DMC Global Inc.(BOOM)Q2 2026 法說會逐字稿

Greetings. Welcome to the DMC Global Second Quarter Earnings Call. Please note, this conference is being recorded. I will now turn the conference over to Geoff High, VP of Investor Relations at DMC Global. Thank you, Geoff. You may begin.

Hello, and welcome to DMC's second quarter conference call. Presenting today are 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 our 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, Geoff, and thanks to everyone for joining us today. Despite continued headwinds in each of our end markets, many of the initiatives discussed in previous calls have been successful, notably at Arcadia. As a result, second quarter consolidated sales of $157 million were at the high end of our forecasted range, while adjusted EBITDA attributable to DMC of $10.7 million exceeded the high end of our range. Arcadia's second quarter sales increased 9% year-over-year and 19% sequentially, marking its strongest quarterly sales performance since the second quarter of 2024 and the best EBITDA performance in over a year. These results were delivered despite a still horrible commercial construction market. The American Institute of Architects reported last week that its Architectural Billings Index has now gone 41 consecutive months without a majority of the firms reporting billings growth. This is the longest downturn in the more than 30-year history of the ABI. While demand for large longer-term construction projects remains highly challenged, Arcadia saw improved turnover for its core short-cycle products across its regional service center network as well as for high-end residential windows and doors. The stronger performance reflects the efforts of Arcadia's management team to improve product availability and service, long-standing hallmarks of Arcadia's business model. Additionally, efforts to rightsize our residential product offerings and refocus on attainable targets contributed significantly to Arcadia's improved performance. Sales at DynaEnergetics, our Energy Products business were flat year-over-year but increased 13% sequentially. Demand was steady but unfavorable mix, increased input costs and price pressure impacted profitability. DynaEnergetics recently completed its first shipment of a new perforating system developed specifically for use in enhanced geothermal systems. EGS is emerging as a potentially significant source of baseload electricity and could represent a meaningful opportunity for DynaEnergetics. At NobelClad, our Composite Metals business, second quarter sales were down 17% year-over-year, due primarily to lower activity in the global oil and gas market. Sales were up 15% sequentially as a result of increased deliveries on a large petrochemical order. NobelClad continues to maintain a healthy backlog with increased shipments from that backlog, including order deliveries delayed by customers, which should drive strong results during the second half of the year. I'll now turn it over to Eric for a closer look at our second quarter, our guidance for the third quarter and some important color on our capital structure as we're on the altar of the potential put-call exercise.

