DMC Global Inc. Q4 FY2025 Earnings Call

Greetings. Welcome to the DMC Global Fourth Quarter Earnings Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce Geoff High, Vice President of Investor Relations. Please go ahead.

Hello, and welcome to DMC's fourth quarter conference call. Presenting today are President and CEO, Jim O'Leary; and Chief Financial Officer, Eric Walter. I'd like to remind everyone that matters discussed during this call may include forward-looking statements that are based on our estimates, projections, and assumptions as of today's date and are subject to risks and uncertainties that are disclosed in our filings with the SEC. Our business is subject to certain risks that could cause actual results to differ materially from those anticipated in our forward-looking statements. DMC assumes no obligation to update forward-looking statements that become untrue because of subsequent events. Today's earnings release and our related presentation on our fourth 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 Jim O'Leary. Jim?

Thanks, Geoff, and thanks, everyone, for joining us today. Macroeconomic challenges continue to be a major issue at DMC, notably tariffs, both pre and post Friday's turbulence and the general trend in the level of interest rates, which have largely been unforecastable, much to the strain of everyone in the building industry. These and other economic challenges weighed heavily on DMC's core oilfield and construction markets throughout 2025 and are persisting into early 2026. Despite these difficulties, we remain focused on our main objective, which we've consistently discussed with you each quarter, strengthening our financial position. And on that front, we continue to make significant progress. We reduced our net debt by another $11.4 million during the fourth quarter. At year-end, our net debt of $18.7 million was down 67% from the end of 2024 and at the lowest level since the Arcadia acquisition was consummated in 2021. However, while we made progress on the balance sheet front, we received little or no cooperation from our end markets, which continued to worsen during the period. Tariffs were a significant headwind for us in 2025, and we're currently reviewing Friday's Supreme Court ruling and the White House's subsequent response to understand what it all means for our businesses. At this point, it appears that the Section 232 tariffs on steel and aluminum will remain in place. We're evaluating what refunds we may be entitled to which the Supreme Court was silent upon in its ruling. With respect to the fourth quarter, consolidated sales declined 6% year-over-year to $143.5 million. Fourth quarter adjusted EBITDA attributable to DMC was negative $1.6 million, which included approximately $7 million in discrete accounts receivable and inventory write-offs at DynaEnergetics, our core oilfield products business as certain of its customers have been negatively impacted by very challenging conditions in the North American unconventional oil and gas market. Arcadia, our building products business, reported fourth quarter sales of $57 million, down 5% year-over-year and down 8% sequentially. Adjusted EBITDA attributable to DMC was $2.4 million, up from $2.2 million in the prior year's fourth quarter, but down from $5.1 million in the third quarter. In addition to year-end seasonality, Arcadia's end markets have been impacted by persistently high interest rates and elevated raw material and labor costs, which have collectively slowed architectural activity and led to the deferral of several large projects. The Architectural Billing Index for Arcadia's core Western U.S. region contracted for 12 months, and these conditions have led to a highly competitive bidding environment that's pressured pricing. Most notably, we've experienced a continued increase in the average price of aluminum, Arcadia's primary input, which was up 55% year-over-year and 12% sequentially. In a soft market characterized by project deferrals and delays, this has led to a very price competitive environment. DynaEnergetics reported fourth quarter sales of $68.9 million, an 8% improvement versus the prior year quarter and flat sequentially. Adjusted EBITDA, including the approximately $7 million in write-offs was negative $2.7 million. As mentioned, DynaEnergetics and its customers have been negatively impacted by challenging conditions in the North American onshore market, which has seen volatile and generally declining oil prices, fewer operating frac crews and highly competitive pricing. During the fourth quarter, Dyna paid more than $3 million in tariffs and related duties and has paid more than $10 million since the tariffs were imposed in February of last year. NobelClad, our composite metals business, reported fourth quarter sales of $17.7 million, down 38% from the 2024 fourth quarter and down 15% sequentially. Reduced bookings during the first half of 2025 led to the declines as evolving tariff policies contributed to significant uncertainty in NobelClad's U.S. and international markets. Adjusted EBITDA was $2.1 million down 64% versus the comparable prior period and up 1% sequentially. The year-over-year decline principally reflects lower absorption of fixed manufacturing overhead on significantly reduced sales. NobelClad's order backlog at the end of the quarter was $62.6 million, up 28% year-over-year and up 10% sequentially. The increase reflects a record $25 million order during the first quarter of 2025 for an international petrochemical project. I'll now turn it over to Eric for a closer look at the fourth quarter financials and our guidance for the first quarter.

