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spk00: Greetings and welcome to the DMC Global Second Quarter Earnings Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. Should anyone require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jeff High, VP of IR. Thank you. You may begin.
spk05: Hello and welcome to DMC's second quarter conference call. Presenting today are DMC CEO Michael Kuda 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 second 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 Michael Kuda. Michael?
spk06: Hello, and thank you for joining us today. DMC reported second quarter sales of $171.2 million and adjusted EBITDA attributable to DMC of $19.4 million. Our results represent a sequential rebound versus the first quarter, and were achieved despite continued weakness in our primary construction and energy products markets. The results also were above the high end of our guidance range. Arcadia, our building products business, was a key driver in our improved financial performance, reporting second quarter sales of $69.7 million and gross margin of 33.2%. Gross margin was up 600 basis points from the first quarter. In the comparable quarter last year, Arcadia's gross profit was 34.7%, which was their best margin performance since we acquired the business in December 2021. Arcadia's second quarter adjusted EBITDA margin was 17.8% versus 9.5% in the first quarter and 20.8% in the year-ago second quarter. The results reflect management's focus on improving operational efficiencies and streamlining Arcadia's cost structure. A successful effort to de-bottleneck finishing operations has improved Arcadia's capacity, and the business is working to further strengthen its customer service and lead times. DynEnergetics, our energy products business, reported second quarter sales of $76.2 million, down 2% sequentially and down 10% versus last year's second quarter. Adjusted EBITDA margin was 11.5%, down from 13.5% in the first quarter, and 23% in the year ago's second quarter. This year's second quarter results reflect lower sales volumes and softer pricing in North America, as well as a $500,000 bad debt expense. Well completions in Dyna's core U.S. onshore market declined in five of the first six months of the year, and the number of rack spreads is off roughly 13% from the 2024 peak. We expect North American completion activity will remain soft during the second half of the year. Dynas has taken steps to align its cost structure with anticipated demand. Recent cost reductions coupled with previously discussed automation and product enhancement initiatives are expected to improve Dynas EBITDA margins during the back half of the year. In the fourth quarter, sales and margins should benefit from an expected increase in international product sales. Sales at Nobelclad, our composite metals business, were $25.2 million, which is up 2% versus the year-ago quarter and down 6% sequentially. Adjusted EBITDA margin was a strong 22.7% and benefited from favorable delivery timing and project mix. Nobelclad's second quarter order backlog of $64 million was up over 20% sequentially and reflects the impact of the record petrochemical order we discussed during our last call. DMC's Board of Directors continues to evaluate a range of strategic options to unlock shareholder value. We will issue an update when appropriate. I'm encouraged by the progress made by DMC's businesses during the second quarter. I want to thank our employees for their commitment and outstanding efforts. Now I'll turn the call over to Eric for a closer look at our second quarter financial performance and a review of our third quarter guidance. Eric?
spk04: Thanks, Michael. Consolidated second quarter sales were $171 million, up 3% sequentially and down 9% from last year's second quarter, which was one of DMC's strongest historical quarters. Consolidated gross margin was 27.1%, up sequentially from the 25.4% and down from 32.8% in last year's second quarter. As Michael noted, the sequential improvement reflects a strong margin recovery at Arcadia versus the first quarter. The decline versus last year's second quarter reflects lower sales and margin at Dyna Energetics. Second quarter SG&A was approximately $27 million, or 15.8% of net sales, versus $29 million, or 15.5% of sales, in the second quarter last year. Lower outside service expenses across all DMC businesses drove the reduction. Inclusive of the Arcadia non-controlling interest, consolidated second quarter adjusted EBITDA margin was 14.3% of sales, up from 11.4% in the first quarter and down from 20.3% in the year-ago second quarter. Second quarter adjusted net income attributable to DMC was $5.7 million, while adjusted EPS attributable to DMC was 29 cents. With respect to liquidity, we ended the second quarter with cash and cash equivalents of $15 million, total debt inclusive of debt issuance costs of $84 million, and net debt of $70 million. Our debt to adjusted EBITDA leverage ratio of 1.1 at the end of the second quarter remained well below our covenant threshold of 3.0. On a pro forma net debt basis, after subtracting cash, our leverage ratio was 0.92 at the end of the second quarter. Now, turning to guidance for the third quarter of 2024. Consolidated sales are expected in a range of $158 to $168 million. We expect activity in Arcadia's primary markets to remain weak in the third quarter, while activity in China's primary North American markets is expected to soften versus the second quarter. NOBO-clad sales are expected to be comparable to the second quarter. Third quarter adjusted EBITDA attributable to DMC is expected in a range of $15 to $18 million. Arcadia's adjusted EBITDA margin is expected to moderate versus the second quarter due to less absorption of overhead expenses on lower sales, while we expect Dyna will improve modestly due to cost reductions in operational initiatives. Adjusted EBITDA margin in Novoclad is expected to decline sequentially due to a less favorable project mix. With that, we're ready to take any questions from our analysts. Operator?
