DMC Global Inc.

Greetings and welcome to the DMC Global Second 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, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Jeff High, Vice President of Investor Relations. Please go ahead.

Hello and welcome to DMC's Second Quarter Conference Call. Presenting today, our President and 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 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 now turn the call over to Jim O'Leary. Jim?

Thanks, Jeff, and thanks to everyone for joining us for today's call. In a volatile environment marked by shifting tariff policies and highly challenged visibility, our businesses remain focused on their operating initiatives, helping us exceed our EBITDA guidance range of $10 to $13 million for the second quarter. At the same time, we've made progress on our most important overall objective, the leveraging our balance sheet. Second quarter consolidated sales were $155.5 million, while adjusted EBITDA attributable to DMC was $13.5 million. At Arcadia, our building products business, second quarter sales totaled $62 million, down 5% sequentially and 11% from the year-ago period. Last year's second quarter benefited from much stronger demand for high-end residential and commercial exterior products. As expected and previously discussed, this year's second quarter reflects nationwide weakness in the high-end residential market and in construction activity more broadly. Building activity in all segments continues to be challenged by persistently high interest rates. Management recently right-sized the cost structure of its residential offering to align with current market activity while refocusing on its core exterior operations, which generate approximately 75% of the segment sales. Arcadia's second quarter sales also reflect the anticipated and previously discussed drop in project billings following the completion of a large mixed-use development project in California that benefited the previous quarter. At Dyna Energetics, our energy products business, sales were $66.9 million, up 2% sequentially, but down 12% year-over-year. That decline versus prior year reflects pricing pressure and weaker demand in our core U.S. unconventional market, where the number of rigs, well completions, and active frack crews are at or near multi-year lows. At Nobleclad, our composite metals business, second quarter sales were $26.6 million, down 5% sequentially and up 6% year over year. Nobleclad's order backlog at quarter end was $37 million versus $41 million at the end of the first quarter. This decline reflects a sharp slowdown in bookings as customers await clarity on tariff actions or have settled on using alternative clad solutions from suppliers not impacted by tariffs. We believe we've lost some business in recent months to non-U.S. suppliers due to tariff-driven cost increases and a willingness by Canadian customers in particular to buy non-U.S. product. On a more positive note, during the second quarter, we drove a meaningful improvement in DMC's financial position. Total debt at the end of the quarter was $59 million, down 17% from the previous quarter, as we focused on our most important objective, strengthening our balance sheet in advance of the unwinding of the Arcadia put call. I'll now turn the call over to Eric for a closer look at our second quarter financial results and our outlook for the third quarter.

Eric? Thank you, Jim. I'll start with a look at second quarter profitability. As Jim mentioned, consolidated adjusted EBITDA attributable to DMC was $13.5 million. Inclusive of the Arcadia non-controlling interest, adjusted EBITDA was $16.2 million, while adjusted EBITDA margin was 10.4%. down from 11.4% in the first quarter and 14.3% in the second quarter last year. The year-over-year decline is largely attributable to lower absorption of Arcadia, where sales of residential and commercial exterior products declined from last year's second quarter, a period that benefited from materially stronger customer demand. Arcadia reported second quarter adjusted EBITDA attributable to DMC of $4 million, Before the non-controlling interest allocation, adjusted EBITDA was $6.7 million, or 10.9% of sales, down from 14.2% of sales in the first quarter and 17.8% in the prior year's second quarter. Dinah delivered $9 million in adjusted EBITDA, while adjusted EBITDA margin was 13.4%, a sequential improvement of 210 basis points and a year-over-year increase of 190 basis points. The improvements primarily reflect lower material costs and a slightly improved sales mix. Novoclad reported second quarter adjusted EBITDA of $4.4 million, with an adjusted EBITDA margin of 16.5%, down from 19.2% in the first quarter and 22.7% in the prior year second quarter. The declines were primarily due to a higher mix of international project sales, which typically carry a lower gross margin. Second quarter SG&A expense was $26.1 million, down sequentially from $28.3 million and $27.1 million in last year's second quarter. The decrease principally reflects lower expenses for professional services and bad debt. Second quarter adjusted net income attributable to DMC was $2.5 million, while adjusted EPS attributable to DMC was 12 cents. With respect to liquidity, we ended the second quarter with cash and cash equivalents of approximately $12 million. As Jim mentioned, total debt, inclusive of debt issuance costs, was down 17% from the first quarter to approximately $59 million. and net debt was reduced to roughly $46 million. And now the guidance. We expect second quarter consolidated sales will be in a range of $142 to $150 million, while adjusted EBITDA attributable to DMC is expected in a range of $8 to $12 million. The wider the normal range on adjusted EBITDA reflects the increased uncertainty in our end markets. Arcadia expects conditions in the U.S. construction industry will remain challenging, and it's right-sized its residential cost structure to align with the current market, while also refocusing on its core commercial operations. At Dyna Energetics, the industry is anticipating a sequential decline in well-completion activity in our core U.S. onshore market. While Noble Class is continuing to be impacted by the deferral of orders by customers that continue to monitor the still evolving tariff policies. I should note that our guidance is heavily influenced by macroeconomic concerns, volatility, and visibility issues created by current tariff policies and the current level of energy prices. It's subject to change either upward or downward as greater clarity emerges. Now I'll turn it back to Jim for some additional comments. Great.