Thank you, Jim. As previously mentioned, our consolidated adjusted EBITDA attributable to DMC of negative $1.6 million included approximately $7 million in discrete charges at DynaEnergetics, and the majority of these charges were related to accounts receivable reserves. As Jim noted, the reduced activity and pricing pressure in the North American unconventional oil and gas sector has created significant challenges for some of DynaEnergetics oilfield services customers. Inclusive of the Arcadia noncontrolling interest, adjusted EBITDA was approximately $61,000 versus $11.9 million in last year's fourth quarter and $12 million in the third quarter. Arcadia's fourth quarter adjusted EBITDA margin before noncontrolling interest allocation was 7.1%, up from 6.2% in the year-ago fourth quarter but down from 13.8% in the third quarter. Dyna's adjusted EBITDA margin was a negative 4% compared with 8% in the prior year quarter and 7.1% in the third quarter. NobelClad's fourth quarter adjusted EBITDA margin was approximately 12% versus 20.6% in the prior year fourth quarter and approximately 10% in the third quarter. The year-over-year decline includes a tariff-related slowdown in bookings earlier in the year. Fourth quarter SG&A expense was $29.6 million or 20.6% of sales versus $25.1 million or 16.5% of sales in the prior year fourth quarter. The year-over-year increase principally relates to discrete accounts receivable write-offs at Dyna. Fourth quarter adjusted net loss attributable to DMC was $9.9 million, while adjusted loss per share attributable to DMC was $0.50. With respect to liquidity, we ended the fourth quarter with cash and cash equivalents of approximately $32 million. Strong fourth quarter cash flow enabled us to reduce total debt to $52 million, a 28% decrease from year-end 2024. As Jim mentioned, net debt was $18.7 million, down 67% from the end of 2024. And now the guidance for the first quarter. We expect sales will be in a range of $132 million and $138 million, while adjusted EBITDA attributable to DMC is expected in a range of $2 million to $4 million. Our results will reflect the impact of severe weather across much of the United States that affected our businesses during the first half of the quarter. We expect many of the factors that negatively impacted our fourth quarter and most of 2025 will continue into 2026. We believe Arcadia products will continue to face the broader factors that have weighed on the construction sector, including persistently high interest rates, volatile input prices, and acute price competition. Project deferrals and generally lower activity in Arcadia's core West Coast markets are expected to continue through at least the beginning of the year. DynaEnergetics' core North American unconventional market remains challenged by margin pressure from both fewer operating frac crews, which have led to a difficult pricing environment and higher input prices that have been inflated principally by tariffs. While NobelClad expects improved performance for the full fiscal year, demand erosion following the imposition of tariffs in early 2025 and the resulting impact on major orders will result in a slow start to the year. 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. Now I'll turn the call back to Jim.

Thank you, Eric. So to sum up, while we're pleased with our progress on the balance sheet, we're equally displeased with our overall financial performance. However, we recognize and we expect that many of our constituents recognize that we operate principally in two markets, energy and construction, that historically have been highly volatile and can and have been deeply cyclical. While we navigate what currently are tough conditions, what will hopefully be close to trough conditions in both markets, we're keenly aware of the need to find future avenues of growth while we continue to batten down the hatches to maximize operating leverage when business conditions eventually improve. Our businesses are actively pursuing potential growth opportunities that align with their core capabilities. For example, DynaEnergetics is exploring opportunities in the enhanced geothermal sector while we're looking to expand our presence in certain emerging international shale markets. Meanwhile, NobelClad, which already supplies mission-critical components to the U.S. Navy, is closely monitoring opportunities associated with the recently announced acceleration of the U.S. Naval Readiness program and expects to be a beneficiary of any increased volume, particularly for future submarine programs. Currently, each of our businesses is assessing the expected impacts of the Supreme Court tariff decision while working on additional tariff mitigation strategies. They're ready to take further cost reduction activity in addition, if business conditions do not improve as we move further into 2026. Finally, I'd like to thank DMC's associates around the world for their contributions during a very challenging year. The contribution and commitment are greatly appreciated. And with that, we'd be glad to take any questions, operator.

And our first question comes from Gerry Sweeney with ROTH Capital Partners.

I want to start with DynaEnergetics. Obviously, at the end of your prepared remarks, you talked about being keenly aware of growth opportunities. And I was wondering if you could touch upon the geothermal opportunity and the international shale opportunity with...

Gerry, are you there?

Did you capture anything, or was it simply not present?

You weren't there? Can you start over?

