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spk01: Good afternoon, ladies and gentlemen, and welcome to the DMC Global Second Quarter Earnings Call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for your questions and comments following the presentation. It is now my pleasure to turn the floor over to your host, Jeff High, VP of Investor Relations. Sir, the floor is yours.
spk02: Hello, and welcome to DMC's Second Quarter Conference Call. Presenting today are President and CEO Kevin Long and CFO Mike Kuda. 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. A webcast replay of today's call will be available at dmcglobal.com after the call. In addition, a telephone replay will be available approximately two hours after the call. Details for listening to the replay are available in today's news release. And with that, I'll now turn the call over to Kevin Long. Kevin?
spk08: Thank you, Jeff, and good afternoon, everyone. DMC's second quarter sales of $65.4 million were up 18% sequentially and 51% versus the second quarter of 2020. The increase reflects improved economic conditions within several of our end markets. Dynergetics, our energy products business, reported greater demand for DS perforating systems due to stronger energy prices and a corresponding increase in well completions. Novoclad, our composite metals business, reported increased product shipments and the receipt of a large order from the chemical industry. Fundamentals in the oil and gas industry are improving, and leading operator and service companies are accelerating their adoption of fully integrated perforating systems that simplify operations, reduce costs, and enhance well performance. Dynanergetics has led a technical revolution in the perforating industry in recent years, and its IS2 initiating systems and DS factory assembled integrated perforating systems remain the safest, most efficient, and best performing solutions on the market. Integrated perforating systems delivered just in time to the well site, lower manufacturing and assembly costs, reduced personnel and trucks, lower the cost and complexity of the supply chain, and increase overall service quality and result in better performing wells for the operator. During the downturn, several machine shops took advantage of the industry's instability and incomplete transition to integrated systems by introducing low-cost, undifferentiated carrier assemblies. The components for these pre-wired carriers are supplied by various shape, charge, and energetic manufacturers that have not fully commercialized their own integrated perforating systems. We believe many of the pre-wired carriers in the market incorporate features that violate DynEnergetics patents, and we are taking aggressive legal action against the companies that make these products. DynEnergetics has made significant investments in technologies and products that have improved the safety, efficiency, and performance of its customers' well completions, and have enhanced the effectiveness and profitability of the industry as a whole. Our patent strategy is designed to protect these investments and provide transparency so others can innovate without violating our intellectual property. As we previously have stated, if intellectual property is not protected, the incentive to innovate is lost and the sustainability of our industry is at risk. DMC's second quarter sales were approximately 2% below our forecasted range, and this shortfall was directly related to continued weak pricing across North America's oilfield services industry. In February, DynEnergetics took an initial step towards restoring margins by announcing a 5% price increase that was implemented at the beginning of the second quarter. However, by the end of the quarter, it became apparent Few, if any, other manufacturers supported a return to acceptable margins, and we decided to push full implementation of the increase into the second half of the year. North America's exploration and production industry is healthier today than it has been in several years. Many operators have said they are anticipating price increases from their service providers, particularly in light of escalating raw material costs. We expect price increases during the second half of the year will hold, especially for companies selling differentiated products and services that significantly improve the performance of the industry. During the second quarter, Noble-Clad was awarded an $8.8 million order for titanium-clad plates that will be used to fabricate specialized pressure vessels and heat exchangers. This equipment will be used in the construction of a chemical plant in Southeast Asia that will produce PTA. PTA is an organic compound used in a variety of products, including polyester. The European firm that engineered the plant selected Novaclad based on its ability to meet the end users, exacting manufacturing specifications, and tight delivery schedule. The plates will be produced at Novaclad's Mount Braddock, Pennsylvania facility, then shipped to China for fabrication. Shipments are scheduled for this year's third and fourth quarters. The order is one of several large projects NOVACLAD has been pursuing over the last several quarters, and we are optimistic there will be several more to follow. A side effect of the COVID-19 pandemic has been a slowdown in NOVACLAD's repair and maintenance work, which is principally performed for the downstream energy industry. Activity in this sector tends to lag the cycles of the broader economy, so the timing of the large PTA order will help offset the effects of this slowdown. We expect downstream activity will begin to recover during the coming year. This week, Novaclad announced a new clad pipe product designed to provide greater fracture toughness and better overall performance versus solid zirconium or titanium pipe. The product called Datapipe will be marketed for use in high pressure, high temperature chemical and metal processing environments. The Datapipe introduction is another example of how Novoclad's product and application development group is successfully expanding our addressable markets. In recent years, this team has developed innovative solutions for the engineered wood sector and for the gold processing industry. where NOBLECLAD's titanium clad plates are currently being used to construct two of the world's largest pressure oxidation autoclays. The improving conditions in our markets is encouraging, and Dynaenergetics and NOBLECLAD are ready to capitalize on the growing demand. In addition, the follow-on equity offering we completed during the second quarter further enhanced our financial position, as well as our ability to pursue long-term strategic growth objectives. With that, I'll turn the call over to Mike for a review of our second quarter financial results and a look at third quarter guidance.