Thanks, Eric. And to wrap up on a slightly more positive note, albeit very high level and anecdotal, despite recent ongoing challenges, continued uncertainty across both building products and the broader industrial markets, our businesses are steadily advancing against the key objectives we set earlier in the year. We exceeded our admittedly cautious EBITDA guidance by remaining focused on self-help initiatives within our control. At Arcadia, while business is subdued due to elevated interest rates and a slow start to the residential rebuild of Los Angeles, there are reasons to be optimistic. There's pent-up demand that will eventually be unleashed when interest rates moderate and local policy supporting the rebuilding initiative in L.A. picks up steam. In the meantime, we're focused on fixing some of the things that need fixing and believe we're making solid progress despite the market headline. At Nobleclad, we believe there's pent-up demand and order volume, which should recover as the tariff situation settles down. In the meantime, we're focused on controlling costs and lowering our overall break-evens. At Dyna Energetics, things are a bit trickier due to the shifting animal spirits around global energy markets, which are impacting oil field service companies and their suppliers. Again, maintaining tight cost controls is our principal focus as we watch for recovery in energy prices and well completion activity. At the mid-year mark of 2025, we've also made important progress to leveraging our balance sheet and improving our financial flexibility. We view these as important achievements as we continue to prepare for the possible acquisition of the remaining 40% stake in Arcadia late next year. The efforts of DMC associates across each of our three businesses has been critical to our continued progress, and I'd like to thank all of our employees for their hard work and commitment to DMC's future success. And with that, we're ready to take any questions. Operator?

Thank you. Well, now we conduct a question-and-answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. One moment, please, while we poll for questions. Our first question is from Jerry Sweeney with Roth Capital Partners.

Good afternoon. Thanks for taking my call.

Hi, Jerry. Jerry?

I wanted to start with Arcadia. It's a multifaceted question, so I apologize in the beginning. But on the weakness or some of the headwinds there, how much of this is resi and how much is sort of just end market across maybe the building product segment? And then the follow-up to that is, you know, what is the roadmap? What should we be looking for as you right-size the business there to fit demand as we go forward?

Hey Jerry, this is Eric. I'll take the first part of that question. So the weakness that we've seen has been really split between the residential business, that's our high-end residential segment, but also we've seen in the commercial exteriors part of the business that some of the projects are being deferred out a little ways. And so we think that that's primarily the impact of tariffs on people in developers trying to wait and see how things are going to shake out, but just the persistence of the higher interest rate environment, which is not helpful from that standpoint. Got it.

