DMC (DMC) Q2 2026 Earnings Report, Transcript and Summary

Greetings. Welcome to the DMC Global Second Quarter Earnings Call. At this time, participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, Please note this conference is being recorded. I will now turn the conference over to Jeff High, VP of Investor Relations at DMC Global. Thank you, Jeff. 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 Eric Walter. I would 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 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 will now turn the call over to Jim O'Leary. Jim?

Thanks, Jeff, 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 24 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. 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. Longstanding hallmarks of Arcadia's business model. Additionally, efforts to right size our residential products 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 on profitability. DynaEnergetics recently completed a 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, should drive strong results during the second half of the year. I will 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 are on the alter of the potential put call exercise.

Thanks, Jim. I will start with a look at our second quarter profitability across our businesses. Arcadia reported adjusted EBITDA margin before NCI 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. Diana's EBITDA margin was up from 4.6% in the prior quarter from sales growth and the tariff refund. NobelClad reported adjusted EBITDA 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 of $727 thousand 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 25 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 would 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 upwards or downwards as these highly volatile inputs evolve in 2026. Now I would like to provide an update on the non controlling 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 agreement, 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 6th. If either the call or put option is exercised, DMC would acquire the 40% share of Arcadia's adjusted EBITDA that we currently do not own. In addition to adding the 40% of Arcadia's EBITDA and cash flow, we 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% in preferred shares. These preferred shares are convertible on a 1-for-1 basis and are mandatorily redeemable. However, I would 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, CMC would make equal annual cash redemptions over the subsequent 3 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 a company from redeeming preferred shares if doing so would impair its ability to operate or adversely affect the interest of its creditor. 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 conferred. 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 will turn the call back over to Jim.

Thanks, Eric. As noted before, we made meaningful progress during the quarter. Particularly at 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 with 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 business each of our businesses can capitalize eventually improving market conditions. Finally, I would like to thank our associates for their continued hard work and focus during the quarter. With that, we would be glad to take any questions. Thank you.

We will now be conducting a question and answer session. Handset. Our first question is from Gerry Sweeney with ROTH Capital Partners LLC. Please proceed with your question.

Good afternoon. Thanks for taking my call. 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 the rest of the year and forward?

Sure. So and Jerry, I am thinking back to whatever we said on the last quarter. The supply chain issues or costing issue, it is all around aluminum it is all around, you know, the just the general environment exacerbated obviously by what is going on in the Middle East. Where we were capturing business and do not 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, think that was the first time I was introduced to the company. We had the goodwill write off And we also had just a horrible quarterly performance where we talked about supply chain disruptions, product availability, customer issues, We brought Jim Schladen back after that and our focus was number 1, stability, from end to end. Let's make sure our supply chain partners feel the love and we get that sorted out, which was really broken in that third quarter. And let's get back to customers who to be candid, kind of screwed over when we have product available. They rely on Arcadia. that is why we have #1 positions in every 1 of these major MSAs we deal with. And that was Jim's priority. And with the short cycle businesses coming back now, it is not because the market's any better. It is still absolutely horrible. it is not because the long cycle business is not any better. it is still very interest rate driven and obviously the Fed did not do us any favors today. But the basic calls it the bread and butter business, the stuff that Arcadia was really I do not know, founded on is wrong, but the thing that made it successful in good times, bad times through recessions was just how important it was in the supply chain for its customers And we think we are getting that business back. Closer to 5 going on 6 months now where the daily storefront business, is consistently up day after day in our daily sales reports. You do not hear about problems in the supply chain, that means something's going right. You know, it is when the trains do not run, that is the only time you hear about them. So that is going well too. And really to give credit, just to Jim, but we focus on stability. We wanted to bring back those customers particularly on the storefront business. So the focus on the customers check working. We did have a lot of turnover besides Jim. We had a lot of presidents, interim presidents during that period. This has been the longest time since DMCs at Arcadia where we have had consistent leadership at the top Jim is doing a great job. he is also done a great job bringing back a lot of the people, who left during that period. And it is lead salespeople, guys in the branches. And I think when they come back, the business is coming back. And even though the macro macroeconomic environment is still challenging, and even though the aluminum issues still keep us awake at night, all the things we can control and we can influence are going right. So hope that answers the question.

