This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
Operator
Good afternoon, ladies and gentlemen, and welcome to the ZMC Global Third Quarter Earnings Call. At this time, all participants are in 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.
Jeff High
Hello, and welcome to DMC's Third 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?
Kevin Long
Thank you, Jeff, and good afternoon, everyone. Activity in DMC's primary end markets continued to improve during the third quarter, However, the recovery was accompanied by various short-term challenges that negatively affected our operational and financial performance. Supply chain bottlenecks and travel restrictions impacted international sales at DynEnergetics, our energy products business, while delayed deliveries of metal plates slowed manufacturing activity at Nobleclad, our composite metals business. These factors led to consolidated third quarter sales that were 4% or $2.8 million below the low end of our forecasted range. An important development during the quarter was the improved demand DynEnergetics experience in its U.S. onshore oil and gas market. Third quarter unit sales of DynEnergetics fully integrated factory assembled DS perforating systems increased 19% versus the second quarter. This was well above the increase in unconventional well completions, which were up 6% sequentially, according to the U.S. Energy Information Administration. As unconventional completion activity accelerates, the superior safety, efficiency, and reliability of our DS systems becomes increasingly important to our customers. This is especially true in a tight labor market. Since DS systems are delivered just in time to the well site, our customers can streamline their supply chain, eliminate assembly operations, and reduce the number of people on location. While well completion activity improved during the quarter, pricing pressure remained a significant challenge. Rising labor and raw material costs have only intensified the pressure on margin. Crude prices have increased approximately 75% since the start of the year, and it's significantly improved the health of the exploration and production industry. Operators are now increasing their capital spending budgets in anticipation of the coming year, and we believe this should help improve the health and profitability of the industry that supports these E&P companies. On Tuesday, DynEnergetics announced a 5% global price increase, that will take effect on November 22nd. The increase is intended to offset higher labor and input costs, as well as the anticipated wind down of the CARES Act. DynEnergetic's substantial investments in new technologies have resulted in a robust product portfolio that has improved the safety, efficiency, and effectiveness of our customers' operations, and has led to increased productivity profitability and job creation in our industry. The significance of these investments is reflected in the approximately 80 patents we have been granted and the more than 400 patent applications we have filed. Our patent strategy is designed to protect our investments and provide transparency so others can innovate without violating our intellectual property. Despite this, a number of competitors are selling products that we believe infringe on DynEnergetics patents. During the third quarter, we intensified our legal action against several of these companies, spending $2.3 million on patent litigation. We intend to continue these expenditures until the issues are resolved. Our commitment of resources to this process reflects our belief that if intellectual property is not protected, the incentive to innovate is lost and the sustainability of the industry is threatened. The outlook in Dynanergetics international markets is improving. Dynanergetics recently entered into a global supply agreement with a large international service company and also was awarded two Middle Eastern projects that will be shipped over the next few quarters. Based on current activity, all indications are that 2022 will be a strong year for Dyna Energetics international business. At Novoclad, interest continues to grow for the new Datapipe product offering, and we anticipate initial orders by early next year. In addition, pricing continues to strengthen for various cladding metals, and Novoclad has improved its commercial organization and strengthened its sales team and market specialists. We are encouraged by the strengthening economy and improving demand in our key markets. We have maintained a strong financial position and operate two highly innovative businesses that continue to lead their industries. With that, I'll turn the call over to Mike for a review of our third quarter financial results and a look at fourth quarter guidance. Mike?
