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spk01: Good day, 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 questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Jeff High, Vice President of Investor Relations. Sir, the floor is yours.
spk05: 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: Good afternoon, and thank you for joining us for today's call. Our second quarter financial results exceeded the high end of our guidance, driven by healthy end market demand, improved pricing, and strong execution by our employees. Our consolidated second quarter sales were a record $165.8 million, up 20% from the first quarter, and up 153% versus the second quarter of 2021. Excluding revenues from Arcadia, which we acquired a 60% controlling interest in during last year's fourth quarter, second quarter sales were up 26% sequentially and up 37% versus the second quarter last year. Second quarter sales at Dyna Energetics, our energy products business, increased 38% sequentially to $67.5 million. The improvement was driven by an increase in international orders and very strong demand from North America's onshore oil and gas industry. DynEnergetics' second quarter gross margin was 30%, up from 26% in the first quarter and 25% in the second quarter last year. The increase reflects higher sales on fixed manufacturing overhead, lower manufacturing costs resulting from improved operating efficiencies, and higher average selling prices. DynEnergetics plans to implement additional price increases in the third quarter, and we expect it will finish the year at its target gross margin of approximately 34 percent. DynEnergetics shipped a record number of its fully integrated DS perforating systems during the quarter and is benefiting from its position as the only single source vertically integrated supplier that takes full responsibility for the performance of its perforating systems and delivers them just in time to the well site. I am pleased with the performance of the manufacturing and assembly teams at Dyne Energetics production facility in Blum, Texas, which are doing an outstanding job addressing growing demand. During the second half of this year, Dyne Energetics plans to launch several new products that will continue to expand the family of DS perforating systems and enhance the features and performance of DynEnergetics intrinsically safe initiating technology. Second quarter sales at Arcadia, our architectural building products business, increased 12% sequentially to $76.5 million. The increase reflects higher selling prices, which were implemented to offset sharply higher aluminum prices. The increase in Arcadia selling prices led to improved gross margin, which increased to 34 percent from 30 percent in the first quarter. A portion of Arcadia's aluminum inventory is purchased during the first quarter at significantly higher prices, and the majority of this inventory should shift during the third quarter. This is expected to temporarily depress Arcadia's gross margin, as Mike will address in his guidance. During the second quarter, Arcadia's commercial business benefited from healthy activity in its primary low and mid-rise building markets and also saw steady demand at its satellite facilities located across the western and southwestern United States. These 11 service centers work with hundreds of regional glass and glazing contractors who are a consistent source of relatively small quick turn orders. Arcadia has established a reputation within this market for providing broad product availability, short lead times, and excellent customer service. Arcadia Custom, which provides premium steel, aluminum, and wood windows and doors to the high-end residential real estate industry, continue to address a large order backlog that is expected to keep its manufacturing facility at full capacity well into 2023. Arcadia Customs serves a segment of the real estate industry that is generally less affected by rising interest rates compared to the broader housing market. We continue to make progress on the implementation of Arcadia's new enterprise resource planning system and are also making headway on the design and planning of additional finishing capacity. Second quarter sales at Novaclad are composite metals business were flat versus the first quarter. However, order backlog increased 5% sequentially to approximately $47 million, reflecting the impact of higher metal prices. Rolling 12-month bookings at Novaclad were $92.5 million, up from $84 million at the end of last year's second quarter. The mid- to long-term growth prospects at Noble-CLAD continue to improve. Growing global use of liquefied natural gas has generated strong demand for Noble-CLAD's cryogenic transition joints, which are used to address the extreme temperatures and pressures inherent to LNG processing. Noble-CLAD is also addressing inquiries from several segments of the alternative energy industry including hydrogen, geothermal, and solar. This week, Novocloud received the first commercial order for its new product line, Datapipe. I'm very pleased with our sales growth and improved profitability during the second quarter. As we head into the second half of the year, we are focused on continual improvement in margins, improving free cash flow, and continuing to strengthen our balance sheet. With that, I'll turn the call over to Mike a review of our second quarter financial results, and a look at third quarter guidance.