Thanks, Jim. I'll start with a look at our second quarter profitability across our businesses. Arcadia reported adjusted EBITDA margin before NCI allocation of 13.6%, up from 10.9% in the year-ago quarter and 6.9% in the first quarter. The improvement principally reflects improved fixed cost absorption on higher sales and improved results as we successfully rightsized our residential offering. At DynaEnergetics, adjusted EBITDA margin was 8.4% and benefited from a $1.5 million tariff refund. The results were down from 13.4% last year, driven by unfavorable pricing and mix, along with higher input costs. Dyna's EBITDA margin was up from 4.6% in the prior quarter from sales growth and the tariff refund. NobelClad reported adjusted EBITDA margin of 13.7%, down from 16.5% in the year-ago quarter and up from 9.8% in the first quarter. Second quarter SG&A expense was $24.5 million or 15.6% of sales versus 16.8% of sales in the year-ago second quarter and 18.1% of sales in the first quarter. The sequential decline principally relates to higher sales and improved operating leverage on fixed costs. Second quarter adjusted net income attributable to DMC was $727,000 or $0.04 per diluted share. With respect to liquidity, we ended the second quarter with cash and cash equivalents of $28.6 million. Net debt increased to $30.5 million up from $18.7 million at our 2025 year-end. The increase was primarily due to higher credit facility borrowings to fund working capital needed for business growth. Net cash used in operations was $8 million, also reflecting our investments in working capital as activity improves. And now the guidance for the third quarter. We expect sales will be in the range of $158 million to $168 million, while adjusted EBITDA attributable to DMC is expected in a range of $10 million to $13 million. The anticipated sequential improvements reflect steady performance at Arcadia, increases in well completion activity at DynaEnergetics, oil and gas and EGS markets and increased product shipments at NobelClad. Our guidance does not contemplate increased disruptions in international supply chains due to renewed hostilities in the Middle East, which could impact both DynaEnergetics and NobelClad, continued volatility in aluminum input costs at Arcadia or generally weaker end market conditions. As a reminder, our guidance is heavily impacted by macroeconomic conditions, including evolving tariff policies, particularly in our core energy and construction markets. Our guidance is subject to change either upward or downward as highly volatile inputs evolve in 2026. Now I'd like to provide an update on the noncontrolling interest in Arcadia. As a reminder, when we acquired our 60% interest in Arcadia in 2021, our joint venture partner retained a 40% ownership interest equal to a net value of approximately $162 million. Under the terms of our operating agreements, DMC can acquire the remaining 40% at any time through a call option that would be settled entirely in cash. Our joint venture partner also holds a put option, which becomes exercisable on September 6. If either the call or put option is exercised, DMC would acquire the 40% share of Arcadia's adjusted EBITDA that we currently don't own. In addition to adding the 40% of Arcadia's EBITDA and cash flow, who would considerably simplify our reporting and operating structure. If the put option is exercised, DMC can settle the obligation either entirely in cash or a combination of 20% cash and 80% preferred shares. These preferred shares are convertible on a one-for-one basis and are mandatorily redeemable. However, I'd like to explain some critical considerations around any redemption of these preferred shares. Under NASDAQ rules and as previously discussed and disclosed, the conversion and related voting rights are limited to 19.9% of DMC's outstanding common shares prior to issuance. Any conversion beyond that level would require approval from our shareholders and the holder of the preferred shares would not be eligible to vote. This leaves any dilution above the 19.9% completely in the hands of DMC's shareholders. In terms of the mandatorily redeemable feature on the preferred shares, DMC would make equal annual cash redemptions over the subsequent three years after issuance. However, any redemption of the preferred shares is subject to DMC having sufficient legally available funds to redeem the shares. Delaware law prohibits the company from redeeming preferred shares if doing so would impair its ability to operate or adversely affect the interest of its creditors. This requires our Board of Directors to make a good-faith determination each quarter as to whether DMC can meet the requirements for a redemption. Our Board could not authorize any redemption that could threaten DMC's solvency or our ability to continue as a going concern. If DMC cannot redeem the preferred shares, it would not be in default under the governing document for the preferred shares. The unconverted preferred shares will remain outstanding until they can be redeemed, assuming the 19.9% has been converted. From an accounting perspective, the redeemable preferred stock would not be considered debt until DMC borrows on its credit facility to make those redemptions. Additional details regarding the redemption of the preferred shares are summarized in Note 2 to the financial statements in today's Form 10-Q under the title redeemable noncontrolling interests. And with that, I'll turn the call back over to Jim.

Thanks, Eric. As noted before, we made meaningful progress during the quarter, particularly in Arcadia, even as our end markets provided very little help. Arcadia executed on several successful performance improvement initiatives. We believe it can build on this momentum, although we remain very mindful the broader construction environment remains challenging. DynaEnergetics should benefit from the anticipated improvement in well completion activity in its core North American market during the balance of the year and hopefully continued success in the emerging EGS space. At NobelClad, a strong order backlog and the expected easing of customer-related delivery delays should drive higher shipment volumes and stronger financial results during the second half of the year. We remain focused on disciplined execution and tight cost controls so each of our businesses can capitalize when market conditions improve. Finally, I'd like to thank our associates for their continued hard work and focus during the quarter. With that, we'd be glad to take any questions.

Our first question is from Gerry Sweeney with ROTH Capital Partners LLC. Please proceed with your question.

I wanted to start with Arcadia. On the Q1 earnings, you did discuss some supply chain constraints that hampered the short-cycle business. And obviously, we saw some improvement in 2Q. Did you recapture all the lost business? Or is there still some more opportunity there to go as we look out for the rest of the year and forward?

Sure. Gerry, I'm thinking back to whatever we said last quarter. The supply chain issues or costing issue, it's all around aluminum and just the general environment exacerbated obviously by what's going on in the Middle East. Where we're capturing business, and I don't want to go too far down memory lane, but if you remember, and this goes back to the third quarter of '24, which I remember vividly, that was the first time I was introduced to the company. We had the goodwill write-off and we also had a horrible quarterly performance where we talked about supply chain disruptions and product availability issues. We brought Jim Slaten back after that. Our focus was, number one, stability from end to end — let's make sure our supply chain partners feel the support and we get that sorted out, which was really broken in that third quarter. And let's get back to the customers who, to be candid, we kind of let down when we didn't have product available. They rely on Arcadia. That's why we have number one positions in every one of these major MSAs we deal with and that was Jim's priority. With short-cycle business coming back now, it's not because the market is any better — it is still absolutely horrible. It's not because the long-cycle business is any better — it's still very interest rate driven. The basic, bread-and-butter business, the stuff that Arcadia was founded on, is what made it successful in good times and bad. We think we're getting that business back. It's closer to five going on six months now where the daily storefront business is consistently up day after day in our daily sales reports. When you don't hear about problems in the supply chain, that means something is going right. So that's going well. To give credit, not just to Jim, but our focus on stability and bringing back those customers particularly on the storefront business has been working. We did have a lot of turnover besides Jim; we had several interim presidents during that period. This has been the longest time since DMC's Arcadia where we've had consistent leadership at the top. Jim is doing a great job. He's also done a great job bringing back a lot of the people who left during that period — lead salespeople and folks in the branches. When they come back, the business comes back. Even though the macroeconomic environment is still challenging and aluminum issues keep us awake at night, the things we can control are going right. I hope that answers the question.