Yeah. I mean, I was just curious. I mean, if let's just say you lost 10 points because of issues. I am just curious if you have gotten 5 points back and there is still some room. To maybe recapture some lost market share with the understanding that the end markets are just in a tough position. that is all.

It would be a guess, but a half of it is probably not wrong. there is still a fair amount with the aluminum being what it is. And I am not going to name names, but we do have some competitors who are have more challenged balance sheets than we do, who are much more aggressive on pricing than we would like and have historically been. there is a little bit of market share that trades because of things that we do not want to participate in as far as like the really bottom of the barrel pricing. So I think we have probably gotten back a lot of the share that is within our control. And the rest we probably do not want to participate in. But at least right now. And when things get better, and everyone starts behaving better, that will come back as well.

Understood. that is helpful. And then you know, DynaEnergetics, it is an interesting world out there.

Hire 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 are hearing out there, what is happening? And if there is, you know, even an opportunity to push this into 2027 or is it too early to even say on that front?

I would say it is too early to say just because it is been so up 1 day, down the next, the straits are open, the straits are closed. I am just going to repeat the things that you have probably read as well. Of the peers of ours, that are larger in some cases are either peers or customers, they may actually have better visibility on it than we do because of their proximity to the majors. Everyone is still expecting a pickup in the second half. And everyone is saying they are hoping there will be momentum into 2027. We are not hearing anything that contradicts it. it is just been slow to come. Obviously, we are not a direct we do not directly correlate with rig count but until last week, think it was the longest streak that rigs had increased in about 2 or 3 years. And again, all the anecdotes are positive, it is just they have yet to translate into meaningfully better business So I would say hopefully momentum in the second half, hopefully that carries into 2027. The only caveat that would be I think specific to us, particularly amongst equipment providers, We have a pretty big European presence and we are a little bit more influenced or impacted negatively when you cannot get stuff to some of our Middle Eastern customers the European supply chain trafficfreight has been an impact. So we might have timing issues there. But nothing again, nothing specific to call out, all anecdotal. Got it. And 1 more quick question on DynaEnergetics Excuse me. The enhanced geothermal Any idea of 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 again, it is just still very nascent in its development. And more testing needs to answer that question.

Way too early. I would not say it is testing, but look, the best indicator and something I draw your attention to, take a look at Fervo's-1, take a look at their website, They are the pioneer in this area. Everyone is watching them to see if they are successful very much driven by all the buzz around data centers, and the power super cycle that is much talked about and seems to be playing out. But the best thing to keep an eye on would be would be Fervo, and for the possible size of the market, I would look to the things they have in their estimates. Understood. All right. Thanks. I appreciate it. Nice to see a good solid quarter for you. You guys deserve it. You are welcome. Thank you.

Our next question is from Stephen Gengaro with Stifel. Please proceed with your question.

Thanks. Good afternoon, everybody. I have 2. Thanks. I had 2 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 kind of another opportunity for advanced perf guns in general? I am trying to figure out, like, is there is there a more or less differentiated opportunity than you participated in the oilfield?

I if I understand the question, it is using the existing technology, but with some nuances and some nuance that we are able to provide The type of gun, we are using a 5-inch gun and some additional tweaks because we are, I still think it is safe to say we are the technology leader there. We are doing a lot of handholding, a lot of partnership and you can only really do that if you have an expertise in the area. Because the rock formations they are going into are different than in the traditional oil and gas application. The type of gun and its attributes are a little bit different, but beyond that and nuances to the detonator as well, it is the reason why you see oil and gas people with the lead of all these companies. it is a very similar technology.

