Good day everyone and welcome to today's DMC Global Second Quarter Earnings Call. At this time, all participants are in listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. Please note this call may be recorded, and it will be standing by should you need any assistance. It is now my pleasure to turn the conference over to your Geoff High.

Hello, and welcome to DMC's second quarter conference call. Presenting today are DMC Chairman, David Aldous; Chief Executive Officer, Mike 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 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 David Aldous. David?

Thank you, Geoff. Good afternoon and thank you for joining us for today's call. I'd like to begin by congratulating Michael Kuta on his appointment as present CEO of DMC. I've had the pleasure of working with Mike for nearly a decade while serving on DMC's board, and for the past seven months, we have jointly led DMC as co-CEOs. Mike is a strategic thinker and proven leader, and he has a deep understanding of DMC and its businesses. He has also earned the respect and support of our employees, customers, and board. I'm confident he will thrive in his role as CEO, and I look forward to supporting him as he leads DMC into its next chapter. Our CEO search process involved extensive interviews with several highly qualified candidates, and I want to thank each of them for their time they spent with us and their interest in DMC. Our board also has been actively interviewing candidates for an open director position, and we announced yesterday that Ouma Sananikone has been appointed to the DMC Board. Ouma has spent more than 30 years in C-suites and board-level roles and brings extensive experience developing and implementing corporate and financial strategy, and we look forward to her contributions. I want to thank my fellow directors for their time and thoughtful consideration of the candidates for both the CEO and director positions. With that, I'll turn the call over to Mike.

Thank you for the kind words, David. I've thoroughly enjoyed working together this year and have appreciated your valuable insight and perspective. I look forward to the continued collaboration with you and the Board as we pursue a very promising future for DMC. Turning to our results, DMC delivered record sales and earnings for the second quarter, and our three manufacturing businesses made important progress on the operational and financial initiatives we established at the beginning of the year. Arcadia, our architectural building product segment, reported second quarter sales of $79 million, which were comparable to the first quarter and up 4% versus the year-ago second quarter. Arcadia's commercial business showed steady demand across its markets in the Western and Southwestern United States. A notable project that entered Arcadia's backlog during the quarter is the first phase of a large mixed-use development in Southern California that makes extensive use of glass and architectural framing. The final project will combine more than 460 residential units with extensive retail and commercial space. Arcadia Custom, which serves the nation's high-end residential market, also reported steady customer activity and much improved operational execution. Arcadia sold through the remainder of its high-cost aluminum inventory, which had been a drag on margins during the past three quarters. The completion of this process helped drive adjusted EBITDA margin to 21%, up from 13% in the first quarter. Arcadia recently completed its transition to a new ERP system. I'm very pleased by how smoothly the conversion went. The system should significantly improve Arcadia's business processes and productivity and will enhance the buying experience for Arcadia's customers. DynaEnergetics, our energy products business, delivered sales of $85 million, the second best quarterly performance in Dyna's history. The results were up 3% sequentially and 26% versus last year's second quarter, and reflect strong second quarter demand in both North American and international markets. Unit sales of Dyna's fully integrated DynaStage perforating system reached another quarterly record. We expect full year unit sales will surpass the million-unit mark later this month. This would be approximately two months earlier than when Dyna reached the million-unit mark last year. Gravity 2.0 is the most recent addition to the DynaStage product family and is being well received by customers who are incorporating oriented perforating into their well designs. Gravity is the most compact oriented perforating system on the market and requires no configuration at the well site. As Eric will discuss in a moment, Dyna's profitability improved markedly in the second quarter, reflecting the impact of several margin enhancement initiatives implemented at the beginning of the year. NobelClad, our composite metals business, delivered second quarter sales of $25 million, up 12% sequentially and 13% year-over-year. A very favorable project mix helped drive NobelClad's adjusted EBITDA margin to 22%. Strong second quarter bookings increased NobelClad's order backlog to $64 million and improved its rolling 12-month bookings to $108 million. We expect the third quarter will represent another period of double-digit sequential sales growth at NobelClad. Our second quarter SG&A expense was $29 million, down $10 million sequentially. We are closely managing our cost structure and expect quarterly SG&A will remain below $30 million through the balance of the year. We also reduced our debt to adjusted EBITDA leverage ratio to 1.3x from 2.5x at the end of last year's second quarter. I'm very encouraged by the progress we've made during the first half of 2023. As we chart our path forward, our focus is on delivering growth, improved cash flow, and stronger returns for our stakeholders. With that, I'll turn the call over to Eric for a closer look at our second quarter financial results and our guidance for the third quarter. Eric?

