Greetings. Welcome to the DMC Global Fourth Quarter and Full Year Earnings Call. All participants are in listen-only mode at this time. A question-and-answer session will follow the formal presentation. I will now turn the conference over to your host, Geoff High, VP of Investor Relations. You may begin.

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 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?

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. 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?

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 deleveraging, 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 deleveraged. 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.

Our first question has come from Ken Newman with KeyBanc Capital Markets. Please go ahead with your question.

Hey, guys.

Hey, Ken.

Thanks for taking the question. I guess my first one will be just on the first quarter guide for Arcadia. Obviously, you're expecting that to be weaker here despite the prior year comp easing sequentially from 4Q to 1Q. Just curious, can you talk a little bit about how much of that is still the pricing drag? Is that completely all of it? Any color around just where volumes are within that business and how they're trending? And what are you seeing from an underlying activity outside of pricing within that business?

Yeah. So pricing is still a bit of a drag with aluminum costs. We're also seeing in the first quarter, I think, it's abating now, but January was challenged with weather. So we had severe rain and flooding on the West Coast, our core markets. So that impacted January, for sure. Volume is relatively steady. We're seeing a bit of softness in our storefront business. But I think as we play out the quarters, Q2, Q3, Q4, we're going to see that strengthening. We're also seeing our project business and outlook there strengthening quite a bit and improving. So it's a bit of a mixed bag. We also see residential in a bit of, I'd say, a valley, and we expect that to pick up throughout the year. So that's kind of the premise behind the, I guess, we'd call it $67 million to $71 million flattish with 4Q. Eric, anything else?

I think you hit it, Mike.

Okay. You mentioned it briefly, but I want to follow up on the confidence regarding margin improvements in Arcadia after the first quarter. The revenue significantly eases starting in the second quarter. I would like to understand the extent of the benefit from capacity expansion. Can you quantify that benefit for 2024 in relation to other factors such as potential pricing stabilization or expected volume improvements as we progress through the year?

Yeah. I think volume is going to help as we go throughout the year. I think Q2, some of the project business, again, there's some good project mix in there. There's some unfavorable project mix in there. But I think what we're going to see is revert back to historical 30%, low 30s, 30% plus margins in Arcadia. Again, it's a high variable cost business. So it's not entirely volume-driven, but volume will help it as we step throughout the year and an increase in residential as well.

Got it. Maybe one more before I jump back in the queue. With the expectation of lighter sales in the first quarter, how do you view the benefits of working capital? And what are your thoughts on free cash flow conversion beyond the first quarter?

Yeah. Ken, this is Eric. So for 2023, we had free cash flow conversion of 40% to 45%. And this year, we're aiming to get that up into the, call it, low 50%, low to mid-50% level. We do think that there's going to be some tailwinds from working capital. We think that the working capital actually was slightly higher in a couple of the businesses in 2023 than maybe what they needed. So as we go forward in 2024, we think we're going to be able to unwind some of that and get a benefit of the free cash flow line.

Understood. Thanks.

Thank you. Our next question comes from the line of Alec Scheibelhoffer with Stifel. Please proceed with your question.

Thanks, good afternoon everyone and thank you for taking my question.

Alec. Hi, there.

Hi. So just to start us off here, I was wondering if you could provide just an update on the competitive landscape in the perforating business. Any kind of color you could provide on how pricing is trending, given some of the consolidation we've seen in the market in North America? And yes, just some color around that would be great.

We've noticed some pricing pressure due to market consolidation, which has impacted our margins. This is occurring ahead of our margin improvement initiatives. We're implementing a lot of automation in the first and second quarters that will enhance our margins and improve the performance of our perf gun systems. Additionally, we are rolling out several operational excellence initiatives to reduce costs this year that will further boost our margins. We also have new technology in our gun systems and an improved product mix that we believe will drive further improvements. Overall, we're seeing a positive market start in January and during the first quarter, and we expect to see enhancements compared to the fourth quarter, leading to a much better outlook as the year progresses.

Great. Thank you for that. And then just shifting gears to Arcadia. I was just wondering if you could provide some additional color on the outlook for the business. Just curious, in the past, you've mentioned kind of going after some low-hanging fruit and growing the business organically. And I see the CapEx, if I'm looking correctly, for '24 is up a little bit sequentially. I'm wondering if that's just speaking to some of that organic growth or if there's any inorganic that you're going after as well?

Yeah. So I'd start on the organic side. I mean some of it is SG&A and people investment. We've got a pull-through on our commercial interiors business and our Arcadia custom business, which is the luxury residential side of our business. The predominant business in Arcadia is commercial exteriors, low-rise storefront. And so I think that's going to be part of it. I think on the CapEx side, some additional investments in paint as well as anodizing are going to drive both volume as well as margin as we outsource some of our anodizing now.

Got it. That's great. If I could ask one more question about Dyna. I know you mentioned some automation and other initiatives related to margins. I'm curious if you're anticipating any growth in the US business if activity remains relatively flat, or how we should approach this from a margin perspective.

Yeah. So I think what we're expecting is a fairly sizable growth in the international business. So we exited 2023 with record international sales. We have a record backlog internationally, so we'll see growth there. North America, we didn't provide full year guidance, but it's off to a good start, I'd say. But I wouldn't put a bunch of growth into the North America side, probably more on the flat side. Eric, would you?

Yeah, I would agree. Just to augment what Mike was saying, I think as you think about the revenue trajectory of that business, I think it's going to be relatively flat going forward. But when you peel it back and look at the domestic versus international components, there's going to be a bit of a mix there. Like Mike said, the international piece, we feel pretty confident about. They're showing a lot of upward growth there. But the North American market is probably going to be a bit flat or maybe a little bit more sluggish than in years past.

And again, the international piece is also part of what's driving the margins as well. So that's a business that should outperform for us in 2024.

Got it. That's great color. And with that, I'll turn it back. Thank you.

And it looks like we have reached the end of the question-and-answer session. I will now turn the call back over to Michael Kuta for our closing remarks.

Thank you again for joining today's call. We appreciate your interest in DMC and look forward to updating you in May following our first quarter.

And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.