I apologize. Jim, you mentioned at the end of your prepared remarks about being aware of growth. Could you discuss the opportunities in geothermal and international shale, specifically how you approach the market and what opportunities exist there?

We will certainly discuss growth. However, we recognize that these markets are cyclical and currently two of them are down. While we've consistently been cutting costs, including in supply chain and variable costs, we're prepared to consider all options, including adjustments to headcount and spending across the board, until we see market improvements. Maximizing our operating leverage is the focus for now. I attended the Builder Show last week and found that our experience aligns with others; particularly in onshore oil and gas, where we face price pressures and challenges due to tariffs affecting margins. Our priority is to ensure the maximum operating leverage we can achieve moving forward. To answer your question, our product for EGS, or enhanced geothermal systems, is essentially the same technology we utilize for fracking. If you recall the One Big Beautiful Bill from a few months ago, enhanced geothermal technology emerged intact and even improved under the bill, gaining positive recognition. We are collaborating with several industry players, many of whom have leadership backgrounds in fracking and oil and gas, emphasizing the similarity in technology and sales channels. Dyna is particularly skilled in this area and we believe we're well-positioned for when geothermal technology gains traction, particularly in North America, while we also have an international presence that we're exploring. Another significant point to highlight, especially given the current news, is naval readiness, which has become a global issue, not just limited to Asia. The lack of investment in naval capabilities, especially concerning submarines and battleships, is a space where NobelClad is exceptionally well-situated. We are a sole source provider for numerous components used in nuclear submarines, and the budget discussions for next year indicate a potential doubling of submarine production. This change could greatly impact NobelClad, although we’re not disclosing specific numbers for individual sectors at this time. Doubling the volume for submarines primarily in the U.S.—not accounting for potential opportunities elsewhere—would be significant. Additionally, any developments regarding pressure vessels and battleships proposed by the Trump administration could yield substantial effects, with anticipated impacts hitting post-2026, especially in 2027 and beyond as we ramp up naval readiness efforts. Lastly, regarding Dyna and international shale, particularly in South America, Vaca Muerta in Argentina receives a lot of attention, but there are also developments in Saudi Arabia and other regions. We believe our global footprint and technology position us uniquely in this market, and we are increasing our efforts in this area.

Got it. I always like to start with the positive aspects of growth, but I want to take a slightly different approach regarding Arcadia. I want to confirm that I understood correctly when I reviewed the transcript; I believe you anticipated better margins during the third quarter for that segment. I'm curious if you experienced increased pressure in the second half. Additionally, as you mentioned, nothing is off the table. Is there anything that needs fixing or investment to enhance margins?

I don't see anything obvious that requires fixing. We are examining every specific physical operation and each product line to determine its contribution. However, the entire industry experienced a significant downturn from the second quarter to the first quarter of this year, which was more severe than we anticipated. We've discussed the run rate, which increased from $20 million in sales per month to $25 million, positively affecting our operating leverage. Unfortunately, we fell below $20 million entering the fourth quarter and the first quarter. It's not due to any particular missteps on our part or specific challenges within our operations. We are concerned and are assessing everything, but it's not because we've done anything significantly wrong. There is one public competitor and two private equity-owned companies we are aware of, and based on the limited data we have, including these comparisons, our performance does not stand out for negative reasons, which is disappointing. I recently attended the Builder Show and found it to be the bleakest since 2011. I'm still hopeful that the phrase "it's always darkest before the dawn" holds true. I expected interest rates to work in our favor sooner than they have, and we will need to keep monitoring that situation. There are various factors at play with inflation, whether from tariffs or the persistent nature of long-term interest rates, versus the potential for cuts later this year, which we hope will lead to improvement. Currently, the sentiment is quite negative, but it's a situation affecting the entire industry, not just Arcadia. The rebuilding efforts in Los Angeles are taking longer than we expected a year ago, which likely impacts us more than our peers since we lead that market. In Vegas, where trade shows are currently low in attendance, we are still performing well due to our market share. However, several key areas, especially in California and Vegas, are experiencing more gloom than usual in the building market. This situation is not unique to Arcadia, as supported by our observations and comparisons with competitors. Nevertheless, it doesn't ease our concerns or lessen our vigilance in examining everything, and we are open to all options.

I understand. I noticed the comparisons with some of the competition, so thank you for that. You also answered my question about the rebuilding process. It seems like there's quite a bit of frustration because it's taking longer than people expected, and some delays are caused by bureaucratic issues. That's all I have for now.

It's incredible and it's disappointing.

