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Operator: Greetings, and welcome to the DMC Global Second Quarter Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Geoff High, VP of IR. Thank you. You may begin.

Geoff High: Hello, and welcome to DMC’s second quarter conference call. Presenting today are DMC CEO, Michael Kuta; 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 turn the call over to Michael Kuta. Michael?

Michael Kuta: Hello, and thank you for joining us today. DMC reported second quarter sales of $171.2 million and adjusted EBITDA attributable to DMC of $19.4 million. Our results represent a sequential rebound versus the first quarter and were achieved despite continued weakness in our primary construction and energy products markets. The results also were above the high end of our guidance range. Arcadia, our Building Products business was a key driver in our improved financial performance, reporting second quarter sales of $69.7 million and gross margin of 33.2%. Gross margin was up 600 basis points from the first quarter. In the comparable quarter last year, Arcadia’s gross profit was 34.7%, which was their best margin performance since we acquired the business in December 2021.

Arcadia’s second quarter adjusted EBITDA margin was 17.8% versus 9.5% in the first quarter and 20.8% in the year ago second quarter. The results reflect management’s focus on improving operational efficiencies and streamlining Arcadia’s cost structure. A successful effort to debottleneck finishing operations has improved Arcadia’s capacity, and the business is working to further strengthen its customer service and lead times. DynaEnergetics, our Energy Products business reported second quarter sales of $76.2 million, down 2% sequentially and down 10% versus last year’s second quarter. Adjusted EBITDA margin was 11.5%, down from 13.5% in the first quarter and 23% in the year ago second quarter. This year’s second quarter results reflect lower sales volumes and softer pricing in North America as well as a $500,000 bad debt expense.

Well completions in Dyna’s core U.S. onshore market declined in five of the first six months of the year, and the number FRAC spreads is off roughly 13% from the 2024 peak. We expect North American completion activity will remain soft during the second half of the year. Dyna has taken steps to align its cost structure with anticipated demand. Recent cost reductions, coupled with previously discussed automation and product enhancement initiatives are expected to improve Dyna’s EBITDA margins during the back half of the year. In the fourth quarter, sales and margins should benefit from an expected increase in international product sales. Sales at NobelClad, our composite metals business, were $25.2 million, which is up 2% versus the year ago quarter and down 6% sequentially.

Adjusted EBITDA margin was a strong 22.7% and benefited from favorable delivery timing and project mix. NobelClad’s second quarter order backlog of $64 million was up over 20% sequentially and reflects the impact of the record petrochemical order we discussed during our last call. EMC’s Board of Directors continues to evaluate a range of strategic options to unlock shareholder value, we will issue an update when appropriate. I’m encouraged by the progress made by DMC’s businesses during the second quarter. We want to thank our employees for their commitment and outstanding efforts. Now I’ll turn the call over to Eric for a closer look at our second quarter financial performance and a review of our third quarter guidance. Eric?

Eric Walter: Thanks, Michael. Consolidated second quarter sales were $171 million, up 3% sequentially and down 9% from last year’s second quarter, which was one of DMC’s strongest historical quarters. Consolidated gross margin was 27.1%, up sequentially from the 25.4% and down from 32.8% in last year’s second quarter. As Michael noted, the sequential improvement reflects a strong margin recovery at Arcadia versus the first quarter. The decline versus last year’s second quarter reflects lower sales in margin at DynaEnergetics. Second quarter SG&A was approximately $27 million or 15.8% of net sales versus $29 million or 15.5% of sales in the second quarter last year. Lower outside service expenses across all DMC businesses drove the reduction.

Inclusive of the Arcadia noncontrolling interest, consolidated second quarter adjusted EBITDA margin was 14.3% of sales, up from 11.4% in the first quarter and down from 20.3% in the year ago second quarter. Second quarter adjusted net income attributable to DMC was $5.7 million, while adjusted EPS attributable to DMC was $0.29. With respect to liquidity, we ended the second quarter with cash and cash equivalents of $15 million. Total debt inclusive of debt issuance cost of $84 million and net debt of $70 million. Our debt to adjusted EBITDA leverage ratio of 1.1 at the end of the second quarter remained well below our covenant threshold of 3.0. On a pro forma net debt basis after subtracting cash, our leverage ratio was 0.92 at the end of the second quarter.