spk06: Mike? Thanks, Kevin. As Kevin noted, second quarter sales were $165.8 million. Excluding the Arcadia acquisition, consolidated sales were $89.4 million, an increase of 37% versus the second quarter of 2021. Arcadia reported second quarter sales of $76.5 million, up 12% sequentially. Dyna Energetics reported second quarter sales of $67.5 million, up 38% sequentially and 60% versus the same quarter last year. North American sales increased 31% sequentially and international sales increased 95% sequentially. Excluding a large order from a customer in South Asia, international sales increased 31% sequentially. Sales at NovoClad were $21.9 million flat sequentially and down 6% versus last year's second quarter. Consolidated gross margin in the second quarter was 31% up from 27% in the first quarter and 26% in last year's second quarter. Second quarter gross margin benefited from the acquisition of Arcadia, which had a higher gross profit percentage than DMC's legacy business units as well as the impact of higher sales volume on fixed manufacturing overhead expenses combined with higher average selling prices at DynEnergetics. These improvements were offset by the expiration of the employee retention credit under the CARES Act, which benefited the second quarter of 2021. Arcadia reported second quarter gross margin of 34%, an increase versus 30% in the first quarter driven by pricing actions. Dyna Energetics reported second quarter gross margin of 30% versus 26% in the first quarter and 25% in last year's second quarter. The margin improvement from last year primarily relates to the impact of higher sales volume on fixed manufacturing overhead expenses, as well as higher average selling prices. Nobel Platts second quarter gross margin improved to 28% from 19% in the first quarter and was flat compared to the year ago second quarter. primarily due to more favorable project mix and the impact of the prior year CARES Act credits, respectively. Looking at our second quarter expenses, consolidated SG&A was $29.4 million and included $11.4 million of SG&A from Arcadia, compared to $14 million in the same quarter last year. The year-over-year increase also was attributable to higher variable incentive compensation, the expiration of the employer retention credits, and implementation costs associated with the new enterprise resource planning system at NovoPlat. We reported consolidated operating income of $9.9 million. Second quarter adjusted net income attributable to DMC was $5.6 million, or 29 cents per diluted share, versus adjusted net income of $1.7 million, or 10 cents per diluted share in last year's second quarter. Adjusted EBITDA attributable to DMC was $22.4 million versus $7.5 million in last year's second quarter. Arcadia reported second quarter adjusted EBITDA attributable to DMC of $9.8 million. DynEnergetics reported second quarter adjusted EBITDA of $13.3 million, while Novelclad reported adjusted EBITDA of $3.4 million. We ended the second quarter with cash of $11.8 million versus cash of $30.8 million at December 31st, 2021. The decrease was driven by a build-in working capital, principal payments on long-term debt, and quarterly cash distributions to our Arcadia joint venture partner. The working capital increase primarily reflects higher required inventory levels at Arcadia and Dyne Energetics from higher input prices and increased lead times. Our total outstanding share count is now 19.5 million. Looking at guidance, third quarter sales are expected to be in a range of 155 million to 163 million dollars versus the 165.8 million dollars reported in the 2022 second quarter. At the business level, Arcadia is expected to report sales in a range of 70 million to 73 million dollars versus the 76.5 million dollars reported in the second quarter. Dyna Energetics is expected to report sales in a range of $65 million to $69 million versus the $67.5 million reported in the second quarter. Improved pricing in North America will be partially offset by lower international sales versus the second quarter, which included the previously mentioned large international order. Nobel-clad sales are expected in a range of $20 million to $21 million versus the $21.9 million reported in the 2022 second quarter Consolidated gross margin is expected in a range of 29% to 31% versus 31% in the second quarter. The expected decline reflects a less favorable project mix at Nobel Plaid and lower margins at Arcadia, resulting from a first quarter spike in aluminum prices that drove up the average cost of Arcadia's inventory. The majority of this inventory is expected to be shipped during the third quarter. Third quarter selling general and administrative expense is expected in the range of $30 to $31 million versus the $29.4 million reported in the 2022 second quarter. Third quarter SG&A will include approximately $600,000 in implementation expense associated with the new enterprise resource planning system at mobile class. Amortization expense is expected to be approximately $6.7 million. The remaining value assigned to Arcadia's acquired backlog was largely amortized during the second quarter. Amortization expense is expected to be $3.6 million in the fourth quarter. Third quarter depreciation expense is expected to be $3.5 million, and interest expense is expected to be in a range of $1.9 to $2 million. Third quarter adjusted EBITDA attributable to DNC is expected to be in a range of $16 million to $19 million. versus the $22.4 million in the 2022 second quarter. Capital expenditures are expected in a range of $5 million to $6 million. With that, we're ready to take any questions. Operator?
