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spk08: Don't mind one final one. When I looked at your guidance for the second quarter and I sort of tried to piece together incremental margins and just sort of different pieces, it seemed like the biggest sequential growth driver was the Dyna Energetics business to the EBITDA line versus the other two segments. Am I thinking about that correctly?
spk05: Yes, you are. In fact, if you think of Noble Cloud and Arcadia, we've seen inflation adjusted pricing to offset material costs. In DynEnergetics, we've seen inflation earlier in the year, but their pricing moves and volume are primarily margin improvement.
spk08: Great. Thank you for the call, Kevin.
spk02: Thank you. Once again, as a reminder, ladies and gentlemen, if you would like to join the queue to ask a question at this time, you may press star 1 on your telephone keypad to join the queue. Your next question today is coming from Cameron Lockridge from Stevens. Cameron, your line is live. Please go ahead.
spk07: Hi there. Thanks for taking my questions. Good afternoon.
spk05: You're welcome, Cameron.
spk07: So, Kevin, you know, since the Arcadia acquisition, late last year, we fielded quite a few questions just on competitive dynamics of the business and the industry, the market that it operates in. One thing that's come across is there's not a great comp out there for Arcadia in terms of what they do, certainly not in the public realm and potentially not in the private realm. And I think that probably speaks to just the niche nature of the offering, of Arcadia's offering. I was hoping you could just take a few seconds to speak to the competitive dynamics in the market that Arcadia operates in. And then related, what are some of the things, again, that you can do to drive share in that market? And I realize we may have touched on some of this in previous calls. I just, for folks that are trying to wrap their arms around the business, I think it will be helpful.
spk05: First of all, Arcadia is in three general market segments, if you will. The commercial exteriors, commercial interiors, and the high-end residential. The commercial exteriors can be broken down into everyday business and project business. And it also can be broken down by product into aluminum framing systems or windows, doors, and more of a complete system. And Arcadia in the commercial area is in the framing systems, low to mid-rise buildings primarily, and also focuses on healthcare and institutional work. and has a very strong everyday business. They're very efficient at serving customers locally with a broad product mix and being very responsive to a high number of small orders, which gives them a target market and a strength from a pricing standpoint that supports their margins the Wilson business is Is an architect driven business also has a local component to it but it's architect and building owner driven and the residential high-end which It goes beyond aluminum framing system, which is primarily in the commercial area we go into to high-end steel wood and also aluminum. But there we are, it's a national market where they're providing products and less of a product line and more of a product capability for high-end homes that are being engineered or Arcadia's engineering their products to fit those homes. And so the combination of the three markets, three market segments and how they participate in those market segments and their geographical footprint lead to a competitive business model that is well-suited for Arcadia and for DMC. There are good competitors and strong competitors in the market, but they have either a different product and market focus and or different priorities. And it's really how it all comes together to create the business model that Arcadia has and the team that they have that serve the segments that they participate in that separates them from other companies.
spk07: That's helpful. Thank you, Kevin. I guess as a related kind of follow-up there, could you maybe just touch on some of the benefits of the diversification aspect of having Arcadia under the DMC global roof and just what DMC brings to the table that really makes a lot of sense for a business like Arcadia, which is different from your traditional end markets, why it makes sense to have that business under the DMC global roof?
spk05: First of all, all three of our businesses are manufactured products and asset-light business models where there's either a know-how in Noble Cloud, a system approach versus a component approach in Dyna Energetics, or a combination of the different product and markets that Arcadia brings. So they're businesses that are tailored for their individual market segments. And we focus in each of our markets on being a market leader, which we define not just by volume. We try to focus on the gross margin dollars that we get out of these market segments. And then DMC, in turn, gets behind the leadership and the management teams of each of these businesses to be a discussion partner and help them to clarify their uh competitive differentiation how they go to market and and provide the resources and support to help them to operate very efficiently and effectively you look at arcadia and and the addition of arcadia to our portfolio brings us into a different set of markets uh you know we we're in uh architectural framing systems and building products both both on the commercial and the residential that augments our industrial markets that we serve with with noble cloud and and obviously the energy market that we we serve with with Dyne energetics and the diversification Makes it a stronger ecosystem if you will and and I think that Our focus on market leadership either through product or business model and excellence in what we do is what differentiates us from our competition. We focus on how well we execute and how well we take care of our customers.