Jeff
Thanks, Kevin. Third quarter sales were $67.2 million, up 3% sequentially, and up 22% versus last year's third quarter. Dyna Energetics reported third quarter sales of $44.2 million, up 5% sequentially, and 29% versus the same quarter last year. North America sales increased 14% sequentially, while international sales decreased 38% sequentially. Sales at Nobel-CLAD were $22.9 million, down 1% sequentially and up 9% versus last year's third quarter. Consolidated gross margin in the third quarter was 25%, down from 26% in the second quarter of 2021, and flat compared to last year's third quarter. Third quarter gross margin benefited from improved project mix at Nobel-CLAD, which was offset by a decline in international sales and higher material costs at DynEnergetics. Dyna Energetics reported third quarter gross margin of 22% versus 25% in the 2021 second quarter and 24% in last year's third quarter. Gross margin in all 2021 quarters includes the effects of the employee retention credits related to the CARES Act, while last year's third quarter benefited from higher margin international sales that were approximately $4.6 million greater than this year's third quarter. Nobel Plaid reported third quarter gross margin of 30% versus 28% in the second quarter and 26% in the year-ago third quarter, primarily due to improved project mix. The CARES Act credits also contributed to higher gross margin versus last year. Looking at our third quarter expenses, consolidated SG&A of $15.3 million increased 9% versus the second quarter and 32% versus the year-ago third quarter. The sequential increase primarily relates to a step up in patent litigation expense at DynEnergetics. We reported consolidated operating income of $1.1 million. Third quarter net income was $403,000 or two cents per diluted share versus adjusted net income of $1.2 million or eight cents per diluted share in last year's third quarter. Adjusted EBITDA was $5.8 million versus $6 million in last year's third quarter. Dyna Energetics reported third quarter adjusted EBITDA of $3.6 million, while NovoClad reported adjusted EBITDA of $4.6 million. We ended the third quarter with cash and marketable securities of $182 million after raising $123.5 million in the equity offering in May. Our total outstanding share count is now 18.7 million. Looking at guidance, Fourth quarter sales are expected to be in a range of $68 million to $74 million versus the $67.2 million reported in the 2021 third quarter. At the business level, Dyna Energetics is expected to report fourth quarter sales in a range of $46 million to $50 million versus the $44.2 million reported in the third quarter. We anticipate that international sales will bounce back in the fourth quarter. Nobel-clad sales are expected in a range of $22 million to $24 million versus the $22.9 million reported in the 2021 third quarter. Nobel-clad's fourth quarter sales forecast includes $8.8 million related to a previously announced order from the chemical industry. Receipt of the raw materials required to produce the order have been delayed due to supply chain bottlenecks. While Nobel-clad still expects to receive the materials and ship the order during the fourth quarter, There remains a risk that some or all of the shipment will occur after year end. Consolidated gross margin is expected in a range of 23% to 24% versus 25% in the third quarter. Fourth quarter selling general and administrative expense is expected to be approximately $15 to $16 million versus the $15.3 million reported last quarter. Amortization expense is expected to be approximately $200,000. Adjusted EBITDA is expected in a range of $5 million to $6 million versus the $5.8 million in the third quarter of 2021. The fourth quarter adjusted EBITDA forecast includes litigation expense of $2 million and assumes the previously enacted CARES Act legislation remains in effect through year-end. Fourth quarter capital expenditures are expected in a range of $2 million to $4 million. DMC's full-year tax rate is expected in a range of 31% to 33%. With that, we're ready to take any questions. Operator?
Operator
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. Once again, if you have any questions or comments, please press star 1 on your phone now. Your first question is coming from Tommy Maul. Your line is live.
Tommy Maul
Good afternoon, and thanks for taking my questions.
Kevin Long
Yeah, so good afternoon, Tommy.
Tommy Maul
Kevin, I wanted to start on the price increase you recently announced for Dyna Energetics. Specifically, if you could give us an update on the industry and competitive environment there. What gave you the confidence to go ahead and move forward again with implementing the increase? And then in terms of the timing, I noted Looks like it's set to become effective late November, so not a whole lot of volumes there in the rest of the year. Should we think of this strategically as a message for the customer base to really start thinking toward their 2022 outlooks? Because just given that's right around when there will be a big budget planning season for next year on presumably a much higher crude deck than currently in place.
Kevin Long
Yes. Tom? Tommy, I think you've read that well. It is a messaging. Prices need to go up in our industry. The price increase that we announced in the first quarter to take effect in the second quarter, actually, we did not get support from the industry on that price increase. And so we ended up rolling that back, which you know, initially impacted our volume in the second and the beginning of the third quarter. We rolled it back, and you can see what happened to our North American land-based business in the third quarter. And so, you know, the price increase is sorely needed. Prices are down significantly from where they were previously and where it is healthy for our industry. We are seeing labor and material cost increases, supply chain cost increases, and there's a CARES Act that for some companies will fall off in the beginning of the year. And so this will be the first of what will probably be two or three price increases over the next 12 to 18 months.
Tommy Maul
That's helpful, Kevin. Thank you. Also was hoping we could get an update on your M&A pipeline. Any way you could characterize it for us in terms of number of deals you've looked at, potential timing, any update on priority and markets, anything you could offer would be helpful.
Kevin Long
I think the only thing that we can say there, Tommy, is that we're active and we've looked at some interesting things. It's less quantity than it is quality. and strategic fit with our company. But we don't have anything that we can talk about at this time.
