Q2 2025 DMC Global Inc Earnings Call

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, 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 oliri 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 DMC global.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 Larry. Jim

Thanks Jeff. Excuse me, and thanks everyone for joining us for today's call.

And a volatile environment marked by shifting tariff policies and highly challenged. Visibility our businesses remain focused on their operating initiatives. Helping us exceed our EA dog guidance range of 10 to 13 million dollars for the second quarter.

At the same time, we may progress on our most important overall objective. The leveraging our balance sheet,

Second quarter, Consolidated, sales were 155.55 million while adjusted. Eva attributed to the 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, 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 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 Dina energetics our Energy Products business sales were 1666.9 million up 2% sequentially but down, 12% year-over-year.

That declined versus prior year, reflecting pricing pressure and weaker demand in our core U.S. unconventional market, with a number of rigs. Well completions and active rack crews are at or near multi-year lows.

At Noble clad our competent medals business. Second, quarter sales were 26.6 million down, 5% sequentially, and up 6% year-over-year.

Is 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 solutions from Spire's 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. products.

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 focus 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, Eva attributable to DMC was 13.5 million. Inclusive of the Arcadia. Non-controlling interest Majesty divido was 16.2 Million while adjusted. Eva 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. Eva attributable to DMC of 4 million.

Before the non-controlling intercal allocation adjusted Eva was 6.7 million or a 10.9% of sales.

Down from 14.2% of sales, in the first quarter and 17.8% in the prior year. Second quarter.

Kind of delivered 9 million in adjusted Eva while adjusted. Eva 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.

Noble, clad reported second quarter adjusted. Eva a 4.4 million with an adjusted. Eva 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 $0.12.

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. Eva attributable to DMC is expected in a range of 8 to 12 million.

The Wider, the normal range on adjusted evader reflects the increased uncertainty in our end markets.

Arcadia expects conditions in the US construction industry will remain challenging and Its Right sized. Its residential cost structure to align with the current market. While also refocusing on its core commercial operations.

At D energetics. The industry is anticipating a sec. Sequential decline in. Well, completion. Activity in our Core US onshore market.

Continuing to be impacted by the deferral of orders. By customers that continue to monitor the the still evolving Terror policies.

I should note that our guidance is heavily influenced by macroeconomic concerns volatility and visibility issues created by current care policies and the current level of energy prices.

Is 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 and the 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 said earlier, in the year,

We exceeded our admittedly cautious. Ibid dog 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 La 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 headlines.

At Noble clad. 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 Dina 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 as our principal forecast, principal Focus as we watch for recovery and 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 3 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. We'll now be conducting 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 2. If you'd like to remove your question from the queue.

For participants, you can speaker equipment and may be necessary to pick up the handset before pressing the star keys.

1 moment, please while we pull for questions.

Our first question is from Jerry. Sweeney with Roth Capital partners?

Uh, good afternoon, thanks for taking my call.

Hi, Jerry. Jerry

uh, I wanted to start with Arcadia, uh,

Just multi questions. So I apologize in the beginning. But uh, on the weakness are some of the headwinds there, how much this is resi and how much is sort of just end market across, um, maybe the building products segment. And then the follow-up to that is, you know, what is the road map? What should we be looking for? As you right-size the, uh, 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, um, segment. But, uh, also we've seen in the commercial exteriors part of the business that some of the projects are being deferred, uh, out a little ways. And so we think that that's primarily the impact of tariffs on people, you know, the in developers trying to wait and see how things are going to shake out, but just the Persistence of the higher interest rate environments, uh, which is not not helpful from that standpoint.

Some of the support, uh, and that's effectively done. We consider taking more drastic action. But to be honest, that most of that product would be perfect for the rebuilding of some of the higher priced areas in La. Uh, and we have an option on that. Now that the challenge with that you know the estimates in Jeff pulled something this morning that said 1300 uh 13,000 homes. I see an estimates as high as 20,000 homes because remember a lot of the structures that are still online Lots may never be inhabitable. So it's a pretty significant number of homes that need to rebuilding and I think there's been 154 permits pulled so far so it it it's pretty far behind and yeah. Uh oh yeah and uh 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 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 and on the commercial side, it it's, you know, tariffs do impacted 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, uh, but they're not going to do. They're not going to do releases. And then it's not going to start construction until they know. It's, their overall cost of financing is and when you're sitting in front of, you know, think about the last week and a half. Uh, 2 fed descents, 1 fed governor

Uh, moving on almost a certainty. You'll have some regime change there and I think Futures are pricing anywhere between 1 and 2. Uh, you know, there are some dissenting 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 6. 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, we want to be careful about not cutting off our nose to spite our face.