spk07: Thank you, Kevin. That's all very helpful. I guess maybe if I can squeeze one more in, just touch on the supply chain, kind of switching gears here a little bit. Is there any one business of your three businesses, is there any one that is being affected more so than the others as it relates to the supply chain? And then just maybe touch on what are some of the steps you're taking to mitigate that. And then specifically on Dyna, pricing has really come on strong Is there any risk to gross margins going forward in reaching that ultimate exit rate of, you know, call it into the 30s as far as the gross margin goes in dynas? Is there any risk to that as you see it today?
spk04: Well.
spk05: We're vertically integrated in our components from raw materials and explosives, if you will, for shape charges, integrated switch detonators, and deck cord. We're also vertically integrated. We've invested in the capacity for all the machining and assembly operations. And so we actually... have less of a supply chain issue in Dyna Energetics than any one of our businesses. And quite frankly, it goes to being a competitive advantage because we handle the supply chain, the working capital requirements, the just-in-time delivery, and we can ramp quickly with our customers as they ramp. And so it's a lower total cost business model if people take into account all the things that we do for them versus assembling components or buying components from other companies. And so we actually use the supply chain as a significant competitive advantage in DynEnergetics. And we saw that in March. We've already seen it in April. You know, previously we were... just north of 250,000, 260,000 perforating guns a quarter. We're operating at over 100,000 a month the last couple of months. And so our ability to respond quickly, just in time, delivered to the well site, managing the supply chain has been a real competitive advantage. In Nobleclad, we've We buy metals, we combine them using a proprietary know-how. We are subject to the delivery of those metals, and they come from unique sources, depending on the chemical composition and size of the project. And lead times are longer, freight is higher, and travel time longer. And so we have to plan further out. So we're seeing a lag in our revenues picking up because of managing the supply chain. But we feel that that's going to be wind to our back as we go into the second half of the year. And then on Arcadia, the primary raw material there, two raw materials that they purchase and manage, is aluminum that goes in all three of their markets primarily the commercial market and aluminum has been in short supply high demand high energy price that feeds into making the product so it ends up ending up being a very high cost and a lot of inflation in aluminum i have to compliment the team they've done very well at implementing price increases in in the commercial market um you know the aluminum goes up the the uh the price increase gets layered in and steps so there's a little bit of a lag uh not to mention the backlog that they have but i i have to complement the leadership team of arcadia as being one of the best companies that i've seen in terms of managing costs and passing on cost to their customer real time, which has really been a pleasure to watch and learn from. And so we've got different characteristics in each one of our different markets and businesses, but I think our teams are very agile in responding to the competitive situation and the supply situations in their industries.
spk07: Thank you, Kevin. That's all helpful, and I will turn it back.
spk02: Thank you. And we have a follow-up question from Steven Gengaro from Stiefel. Steven, your line is live. Please go ahead.
spk08: Thank you. Thank you for taking the follow-up. Kevin, you mentioned in your prepared remarks, or maybe Mike did, about the price increases in Guyana Energetics. I think you mentioned two things. Can you give us a sense for how well they're sticking? And also, is this something that starts to show up in margins in 2Q or 3Q?
spk05: Yeah. First of all, they're sticking because we would rather, we don't need practice, if you will, making perforating guns. We do pretty well at it. And we're in the market to create value for our customers. We feel that we create a superior value for our customers. And that over the last couple of years, when demand collapsed due to COVID, the markets were very much in disarray and a lot of excess capacity. And pricing was very low. very challenging, and we sell at a premium, and we continue to sell at a premium, but when the markets were oversupplied and others were competing against our technology on price, we had no choice but to be responsive to support our customers and maintain our delta, but follow that market. The market has hit an inflection point where Demand is quite strong, difficult to manage the supply chain that I mentioned earlier, difficult to hire and retain good people. And our systems simplify the supply chain and require fewer people at the well site. And we've got the capacity in place to ramp. And that's part of our value add to our customers. Not to mention we feel that they perform better and more efficiently and safer. And so we're holding on our prices. I will say last year, the beginning of this year, it was harder to do. Now we're holding quite firm. With the two increases that we've had, the first one, if you will, was absorbed in inflation and raw materials and other things. Where we stand today, it's margin recovery. And I will say that we had a record, another record month in operating systems in April, and that's with the higher price that we've implemented. And so when you look at Dyne Energetics in the second quarter of this year, it's pricing that's driving the margin improvement, which we're guiding. And we're already a third of the way into the quarter and feel reasonably confident that we're going to have a very good quarter in that regard.