spk07: Mike? Thanks, Kevin. Second quarter sales were $65.4 million, up 18% sequentially and up 51% versus last year's second quarter. Dyna Energetics reported second quarter sales of $42.3 million, up 11% sequentially and 79% versus the same quarter last year. International sales increased 13% sequentially, while North America sales increased 10% sequentially. Sales at Nobel-CLAD were $23.2 million, up 33% sequentially and 18% versus last year's second quarter. Consolidated gross margin in the second quarter was 26%, up from 23% in the first quarter of 2021 and 15% in last year's second quarter. The increase from the year-ago second quarter primarily relates to better fixed cost absorption and receipt of employee retention credits under the CARES Act. Dyna Energetics reported second quarter gross margin of 25% versus 22% in the 2021 first quarter and 8% in last year's first quarter. The margin improvement from last year primarily relates to improved fixed cost absorption, higher average selling prices, and CARES Act credits. Nobel-CLAD reported second quarter gross margin of 28% versus 26% in the first quarter and 25% in the year-ago second quarter, primarily due to improved project mix. CARES Act credits also contributed to higher gross margin versus last year. Looking at our second quarter expenses, consolidated SG&A of $14 million increased 6 percent versus the first quarter and 15 percent versus the year ago's second quarter. We reported consolidated operating income of $2.7 million in the second quarter. Second quarter net income was $1.7 million, or 10 cents per diluted share, versus a net loss of $5.6 million, or 38 cents per diluted share, in last year's second quarter. Adjusted EBITDA was $7.5 million versus negative $1.8 million in last year's second quarter. Dyna Energetics reported second quarter adjusted EBITDA of $5.3 million, while NovoClad reported adjusted EBITDA of $4.3 million. We ended the second quarter with cash and marketable securities of $181.3 million after raising $123.5 million in a follow-on offering in May. Our total outstanding share count is now 18.7 million. Looking at guidance, third quarter sales are expected to be in range of $70 million to $73 million versus the $65.4 million reported in the 2021 second quarter. At the business level, Dyna Energetics is expected to report sales in a range of $46 million to $48 million versus the $42.3 million reported in the second quarter. We expect continued improvement in North America to be partially offset by lower international sales at Dyne Energetics. Nobel-clad sales are expected in a range of $24 million to $25 million versus the $23.2 million reported in the 2021 second quarter. Consolidated gross margin is expected in a range of 24% to 26% versus 26% in the second quarter. Third quarter selling general and administrative expense is expected to be approximately $14.5 to $15 million versus the $14 million reported last quarter. The sequential increase primarily relates to headcount additions for commercial resources, digital initiatives, restoring variable compensation, and resuming travel. Amortization expense is expected to be approximately $225,000. Interest expense is expected to be in a range of $80,000. Justed EBITDA is expected in a range of $6.5 million to $8.5 million versus $7.5 million in the 2021 second quarter. The third quarter capital expenditures are expected in a range of $4 million to $6 million. EMC's full-year tax rate is expected in a range of 31% to 33%. We are not providing full-year financial guidance. However, pricing at DynEnergetics is expected to improve during the second half of the year which should offset the impact of inflation on materials, labor, and benefits from employee retention credits under the CARES Act that are expected to roll off in the fourth quarter of 2021. With that, we're ready to take any questions. Operator?