And Jerry, when you asked, the right sizing is effectively done in residential. One or two facilities where at the end of the second quarter of last year, Like everybody else, there's a couple of public comps out there you can look at that are pretty illustrative. You know, when the volume dropped off, we right-sized the workforce, right-sized some of the support, and that's effectively done. We consider taking more drastic action, but to be honest, most of that product would be perfect for the rebuilding of some of the higher-priced areas in L.A., And we have an option on that. Now, the challenge with that, you know, the estimates, and Jeff pulled something this morning that said 13,000 homes. I've seen estimates as high as 20,000 homes because, remember, a lot of the structures that are still on lots may never be inhabitable. So it's a pretty significant number of homes that need rebuilding. And I think there's been 154 permits pulled so far. So it's pretty far behind. Oh, yeah. And we've got a pretty good position. We've got a unique option on that market. We want to make sure we're positioned to take advantage of it. So we think we've done the right amount of belt tightening in the residential side, which is reflective of higher interest rates principally. On the commercial side, tariffs do impact it a little bit, but it really is principally interest rates. And most commercial contractors, you know, they placed orders, they're long lead, long-term demand, but they're not going to do releases and they're not going to start construction until they know what their overall cost of financing is. And when you're sitting in front of, you know, think about the last week and a half, two Fed dissents, one Fed governor moving on, almost a certainty you'll have some regime change there. And I think futures are pricing anywhere between one and two. And, you know, there are some dissents saying zero. But, you know, if we had to bet, we'd say there'd be some substantial cuts in at least the next 12 months, if not in the next six. So, you know, there's a lot of pent-up demand and making deeper cuts to commercial, which is still healthy and will also benefit, if you think about storefronts and some of the low-mid-rise buildings we do. they were impacted by the fires too. So we want to be careful about not cutting off our nose to spite our face.

I got you. And I understand that. You know, besides maybe, you know, reductions in force and right-sizing, are there other opportunities within Arcadia to drive profitability or other initiatives and any update on that front?

I mean, the principal initiatives and where Jim, Jim Slayton, who, returned to us earlier this year, spending time, is getting customer service, principally customer service, lead time reduction, a little bit on the quality side, back up to the standards that the organization lived and breathed when he was there. I mean, it's a custom customer service driven business, you know, top to bottom. And, you know, restoring that focus is where he's been spending a lot of his time in every division, not just Arcadia. We've got basically zero headcount ed mandates, unless it's for specific initiatives. We've got basically zero variable cost additions until volume returns. Less a factor for Arcadia than some of the other businesses where they've seen the volume really fall off. Jim's the guy who did most of the headcount reduction across the residential business when the backlogs were really depleted at the end of last year. So I think on the discretionary side, where it makes sense, we've done all the things you should without impairing yourself. If you look at Nobleclad, which is definitely our most tariff impacted business, although if you ask me to quantify it, you remember the model, we pass through raw material increases, but you don't know what demand you lose if your raw material increases are higher than somebody who's not burdened by tariffs. Yeah, that's the business that's probably seen the steepest drop in actual business impact, but it's more reflective in the backlogs, in the recent drop in quarterly performance, because the project business and most of the CapEx numbers I've seen come out from the government are absolutely horrendous. And that's a function of people either deferring or canceling orders until they know what the economy is going to look like and until they know what the true cost of a project is going to be. And I'll commend the Nobel Prize people. They've not only done the variable cost reduction that I always view as kind of the automatic shock absorber. They have cut much deeper than I would say selectively around other things, everything from travel down to discretionary headcount. They've done all the things you do when you really have a steep downturn driven by exogenous events, which they have. And Dyna, you know, Dyna, they've done all the things that are consistent with the initiatives we started last year. I remember that business fell off steeply last year. We had an automation initiative, which is going well, but I'd say probably 50-ish plus percent there, so more to come around getting that implemented. I would say a value engineering product, which I'd love to say was intelligently driven by our crystal balls, but we took a lot of material out of the product that's out in the market now. We did things that not only took material costs out, But by taking material costs out that would be impacted by tariffs, you kind of got the double whammy of preempting some of the things that, unfortunately, tariffs have done to a really challenged oil service market now. So outside of those, I don't think there's really a lot we can do right now. If the economy takes a huge step down, you know, of course there's more. But at this level of volume, I think we're at the right level.

No, I wouldn't disagree. I thought you guys executed very well in the quarter and, you know, Not surprised guidance is probably a little bit lower than my numbers, but that's not a surprise to me. One other quick follow-up question.