spk08: Great. Thank you. And the other question I was curious about, and I'm not exactly sure how to ask this, but when you think about the well site and the efficiencies and what's going on from a frack perspective with pressure pumping equipment being very tight, more simulfracts and zipperfracts. So I'm trying to figure out, I would think that would help the demand for the integrated product because of the efficiencies it brings to the well site. But on the flip side, you know, they've had some other disruptions from frac sand shortages and other things creating inefficiency. So I'm just wondering about sort of the drivers of demand because of the needs at the well site and how the needs are evolving for the integrated systems you're selling?
spk05: Well, I think it's important to note that when you look at the cost of a perforating system from DMC or how it's put together by other people in the industry, it's a very small percentage or fraction of the completion costs, you know, under 2%, if you will. Yet with Dyna Energetics integrated systems and how they're delivered to the well site, assembled, they go together fast, faster than any other product in the market. They're armed safely and quickly. And they go down the well more efficiently because they're very compact systems. It helps the whole wall site to operate effectively and the stronger the frack crews and the more skilled the frack crews, the better our system is for them because they're not waiting on perforating systems and we can run as fast as they can run. And that ultimately creates value for their customer and we're helping to our customer to create value for their customer. And so in a strong market, we believe we're going to gain share. In the weaker markets that we've had over the last couple of years where we're going to lag on price rather than lead price down, it challenges our market share. But in the type of markets that we see for 2022 and 2023, we believe that it plays into our sweet spot, which is to create a high-performing well site and a safe and efficient well site for our customers.
spk04: Great.
spk08: Thank you, Kevin.
spk02: Thank you. Your next question is coming from Ken Newman from KeyBank. Ken, your line is live. Please go ahead.
spk01: Hey, guys. Thanks for taking the question.
spk04: Yeah. Hi, Ken.
spk01: Hi. So I guess my first question was going to be revolving around Arcadia. I'm just curious if you could just talk a little bit about what you're seeing from order or bidding activity within the commercial businesses for that segment. whether you've seen some acceleration or if inflation has started to slow that down at all. Obviously, I think, as you mentioned, these businesses seem to be a little bit more resilient to figures in interest rates potentially moving here. But just curious what you're seeing on the ground in terms of either order activity or just indications of backlog growth.
spk05: Well, we actually have very strong backlogs in all three of our market segments right now. And we remain pretty optimistic for non-residential construction spending as this year progresses. But as you might expect, the macro picture is creating some uncertainty and also the elevated material costs. But I will say that we haven't seen it in the short-term order input. We had a very good month in April. We've had a good start to the year. You will see that when you look at our numbers in that segment that the revenues are up and will be up more so than volume. The underlying volume is our units, if you will, is softer. but it's at much higher prices because of what we're seeing from an inflation standpoint. But having said that, we're managing our inventories the best we can, and up to this point, we've had capacity constraints and inflation in raw materials. Demand is strong short-term, but there's a lot of things On the horizon, it looks like that could create some uncertainty, but we're just not seeing it day in and day out.
spk01: Yeah. I understand all the volatility around raw material costs and inflationary impacts. Obviously, we didn't get a prior year number in terms of the quarter revenue and margins, but I'm just curious if you could help us think about the go-forward operating leverage of this business given what seems to be a still pretty strong outlook for demand here in the near term, notwithstanding some of these macro uncertainties?
