DMC Global Inc. Common Stock Q2 2026 Earnings Call

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 during the conference, please press star zero on your telephone keypad. 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, welcome to DMC's second quarter conference call. Presenting today are President and CEO, James 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.

With that, I'll now turn the call over to James O'Leary. Jim? Thanks, Geoff, 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 Architecture 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, longstanding hallmarks of Arcadia's business model. Additionally, efforts to rightsize 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 weighed on 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 base load 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 stronger 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 rightsize 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. Now the guidance for the third quarter.

We expect sales will be in a range of $158 million-$168 million, while adjusted EBITDA attributable to DMC is expected in a range of $10 million-$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 these highly volatile inputs evolve in 2026.

I'd 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 don't own. In addition to adding the 40% of Arcadia's EBITDA and cash flow, it 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. 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.

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 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 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 Non-Controlling Interest. With that, I'll 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 that 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, 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, each of our businesses can capitalize on eventually improving market conditions.

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.

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

Good afternoon. Thanks for taking my call.

Hey, Jerry. Hey, Jerry. I wanted to start with Arcadia.

On Q1 earnings, you did discuss some supply chain constraints that hampered the short cycle business. 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 to the rest of the year and forward?

Sure. And Jerry, I'm thinking back to whatever we said on the last quarter. The supply chain issues or costing issue, it's all around aluminum.

Yeah. It's all around just the general environment exacerbated, obviously, by what's gone on in the Middle East.

Where we're recapturing business, I don't want to go too far down memory lane, but if you remember, this goes back to the third quarter of 2024, which I remember vividly. I think that was the first time I was introduced to the company. We had the goodwill write-off, 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 one, 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.

Let's get back the customers who, to be candid, we kind of screwed over when we didn't have product available. They rely on Arcadia. That's why we have number one positions in every one of these, the major MSAs we deal with. That was Jim's priority. Where the short cycle business is coming back now, it's not because the market's 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, and obviously the Fed didn't do us any favors today. The basic, Jim calls it the bread and butter business, the stuff that Arcadia was really, I don't know, founded on is wrong. 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.

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's going right. When the trains don't run, that's the only time you hear about them. That's going well, too. Really to give credit, not just to Jim, but we focus on stability. We wanted to bring back those customers, particularly on the storefront business. 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 DMC's Arcadia, where we've had consistent leadership at the top. Jim's doing a great job.

It's also done a great job bringing back a lot of the people who left during that period. It's lead salespeople, guys in the branches, and I think when they come back, the business is coming back. Even though the 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. Hope that answers the question.

Yeah. I was just curious. Let's just say you lost 10 points because of issues. I'm just curious if you've gotten five points back and there's still some room to maybe recapture some lost market share, with the understanding that the end markets are just in a tough position. That's all. It would be a guess, but half of it's probably not wrong.

They've killed a fair amount, with the 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, 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 that we don't want to participate in as far as like the really bottom of the barrel 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. At least right now. When things get better and everyone starts behaving better, that'll come back as well.

Understood. That's helpful. Then DynaEnergetics, it's an interesting world out there, 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 2027, or is it too early to even say on that front?

I'd say it's too early to say just because it's been so up one day, down the next, the straits are open, the straits are closed. I'm just going to repeat the things that you probably read as well. Of the peers of ours that are larger, in some cases 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. Everyone is saying they're hoping there'll be momentum into 2027. We're not hearing anything that contradicts it. It's just been slow to come. Obviously, we don't directly correlate with rig count. Until last week, I think it was the longest streak that rigs had increased in about two or three years. Again, all the anecdotes are positive.

It's just they've yet to translate into meaningfully better business. I'd 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're a little bit more influenced or impacted negatively when you can't get stuff to some of our Middle Eastern customers. The European supply chain traffic/freight has been an impact. We might have timing issues there, but again, nothing specific to call out. All anecdotal. Got it. One more quick question on DynaEnergetics.

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? Again, 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 look, the best indicator and something I draw your attention to, take a look at Fervo's S1. Take a look at their website. They're the pioneer in this area. Everybody's watching them to see if they're successful. Very much driven by all the buzz around data centers and the power super cycle that's much talked about and seems to be playing out. The best thing to keep an eye on would be Fervo. For possible size of the market, I would look to the things they have in their S1.

Understood. All right, thanks. I appreciate it, King. Nice to see a good solid quarter for you. You guys deserve it. You're welcome.

Thank you. Our next question is from Stephen Gengaro with Stifel.

Please proceed with your question.

Thanks. Good afternoon, everybody. Thanks, Stephen.

Thanks. I had two. I'll 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 perforating 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'm trying to figure out, is there a more or less differentiated opportunity than you participate in the oil field?