spk01: Thank you, ladies and gentlemen. The floor is now open for questions. If you have any questions or comments, please press star 1 on your phone now. We ask that while posing your question, you please pick up your handset, if listening on speakerphone, to provide optimum sound quality. Please hold a moment while we poll for questions. Your first question is coming from Steven Gingaro. Your line is live.
spk03: Thanks, and good afternoon, gentlemen.
spk08: Good afternoon, Steven.
spk03: So I have questions. Two or three things, but I'll just start quickly because Michael was just talking about gross margins in the next quarter and the guidance. Can you give an additional color on kind of how you think gross margins can play out over the next several quarters? I understand the raw materials side, and it seems conservative to me, the third quarter, but that's probably because I don't have as much color on some of the moving pieces behind the gross margin guide. So is there anything you can add there to shed some light on it?
spk07: Yeah, Steven. So when I gave the guidance 24 to 26% in both businesses, we're getting a bit of unfavorable mix. I'll start with Dyna Energetics. So that's really geographic mix in the third quarter. If you look at the second quarter, what we call international, um you know was essentially uh seven and a half million uh international sales we think that's going to probably be five and a half to six in the third quarter so you're getting more growth uh on the north american side call it 15 to 20 percent and then we're going to step back and international that's more timing of orders we did pull some forward into uh the second quarter so you're getting that on the the diana energetic side and you're also getting that on the Nobel-clad side. So a bit better of a mix in Nobel-clad in the second quarter than in the third quarter. Now, there's definitely upside to the margins over the short, medium, and long term. And so we haven't modeled much in the way of price increases in there. And so we should get price increases coming out of the third quarter, fourth quarter, and moving forward. So we expect price increases to take hold. So there's definitely some ability to move up from those numbers of price increases.
spk03: And you said international Dyna in the second quarter was 6.5?
spk07: In the second quarter, Dyna Energetics International was 7.5. So that's everything except the U.S. and Canada was 7.5 million, and that's probably going to step that'll probably be five and a half or six and a third.
spk03: Okay. Okay. Um, the other thing, you know, we've seen some consolidation on the, on the wireline front. Uh, and I was just kind of curious about how, how you're thinking about the impact of some of that consolidation on, on your business, right? Cause we're thinking about maybe they get better pricing, which is good for you. But then I think at least one of the deals, there's a, Stephen Hamilton, Per business which came with it and I'm just trying to think about how how the landscape is evolving and how that plays into die energetic share and growth as we move forward.
spk08: Stephen Hamilton, We Stephen we fully expect or expected the consolidation to begin taking place in this year. Stephen Hamilton, The consolidation is required or needed. In addition to consolidation, there will be attrition and rationalization of some of the supply in the wireline service market. That's healthy for the industry. It's healthy for our company. We're pleased to see it happen. I think there were two acquisitions. public company in the in the second quarter or were recently announced and Those companies use our products or have used our products and And so we're encouraged by the strengthening of that business quite frankly And just as we think about the the share in
spk03: And maybe if you look at the total perf market and the integrated systems separately, but how do you think your shares evolved and how do you think it does evolve going forward?
spk08: Our share has been fairly constant during this difficult marketplace. And, you know, it grew quite a bit from 17, 18 into 19, 20. It's held steady. in 20 and currently held in 2021. And we did not expect to pick up share or increase our share significantly in a market that was in turmoil and price was the primary driver. As we go into the second half of this year and into next, and performance and quality service delivery availability is more important than price, we'd expect to see our share pick up from its current levels. And right now, it's plus or minus 20% of the perforating systems market.
spk03: Great.
spk00: Thank you.
spk01: Your next question is coming from Tommy Mall.
spk04: Good afternoon, and thanks for taking my questions.
spk08: Yep. Hello, Tommy.
spk04: Kevin, I wanted to start on the topic of the litigation that you referenced, and you mentioned a couple times what's going on among the machine shops and some of the large energetics manufacturers in your industry. So I guess just on the litigation, what can you provide just to update us on where things stand and what's on the docket looking ahead to the extent you can give us that visibility. And then as a related point, Kevin, it may be premature to know, but is there a potential pathway here that's a win-win-win for all industry participants that could occur outside the context of that litigation?