Thanks Mike. DMC delivered record second quarter sales of $189 million, which was up 2% sequentially and 14% versus last year's second quarter. Gross margin was 33%, up 450 basis points from the first quarter and 140 basis points from last year's second quarter. All DMC businesses achieved gross margin expansion during the quarter. Our second quarter SG&A expense of $29 million was 15% of sales, down from 18% of sales in the second quarter last year. Second quarter adjusted EBITDA attributable to DMC was $32 million, up nearly 60% sequentially and over 40% year-over-year. Inclusive of the Arcadia non-controlling interest, consolidated adjusted EBITDA was $38 million. As a percentage of sales, total adjusted EBITDA was a very healthy 20%. Arcadia reported second quarter adjusted EBITDA of $16 million, of which $10 million or 60% was attributable to DMC. Arcadia's adjusted EBITDA margin was down 50 basis points versus the prior year second quarter, but expanded 780 basis points sequentially. As Mike noted, Arcadia's margin was compressed during the prior three quarters due to last year's sharp escalation in the cost of aluminum, which is a key raw material in Arcadia's products. Arcadia's second quarter improvement in EBITDA margin reflects its effort to recover pricing after selling through the balance of its high-cost inventory. Dyna reported second quarter adjusted EBITDA of $19 million or 23% of sales. Adjusted EBITDA margin improved 480 basis points sequentially driven by a combination of lower litigation costs, greater absorption of manufacturing overhead, new product designs, and a higher margin product mix. Adjusted EBITDA margin expanded 330 basis points versus the prior year second quarter. NobelClad reported adjusted EBITDA of $5 million for approximately 22% of sales. A mix of higher-margin projects increased adjusted EBITDA margin by 650 basis points sequentially and 620 basis points year-over-year. Second quarter adjusted net income attributable to DMC was $14 million or $0.72 per diluted share, up from $6 million or $0.32 per diluted share in this year's first quarter and up from $6 million or $0.29 per diluted share in last year's second quarter. During the quarter, DMC generated free cash flow of $9 million, which compares with $2 million in the second quarter of 2022. We used our cash flow primarily for principal payments on our long-term debt, distributions to our Arcadia joint venture partner and an investment in marketable securities. In terms of liquidity, we entered the second quarter with cash and marketable securities of $21 million and had no amounts outstanding under our $50 million revolver. As Mike mentioned, our leverage ratio was 1.3 times at the end of the second quarter, which was well below the covenant threshold of three times, and represents the sixth consecutive quarter of deleveraging the balance sheet. Highlighting our third quarter guidance, which is detailed in our news release, we expect consolidated sales in a range of $178 million to $188 million versus the $189 million reported last quarter. We anticipate Arcadia will experience some downward pricing pressure during the third quarter on relatively stable volume. Dyna expects activity levels in its core North American markets to soften a bit in the second half of the year based on lower well completion activity. However, Dyna does expect to maintain its market share in advance of the next upcycle. NobelClad expects a sequential sales increase of approximately 20% in the third quarter as it delivers key projects from its order backlog. Consolidated gross margin is expected in a range of 29% to 30%, compared with the 33% in the second quarter. Consolidated SG&A expense is expected to range from $28 million to $30 million. Third quarter adjusted EBITDA attributable to DMC is expected in a range of $24 million to $27 million. And finally, we expect second quarter capital expenditures will be in a range of $5 million to $7 million, while full year CapEx should be in a range of $18 million to $20 million. With that, we're ready to take any questions.