Now turning to guidance for the third quarter of 2024. Consolidated sales are expected in a range of $158 million to $168 million. We expect activity in Arcadia’s primary markets to remain weak in the third quarter, while activity in China’s primary North American markets is expected to soften versus the second quarter. NobelClad’s sales are expected to be comparable to the second quarter. Third quarter adjusted EBITDA attributable to DMC is expected in the range of $15 million to $18 million. Arcadia’s adjusted EBITDA margin is expected to moderate versus the second quarter due to less absorption of overhead expenses on lower sales. While we expect Dyna will improve modestly due to cost reductions and operational initiatives. Adjusted EBITDA margin at NobelClad is expected to decline sequentially due to a less favorable project mix.

With that, we’re ready to take any questions from our analysts. Operator?

Operator: Thank you. [Operator Instructions] The first question is from Gerry Sweeney from Roth Capital Partners.

Gerry Sweeney: Revenue at Arcadia was ahead of forecast and obviously gross margins, you executed extremely well on that front. Can you give us a little bit more detail on maybe some of the operational efficiencies and cost-out reductions that you implemented in the segment to drive those margins? And are they sustainable?

Michael Kuta: So what we’ve been doing is doing some cost-outs, really streamlining the organization, getting more efficient, in particular, in our finishing operations. So our finishing operations are the heartbeat of our organization. So that’s what enables our customer service model. Everything goes through finishing, whether it’s paint anodizing, all material run through there. So the organization has really worked hard to debottleneck those ops increase finishing capacity throughput. And so that’s real driving real productivity improvements in the business and enabling the front end of the business.

Gerry Sweeney: Cash flow was, I think, flat essentially in the quarter. Maybe what’s driving free cash flow in the quarter and then projections for the remainder of the year? Obviously, the cash flow there’s puts and takes on that front, but just interested on that.

Eric Walter: Yes, for the second quarter, the free cash flow performance was really a function of timing and some onetime items. We had a prepaid purchase of explosives to secure our supply within Dyna. There was the timing of some customer advances in the NobelClad business moving from Q2 into Q3. And then we had some higher cash taxes in the quarter. And when you add all of those up, that had an impact — a negative impact to cash flow of about $10 million in Q2. So going forward, to answer to the second part of your question, we think that there is an opportunity to take out the — some net working capital out of the Dyna business given where we think activity levels will materialize in the second half of the year and also the opportunity to sharpen our pencil also at Arcadia.

So we’re looking to be finishing the year with a debt position of, call it, $65 million to $70 million and using the cash flow we generate in the second half of the year to continue to pay down and delever that debt. So we feel good about where we’re going to be going, but had some headwinds, unfortunately, in the second quarter that were onetime in nature.

Operator: The next question is from Stephen Gengaro from Stifel.

Stephen Gengaro: Two things for me. The first, can you talk about the DynaEnergetics business a bit more? And just kind of, a, the competitive landscape and what you’re seeing kind of from a potential growth of that business relative to kind of completion activity, whether it’s market share or completion intensity? How should we be thinking about that as we look at the next couple of quarters?

Eric Walter: I think generally, we’ll move with the market. When you think about sequentially Q2 versus Q1, when you look at — whether you look at completions, rig count or FRAC spreads, those were generally down in the 4% range, which tracked Dyna name performance. So I think that’s probably the way to look at it. And our guidance reflects that softness in Q3 and Dyna. I think — so the — I mean, the competitive dynamics are fairly steady, I would say, and pricing continues to be a challenge. But we’ve got quite a bit of — quite a few initiatives in place to offset these impacts and also reflected in our guidance. So the [OPEC excellence] initiatives we’re working on cost take out. That’s going to continue into the second half of the year.

And some of that on the product design side is going to take hold in 2025. So whatever the market is doing, we feel pretty good about controlling what we can control from a cost standpoint as well as from a competitive standpoint in our differentiation and that remains. So — but I think that’s the way to think about Dyna as we move forward. Maybe the last thing I’d say is that we’re seeing healthy international activity, and we see a pickup, a bump in Q4. So we should exit the year pretty strong on the international front in Q4, which will offset some of the softness in North America.

Stephen Gengaro: And then I think the other question I had was just kind of around the Arcadia the put call option in Arcadia. And I think there’s a little confusion out there, like people like talk to whether it’s at a snapshot in time, like in December or whether this thing kind of rolls forward? And what’s the timing on the way the decision on either party’s part has to be made on the foot call option on Arcadia? And how does that mechanically work?

Michael Kuta: Yes. So the put call first becomes exercisable at the end of December of this year. But that does not mean that anyone is compelled to exercise us being exercising the call or a minority partner exercising the put. So there’s nothing that’s compelling anybody to do that.