spk00: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate 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. One moment please while we poll for questions. The first question is from Jerry Sweeney from Roth Capital Partners. Please go ahead.
spk01: Good afternoon. Sorry, good afternoon, Mike, Eric, Jeff. Thanks for taking my call. Good afternoon. Question. Sorry, not feeling well. Revenue at Acadia was ahead of forecast, and obviously gross margins, you executed extremely well on that front. Can you give us a little bit more detail on maybe some of the operational efficiencies and cost-out reductions that you implemented in the segment to drive those margins? And are they sustainable?
spk06: Yeah, thanks, Jerry. So what we've been doing is doing some cost outs, really streamlining the organization, getting more efficient in particular in our finishing operations. So our finishing operations are the heartbeat of our organization. So that's what enables our customer service model. So everything goes through finishing, whether it's paint, anodizing, all material runs through there. The organizations really worked hard to de-bottleneck those ops, increase finishing capacity, throughput. And so that's driving real productivity improvements in the business and enabling the front end of the business.
spk01: Got it. And then maybe this one for Eric. Cash flow was, I think, flat essentially in the quarter. Maybe what's driving free cash flow in the quarter and then projections for the remainder of the year? Obviously, the cash flow, there's puts and takes on that front, but just interested on that front.
spk04: Yeah, thanks, Jerry. Yeah, for the second quarter, the free cash flow performance was really a function of timing and some one-time items. We had a prepaid purchase of explosives to secure our supply within Dyna. There was the timing of some customer advances in the Novoclad business moving from Q2 into Q3. And then we had some higher cash taxes in the quarter. And when you add all of those up, that had an impact, a negative impact cash flow of about $10 million in Q2. So going forward, to answer the second part of your question, we think that there's an opportunity to take out some networking capital out of the Dyna business, given where we think activity levels will materialize in the second half of the year. And also the opportunity to sharpen our pencil also at Arcadia. So we're looking to be finishing the year with a debt position of call it 65 to $70 million and using the cashflow we generate in the second half of the year to continue to pay down. and deliver that debt. So we feel good about where we're going to be going, but had some headwinds, unfortunately, in the second quarter that were one time in nature.
spk01: Got it. Okay. I'm going to jump back in queue. Thanks.
spk00: The next question is from Steven Gingaro from Stiefel. Please go ahead.
spk02: Thanks. Good afternoon, everybody. Hey, Steven. Hey, Steven. Steven. So two things for me. The first, can you talk about the Dyna Energetics business a bit more and just kind of the, A, the competitive landscape and what you're seeing kind of from a potential growth of that business relative to kind of completion activity, whether it's market share or completion intensity. How should we be thinking about that as we look at the next couple of quarters?
spk06: Yeah, I think generally we'll move with the market. When you think about sequentially Q2 versus Q1, whether you look at completions, rig count, or frac spreads, those were generally down in the 4% range, which tracked Dyna NAMM performance. So I think that's probably the way to look at it. And our guidance reflects that softness in Q3 and Dyna. So the I mean, the competitive dynamics are fairly steady, I would say, you know, and pricing continues to be a challenge. But, you know, we've got quite a bit of – quite a few initiatives in place, you know, to offset these impacts and, you know, also reflected in our guidance. So the op excellence initiatives we're working on, cost takeout, that's going to continue into the second half of the year. And Some of that on the product design side is going to take hold in 2025. So, you know, whatever the market's doing, we feel pretty good about controlling what we can control from a cost standpoint, as well as from a competitive standpoint in our differentiation, and that remains. But I think that's the way to think about dying as we move forward. Maybe the last thing I'd say is that we're seeing healthy international activity and we see a pickup, a bump in Q4. So, you know, we should exit the year pretty strong on the international front in Q4, you know, which will offset some of the softness in North America.
spk02: Okay. That's helpful. And then, I think the other question I had was just kind of around the Arcadia, the put call option in Arcadia. And I think there's a little confusion out there, like people I talk to, that whether it's like a snapshot in time, like in December, or whether this thing kind of rolls forward. And what's the timing on when a decision on either party's part has to be made on the foot call option on Arcadia and how does that mechanically work?
spk06: Yeah, so the foot call first becomes exercisable at the end of December of this year, but that does not mean that anyone is compelled to exercise us being, you know, exercising the call or minority partner exercising the foot. There's nothing that's compelling anybody to do that.
spk02: But is it like a one-time event or does it roll, like how long do you have to exercise the option? Is it a day, a week, a year? How does that work?
spk06: It quite frankly continues on into perpetuity to the extent that neither party exercises the put for the call.