spk08: So first of all, the litigation is quite extensive, and so it's hard to get into any one particular case or situation, nor do we want to do that publicly, at least in an earnings conference call. The litigation, particularly intellectual property, takes time. And we've been involved with this for quite some time, so we're starting to see more action taking place within the court system. And everything that we've seen to date, we believe, supports our position, and we're confident that we're going to prevail in the medium to long term on these cases of infringement. We've had a couple of smaller cases settle in the recent quarter, which we were pleased to see, and we'd expect more of that to take place as we go forward. And we are making every possible effort to arrive at a mutually acceptable solution with those who infringe our technology. And we just feel that... We innovated and have the intellectual property and expense in developing better solutions for the market, and it's our responsibility to make sure that others don't infringe our innovations.
spk04: Thank you, Kevin. That's helpful. Shifting gears to capital allocation, You've got substantial dry powder on the balance sheet now. So I wondered if you could give us any insight on capital allocation priorities and specifically around M&A. What do you want folks to know in terms of your current pipeline, potential timing on any deals that are in front of you to the extent you could comment, and how it all ties together under the broader platform strategy that you've been pursuing for some time now?
spk08: On a capital allocation, our two existing businesses, Don Energetics and Noble Cloud, are self-supporting in terms of their growth capital through their earnings. The capital that we've raised through the ATM and the offering that we did in the second quarter is there for longer-term growth opportunities. We're actively reviewing opportunities. It's not a short-term initiative. It's a medium to longer-term initiative. And it's one of those things that the color around it really is quite limited until we have something that we've completed.
spk04: Fair enough. I'll turn it back. Thank you.
spk01: Your next question is coming from Taylor Zurcher. Your line is live.
spk06: Hey, guys. Thanks for taking my question. I just wanted to first circle back on some of the pricing comments you made, which I think you described pretty well. I guess my question is, is some of this irrational behavior, if you look at the market today versus maybe a month or two months ago or even three months ago, has the pricing situation improved at all over that trailing three-month basis? And if not, just curious if you could flesh out how we should be thinking about the competitive landscape from a pricing standpoint over the back half of the year.
spk08: So the industry during the pandemic and the significant drop in demand and a significant amount of inventory that existed in the marketplace led to very extensive price competition. And in the margins, not just for ourselves, but the other companies in the industry declined during that time period. And now we're in an inflationary market to some degree on labor and materials. And we also see the CARES Act coming off in terms of supporting some of the decisions that other companies have made in the market. We're optimistic that we'll see a net price increase coming in the third and fourth quarter. We attempted to get price in the second quarter. We announced 5%. We realized 1.7%. Surprisingly, we did not see or hear of any other oilfield service company following with price increases in the second quarter. We're optimistic that it's going to take place in the third and fourth quarter. It's required, it's needed for the long-term support of capital coming into our companies and into this industry.
spk06: Got it. And just to clarify some of the comments you made there, clearly there's a lot of inflationary items out in the market today with respect to the supply chain and also labor. Am I reading your response to my prior question correctly in that you do expect to get some net pricing over the back half of the year above and beyond some of these inflationary items that you're seeing today?
spk08: We do. However, we need to see that reflected in actions of the broader industry moving in the same direction that we're trying to pull. pull in and we did not see that in the second quarter.
spk06: Understood. Thanks for the answer.
spk01: Your next question is coming from Matthew Galenko. Your line is live.
spk05: I guess moving to the data pipe business, if we could get a little more color on that, can you talk about the pipeline that you see for the new product and how the gold market shapes up? Does that add on to the project work you're already involved in? Is it mostly standalone orders that you see yourself getting involved in? And I guess the second follow-on question to that is how does the margin profile of the pipe business look compared to the consolidated clad segment. Thank you.
spk08: Yeah, so that product is just being announced. It goes into applications that we're currently working on for other plate-like products, and so we're very close to this market, and it has a very strong value proposition versus, you know, solid zirconium or titanium. So we expect to, as we work with companies to adopt this product, we feel that it's going to be successful. And the development period is relatively long when you're going into process environments. And so it will take time to ramp, but we do see this product and several of the other applications that we've been working on, increasing the market for us, for NobleClad, in the range of 20-plus percent on a longer-term basis. And the margins are at or above the current contribution margins that NobleClad is currently achieving, which are in the low to mid-40s.