spk05: I would say if there's one thing that we feel that we can improve upon right now is our margins. I mean, we're lagging because of our strong backlog and kind of the mechanisms for... implementing price increases, our margins percentages have softened over the last, well, it's up over the fourth quarter, but we feel that they should be stronger in the second half of the year compared to the first as we work through our backlog with newer price materials. and also get our price increases implemented. So we feel that we'll continue to do well from a volume standpoint, and the margin percentages will improve. And the underlying unit volume will be fairly constant. That's more of a capacity constraint from suppliers than it is an order constraint for suppliers. for Arcadia. And, you know, for us to address that, that's a little bit more medium to longer term.
spk01: Understood. Then last question for me, if you don't mind, you know, I think I just wanted to go back to the $4 to $6 million in CapEx for the second quarter. You know, when I think about the free cash flow, I think you mentioned, Kevin, at the beginning of the call, expectations for improving free cash flow by the end of the year. And Can you just kind of put some color or help me kind of quantify that a little bit in terms of, you know, one, how do you think about the working capital build as we work through some of this higher cost inventory and where are the risks in terms of potential higher CapEx needed to help integrate Arcadia as we go forward?
spk05: First of all, I'll address the CapEx, and then I'm going to let Mike help on the – on the raw materials and pricing. The CapEx is, you know, we've already are implementing an ERP system. You know, DMC has a very good IT and digital group and is supporting Arcadia in the implementation of a new ERP system, a D365 Microsoft system, which we have in other businesses. And there's an efficiency and actually quite an efficiency in the company for that when we get that fully implemented. And we'll be going live with some of those functions in November of this year, I believe. And the... So there's two inefficiencies. One's in processes and systems, and the other is just in manufacturing capacity. Anodizing painting. Painting is a relatively quick thing to add and not that expensive. But anodizing requires a little bit more thought, and that's something that we're going to be looking at at the beginning of the following year, 2023. This year, we're really focused on processing systems, integrating our people and our culture, and working well together. And the capacity will follow as we're more aggressive in our markets. But as far as margins and the price increase,
spk06: Yeah, right. So we think that Q2, from a cash flow standpoint, is we're still seeing these elevated raw material costs and a little bit heavier capex quarter that will probably cash flow, pre-cash flow neutral in Q2. And I would expect us in Q3, Q4 to be in that generating operating cash flow, you know, in the 15 to 20 million range, you know, 15 million probably per quarter in the back half of the year, and yet to look at our, we haven't provided guidance on Q3, Q4 from a CapEx standpoint, so we'll look at that, but that should probably be relatively consistent with the first half of the year if you look at our guidance, and we'll have some CapEx wrap-in to the first part of 2023, as Kevin mentioned, to get this painting at either capacity and at Arcadia. I hope that helps.
spk05: But we've invested in inventory in two of our businesses in the first two quarters of this year that will turn to earnings and receivables, and then those receivables will get collected in the third quarter and fourth. And so we're just following that path right now.
spk06: Yeah, and that inventory bill was then just not just pricing, but the also ramp and expected volume at DynEnergetics, both in North America, where that market is strong right now, as well as international.
spk05: Yeah, and I'll say in Arcadia, we'll have better matching of the raw material prices with the backlog and with the inventory in the second half of the year, which will lead to a margin improvement.
spk01: That's all very helpful, Keller. I appreciate it.
spk02: Thank you. And your next question is coming from Jim Brilliant from Century Management. Jim, your line is live. Please go ahead.
spk03: Hi, guys. How are you doing? Hi, Jim. Good afternoon. I just want to clarify that last point. Mike, did you say that Q3, Q4, you're looking at $15 to $20 million per quarter in pre-cash flow, so $30 to $40 million in the second half?
spk06: operating cash flow, 15 million per quarter in operating cash flow before CapEx. We're still evaluating CapEx. But it should look like the CapEx should look like, you know, average the first and second quarters.
spk03: Okay. Okay, great. Can you guys kind of quantify what you think the, maybe characterize the capacity in, industry capacity in the perforating market these days?
spk05: You know, I still think that there's, you know, capacity has a time component and efficiency to it. And where we're seeing advantages, Jim, is in our ability to respond quickly to increased demand and what we were touching on earlier, the ability to orchestrate the wireline and the frack crews in a very efficient way. And that is easier when you're vertically integrated and have the type of system that we have. And so I don't want to say that the capacity for perforating systems is tight. It's the performance level of perforating systems is tight. And that's where we're aligning with our customers in really getting behind the businesses that are operating most efficiently.