Tommy Maul
Fair enough. And if I could slip one more in, this is probably for Mike. Mike, just looking at your full year guidance on the tax rate, if I'm doing my math correctly, I've got to assume a pretty high rate in Q4 2020. And I just want to understand if maybe I've missed something there, if there's something squirrely about the fourth quarter that you could clarify just as it will impact everyone's EPS assumption for the next quarter.
Jeff
Yeah, Tommy, our tax rate is back end loaded because we have discrete items in the first half of the year that drive the rate down. So therefore, getting back to a 31 to 33% rate requires a higher backend rate, so you're reading that right.
Tommy Maul
That's very helpful. Thanks for the time, and I'll turn it back.
Kevin Long
Okay.
Tommy Maul
Thank you, Tom.
Operator
Your next question is coming from Steven Gengaro. Your line is live.
Steven Gengaro
Thanks. Good afternoon, everybody.
Kevin Long
Good afternoon, Steven.
Steven Gengaro
So a couple things, and one to just follow up on Tommy's first question. With the price increase you announced earlier this week or the push to get it through November, are you seeing a change in behavior from your peers yet? Is it higher activity expectations? What's giving you the confidence there? that A, you can get this through, and then B, your subsequent comment, you expect a couple more in the next 12 months?
Kevin Long
We have seen our hearing, both through earnings calls and some activities in the marketplace, of a couple of our major competitors who also feel that they need to increase prices to return margins to where they should be. So I think that we're going to see generally more support from a market standpoint. And the ultimate end-use markets for our E&P customers are strong. I think the lack of being able to push through a price increase to date has more been driven by our – customer market the wireline service companies has been oversupplied and relatively fragmented there's been a lot of competition among our customers on price and so we've seen a lot of buying on price from the general market and there's a number of service companies who have not fully adopted a just-in-time delivered to the well site model where they've maintained the vertical integration in building perforating guns. And so the industry is kind of, I guess, reverted to kind of a component industry in a low-priced market. We haven't seen as much system sales from the major companies, and we've seen a lot of The smaller machine shops that are making partially assembled carriers and carrying the litigation risk, if you will, by violating our IP, be a larger part of the market. And we think that that part of the market is going to be challenged not just by our legal actions, but also by their own lack of profitability. and rising material costs and so you know we feel we're in a pretty good position it's taken longer for some of the attrition and consolidation that we think is necessary in our market to to take place but at the end of the day our systems are lower in cost for our service company customers even though the initial price may be higher we do get a premium over other systems. But we are supporting our customers right now who are competing against other wireline service companies that are with a more commodity-like component mentality at this time.
Steven Gengaro
Okay. And then that's helpful. And as we think about, I mean, the 4Q guide, I mean, you mentioned I think Mike mentioned international recovering a bit, which kind of sounds like that means U.S. dynast pretty flat, and that's a little surprising given what's probably activity growth, what we're seeing as far as – is that year-end seasonality concerns, or is there something else in there that I should be thinking about?
Kevin Long
There's a little bit of seasonality in North America, but we're actually – the underlying volume of work rating systems that we're making are pretty healthy. What we need to see is the price increase starting to take hold. And we also expect the number of completions to accelerate going into 2022. There's somewhat been a slowdown in completions with the docks or the drills but not completed, inventory declining dramatically over the last couple of quarters, and CapEx moving more towards drilling. But that just bodes well for completions in the new year. And so we're very excited about the hand that we have going into the new year.
Jeff
And, Stephen, just quickly, this is Mike. On the international front, I mean, we see that, you know, in the six and six, six to six and a half range in the fourth quarter off of four, six and Q3. So I still show North America growing at the bottom end of kind of what we're thinking North America is going to do for Dyna Energetics. So we still think that's going to be on the bottom end flat to slightly up and with some upside to that.
Steven Gengaro
Okay. Okay. That's helpful. And then just one more for me. When you think about your history and then you sort of look at looking ahead to 2022, I believe, and I got to check the numbers exactly, but your incremental margins, your incremental operating margins on the Dyna, I guess on both businesses really, but I'm thinking Dyna specifically, they've been really healthy, right? They've been kind of, I think, Kevin, you've sort of referenced like a 40% mark when things are normalized. Should we expect that type of incremental next year as we go through, given pricing expectations off of weak pricing plus activity growth, or am I missing something?
Kevin Long
Yeah, I think, so you You'll definitely see the incremental margin improving as the year goes on. We're walking through our price increases, staging those throughout the year, and at the same time that the volume's picking up. I will say, too, we require significantly fewer people at the well site and in our service company customers operations. And in a tight labor market, that volume is picking up. It plays into our integrated system delivered to the well site. We should see an improvement in share and an improvement in margin as we get the price increases implemented. So we should see that unfolding as the year continues, we probably won't get to that 40% by the end of the year, but we should be fairly strong. Mike, do you want to?