Jerry, we have the unfortunate benefit by releasing today. We got to see a lot of the people you cover and a lot of the commentary from customers, peers, you know, the whole oil field space. So I think we were appropriately prudent.

Yeah. Balance sheet. You know, obviously, nice pay down in debt in the quarter. Maybe this is for Eric. Anything in terms of on the balance sheet that you can continue to work on? I'm not sure inventories or payables, receivables, et cetera. I didn't have a chance to really come through it, but it looks like it's trending in the right direction and at decent velocity, so.

Yeah, I think from a networking capital standpoint, I think the business has performed reasonably well during the quarter, and there's always more that can be done, so we'll continue to push there. The free cash flow performance we had was really strong in the second quarter. I'd say looking out over the next several quarters, we would expect that we would be converting EBIT into free cash flow 40% to 45%. similar to where we were the first half of the year. And if you look back at the prior couple of years, we were kind of in that ballpark, 40% to 45%. So the network and capital performance is part of it. Obviously, generating cash earnings as we head into the second half of this year will be another critical aspect of it as well.

Got it. Okay. I'll jump back in line. I appreciate it. Thanks, everybody.

Thanks, Jerry. Thanks for the nice comments as well. We appreciate it.

Our next question is from Ken Newman with KeyBank Capital Markets.

Hey, good evening, guys.

Hey, Ken. Ken?

Hey. Jim and Eric, maybe to go back to Arcadia, thanks for all the help there on some of the cost-out initiatives there. I just want to ask, just given some of the work that you've done in recent months to right-size the costs in Arcadia, Can you just help us size up how you expect gross margins in that segment to perform at the midpoint of the third quarter guide? I'm just trying to figure out where do you think volumes need to be in order to step back up to that high 20, low 30% range?

Yeah, I think with this business, Ken, there's a fair amount of fixed costs in our COGS area. So When you look at the revenue that we've generated over the past couple of quarters, to the extent that we increase that, we have much better fixed cost absorption. So going into the third quarter, we've caveated what we think the performance is going to be for Arcadia, just given what the overall environment looks like. And there's going to be some softness in the fourth quarter that's just seasonal in nature. But really, for Arcadia, it's trying to get the volume picked back up to levels that we had in prior years. And to the extent that we do that, we get a disproportionate amount of impact at the EBITDA level and can push the EBITDA margins up, you know, closer to where you saw them in prior years. But for the next, I'd call it two, three quarters, it's still going to be touch and go given how the environment's operating.

Again, just one slight addition. The difference between this company at $240 to $250 million and $300 million, if you look at the history going back even before we acquired it, because you've got 11-ish or give or take number of distribution sites around the hub and spoke model, you've got all your manufacturing in one place, you're effectively got your operating leverage as good as it can be. The difference between $240 and $300, that's the difference between you know, the consistent $40 to $50 million years this company was doing, you know, right up until 2023, going into 2024. And the drop-off in volume, you know, $5 to $10 million a month, that's really where all the tremendous operating leverage is. That's why we want to be really careful about doing anything that impacts service, lead times, or our ability to meet demand. Because if interest rates come down, and if LA were to really jumpstart the permitting process, There's just a ton of business and a ton of leverage there. But as Eric pointed out on the fixed cost structure, it really shows pronounced differences in the difference between 240 and higher.

Yeah, no, that makes a lot of sense. Jim, you kind of touched on it there a little bit, but you did talk about interest rates kind of remaining stubbornly high. That's not too surprising from some of the other non-risk disruption guys that we cover today. What do you think is the lag time between, you know, hopefully an eventual cut versus when that starts to pull through in orders?

Well, for residential, it's usually pretty quick. And, you know, this doesn't impact us as directly as if you were a Geldwin or somebody who's doing first-time, first-time step-up. You know, the transmission mechanism, particularly if you've got lots available, if building's underway, is really quick. And the ability of builders and construction folks to get out there and jumpstart demand, it's impacted only by the labor. The construction market, and this is kind of untested right now because, and I don't want to throw a curveball in there, but what's happening to labor markets across the country, particularly labor markets where you know, you're impacted by some of the other headline issues that, you know, I don't want to throw in there, but, you know, if your workforce is impacted by job site guys who may or may not be coming in right now, there was a lot of disruption in LA around the fires and whatnot, you know, how quickly you can respond there and how quickly commercial contractors get out there. It may be a little bit slower, but I don't think it's two or more quarters, probably a quarter to two. Okay.