spk01: Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star one on your phone at this time. We ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Please hold while we poll for questions. Your first question for today is coming from Cameron Lockridge. Cameron, your line is live.
spk07: Hey, good afternoon, guys. Thanks for taking my questions.
spk08: Good afternoon, Cameron.
spk07: So I was hoping to start just at a high level with Dinah. very strong margin progression here so far in the first half expected to continue into the back half. Kevin, you've touched on previously that margins in that segment, um, are likely not to return to the 2019 levels, just given the difference in mix going from selling, uh, uh, components and systems to now solely systems. But I was wondering, um, if you can maybe help us kind of think about what the ultimate earnings power of that business now looks like, um, could we see a scenario where even if margins did not return to 2019 levels, even that dollars still could reach that level. And if so, maybe when do you think that could happen?
spk08: Um, well, first of all, that's, that's correct when we were selling, um, more components, the initiating systems, which were higher margin, lower dollar value units. We primarily started out as a component company and turned it into a system company. And by doing that, the revenue increased significantly, but the average margin came down as we began selling more of the components. the hardware that goes with the energetics. We see probably the sweet spot for margins, gross margins in the 34 to 36% range. We're happy with the progress that's happened year to date, Q2 over Q1. We're up 31% in revenue in North America. Our unit volume was up less around 28%, the difference being price. We want to continue that into the third and fourth quarter. And we're targeting less volume pickup in the second half of the year, more margin improvement. And we would expect to see more unit growth in 2023 as the industry adjusts to the current level of activity. And so we see getting back to reasonably healthy, similar EBITDA levels, hopefully sometime over the next 12 to 18 months.
spk07: Got it. That's very helpful. Thank you, Kevin. Switching gears here to Arcadia, again, strong first half of the year, strong sequential growth in the second quarter. It sounds like next quarter, the current quarter, 3Q, we might see some dip in margins just given the high aluminum prices earlier on in the year. On the top line, though, I was wondering if you can comment on the sequential decline and maybe what's driving that here in the third quarter. And on a related note, how can we think about maybe order trends throughout the second quarter and here into the first parts of
spk08: Yeah, breaking that down, I think the order trends are fairly resilient and we've got a high backlog and quite frankly, an uncomfortably high backlog in the Arcadia business relative to the service levels that we'd like to provide our customers. And so what you're seeing is less of a volume change in revenues and more of a pricing change from quarter to quarter as the cost of aluminum primarily is softening compared to where it was at the end of last year and in the first quarter. You know, it's come down and it's come down even more into the second quarter. And so that's impacting the top line. And as we begin to shift the inventory that we have in stock, which was purchased at higher levels, we'll see some margin compression going into the third quarter. But we expect to work through this by the end of the year. But we're fairly pleased with their unit performance and the resiliency of their markets at this point.
spk07: Got it. And so just to make sure I'm tracking you correctly, it sounds like in the third quarter, the decline is mostly on a pricing decline and not so much on a unit volume decline, as it were. Correct.
spk06: Yeah. And just real quickly, if you look at average LME through 630, it was just over $3,000 at that time. And, you know, Q3 to date so far, just the first month in, we're running $2,500 in that ton.
spk07: Got it. Got it. That's super helpful. Thank you. Thank you both. And I will turn it back.
spk09: Thanks, Cameron.
spk01: Your next question is coming from Steven Gingaro. Steven, your line is live.
spk03: Thanks. Good afternoon, everybody.
spk09: Yeah, hi, Stephen.
spk03: Hi, Kevin. So if you don't mind, can you talk about the margin compression in the next quarter at Arcadia? Can you help us bridge the gap on the EBITDA line? It sounds like it's mostly margin compression at Arcadia, which is impacting the sequential decline. Can you talk about that? And maybe also, and I'm not sure I heard this right, but given the raw material costs you have in your inventory, were the second quarter EBITDA margins a good longer-term guide, or is it sort of somewhere in between where second and third quarters flush out?