Okay. Thank you. And then you talked a little bit about the market backdrop for DynaEnergetics and kind of what we are 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 is still very challenging. it is still 1 of the more fragmented areas in the chain when you work your way from the majors down. Pricing is still hard to come by. That there is no price increases and it is very competitive. Which has certainly been the case since the 3 years that I have been on the Board and in the company. So, no different really there. And I would also add between tariffs that we have been unable to recover between cost pressures on almost every input cost we have the margin squeeze has been has been painful and you see it in ours. And I think you would see in our competitors numbers as well. Okay, great. Thanks.

If I could just ask 1 more, you did a good job, and I appreciate the explanation on the put call option. And kinda we it seemed like we revisited that with sort of more detail than we have heard recently. Is there is that sort of foreshadowing something that is gonna happen in the near term? Or you are kinda reminding the market as to how the put call option functions?

Well, so you know, I will start off. I will I will give you kudos. I mean, you are 1 of our few analysts who is gone out and modeled it because you could I think you went a year or 2 further out last year. And it highlighted to us the fact that even though everything has been disclosed and if you go back to 2021. The agreement, the operating agreement, the form of the everything is disclosed out there. But we cannot get away from the fact that it is a complicated transaction, it is been 5 years. And this will not be groundbreaking news. it is July 29th. The thing is exercisable on September 6th, And we have absolutely no idea if our partner will stay in the joint venture, if they will decide to exercise. But this is the first time that it is exercisable. And we are assuring our quarter and the next time we will formally talk to you it could be exercised. So what we wanted to do is make sure everybody has the same information in addition to yourself, anybody else who is going to model it in the next report, including our shareholders if they are doing their own modeling. Want to make sure people understood 2 things. Number 1, the level of dilution that was originally committed to. Nothing changed, exactly the same. We wanted to make sure, particularly the shareholders knew that misconception that it was endless dilution. Completely in the hands of our shareholders. They will get a vote on anything above the 19.9%. I think you have modeled that well and you understand it really well. We wanna make sure everybody understands it as well as you. And the other thing you know, whether it is the $132 million or $100 million, want to make sure people understand that the debt, you know, if you put it in our debt footnote, if you schedule it out, it looks like a lot for this company to handle but we want to make sure people understand the preferred stock is a capital instrument It is called mandatorily redeemable but the board has an obligation to make sure it is not buying back the preferred shares at the wrong time. So want to make sure that people understand, number 1, how the dilution works, number 2, how the debt works and number 3, they know that they are in control as far as shareholder vote. And we are in control as far as making sure we are not buying back shares or redeeming the preferred. A time that would put the company in jeopardy. So really just clearing up things that are in the marketplace, and making sure, we do not have again, you have done a great job at it. Other guys are working on it. Want to make sure we also do not have selective disclosure issues in between in trying to explain something that is out there. But we appreciate it is a really complicated transaction. Great. No. Thank you for all the color. that is very helpful. No. You are welcome. And by the way, I really meant that. You did a good job modeling it. Want to make sure everyone has the same information. Thank you.

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

Hey, thanks. Congrats on a nice quarter of course. I just wanted to circle back a little bit onto the supply chain dynamics question in Arcadia a little bit more. I think last quarter, were talking about higher aluminum prices being a bit of a headwind for new project activity. Obviously, I know commercial activity is still very challenging right now. It sounds like it may also have been a tailwind on sales this quarter to a certain extent, right? So maybe, Eric, is there any way to maybe help us bridge how much of the year over year sales was really driven by stronger volumes versus the higher aluminum pricing?