And we'll take our first question from Gerry Sweeney with ROTH Capital. Your line is open.

So Mike, first of all, congratulations, it was a nice press release to see you on a Monday morning. So again, congratulations. Well deserved. Just jumping right into the questions. With Arcadia, maybe would you be able to dig in a little deeper, right, so we have, we know, higher aluminum costs. There's a lot of activity there as well. I'm just curious as to what is sort of maybe equilibrium on margins as you work through some of the higher aluminum costs that get through the system? I'm not sure if they were all the way through the system in the quarter or partially. And where would sort of margins ideally sort of fall out longer-term?

Yes. Gerry, we recovered margin lost in Q2 and probably the recovery was quicker than expected from a guidance standpoint. I think from a longer term we would think low 30s, so probably in that 31, 32 type range.

And then also, obviously, we got a couple things going on here, right? First of all, great quarter we're seeing deleveraging, Dyna's doing great, and then you also had this Arcadia put call next year. How do we look at, but you also have some really nice growth opportunities with Arcadia in markets that you're just starting to look at or starting to penetrate in Houston, Dallas. How do we look at a balance of deleveraging versus growth opportunities over the next 12 to 18 months?

Yes. So first of all, we feel like we've got a very clear and strong path on the put call, and but definitely we know that that's out there. So we're going to balance the growth side with the investment on the Arcadia side. We do feel very bullish about generating cash flow, the remainder of this year and into 2024. So, we feel pretty optimistic that we're going to be able to balance that pretty well and be able to invest in Arcadia continuing with investments this year to increase paint capacity and next year to put a second leg of capacity in and continue on in '24 with investing in that business and also making some investments in Dyna and NobelClad.

Yes, and just maybe one, this is Eric. One thing to add to that is, when we go through the capital allocation process, the first question we ask is what do the businesses need to support their growth? And we start with that and make sure that we can fund that. And then with excess cash, we use it for the deleveraging process. So, we feel pretty comfortable that everything that Dyna's got ahead of themselves in terms of paying capacity and other longer-term objectives that we're going to be able to fund that, but also use additional cash that we're generating from the other businesses to go through the deleveraging process.

Lastly, Jerry, I mean, what some of the things we're looking at in terms of CapEx are big impact, but lower CapEx.

And then one quick question on Dyna and I'll jump back into you. Obviously, great quarter, it sounds as though that maybe at least Q3, well you said the second half would slow down. But my sense was things maybe have slowed going into the end of Q2 into Q3, but there's also this feeling that at some point activity is supposed to pick up. What's your feeling maybe next this quarter, the fourth quarter, and then is that an accurate sort of assessment of what we're seeing with the market maybe into next year?

Yes, so we're projecting a softer Q3 that's reflected in our guidance. We think that Q4 could be a bit soft as well, maybe a bit better than Q3. But as we look forward into 2024, I think it's going to be a really nice setup for 2024 and a nice recovery off of the second half of '23. So, we're feeling pretty optimistic looking through the third quarter here into the fourth quarter. In 2024, we're set up nicely.

Our next question comes from Ken Newman with Keybanc Capital Markets. Your line is open.

So maybe just getting started here. I want to circle back to Arcadia. Thanks for the color on the longer-term gross margins profile there. Understand there's been a lot of moving pieces, but I guess on the revenue line for this quarter, can you just clarify how much of that revenue growth was from price versus volumes?

You know, we think from Q1 to Q2 sequentially, that's probably flattish on both fronts and year-over-year.

Yes, year-over-year, it's going to be primarily pricing because as we've talked about in other calls, the business is fairly constrained from a volume standpoint. So, any type of fluctuation until we can add in this paint capacity is going to be primarily pricing.

Yes. So, as I think about, I know you're kind of putting in the new paint capacity today and I think you talked a little bit about further capacity expansions in '24. If volumes are flattish through the back half and pricing is kind of moderating on some of these raw material costs, just how do you think about the impact to gross margins for that segment as we think about Q3 and Q4?