spk03: Yeah, I mean, there's, I guess it's the effective capacity, right? Because you've got labor constraints across the oil field services business in total. And you've had some of your competitors go through some big downturns and had to reduce their labor force and then ramping that up. There's been some difficulty with some trying to, you know, to field enough people for that. And now you've got, you know, completion and frack crews that are you know, the whole calendar is filled up. So, you know, to effectively and efficiently deliver perforating guns has got to be getting tighter in that respect and more difficult. So your business model obviously is better positioned to be able to do that than some of your competitors. So I guess, so that kind of just leads me to the next question. It looks like Q2, Q1 and Q2, the improvements were largely some effective price increases, which drove top line but improved margins, and more so than volume. But am I hearing it correctly that now you're starting to see the inflection on both price and volume in the second half, more so than you have in the first half?
spk05: And I would say our volume is picking up, but our margins are improving more because of pricing than volume as we go into the second half of the balance of this year. And I will note for all our E&P customers out there that, again, we're a fraction of a percent when we're talking about our prices in terms of what it means to the market. cost of completing the well. If we're talking single-digit or $10,000 a well, not $200,000 a well like you see with sand and other things at times.
spk03: Beyond that, you provide efficiencies at the well site, so it's a better value. Correct.
spk05: We're not part of the inflation, if you will, of the well site. We tend to view our value add as the greater efficiency at the well site and better value.
spk03: So as, you know, we've heard about, you know, from all the E&P companies and service guys that everything is booked through the year and they're now looking at longer term contracts into 2023 for frack crews and drilling crews. So obviously it's gotten tight all over the place. And there's no let up in the difficulty of getting labor into the field. Should we expect now that some of your, that your volume now gets back up to levels that are consistent with the higher frack crews and have that same kind of attach rate? that we've seen in the past?
spk05: Well, I think, I think, you know, we're pleased with our volume. Um, we're not trying to be all things to all people. Uh, we're, we're focused on a handful of, of, of companies and, and we do want to be all things to them or as much as we can to them. And, and, um, um, And we're, like a lot of the other companies in the industry, Jim, that, you know, we have capacity. We have capacity in place to support our customers. You know, in our dine energetics, we're not going to add capacity unless it's at good margins. And so we're really focused on serving the the customers we have and making sure that, uh, um, we're getting rewarded for the value that we bring to them.
spk03: Okay. That's fair. Uh, and then moving over noble clad. Um, so, you know, the, uh, certainly the, the back excluding the, the increased metal prices in the supply chain issues around, uh, uh, key raw materials. The demand backdrop is setting up nicely for you guys with, you know, the strength in chemicals and petrochemicals and all the end markets that use your materials. How do you look at it, you know, over the next, the second half? It sounds like it's going to get better, but into 23, 24 in terms of, you know, some
spk05: finally getting some project growth through the system yeah i think i think when we look at this year we're seeing mostly um um the price of metals entering into um you know potentially higher revenue um and it's it you know there are large projects that are long cycle and you know When we book things in the second half of this year, they fall into next year. And so right now, we're working our backlog for the balance of this year, mostly. And we think the back half of the year will be up over the first half of the year and in the 8% to 10% range, but it's mostly pricing. And then we see 20, you know, we're not giving guidance yet for the back half, let alone for 23 and 24, but we'll start to see the projects get layered in for 23 and 24.
spk03: And are you seeing increased bid activity for 23, 24? We are.
spk05: We're definitely seeing increased quoting activity. from a lot in petrochemical, you know, from maintenance to, you know, the larger projects take time, but they're being talked about.
spk04: Okay.
spk03: Right. Okay. Yeah, that does it for me. Thank you.
spk02: Thanks, Jim. Thank you. And there are no further questions in queue at this time. I would now like to turn the floor back to Kevin Long for closing remarks.
spk05: Thank you, everybody, for joining us for today's call. And we look forward to getting back together at the end of the second quarter and later in the year.
spk04: So thank you.
spk02: Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.
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