I got you, and I understand that. Um,

You know, besides maybe, you know, reductions in force and right. Sizing is are there other opportunities within Arcadia?

To drive uh, profitability or other initiatives. Um and any update on that front?

I mean the principal initiatives and where Jim, uh, Jim schleiden, who returned to his earlier this year, spending time is getting customer service, uh, principally customer service lead, time reduction, little bit, on the quality side, back up to the standards, that, uh, the organization lived and breathed, when he was there. I mean, it it's a custom 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, uh, in every division, not just Arcadia, we've got, uh, basically, zero head

Account, add mandates unless it's for specific initiatives. Uh, we've got basically zero variable cost editions until volume returns, you know, less a factor for Arcadia. And then some of the other businesses where they've seen, the volume really fall off, uh, Jim's the guy who did most of the headcount reduction, uh, across the residential business when the backlogs were really depleted at the end of last year. So I I think on the discretionary side where it makes sense, we've done all the things you should without impairing yourself. Uh, if you look at Noble clad, which is definitely our most tariff impacted business. Although if you ask me to quantify it and I remember the model we passed through raw material increases but you don't know what demand you lose its 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

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. Until they know what the true cost of a project's going to be. And I'll commend the Nobelclad people. They've not only done the variable cost reduction that I always view as kind of the automatic shock absorber; you know that they have cut much deeper than I would say selectively around other things. Everything.

From travel down to discretionary headcount. Uh, they've done all the things you do. When you really have, uh, a steep downturn driven by exogenous events, which, which they have, and Dina, you know, Dina, they've done all the things that are consistent with the initiatives we started last year. You know, remember that business fell off steeply last year.

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 uh was intelligently driven by our crystal balls but you know, 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 cost out, but by taking material cost 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 uh to a really challenged oil service market now. So, uh, outside of those, I don't think there's really a lot we can do, uh, 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 I I I I wouldn't disagree. I tell you guys executed very well in the, in the quarter and, you know, not surprised guidance is probably a little bit lower than my numbers but um, that's not a surprise to me. Uh, 1 other quick, follow-up question. I know there's other people. Yeah, Jerry we. We we, we, we, 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. Uh, you know, the whole oil field space. So I I think we were appropriately prudent.

Yeah, um, balance sheet, you know, obviously uh nice, uh, pay down in debt and a quarter. Maybe this is for Eric anything in terms of uh on the balance sheet that uh you can continue to work on. I'm not sure inventories are payables receivables, Etc. I didn't have a chance to really come through it. But um, it looks like it's trending in the right direction and and a decent philosophy. So

yeah, I think from a networking Capital standpoint, I think the business is performing recently well during the quarter and there's always more that can be done. So we'll continue to push their

the the free cash flow performance. We had um, was was really strong in the second quarter. I'd say looking out, you know, over the next several quarters, we would expect that we would be converting Eva 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 networking Capital Performance, as part of it obviously uh 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. Thanks for the nice comments as well. We appreciate it.

Our next question is from Ken Neumann with keybanc capital markets.

Hey, good evening, guys.

Hey, Ken, Ken.

Hey.

Uh, Jim and Eric, uh, maybe to go back to Arcadia. Um, thanks for all the the help there on on some of the costs out initiatives there. Um, I just want to ask just give me some of the work that you've done in recent months to write size of costs in our caydia. Can you just help us size up? How you expect gross margins in that segment to perform at the midpoint of the of the third quarter guide. Um, I'm just trying to

Trying to figure out how you think, you know, where do you think volumes need to be in order to step back up to that high, 20 low 30% range?

Yeah, I think uh with this business can there's a fair amount of fixed costs and it's in our um in our cogs area. So when you look at the revenue that um we've we've generated over the past, couple of quarters to the extent that we increase that we have much better fixed costs. Absorption. So going into uh 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. This just sees

In nature, but really for Arcadia is trying to get the volume picked, back up to levels that we had in Prior years into the extent that we do that. We get a diss disproportionate amount of impact at the EA level and can push the EA margins up, you know, closer to where you saw them, uh, in Prior years. But uh, for the next I call it 2 3 quarters. It's still going to be touch and go giving out of the environments. Operating

Again, not just just a 1 slide Edition.