Jeff
Yeah, I mean, and just as a reminder, Novel Flat is usually in that 40% to 45% range. And historically, on the contribution margin level, And Dyna Energetics has also been in that 40, 45% range. And so I think as we enter 2022, as we get price increases, we're going to be in the low 30s on that contribution margin. As we get a couple price increases across, I think we're going to start to approach that 40% contribution level as we exit and get in the back half of 2022 and exit 2022. Okay.
Steven Gengaro
Great. No, that's helpful. I'll get back in line. Thank you.
Operator
Once again, ladies and gentlemen, as a reminder, if you have any questions, please press star 1 on your phone now. Your next question is coming from Taylor Zurcher. Your line is live.
Taylor Zurcher
Hey, Kevin and Mike. Thanks for taking my question. My first one's on Dyna. I'm just hopeful you guys could Just give us a bit more color on the walk-down and margins, at least at the adjusted EBITDA line at Dinah, Q3 versus Q2. You talked about some of the issues going on internationally. There was less favorable mix, which is pretty clear. But in total, I suspect the volumes were up. They certainly were in North America sequentially. So could you maybe talk to what the margin differential is between international and North America and whether – you know, the margins in North America might have actually ticked lower sequentially if some of these inflationary items kind of ramped up more dramatically than you might have thought previously?
Jeff
Yeah, so, Taylor, I think that when you look at DynEnergetics, 25% gross margin in June quarter versus September quarter, 22%. You know, the largest driver there was really the lower international mix, which does carry higher margins than what we have here in the U.S. We also had the supply chain issues. We had some, you know, raw material inflation driving that as well. But the largest factor was that mix driving us from 25 to 22 percent.
Taylor Zurcher
Okay. And as we think about a 5 percent price increase for November and beyond, I mean, does that just keep margins flat on a unit economic basis, or is there some, you know, net momentum embedded in that 5% increase?
Kevin Long
Excluding the CARES Act, there's a fair amount of net momentum in that, Taylor. You know, we're in a fortunate position where we feel that we are managing our supply chain and our operations very well from a cost standpoint. And a lot of the inflation that we've seen is already embedded in the margins. And we're happy with our volume picking up. We have one challenge, one challenge only, and that's to continue to walk the industry through the merits of switching from a component-driven business to a systems business, particularly a systems business that is strong in intellectual property. and restoring some of the pricing that our customers are supportive of, but they're competing against other service companies who are less price-focused and margin-focused. And so we're in a strong position, and we also have the capital in place not only for the existing demand, but for the demand that we see over the next 18 to 24 months.
Taylor Zurcher
Okay, and last question for me is on international at Dyna. You talked about, I think you said a supply agreement with a large international service company and then a couple awards in the Middle East. As we think about the next 12 months or maybe just through 2022, it feels like international has a bunch of at least activity tailwinds, work in its favor for 2022. I was hoping you could maybe just frame some realistic expectations for growth internationally in 2022. Do you think 2022 you could get back to where you were in 2020 from an international sales perspective, or is it still a little bit of a longer-term story there?
Kevin Long
We actually feel that 2022 will exceed where we were in 2020 internationally. This quarter was a tough quarter internationally, but with the projects or the large tenders that we were recently awarded, and most importantly, the service agreement that we have with one of the leading customers is international companies is really going to strengthen our international sales, and we think exceeded quite a bit.
Taylor Zurcher
Got it, thanks for the answer, Seth.
Kevin Long
And in fact, when I say quite a bit, we should be up 20 to 30% over where we were in 2020. Makes sense.
Taylor Zurcher
All right, thank you.
Operator
Your next question is coming from Jerry Sweeney. Your line is live.
Jerry Sweeney
Hey, good afternoon, guys. Thanks for taking my call.
Kevin Long
Yeah, good afternoon, Jerry.
Jerry Sweeney
Wanted to just, one real question about On Noble Cloud, most of the stuff went down Energex. It's been picked over. But obviously, some inflationary pressures, metals, et cetera, if we hook them back to Noble Cloud, I don't know, the last sort of metal cycles we saw, it turned out to be pretty positive. I think part of your customers, either you do the purchasing of metals and pass through the cost, and there's even a markup on that, Is there an opportunity to see some improvement in Novoclad just from metals pricing if this trend continues?