Yes. I was just curious — let's say you lost 10 points because of issues; I'm curious if you've gotten 5 points back and there's still some room to maybe recapture some lost market share with the understanding that the end markets are in a tough position. That's all.

It would be a guess, but half of it is probably not wrong. With aluminum being what it is, and I'm not going to name names, but we do have some competitors who have more challenged balance sheets than we do and who are much more aggressive on pricing than we'd like and have historically been. There's a little bit of market share that trades because of things we don't want to participate in, like extremely low pricing. I think we've probably gotten back a lot of the share that's within our control, and the rest we probably don't want to participate in right now. When things get better and everyone starts behaving better, that share should come back as well.

Understood. That's helpful. And then DynaEnergetics — it's an interesting world out there with higher-for-longer. I think you indicated maybe some increased well completions in the second half of the year. Just curious if you could give any more color on what you're hearing out there, what's happening and if there's even an opportunity to push this into '27 or is it too early to even say on that front?

I'd say it's too early to say because it's been so volatile, up one day and down the next. Of the peers of ours that are larger, in some cases either peers or customers, they may actually have better visibility because of their proximity to the majors. Everyone is still expecting a pickup in the second half and hoping there'll be momentum into 2027. We're not hearing anything that contradicts that; it has just been slow to translate into meaningfully better business. We don't directly correlate with rig count, but until last week I think it was the longest streak that rigs had increased in about two or three years. Anecdotally things are positive, but they haven't translated into significantly better business yet. Hopefully momentum comes in the second half and carries into 2027. One caveat specific to us is our significant European presence — we're more impacted when you can't get product to some of our Middle Eastern customers. European supply chain traffic and freight has been an impact, so we might have timing issues there, but nothing specific to call out beyond that.

Got it. And one more quick question on DynaEnergetics and enhanced geothermal. Any idea how we should look at that in terms of potential market size or growth or where it could go over the next couple of years? Or is this still very nascent in its development and more testing needs to answer that question?

Way too early. I wouldn't say it's testing, but the best indicator would be Fervo's S-1 and their website; they're the pioneer in this area. Everybody's watching them to see if they're successful. It's very much driven by the buzz around data centers and the power super cycle. The best thing to keep an eye on would be Fervo, and for a possible size of the market I would look to the information in their S-1.

Understood. I appreciate it. Nice to see a good solid quarter for you. You guys deserve it.

Our next question is from Stephen Gengaro with Stifel.

I had a follow-up on the prior question on the geothermal side first. Can you talk a little bit about — on the geothermal side, is the integrated perf gun technology a differentiator like it is in the oil patch? Or is it just another opportunity for advanced perf guns in general? I'm trying to figure out, is there a more or less differentiated opportunity than you participated in the oilfield?

If I understand the question, it's using the existing technology but with some nuances. The type of gun we're using is a 5-inch gun with additional tweaks because the rock formations for EGS are different from traditional oil and gas applications. The type of gun and its attributes are a little different, and there are nuances to the detonator as well. It's the reason why you see oil and gas companies leading a lot of this effort. It's very similar technology but with specific adaptations, and we still consider ourselves a technology leader there. We're doing a lot of handholding and partnership, which you can only really do if you have expertise in the area.

Okay. And then you talked a little bit about the market backdrop for DynaEnergetics and kind of what we're seeing on the activity side and hopefully it continues to improve. What do you see specifically on the competitive landscape and the pricing dynamics for the perf guns?

That's still very challenging. It's one of the more fragmented areas in the chain when you work away from the majors. Pricing is still hard to come by, and it's very competitive, which has been the case for the last few years. Between tariffs that we've been unable to recover and cost pressures on almost every input, the margin squeeze has been painful and you see it in our results. I think you'd see it in our competitors' numbers as well.

