DMC Global Inc. (BOOM) Q2 2025 Earnings Report, Transcript and Summary

Greetings, and welcome to the DMC Global Second Quarter Earnings Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce Geoff High, Vice President of Investor Relations. Please go ahead.

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 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, Geoff, and thanks, 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 million to $13 million for the second quarter. At the same time, we made progress on our most important overall objective, deleveraging 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 rightsized 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 DynaEnergetics, 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 frac crews are at or near multiyear lows. At NobelClad, our composite metals business, second quarter sales were $26.6 million, down 5% sequentially and up 6% year-over- year. NobelClad'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 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 EBITDA attributable to DMC was $13.5 million. Inclusive of the Arcadia noncontrolling 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 at 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 noncontrolling 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 second quarter. Dyna 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. NobelClad 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 $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 to guidance. We expect second quarter consolidated sales will be in a range of $142 million to $150 million, while adjusted EBITDA attributable to DMC is expected in a range of $8 million to $12 million. The wider-than-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 rightsized its residential cost structure to align with the current market while also refocusing on its core commercial operations. At DynaEnergetics, the industry is anticipating a sequential decline in well completion activity in our core U.S. onshore market, while NobelClad 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 policies 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 headwinds. At NobelClad, 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 breakevens. At DynaEnergetics, things are a bit trickier due to the shifting animal spirits around global energy markets, which are impacting oilfield service companies and their suppliers. Again, maintaining tight cost controls is our principal focus as we watch for a recovery in energy prices and well completion activity. At the midyear mark of 2025, we've also made important progress deleveraging 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?

[Operator Instructions] Our first question is from Gerry Sweeney with ROTH Capital Partners.

I wanted to start with Arcadia. This 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 products segment? And then the follow-up to that is, what is the roadmap? What should we be looking for as you rightsize the business there to fit demand as we go forward?

Gerry, 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, the end 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.

And Gerry, when you asked, the rightsizing is effectively done in residential, 1 or 2 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. When the volume dropped off, we rightsized the workforce, rightsized 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, the estimates and Geoff pulled something this morning that said 1,300 -- 13,000 homes I see an 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. 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 -- on the commercial side, it's -- tariffs do impact it a little bit, but it really is principally interest rates. And most commercial contractors, 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 -- think about the last 1.5 weeks, 2 Fed descents, 1 Fed governor moving on, almost a certainty you'll have some regime change there. And I think futures are pricing anywhere between 1 and 2. There are some descent saying 0. But 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 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 despite our face.

I got you. I understand that. Besides maybe reductions in force and rightsizing, are there other opportunities within Arcadia to drive profitability or other initiatives? Any update on that front?

I mean the principal initiatives and where Jim Schladen, 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 top to bottom. And restoring that focus is where he's been spending a lot of his time in every division, not just Arcadia, we've got basically 0 headcount add mandates unless it's for specific initiatives. We've got basically 0 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 is 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 NobelClad, 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. That's the business that's probably seen the steepest drop in actual business impact, but it's more reflective in the backlogs and 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 NobelClad 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, they've done all the things that are consistent with the initiatives we started last year. 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 cost 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, 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 tell you guys executed very well in the quarter and 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. I know there's other people...

Gerry, 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, the whole oilfield space. So I think we were appropriately prudent.

Yes. Balance sheet, obviously, nice paydown 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 in a decent velocity.

Yes. I think from a net working 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 EBITDA into free cash flow 40% to 45% similar to where we were in 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 net working 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.

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

Jim and Eric, maybe to go back to Arcadia. Thanks for all the help there on some of the cost-out initiatives there. I do want to ask, just given some of the work that you've done in recent months to rightsize the cost 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 how you think -- where do you think volumes need to be in order to step back up to that high 20%, low 30% range?

Yes. 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, trying to get the volume pick 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 closer to where you saw them in prior years. But for the next, I'd call it, 2, 3 quarters, it's still going to be touch and go given how the environment is operating.

And Ken, just one slight addition. The difference between this company at $240 million 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, a number of distribution sites around the hub-and-spoke model, you've got all your manufacturing in one place, you effectively got your operating leverage as good as it can be. The difference between $240 million and $300 million, that's the difference between the consistent $40 million to $50 million years this company was doing right up until 2023 going into 2024. And the drop-off in volume, $5 million 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 L.A. were to really jump start 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 million and higher.

Yes. 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 nonres construction guys that we cover. What do you think is the lag time between hopefully, an eventual cut versus when that starts to pull through in orders?

Well, for residential, it's usually pretty quick. And this doesn't impact us as directly as if you were a JELD-WEN or somebody who's doing first-time step-up. The transmission mechanism, particularly if you've got lots available, if buildings underway, is really quick. And the ability of builders and construction folks to get out there and jump-start 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're impacted by some of the other headline issues that I don't want to throw in there. But 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 L.A. around the fires and whatnot. 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 1 quarter to 2.

Okay. And then maybe one more if I could just squeeze it in. Look, I understand that there's a 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, 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 it, he can jump in. Arcadia is really successful and our peers have been very good about passing along tariff-driven increases, particularly on the aluminum side since almost everything we do is aluminum. And it's -- a lot of it is health of the market, competitive reaction. 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. Schladen, it's -- we just need the sales. So when the demand comes back, we're fine there. NobelClad is 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. And until there's a little bit more clarity on us relative to our competitors, there was that comment in there, which, again, hopefully, these things pass. But 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 is 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 oilfield services, everybody has 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 do we have -- I look to Eric, is it 100-ish, 100-plus basis points to recover? 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.

Our next question is from Jawad Bhuiyan with Stifel.

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.

Yes. 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 frac crews and all other metrics you would see out there for the market.

Got it. And then -- so we're seeing some data that's indicating that oriented perforating guns are kind of driving improved recovery rates and also better frac. 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 has 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.

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

Well, to the 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. I appreciate you hanging in there during a very difficult environment with some challenging visibility. And back to shareholders and 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.