spk06: Yeah, so this is Mike, and to answer your question on when you think about bridging Q2 to Q3 guide, Nobel Plaid is lumpy. They've got unfavorable project mix, so That's a couple million down on EVA, the Opther 3.4 and Q2. So it's really kind of a mix, probably 50-50 between Nobel Plaid and just a slight margin downtick in Arcadia. I think from an Arcadia standpoint, with the ride that we've taken in aluminum prices, you're seeing margins move around quite a bit. But on a medium to longer-term basis, we see Q2 as a good indicator of long-term margins, and that was 34%. Their pro forma 2021 was 34%, and that's been a historical average even before then. So I think you're going to see it bounce around a little bit with aluminum price volatility, but that's where it's going to settle out long-term.
spk03: Okay, thank you. And can you remind us, you mentioned international versus U.S. changes at Dinah. Are you speaking U.S. specifically? Just want to make sure because I know in the queue there's international. I'm not sure if Canada is included. I'm trying to figure out where Canada is in those comments.
spk06: Yeah, Canada is in our North America. It's not part of the international, I guess I would say.
spk03: Okay, great, thanks. And then the other question I had was we are hearing pretty consistently that pressure pumping equipment is largely sold out and EMPs are working hard to secure equipment even into next year in a lot of cases. And it would seem like the efficiency that your products bring on the perf side would be in higher demand. And I'm just trying to get a sense for if you're seeing that acceleration or re-acceleration or greater shift to integrated systems and how your products are faring versus maybe some of these other similar products or some of these products that are being packaged in the scene shops and trying to compete.
spk08: Yeah, we saw quite a pickup in the year-to-date numbers, but specifically in Q1 to Q2 in the unit volume, approaching 38%, actually 28% in our DS systems. And at the same time, we saw a pickup in our pricing by approximately three percentage points. So we're pleased with the progression in both our volume and our price in the first half of this year. We expect with some of the sold out situations that you have in pressure pumping that we're gonna see more margin growth and price growth in the second half of the year. But we're seeing our market share at a healthy number compared to where it was a year ago. And we benefit in strong markets where single source responsibility, less working capital, fewer people, in the service companies and at the well site, all these dynamics work towards an integrated system. And so we feel pretty good about where we sit right now.
spk03: Great, thanks. And just one other quick one. Is the international large sale in Dyna in a quarter, is that accretive to margins? Yes. Okay. Thank you both. I appreciate the call.
spk09: Yep.
spk01: Your next question for today is coming from Jerry Sweeney. Jerry, your line is live.
spk02: Good afternoon, Kevin, Mike. Hi, Jerry. How are you doing? Good. Just a point of clarity on dynanergetics. It looks like sequentially on the guidance 3Q is sort of flat, but as you said, In 2Q, you had the large international order. You kind of gave, I bracketed out, but how big was that order? And that was a one time, that happens once a year. So 2Q to 3Q, even though flat sequentially, you're actually seeing growth sort of in that North American based business. Is that right?
spk08: Correct. It was approximately a $4 million order And that order, we're not anticipating that volume to be replaced internationally in the third quarter. And so where the revenues are, that pickup is in North America, both in unit volume and price.
spk02: Got it. And then on Arcadia, the one thing I was struggling with, when you purchased it, I think some of the talk was they had some very unique pricing strategies or way of implementing pricing that sort of mitigated some of the potential inflationary costs with cost of goods sold, i.e., let's just say aluminum in this case. But it seems like that's not necessarily happening currently. Is that because of the just extreme volatility in aluminum pricing? Or can you help me sort of understand that?
spk08: Yeah, I think they've actually done an excellent job in terms of managing selling prices and are very, very efficient at it. And it's a primary focus, and they've got the proper mechanisms in place for passing along price increases with the inflation that they're seeing, particularly in metals. The situation that we have, it's odd in the sense that there's great volatility in the cost of aluminum And there's also been, it's been very difficult to get a hold of materials with some of the supply chain challenges. And so we have an uncomfortably high backlog, as I mentioned earlier, but it was important for us to have inventory going into the second half of the year. And we bought inventory at various prices, but At the time that we were building inventory, it was at the higher prices for the cost of aluminum. And it's just, you know, what we're going to see in the third quarter in absorbing that aluminum with our revenues is really the cost that we're going to pay for meeting our customer requirements. But as far as an organization and their ability to manage inventory management pricing, past pricing along at fair prices to our customers, they're second to none, quite frankly, in companies I've been associated with.