Stephen Gengaro: But the — is it a onetime event? Or is it — does it roll? Like how long do you have to exercise the option? How long — is it a day or a week, a year? Or how does that work?

Michael Kuta: It quite frankly continues on into perpetuity to the extent that neither party exercises the put for the call.

Operator: The next question is from Ken Newman from KeyBanc Capital Markets.

Ken Newman: I guess I’ll start with Arcadia. Obviously, the market is still pretty weak. It looks like you’re expecting revenue down sequentially here from second quarter. I know you’re not ready to give fourth quarter guidance or anything, but I’m curious about what the customers are kind of saying in terms of longer-term visibility? And how they’re kind of thinking about stabilization or timing of stabilization within that market specifically?

Michael Kuta: I think that we’ve got a couple of — I mean, just looking at the indicators out there and that we all look at, whether it’s ABI in the West at 43 spot run or the Dodge Momentum Index, which points towards some favorable end markets, but once again driven by very kind of specific markets like data centers [indiscernible]. So I mean, you see all the same data that we do. From a customer perspective, I think we’re seeing — it’s going to be soft markets for a couple of quarters here as we go out into the year. I think the good — and in particular, when you look at our Q2, we were pretty resilient. We’re seeing, obviously, our exposure to diverse end markets. Our bookings are relatively consistent and quoting activity has been good.

But there’s folks citing interest rates that are pushing projects out. So look, I think we’ve got a couple more quarters of softness. But I do think our guidance — we guided in Q2 64% to 68%, Q3 is another 64% to 68% because that’s sort of what the market is serving up. What we’re doing though is the things that we can control, and we’re talking about improving our operational effectiveness is really driving the profitability and the EBITDA at the bottom line and driving cash flow. And I feel confident that we’re going to do that the remainder of this year for whatever the market serves up.

Ken Newman: I guess as a follow-on to that, I mean, with the cost — the cost outs inflator Arcadia, I mean, is there a way that we should think about normalized operating leverage as the volumes stabilize? Obviously, I know it’s going to be very dependent on what the volumes do. But how do we think about incremental or decremental margins with this new cost kind of platform that you’re on?

Michael Kuta: Yes. incremental and decremental our material margin is probably in the, call it 45-ish-% range. And then when you think about — it’s not a high fixed cost business. there’s a larger labor component. So I think incremental or decremental margins are probably between, call it, 35% and 40%. Eric, would you concur with that?

Eric Walter: Yes.

Michael Kuta: Yes. The incremental and decremental just aren’t — they’re not significantly higher than our gross margin percent in that, call it, 33% range.

Ken Newman: You talked about some project mix headwinds, I think, on NobelClad. I know it’s a smaller part of your business, but just can you just talk about how persistent that mix headwind could be beyond this quarter as you think about the backlog of activity there?

Michael Kuta: So we see a dip in Q3, but a very strong Q4. And quite frankly, not obviously providing guidance on ’25, but pretty bullish on ’25. And I think there’s things shaping up that 25% be a really good year.

Operator: The next question is from Stephen Gengaro from Stifel.

Stephen Gengaro: Just a quick follow-up. And honestly, Michael, I’m not sure you can comment on this, but I’ll ask it. When you think about the structure of the Company and what you’re looking at doing with the Dyna side, is there any thought to pulling back on that either permanently or temporarily, given kind of what the market is like on the buyer side?

Michael Kuta: I would just say that we’re in the throes of strategic alternatives, and there’s a lot of things on the table, okay? So a lot of different things that we’re evaluating. So broad scope.

Stephen Gengaro: Is there any way to think about how you balance the maybe creating more of a pure-play business versus valuation of pieces you might want to sell?

Michael Kuta: Can you rephrase or clarify the question?

Stephen Gengaro: I guess the easier — I guess the more direct way to say is, would you take a lower price on something just to get rid of it? To make a cleaner less — a cleaner business that is left to run?

Michael Kuta: Yes. The viewpoint is, again, we’re looking at a wide range of options to maximize shareholder value. And so that’s maximizing shareholder value is the key.

Operator: There are no further questions at this time. I would like to turn the floor back over to Michael Kuta, CEO, for closing comments.

Michael Kuta: Thanks again for joining us today. We appreciate your interest in DMC and look forward to our next update. Take care.

Operator: This concludes today’s conference call. You may disconnect your lines at this time. Thank you for your participation.