The next question comes from the line of Stephen Gengaro with Stifel.

I have a couple of questions. First, regarding DynaEnergetics, it seems the fourth quarter revenue was quite strong. I noticed that there was less seasonality in the frac business than usual. Did the top line results surprise you? I'm also curious if this could positively impact overhead absorption and how it affects margin performance, even excluding the specific items you mentioned.

I wouldn't say I was surprised because we had fairly good visibility when we announced our guidance. On the volume side, particularly unit volume, it came in as we anticipated. There was nothing disappointing about it. In fact, based on what you read in the press, it was quite solid. It did see a slight decline toward the end of the year and into the beginning of the new year, which is why we are being a bit more cautious with our first quarter outlook. The main concern was margins. The pressure on margins from tariffs had a significant impact on DynaEnergetics, and we felt it was important to share the specific numbers. The effects of 3.25% and 10% for the year are quite substantial for a company of DynaEnergetics' size. I want to clarify that there’s a distinct difference between unit volume and price. Pricing has been quite challenging for perforating guns in particular, due to the narrow market segment we operate in. While some of our peers are benefiting from increased offshore exposure or greater activity in conventional markets in other regions, our market is more limited, with about a 70-30 split favoring unconventional opportunities in the U.S., mainly in the Permian and some other areas. Price pressure in this market has been significant. To simplify: unit volume was as expected and satisfactory, but we faced considerable price pressure. This pressure, combined with tariffs, rising labor costs, and the complications of having to adjust to changing tariff conditions, has affected our margins. We made many improvements on the supply chain side, but the necessity of reengineering processes multiple times a year also incurs additional costs. Therefore, the main issue we are facing is margin compression, primarily due to costs and somewhat due to pricing challenges.

Okay. For my follow-up, I'd like to discuss DynaEnergetics. You mentioned earlier about cyclical issues, and I'm trying to understand how much of the current situation is truly cyclical versus what could be a structural problem in the U.S. perforating business. This is influenced by what some of the machine shops have done and the competitive landscape, which seems improved compared to a couple of years ago. I'm having difficulty with this and want to know what it will take for DynaEnergetics' margins to begin expanding again.

That's a relevant question and one we've been contemplating as well. I can't provide specific percentages, but on the volume front, while unit volumes are reasonable, rig counts, frac spreads, and frac crews have all declined. If you analyze industry data, it would be beneficial if oil prices were consistently above $70, and having a clearer understanding of factors like Iran's operations or Saudi output variations would help. More consistency would likely lead to improved volumes. Just because current volumes are acceptable doesn't mean they couldn't be significantly better with better global insight. Although unit volume is okay, many metrics impacting us have decreased. This situation isn't entirely secular, but it's also not as severe cyclically as during the COVID period in 2015 and 2016. I wish I could provide a clearer answer regarding the proportion of cyclical versus secular changes and when we might see improvement. We don't usually delve into such specifics, but we've made significant personnel changes at Dyna in manufacturing and inside sales, which we believe will positively impact us. We may have become somewhat complacent during the past couple of years, especially as volumes decreased but didn't collapse, which didn't prompt the necessary action. I hope this clarifies things, and I wish we could give a more definitive answer about the cyclical versus secular aspects. On the secular front, as mentioned in the press release, we recognize the cyclical nature of our business, but we need to pursue additional growth avenues. I believe we should focus on international shale opportunities and enhanced geothermal energy until we gain better visibility and can address these questions more effectively.

Great. No, that's fine. I appreciate you giving some color. And then just one final one. Like I'm not sure how granular you'll get on this, but when we think about the first quarter and then maybe as '26 progresses, any commentary on the segment puts and takes in the first quarter? And maybe which segments you're probably more or less optimistic about as far as seeing some expansion throughout '26.

The first quarter is going to be challenging, and NobelClad isn't expected to see much improvement. The anticipated growth will mainly come from that significant project we mentioned, which won't materialize until later in the year. It’s too early to determine the impact of interest rates or the overall economy in Los Angeles or the West in general. I expect a generally pessimistic outlook. The recovery is likely to occur in the latter half of the year, possibly in the second quarter, but I don't want to tempt fate. Additionally, factors such as interest rates and more clarity on tariffs will play a role. If we consider the 15% tariff under Section 122 of the 74 Act, we might see some relief, although it only represents a small portion of the 3 and 10 mentioned in the press release. There should be some cost improvements, but as we near the end of February, we have tried to remain conservative yet realistic about the first quarter. While it's unfortunate, I think the outlook for the first quarter has already been largely determined.