Okay. Great. And if I could just ask one more — you did a good job, and I appreciate the explanation on the put-call option. It seemed like we revisited that with more detail than we've heard recently. Is that foreshadowing something that's going to happen in the near term? Or are you just reminding the market how the put-call option functions?

I'll start off by saying you did a good job modeling it; you're one of the few analysts who've gone out and modeled it. It highlighted to us that even though everything has been disclosed since 2021 — the agreement and the operating agreement — it's a complicated transaction and this is the first time it is exercisable, on September 6. We have no idea if our partner will exercise. What we wanted to do is make sure everybody has the same information, including shareholders who might be modeling it. We wanted to ensure they understood two things: number one, the level of dilution that was originally committed to — nothing changed; and number two, that the preferred stock is a capital instrument. It is mandatorily redeemable, but the Board must ensure redemptions don't threaten solvency. Shareholders control any dilution above 19.9% via a vote. We also wanted to clarify how the accounting and timing could appear in schedules, because if you schedule it out it can look like a lot of debt for this company to handle, but it's a capital instrument until redemptions are actually funded by borrowing. We wanted to clear up misconceptions and make sure people understood both the mechanics and the protections in place. Again, you modeled it well; we want everyone to have the same clarity.

Our next question is from Ken Newman from KeyBanc Capital Markets.

Yes, of course. I just wanted to circle back a little bit on the supply chain dynamics question in Arcadia. I think last quarter we were talking about higher aluminum prices being a bit of a headwind for new project activity. Obviously, the commercial activity is still very challenging. But it sounds like it may also have been a tailwind on sales this quarter to a certain extent. Eric, is there any way to help us bridge how much of the year-over-year sales were really driven by stronger volumes versus higher aluminum pricing? Aluminum costs took a step up sequentially on a year-over-year basis.

Yes. I think a lot of the year-over-year increase is due to aluminum price increases. There was some volume pickup, but where we're seeing the increases is in the short-cycle business, typically serving small to medium-sized glazers and contractors that are less price sensitive versus longer-cycle projects that would have more competitors bidding. The issues we discussed in the first quarter around projects being delayed and intense price competition still exist for long-cycle business. What we've seen is that the short-cycle or storefront business has picked up considerably over the last several months, and that's higher margin and fairly steady. That's the bread-and-butter of what Arcadia was founded on: servicing small to medium-sized glazers.

That's helpful color. Jim, does it feel like with all the work you've done optimizing the network in Arcadia that this is pretty stable so long as the macro cooperates? Or is there still more work or more levers to pull to drive better optimization from here?

Really, the one thing I did was bring back Jim Slaten, and the other thing I did was allow stability to take hold. I think Jim brought back the right people, reprioritized, and restored stability in the supply chain and how we manage our partners. We've calmed down the level of introducing new processes. When you buy a founder-led company there's a temptation to change everything at once; we stopped that. There's a reference in the press release to the high-end residential business which a couple of years ago I might have thought could be closed down, but that was an overreaction to the challenges created by too much change. Jim and I agreed on measurable goals regarding sales and profitability, and he's meeting those goals. We're measured on where we can get in a very difficult macro environment. When we first bought the company, we set ambitious goals that may have been too aggressive given the market. We still have the best product in the market and the Arcadia name has a halo effect on residential work. Jim and the people he brought back are meeting commitments. We're not going to force-feed the company additional changes in this environment; we'd rather have tailwinds. For the time being, restoring trust with customers and supply chain partners and getting back to a healthy storefront business is a tall task and that's where we're focused.

Got it. That's very good color. Maybe one last one if I could squeeze it in. It sounds like there was a modest benefit to Dyna EBITDA margins this quarter from tariff refunds. Is there a way to parse out what that benefit was and whether that stretches into the remainder of the year?

Ken, we had about $1.5 million of tariff refunds in the second quarter. That's from a combination of refunds from the government as well as negotiations with vendors. We're continuing to file for additional refunds from the government and continue negotiations with our supply chain, but it's really difficult to forecast what that's going to look like going forward.

Just to be clear, does the current guidance assume a similar level of refunds for the third quarter?

It does not. The current guidance has no tariff refunds factored into it.

Our ability to forecast tariff recovery is as uncertain as predicting near-term geopolitical disruptions. Operator, thank you to everyone who participated today. We are doing the best we can in a very challenging market and really appreciate the hard work of our employees across our divisions here and in Europe. We look forward to talking to you in a couple months and enjoy the rest of the summer.

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