Because obviously, that took a step up I think, sequentially. On a year over year basis. In aluminum costs. Yeah. I think, I think the lot of the year over year increase is going to be due to the price the aluminum price increases. There was some volume pickup that we had. Where we are seeing the increases in what Jim talked about, our short cycle business, and that is typically business that is to the small to medium size glazers and contractors that are less price sensitive. Versus a longer cycle project that would have more competitors bidding for the same piece of work. So those same types of issues that we talked about in the first quarter around, projects being delayed, intense price competition. Those still exist for the long cycle business. But what we have seen is that the short cycle business, or sometimes we call it storefront business, has picked up, you know, considerably over the last several months. And so we are excited about that because that business is fairly steady. it is higher margin. And it is really the bread and butter of what Arcadia was founded on, which was to service that small to medium sized glaser.

that is helpful color. I guess, Jim, does it feel like with all the work that you have done in optimizing you know, the network within Arcadia, does it feel like this is pretty stable so long as the macro is going to still work with you, or is there still kinda more work or more levers to pull in order to drive better optimization from here?

Well, really, the 1 thing I did was bring back Jim Schladen and the only other thing I did was nothing, meaning stability, prioritize, just letting the thing get healthy by itself. I think as far as getting it back to where it was in 2021-2022, Jim, he brought back the right people We reprioritized and brought stability into the supply chain, how we managed some of our supply chain partners. We have calmed down the level of introduction of whether new processes, Whenever you buy a founder led company, and I have seen this a bunch of times, there is a temptation to try to boil the ocean right away and do everything new. We stopped that altogether. there is a reference in the there is a reference in the press release to the high end residential business. which, a couple of years ago, I have told you I was more likely to close it than not. And that was just an overreaction. Probably on my part to the challenges it had because we have introduced so much change and maybe set maybe we set the goals for that company as far as how big it could get and how fast it would get there. Maybe we were too ambitious. And Jim and I had a handshake when he came back. He would get it to a certain level, both on sales and profit profitability within a certain time period. And he is meeting all those goals. We are more I think we are more measured on where we can get to in absolutely horrible macroeconomic environment. When we first bought the company, I think we set out some goals that were probably too hard to get to. But we still have the best product in the market. We think the Arcadian name Edge halo effect to whatever we put out there. On the residential side. And Jim and the people he is brought back are again, every commitment he made to me and I made to our Board is far as getting that business to where it is are all coming to pass. The short answer is that the only thing I did was bring him back and let him bring back the people he wanted. We kind of restored the trust in our supply chain partners. Our people are restoring the trust our customers had in us. When we let them down in 2024. And right now there are some things we probably could do in terms of processes, We think we got the systems, we had an ERP conversion We are maybe 75% to 80% of the way there. We are going slow. it is still a big digestion issue. And as far as other operational improvement, I would rather we are not going to force feed the company things like maybe we had in the past. I would like to have tailwinds to be candid. We really have headwinds in every 1 of our markets in Arcadia despite the fantastic performance this quarter, it still got real headwinds as far as input costs, interest rates, general malaise with our developers. So when we have tailwinds again, we will be a little bit more on additional improvements we can do. But for the time being, getting back to where we were on the storefront business, and with both our customers and our supply chain partners is I think that is a tall enough task Got it. that is very good color. Appreciate that.

Maybe 1 last 1, if I could squeeze it in. It sounds like there was a maybe a modest benefit to Dyna EBITDA margins this quarter from the tariff refunds. Is there a way to maybe parse out what that benefit was and whether or not that stretch into the remainder of the year?

Yeah. We Ken, we had about $1.5 million tariff refunds in the second quarter. that is from a combination of refunds from the government as well as negotiations with vendors. We are continuing to go through and file for additional refunds from the government and continuing those negotiations with our supply chain. But it is really difficult to forecast what that is gonna look like.

Does just to be clear, does the current guidance already assume like, a similar level of refunds for the third quarter?

It does not. The current guidance says no refund no tariff refunds back into it. Very helpful. Thank you. Yeah. Our ability to forecast tariff recovery is almost as good as our ability to forecast whether the Straits of Hormuz will be open when we walk out of this room. All right.

Thank you. And operator, other than thank you to anybody who participated today. Thanks for your patience. We are doing we are trying to do the best we can in a very challenging market, but really appreciate all the work on the part of our employees at each 1 of our divisions here and in Europe. And we look forward to talking to you in a couple of months. And enjoy the rest of the summer. that is it for me, ladies.

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