The next question comes from the line of Ken Newman with KeyBanc Capital Markets.

Eric, maybe for my first question, I was hoping maybe you could help us bridge a little bit to this first quarter EBITDA guidance. I wanted to get some clarity. First, is there any other carryover write-down impacts or anything else that outside of just the core operations that we should be aware of from 4Q to 1Q? And then also maybe a little bit of help from a gross margin perspective across those segments as we think about the sequential moves there.

I am not aware of any carryover write-downs from Q4 to Q1 in response to your first question. Regarding gross margins, as mentioned earlier, both Arcadia and Dyna are facing pressure. Arcadia is experiencing rising input costs, specifically aluminum, which increased by another 10% quarter-over-quarter as of last Friday. This makes it challenging for Arcadia to pass these costs onto their customers. Additionally, some projects are being delayed, leading to heightened price competition, which further impacts them. Therefore, it is unlikely that Arcadia's gross margin will recover to historical levels in the first quarter based on current insights. Similarly, Dyna is facing comparable challenges, including tariff-related issues, and there are no indicators suggesting that tariff exposure will significantly change through the end of the quarter. The pricing pressures experienced in the second half of 2025 will likely persist into the first quarter as well. Both businesses are affected by customer pricing and input cost pressures, which will impact their margins. Lastly, for them, as well as NobelClad, decreased volume in their plants is contributing to pressure related to fixed cost absorption and operating leverage. Consequently, the margin pressures we saw in Q4 are expected to continue into Q1.

Yes. Okay. That's very helpful. And then for my follow-up here. Jim, you gave a lot of great color. It sounds like there's more blood that could be squeezed from the stone here from a cost down and efficiency perspective if the demand remains weak. I know you talked a bit to the opportunities for when that demand recovers. But as you think about this from a higher level, how much of this story you view it as one of just hoping that the end markets improve versus something that you can actively do today to kind of drive that incremental demand? And how much do you have to spend in order to kind of go after those opportunities?

We won't need to spend anything significant. There aren't any major capital projects or transformative technological changes required. In the past, we've discussed automation at DynaEnergetics and some occasional CapEx projects at Arcadia, but currently, no expenditures are necessary. We had an intentional discussion about the cyclical aspects of our business. While there isn't excessive room to extract more, we are carefully monitoring specific areas and making adjustments in response to volume changes over time, such as temporary labor and transportation costs. When adjustments aren't made timely, we're proactive in addressing them, and we’re doing that now. There are definitely areas where we can be more vigilant and push harder. Changes might not be immediately noticeable to others, but we are exploring different options and strategies. If there is a significant downturn, I have experience from the 2007-2011 period in the building sector, where it’s crucial to be prudent. In that scenario, there may be substantial layoffs that aren't done lightly but are necessary. So far, the decline over the past four quarters has been measured, unlike the consistent downtrend seen in our industry peers. However, if we experience a drastic drop, we will be prepared. We are focusing on maximizing our operational efficiency and being ready for any upturn as well. Having previously seen the building industry surge, significant increases in monthly sales would result in notable improvements in operating margins. It's essential that we're in a position to capitalize on this. While we hope we have reached the lowest point, we can't afford complacency after a couple of years of it; we must keep a close eye on all variable costs. If another downturn occurs, we are ready to take necessary actions. On the other hand, if the building market rebounds, we cannot be in a position of being unable to meet demand. I believe we're currently balancing this situation well and remain optimistic for a potential upswing later this year, although it likely won't be immediate. Should there be a downturn, we are prepared for that outcome.

This concludes the question-and-answer session. I'll turn the call back over to Jim O'Leary for closing remarks.

Operator, thank you and for anyone listening on the call, including the fellows who asked questions. Thank you. All good questions, all provided the color we want you to leave with. And again, just to repeat something, cyclical end markets, we don't see anything that's specific to us that is in desperate need of help. We're trying to maximize the operating leverage on the other side. We're prepared if there's another leg down, which hopefully there won't be. Tariffs and the general level of interest rates have not been kind to us, but they haven't been kind to anybody and not just maximizing the operating leverage, but looking for avenues of growth, which would be geothermal and international with Dyna, certainly, the naval readiness initiative at NobelClad amongst getting back in the game with some of the larger projects that we think now that there's a little bit more stability on the demand front, we should avail ourselves of. We're looking at all the right things. We appreciate your patience, and we're trying like heck to do a better job for you. So with that, thank you, and we're looking forward to talking to you in a couple of quarters.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.