You know, the difference between 240 and 300. That's the difference between, you know, the consistent 40 to 50 million dollars. A year is 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. Uh, that 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 uh, 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, uh, it really shows pronounced differences in the difference between 240 and higher.

Yeah, no that that makes a lot of sense.

Um, 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. Uh, from some of the other non-res construction guys that we cover.

What do you think is the lag time between you know, hopefully and eventual cut versus when that starts to pull through in in orders?

Hello. Well for residential is usually pretty quick. And, you know, this doesn't impact us as directly as if you were uh, you know, a gel 1 or somebody who's doing, uh, first time, first time step up, you know, the transmission mechanism. Particularly, if you've got lots of available, if buildings underway is really quick, uh, you know, and the ability of Builders and construction folks to get out there, uh, and jump start demand it, it's impacted only by the labor, the construction market. And this is kind of untested right now, because and I and I don't want to throw a curveball in there. But you know, what's happening to labor markets, across the country, particularly Labour markets, where, you know, your impacted by some of the other headline issues that and I don't want to, uh, throw in there. But, you know, if you work force is impacted by job job job site guys, who may or may not be, uh, 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 2 or more quarters. Probably a quarter to 2.

Okay.

And then maybe 1 more, if I could just squeeze it in, um, you know, look, I I understand that there's there's few problems that that better volumes can't fix. Um, 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 giving some of the the moving pieces on tariffs.

Um you know, how is how is realization been this quarter? Just given the Tariff environment and what do you kind of expecting here in the third quarter?

We'll give you a real generalities. And if Eric's got some specifics, he's not uncomfortable with it, he can jump in, you know, Arcadia is really successful in. Our peers have been very good about passing along Taft driven in crisis, particularly on the aluminum side. Since almost everything we do is aluminum. Uh, 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 you know, every time I talked to Mr. Schleiden it's, uh, we just need the sales. So when the demand comes back, we'll find there, uh, Noble clads trickier because, you know, we're passing along, uh, the cost of the metal and where your demand impact is on you. You just don't get projects so they just don't get started. Because it's a very chunky project. Driven tariff business, the margin structure shouldn't be impaired there, uh, but it's a volume issue, you know, and until

Well, there's a little bit more clarity on us relative to our competitors. It was a comment in there, which again, you know, hopefully these things pass, but, you know, Canadian buyers are not as enamored by us suppliers as maybe they used to be that. That's purely a volume. I don't think there's any permanent impairment in the margins. Uh, Dina's a little trickier and they did a great job executing. They've done a great job executing the number of projects. But if you look at everybody in oil field services, everybody's been impacted by tariffs. Uh every 1 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 look to Erica? Is it a 100 is 100 plus of basis points to recover? You know, there. There's definitely a hit there. I just think it's too hard to quantify now because, uh, energy markets are so volatile, and to be began to. That's so terrible.

Very helpful. Appreciate it.

our next question is from Jawad Burian with stifel

Hi everyone, thanks for the question. Um,

I guess. Could you just talk a little bit about your second half, uh, sales expectations for Dina 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 and uh Diana's primary us 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, a relative to the first half of the year, but uh most of the sales, as you know, the dino generates would come from uh, the North American market. And so we just expect that to be uh, trending lower just given where the completion activity is and fat Crews and all other metrics you'd see out there for the, for the market.

Got it. Thanks. Um, and then

So we're seeing some data that's indicating that uh oriented Perforating guns are kind of driving improved recovery rates and then also better. Frac um are you also seeing this and

How should we kind of think about that in terms of impacting, your business, uh, going forward?

Uh, 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. Uh, I don't think it is dramatically changed. Uh, anyone's performance, relative to other peers. There is a product out there. That's uh, you know, sold to, you know, it's a self orientated product that's sold to non non Dina customers. But I don't think that changes the Paradigm in the way that you're referring to, right? It's not going to make the oil and gas market be better than what energy prices will allow it to be.

Got it. Thanks, I'll pass it on.

Yeah, 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.

Right, uh, well to shareholders and the analysts, who cover us, we appreciate your time this afternoon. Uh, and to any employees or uh or others listening. Again, we appreciate your hard work during the quarter. Uh, appreciate you hanging in there, joining, a very difficult environment with some challenging visibility and, uh, you know, back to shareholders investors we're we're working as hard as

We can for you, we'll be there to participate in the recovery when it's here and uh 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.