And then maybe one more, if I could just squeeze it in. You know, look, I understand that there's few problems that better volumes can't fix. But maybe just kind of going around each of the segments and talking a little bit about what you saw from a price-cost perspective, just given some of the moving pieces on tariffs, you know, how has realization been this quarter, just given the tariff environment? And what are you kind of expecting here in the third quarter?

We'll give you real generalities. And if Eric's got some specifics he's not uncomfortable with, he can jump in. You know, Arcadia is really successful. And our peers have been very good about passing long path driven increases, particularly on the aluminum side, since almost everything we do is aluminum. And, you know, it's a lot of it is health of the market, competitive reaction. You know, there's nothing there that's long term competitively damaging. And I would say it's purely a demand issue. And every time I talk to Mr. Sladen, we just need the sales. So when the demand comes back, we're fine there. Nobleclad's trickier because we're passing along the cost of the metal and where your demand impact is on, you just don't get projects or they just don't get started because it's a very chunky project-driven tariff business. The margin structure shouldn't be impaired there. But it's a volume issue, you know, and until there's a little bit more clarity on us relative to our competitors, there was that comment in there which, again, you know, hopefully these things pass. But, you know, Canadian buyers are not as enamored by U.S. suppliers as maybe they used to be. That's purely a volume. I don't think there's any permanent impairment in the margins. Dyna's a little trickier, and they did a great job executing. They've done a great job executing a number of projects. But if you look at everybody in oil field services, everybody's been impacted by tariffs. Every one of our customers and peers who's in the marketplace already talked about having to take that on the chin a little bit on margins. So, you know, do we have a look, Eric? Is it 100-ish, 100-plus basis points to recover? You know, there's definitely a hit there. I just think it's too hard to quantify now because energy markets are so volatile. And to be candid, it's so terrible.

Very helpful. Appreciate it.

You're welcome. Thank you.

Our next question is from Jawad Buryan with Stifel.

Hi, everyone. Thanks for the question. I guess, could you just talk a little bit about your second half sales expectations for Dyna? And I guess, how do you expect your sales to perform relative to the market that you're seeing right now? And then I do have a quick follow-up after that.

Yeah, so I think we said in our prepared remarks, but for the second half of the year, we're expecting the activity in Dyna's primary U.S. markets to be down. I think that's consistent with what you'll see with other players in the OFS space. There could be some opportunity for higher international sales relative to the first half of the year, but most of the sales, as you know, that Dyna generates would come from the North American market. And so we just expect that to be trending lower, just given where the completion activity is in frack crews and all other metrics you'd see out there for the market.

Got it. Thanks. And then, so we're seeing some data that's indicating that oriented perforating guns are kind of driving improved recovery rates and then also better frack. Are you also seeing this and how should we kind of think about that in terms of impacting your business going forward?

It's a trend in the market. We have a product that is in the market as good as anybody's and we're benefiting just like everybody else. I don't think it is dramatically changed anyone's performance relative to other peers. There is a product out there that's sold to, It's a self-orientated product that's sold to non-dyna customers, but I don't think that changes the paradigm in the way that you're referring to. It's not going to make the oil and gas market be better than what energy prices will allow it to be. Yeah. Thanks, El Paso. You're welcome. Thank you.

Thank you. There are no further questions at this time. I'd like to hand the floor back over to management for any closing comments.

Thanks. Well, to shareholders and the analysts who cover us, we appreciate your time this afternoon. And to any employees or others listening, again, we appreciate your hard work during the quarter. Appreciate you hanging in there during a very difficult environment with some challenging visibility. And back to shareholders, investors, we're working as hard as we can for you. We'll be there to participate in the recovery when it's here. And we appreciate your patience. So thank you very much.

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