spk02: Gotcha. Okay, great. Thanks. I'll get back in line. That's very helpful.
spk00: Thank you, Stephen. As a reminder, it is star one to ask a question. The next question is from Ken Newman from KeyBank Capital Markets. Please go ahead.
spk03: Hey, guys. Hey, Ken. I have a question. Hey. Uh, you know, I guess I'll start with Arcadia. Um, you know, obviously the market's still pretty weak. Uh, it looks like, um, you're expecting revenue down sequentially here from second quarter. Uh, I know you're not ready to give, you know, fourth quarter guidance or anything, but I'm curious about what the customers are kind of saying in terms of longer term visibility and how they're kind of thinking about, um, stabilization or timing of stabilization within that market specifically.
spk06: I think that we've got a couple of core, I mean, just looking at the indicators out there and that we all look at, whether it's ABI in the West at 43 spot one or the Dodge Momentum Index, which, you know, points towards some, you know, favorable end markets. But, you know, once again, driven by, you know, very kind of specific markets like data centers. So, I mean, you see all the same data that we do, you know, from a customer perspective. I think we're seeing, you know, it's going to be soft markets for a couple of quarters here as we go out into the year. I think the good, and in particular, when you look at our Q2, you know, we were pretty resilient, you know, We're seeing, you know, obviously our exposure to diverse end markets. Our bookings are relatively, you know, consistent. And voting activity has been good. But, you know, there's, you know, folks citing interest rates that are pushing projects out. So, look, I think... I think we've got a couple more quarters of softness, but I do think our guidance, you know, we guided in Q2, 64 to 68. Q3 is another 64 to 68 because that's sort of what the market's serving up. What we're doing, though, is the things that we can control, and we're talking about improving our operational effectiveness is really driving the profitability and the EBITDA at the bottom line and driving cash flow. And I think and I feel confident that we're going to do that the remainder of this year for whatever the market serves up.
spk03: That's helpful. I guess as a follow-on to that, I mean, with the costs out in place for Arcadia, I mean, is there a way that we should think about normalized operating leverage as the volume stabilizes? Obviously, I know it's going to be very dependent on what the volumes do, but how do we think about incremental and decremental margins with this new cost
spk06: uh kind of platform that you're on yeah incremental decrementals are are uh you know material margin is probably in the you know call it um you know 45 ish percent range and then grow you know and then when you think about um you know it's not a high fixed cost uh business there's a larger labor component so i think incremental or decremental margins are probably between, you know, call it 35 and 40%. Eric, would you concur with that? Yeah. Yeah. But the incremental, I'm sorry, Ken, just real quick, the incremental and decrementals just aren't, they're not significantly higher than our gross margin percent in that call it 33% range, right? Right. Right. Okay.
spk03: Maybe one more, if you squeeze it in. You talked about some project mix headwinds, I think, on Nobel-clad. I know it's a smaller part of your business, but just talk about how persistent that mix headwind could be beyond this quarter as you think about the backlog of activity there.
spk06: Yeah, so we see a dip in Q3, but a very strong Q4 drop. And quite frankly, you know, not obviously providing guidance on 25, but pretty bullish on 25. And I think there are things shaping up that, you know, 25 would be a really good year.
spk03: Very helpful. Thanks, guys. Thanks, Ken.
spk00: The next question is from Steven Gingaro from Stifel. Please go ahead.
spk02: Thanks. Just a quick follow-up. Honestly, Michael, I'm not sure you can comment on this, but I'll ask it. When you think about the structure of the company and what you're looking at doing with the Dynaside, is there any thought to pulling back on that, either permanently or temporarily, given kind of what the market's like on the buyer side?
spk06: Yeah, Stephen, I would just say that we're in the throes of, uh, strategic alternatives and, uh, you know, there's a lot of, a lot of, a lot of things on the table. Okay. So a lot of different, uh, things that we're evaluating. So broad scope.
spk02: Okay. Is, is there any way to think about how you balance the, you know, maybe creating more of a pure play business versus valuation on pieces you might want to sell?
spk06: Can you rephrase or clarify the question?
spk02: I guess the easier, I guess the more direct way to say is, would you take a lower price on something just to get rid of it, to make a cleaner left, you know, a cleaner business that is left to run?
spk06: Yeah. The, the, the viewpoint is, again, we're looking at a wide range of options to maximize shareholder value. And so the, That's maximizing shareholder value is the key. Gotcha.
spk02: Okay. Gotcha. That makes sense. Thanks.
spk06: Thank you, Stephen.
spk00: There are no further questions at this time. I would like to turn the floor back over to Michael Kuda, CEO, for closing comments.
spk06: Thanks again for joining us today. We appreciate your interest in DMC. and look forward to our next update. Take care.
spk00: This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.
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