spk05: Got it. Appreciate that caller. And maybe just a follow-up. I think you referenced there might, or did I understand correctly that you have additional product development at Noble Cloud? And, you know, if so, do you expect those to be unveiled this year, or is that for more distant launches?
spk08: I think the... We're starting to see it already enter into our backlog this year for some of those applications. Having said that, the everyday business is low or been impacted by the effects of the pandemic. We should see it adding to revenues in 2021 in the coming year as we go forward from where we've been historically.
spk00: Great. Thank you.
spk01: Your next question is coming from Steven Gingaro. Your line is live.
spk03: Thanks. Thanks for taking my follow-up. So I was just – I know this crushed me up a little bit earlier, but I was curious, you know, on the equity deal and the potential for consolidation – Can you give us any thoughts on either timeframe and or the types of things you're looking for and whether the market dynamics, since you raised capital, how they've evolved and how things are looking sort of on that front as we think about sort of the timing of something that's in the pipeline or could be in the pipeline?
spk08: Yeah, the timing will be medium to longer term, Stephen. possibly end of this year, most likely next year. It's a longer-term process, and so there's nothing right around the corner. I want to be clear on that. And the things that we look for are things that add to our total available market, have a similar margin profile to the to what we have in a normalized market with our current products. And we're interested in stable to growing markets, differentiated products, niche market segments, and companies that we can get behind and help to accelerate their growth by going from regional to national and national to global. And people are an important part of it, strong R&D, engineering. and product development capabilities, and low capital intensity. We're actively reviewing a number of opportunities, but again, they take time, and there's a lot of variables in this process that are outside of our control.
spk03: Thank you. follow-up on the Dyna Energetics business. You guys clearly have a very good product, and we saw this kind of rapid share gain for a couple of years, and then you had last year's sort of macro debacle, and then this expectation that we have for kind of a reacceleration in the adoption of of integrated systems in general, and then more specifically, you know, yours and maybe one or two others sort of leading the way, but clearly it looks like it seems to be you guys continue to have a leadership position. What do you see in there? What do you see in as far as, you know, the component inventory causing price issues late last year and just sort of the whole dynamic of that business and whether we should think about your growth trajectory in that business outpacing completion slash frac stage growth in the back half of this year, particularly in 2022.
spk08: Well, again, we're pleased that we've held our market share in a very difficult price environment. We do get a premium over most, if not all, products in this area. When we came out of the last downturn, we had 3%, 4% market share that grew to 20, plus or minus our estimates. We've maintained that 20% in a very, very difficult demand situation over the last 18 months. And going into this current cycle where things are improving, We're in a much stronger position today than we were in 17, 18, both in terms of the breadth of our product line, our manufacturing capability, as you know. We've got the capacity in place in the vertical integration in all the components. And we feel we are strongly positioned going into the second half of this year and to next year to serve the market in a way that provides the products just in time to the well site at higher performance, lower total cost, less working capital for the people who are deploying those products. It's a very difficult value proposition to not accept if you're interested in succeeding in this market. And we expect our market share to grow. And we're not trying to be all things to all people. I think that's important. Our objective is to build our market share to roughly a third of the market, which also means two-thirds of the market is available to other people and different technologies. And so we're very pleased with the position that we have and the strength of our balance sheet going into what we see as a beneficial up cycle.
spk03: Okay, great. And maybe just one quick one for Michael. The costs around the patent infringement lawsuits, are they rising? And where are they showing up on the corporate line or are they in the DynEnergetics line?
spk07: We're in the DynEnergetics line in SG&A, so in the G&A section of SG&A. And, you know, that's around $1,250,000 in the second quarter, about $1,000,000 in the first quarter. And we're seeing a run rate. We've been talking about a million and a half run rate as we move forward.
spk03: Okay, great. Thank you, gentlemen.
spk08: Yep, you're welcome.
spk01: There are no further questions from the lines at this time. I would now like to turn the floor back to Kevin Long for closing remarks.
spk08: Thank you, everybody, for joining us today. We look forward to talking with you again at the end of Q3. Thank you.
spk01: Thank you, ladies and gentlemen. This does conclude today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.
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