Kevin Long
Yes, and while we're not in the giving guidance for the next year yet, Novoclad has a differentiated product and service, if you will, and they have a very strong history. and process for pricing by project in generating a 43% on average contribution margin that's based on the costs of the materials that are incorporated into the project at that time. When they quote a project, the project is dependent, the price is dependent on the price of metals at time of order, and then we place orders, lock into those metals, and it's reflected in a constant margin for that business. Most of their projects are out several months, and we're starting to see higher metal pricing flowing through the quoting process and at the orders that are being placed. and it goes right into driving the revenues north, if you will. So we feel that there's good momentum going into the new year for Novolclad in terms of metals pricing.
Jerry Sweeney
So constant margins. So margins stay the same, but we'll say gross profit dollars up just because the size of the project costs are up as well, right? Quite a bit, yeah. Yeah, got it. Okay, that's it for me. I appreciate it. Thank you.
Operator
Your next question is coming from Steven Gengaro. You're live.
Steven Gengaro
Thanks. Two other quick ones, Kevin. Maybe the first was not so quick, actually. But when you think about the Dyna business and you look at, kind of where you were a few years ago and the product started to gain immense traction in the market, right? And you guys obviously had a huge run, both driven by activity, but also kind of an acceleration in the adoption of your technology. And then you sit here today and you look out to 22 and 23, which look like they're going to be pretty strong years based on E&P spending budgets and where commodity prices are, et cetera. What's different? Is there something that's different, whether it's the competitive landscape, whether it's the way the customers are taking in your technology? Is there anything that's changing, or is it just a matter of activity growth and then the ability to kind of realize the value you bring to the well site?
Kevin Long
One of the things that's changed is we have a handful of these machine shops that are making the partially assembled carriers, which are approximately half the cost of a perforating gun or a perforating system, and violating what we believe is violating our intellectual property and enabling them to assemble components that they buy externally into a percolating system that has some of the features that our system has. These companies aren't vertically integrated in the energetics primarily. The systems are mismatched components that don't have the same operating safety and performance features as ours. And significantly, they violate our IP, and we're actively going after these companies to stop them from using our IP on how they assemble these carriers. And we feel that we've had solid progress on all fronts on the legal side of it. A lot of the stuff that we've been involved with legally has been jurisdictional or procedural jockeying around, but it hasn't been substantive. And we expect to positively impact our competitive landscape on our intellectual property over the next year that will enable our business to continue the same dynamics that we had in the 2017, 18, 19, 20. We've maintained our position in the market. It's just been a very unsettled market over the last couple of years. And we expect it to be more normalized going forward.
Steven Gengaro
Great. No, that's helpful. Thank you. And just one quick one. I think you referenced 19% sales growth, unit growth in the U.S. market in the quarter. when we look at activity growth in 2022, would you expect your, I mean, obviously we'll see what happens with price, but would you expect your volume growth to outpace underlying frac stage growth?
Kevin Long
We would, and we expect to continue to gain share in this marketplace. And so we see unit volumes going up significantly. You know, greater than 10%, probably in the 10% to 20% range. And we expect pricing to go up another 10% in the coming year. But we're not in the point of giving guidance yet for 2022. But we see share volume and pricing all benefiting DynEnergetics in the coming year.
Steven Gengaro
Great. Thank you for your help.
Operator
Your next question is coming from Tommy Mall. Your line is live.
Tommy Maul
Thanks, Kevin. I just wanted to make sure I understood correctly. A couple minutes ago, you referenced the contract award for Dyna on the international side should drive some pretty substantial growth internationally next year. I think I heard that correctly. And did I hear you give a range somewhere in the 20 to 30
Kevin Long
percent range and just any other context you could give us around that would help yeah i i think we should see you know 20 to 30 percent with with uh you know three things there's two large tenders that that business has been successful uh securing and a contract with a large service company great thank you for that clarification i appreciate it i'll turn it back
Operator
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.
Kevin Long
Thank you, everyone, for joining our call today. While this was a difficult quarter, we believe the fundamentals are improving for our businesses. The recent price increase of diner energetics is an important first step towards improving our margins. And we are encouraged by the strong increase in demand we are seeing for DynEnergetics product offering in North America and by the strength that was mentioned earlier on our international business. We also feel quite strong of the pricing dynamics that Noble Cloud will have for the metals that goes into their products in the coming year, as well as the new applications for data pipes. We remain very confident in the strength of DMC, and we look forward to speaking with you again when we report our fourth quarter results. Thank you.
Operator
Thank you, ladies and gentlemen. This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.
Disclaimer