suggests that keeping the custom window operation, particularly the thermal steel operations, will pay dividends over the next many years. If it doesn't, there's really not a lot we would do different on the EBIT and EBITDA basis as far as the step flow type things you do on an outright exit. That's always available. We just don't think it's necessary today.

Gerard Sweeney (Managing Director and Senior Research Analyst)

Understood. Switching gears a little bit. This may be 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?

Eric Walter (CFO)

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. Part of the free cash flow generation is getting more efficient in terms of how we manage working capital. We think that there's opportunities across all the businesses, particularly in Arcadia. 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. 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. That is absolutely an area where we're focused and one that we expect to see some improvement in.

If you looked at our Q4 numbers, we did have some improvement there from a net working 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.

Gerard Sweeney (Managing Director and Senior Research Analyst)

All right. That's it for me, guys. Thanks. I appreciate it.

James O'Leary (Interim CEO)

Thank you, Gerry.

Eric Walter (CFO)

Thanks, Gerry.

Operator (participant)

There are no further questions at this time. I will hand the floor over to James O'Leary for closing remarks.

James O'Leary (Interim CEO)

Okay. Operator, thank you very much. I said it in the prepared remarks, but can't hurt to say it again. All our employees, last year was a tough year. 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. For the next year and a half, two years, our number one priority is free cash flow. Our tenth priority is free cash flow. Every number in between is free cash flow and debt repayment. You know very clearly and crisply what we're focused on going forward. Thanks for your time, and have a great rest of your day.

Thank you.

Operator (participant)

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