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

Okay, thank you. 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 still one of the more fragmented areas in the chain. When you work your way from the majors down, pricing is still hard to come by. There's no price increases, and it's very competitive, which has certainly been the case since, in the three years that I've been on the board and in the company. No different really there. I would also add between tariffs that we've been unable to recover, between cost pressures on almost every input cost we have, the margin squeeze has been painful, and you see it in ours, and I think you would see it in our competitors' numbers as well.

Okay, great. Thanks. 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 sort of more detail than we've heard recently. Is that sort of foreshadowing something that's going to happen in the near term, or are you just kind of reminding the market as to how the put call option functions?

To start off, I'll give you kudos. You're one of our few analysts who's gone out and modeled it because I think you went a year or two further out last year. 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 preferred, everything's disclosed out there. We can't get away from the fact it's a complicated transaction. It's been five years, and this won't be way breaking news. It's 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'll decide to exercise. This is the first time that it is exercisable, and we're issuing our quarter, and the next time we'll formally talk to you, it could be exercised.

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're doing their own modeling. We want to make sure people understood two things. Number 1, the level of dilution it was originally committed to, nothing changed. Exactly the same. We wanted to make sure particularly the shareholders knew that the misconception that it was endless dilution, it's completely in the hands of our shareholders. They'll get a vote on anything above the 19-9. I think you've modeled that well, and you understand it really well. We want to make sure everybody understands it as well as you.

The other thing, whether it's the 132 or 100, we want to make sure people understand that the debt, if you put it in our debt footnote, if you schedule it out, it looks like a lot for this company to handle. 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's not buying back the preferred shares at the wrong time. We want to make sure that people understand, number one, how the dilution works, number two, how the debt works, and number three, that they know that they are in control as far as shareholder vote, and we are in control as far as making sure we're not buying back shares or redeeming the preferred at a time that would put the company in jeopardy.

Really just clearing up things that are in the marketplace and making sure. Again, you've done a great job at it. Other guys are working on it. We want to make sure we also don't have selective disclosure issues in between in trying to explain something that's out there, but we appreciate it's a really complicated transaction.

Yeah, great. No, thank you for all the color. That's very helpful. You're welcome.

By the way, I really meant that. You did a good job modeling it. We 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 the nice quarter, guys.

Thanks, Ken. Yep. Of course.

I just wanted to circle back a little bit on to the supply chain dynamics question in Arcadia a little bit more. I think last quarter we 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, but it sounds like it may also have been a tailwind on sales this quarter to a certain extent, right? 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? Obviously that took a step up, I think, sequentially on a year-over-year basis in aluminum costs.

Yeah, I think a lot of the year-over-year increase is going to be due to the aluminum price increases. There was some volume pickup that we had. Where we're seeing the increases in what Jim talked about, our short cycle business. That's typically business that's to the small to medium-sized 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. 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. What we've seen is that the short cycle business, or sometimes we call it storefront business, has picked up considerably over the last several months.

We're excited about that because that business is fairly steady, it's higher margin, and it's really the bread and butter of what Arcadia was founded on, which was to service that small to medium-size glazer.

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

Well, really the one thing I did was bring back Jim Schladen. 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've calmed down the level of introduction of whether it's new processes. Whenever you buy a founder-led company, I have seen this a bunch of times, there's a temptation to try to boil the ocean right away and do everything new. We've stopped that altogether. There's a reference in the press release to the high-end residential business which, a couple of years ago, I could 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'd introduced so much change and 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. Jim and I had a handshake when he came back. He'd get it to a certain level, both on sales and profitability, within a certain time period. He's meeting all those goals. I think we're more measured on where we can get to in an 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. We still have the best product in the market. We think the Arcadia name adds a halo effect to whatever we put out there on the residential side. Jim and the people he's brought back are, again, every commitment he made to me and I made to our board as 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.

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're maybe 75%-80% of the way there. We're going slow. There's still a big digestion issue. As far as other operational improvement, we're not going to force-feed the company things like maybe we had in the past. I'd like to have tailwinds. To be candid, we really have headwinds in every one of our markets. Arcadia, despite the fantastic performance this quarter, it's still got real headwinds as far as input costs, interest rates, general malaise with our developers. When we have tailwinds again, we'll be a little bit more ambitious on additional improvements we can do.

For the time being, just getting back to where we were on the storefront business and with both our customers and our supply chain partners is, I think that's a tall enough task.

Got it. That's very good color. I appreciate that. Maybe one last one, if I could squeeze it in. It sounds like there was 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 stretches into the remainder of the year?

Yeah. 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 go through and file for additional refunds from the government and continuing those negotiations with our supply chain. It's really difficult to forecast what that's going to look like.

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

It does not. The current guidance has no tariff refunds factored 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. Operator, other than thank you to anybody who participated today, thanks for your patience. We're trying to do the best we can in a very challenging market, really appreciate all the work on the part of our employees at each one of our divisions here and in Europe. We look forward to talking to you in a couple of months, and enjoy the rest of the summer. That's it, please. Thank you.

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