Yes. So I think the gross margins will moderate from Q2 levels because there is going to be some pricing pressure that we're going to see in some of the select markets. We do think that the volumes are going to be relatively stable based on what our backlog is right now and what we can see for the next 60 to 90 days. The paint capacity is going to be strategic for us. We think that that's going to be something starting at the end of this year and going into 2024 that's going to be adding upwards to 10% top-line capacity for Arcadia. And that's going to be really transformational for the business. It'll be the first time in a long time that we've actually been able to grow volumes. So, as that increases going into next year, it could also increase the amount of absorption of manufacturing overhead, which could help gross margins in 2024. But we think for the balance of this year, it's going to be relatively flat volumes.

And then just kind of moving, this is kind of a general question across all the businesses, but we have heard about from other industrials this earnings season that some impacts about supply chains normalizing and maybe some customers destocking inventories as those kind of normalize. Curious if you're seeing that impact at all across any of the three businesses or if that's kind of being something that is a near-term watch point for you at this point?

Ken, we don't see that as a significant issue. And when you think about our two largest businesses, Arcadia and Dyna, they're pretty short cycle, quick turn. Our customers don't have a lot of inventory, right? A lot of that business is sort of, I'd say hand to mouth. I just don't see a customer destocking impact in our results, our guidance, or in our future.

And we'll take our next question from Sean Mitchell with Daniel Energy Partners. Your line is open.

Obviously my question will revolve around Dyna more than anything, but just could you talk a little bit more about the margin enhancements you're working on within Dyna? I know you had some litigation expense in Q1 that you didn't have in Q2, but just margin enhancement in Dyna. And then the second one would be given DS Gravity 2.0, is the customer mix changing at all? And can you talk about kind of how the conversations are going around the DS Gravity 2.0?

Yes. So, a couple of questions there. I think the first one, we've got operational initiatives in our plants, OpEx enhancements that we're working on to improve margins, and that gets into not just our plants but in our products as well and how we're streamlining those. So, that's contributing to the margin. From a Gravity 2.0 standpoint, self-orienting systems, that's one that we're starting to get some traction around and customer interest. That's a product that could, from a mix standpoint, also help our margins as well and something that could be 10% to 20% of our business moving forward. I mean, we are seeing, as we move from Q2 to Q3, as mentioned, we're seeing a bit of a softer market. There will be some absorption impact in Q3 and customer mix impacting our results, but we expect a pretty resilient, if not strong Q3 as we move forward.

And we'll take our next question from Alec Scheibelhoffer with Stifel. Your line is open.

Good afternoon everyone, and Michael, congrats again on the appointment. Again, great to hear that on a Monday. So, just honing in again on DynaEnergetics, so clearly with how the quarter performed, it was very strong relative to what completion activities have been doing. Can you just talk about the competitive landscape and what you're seeing on the market share side? And I know, I think you said during your prepared remarks, you're going to be approaching 1 million unit sales sometime in the next month or so. And I guess just how the volume outlook looks for the remainder of the year and maybe even in 4Q if you have any color there?

Yes, so from a competitive intensity standpoint, we think that there's high competitive intensity here. But we think with our value proposition in DynaEnergetics, the market leader. We're trending up on share and that's in part due to our customers and our customers' customers. So, we've got great customers that we partner with that are leading the charge on this. I think that's a big part of the Q2 increase, and I think the resilience you're seeing in Q3.

And it appears we have no further questions at this time. I'll now turn the program back to Michael Kuta for closing remarks.

Thank you again for joining us today. The progress we've made this year to strengthen and grow DMC reflects the exceptional effort of our employees, and I want to sincerely thank them for their commitment to the Company. I also want to thank our customers for their loyalty and our Board of Directors for their continued support. We look forward to speaking with you again soon. Take care.

This does conclude today's program. Thank you for your participation and you may disconnect at any time.