spk02: Got it. So at the end of the day, this was more of a business service as it relates to the customer decision and not a profitability discussion. Correct.
spk08: You know, they're thinking medium to long term. managing selling prices, managing inventory levels, and making sure that we can meet demand. And it's been an imperfect world of late and the LME or the price for aluminum is all across the map. And that's difficult to manage. What we're trying to do is manage our selling prices, which we've done a good job with. in managing our service levels to our customers.
spk02: Got it. And then the comment you made, targeting less volume, more pricing in the second half with Dyna Energetics, is this sort of, you know, I don't want to say drawing a line in the sand, but maybe that's the right term, but saying, hey, price increases are coming and you're going to take them or we're going to not sell you the equipment?
spk08: I think it's really, you know, our focus No, I think that that's maybe too heavy-handed for how we deal with our customers. Our customers are seeing the value of our product line, and when you really look at the cost of our perforating equipment, even with the price increases that we're implementing, the value that we create for our customers far outweighs outweighs the premium or, quite frankly, the cost of the equipment. And so, you know, we're getting through fair price increases, and actually the overall cost of perforating equipment for drilling and completing of a well is declining because of the improved efficiencies that we're offering. And our cost of that well is declining, even though we're getting our price increases.
spk02: Got it. So, and then just one more question on the pricing. Is this, is it just an across-the-board price increase? Or I've seen companies that used to, so they started, we raised price once a year, then inflation came along, and then they're due twice a year. Then I said, you know what? we're just going to start implementing price increases as they come along basis. I'm just curious as to where your strategy is and how you're looking at pricing and how you implement it.
spk08: Yeah, I mean, the markets are much more dynamic of late than they've been where you see inflation and you see significant cost increases and you have to be flexible both in terms of how you manage your supply chain, but how you implement these price increases. We have a framework where our best customers get our best prices, but we're ratcheting up that framework. We're not changing the relationships of people within that framework. And we have a customer base that is committed to the product and loyal to the product because of all the operating costs characteristics that it brings to their operations. And so we have a responsibility of also keeping them competitive and successful in the marketplace, and we're just balancing all these things.
spk02: Got it. Okay. I'll jump back in line. Thank you.
spk01: Once again, if there are any questions or comments, please press star one on your phone at this time. We have a follow-up question coming from Steven Gingaro. Steven, your line is live.
spk03: Thanks for taking the follow-up, gentlemen. So, Kevin, just going back a couple years, we used to talk about Nobleclad and Dynah and sort of the the incremental margin that would kind of be a normalized incremental margin. And they were pretty healthy. I think we really talked about somewhere in the 30 to 40% range. How do you think about the incremental margin potential in the three segments as we go forward from here?
spk06: Yeah, Stephen, I would say that with NovoClad, the incremental margins remain in that range. 40 to, you know, 40 to 45% range, usually it's right in that range. And again, you know, we have lumpiness from quarter to quarter, but, you know, over a year, that's how we would think about that as that business grows. DynEnergetics, you know, historically, you know, on a pre-pandemic, they were, you know, in that 45% range. I think right now they're closer to 35%, but we see them with the ability to get back to that 40 to 45% range with the margin growth and pricing. And then in Arcadia, that's a high variable cost business as well with we think a long-term run rate in the mid-30s on gross margins. So their incremental margin should be in that 40 to 45% percent range as well. So we still see them all in that sort of same zip code in that 40 to 45 range.
spk09: Steven, that it?
spk03: I had muted you, so you wouldn't hear the background noise. Yeah, I think the only other quick one I would add is as we look into into the next couple of quarters on the Arcadia front. I know this came up a little bit. Are there any pieces of it we should be more concerned about from a GDP perspective? I know you mentioned the custom size is probably more resilient, but do you see any signs in the other businesses that worry you or things pretty solid?
spk08: I think that they're pretty solid in terms of their commercial outlook has a little bit their end of the commercial is pretty resilient and between replacement, repair and replacement versus new construction they do a great job balancing those two or they self-balance as the market evolves and so combination of the market that is served and the backlogs that we have we feel that they're fairly comfortable with where they are from a unit volume standpoint for the foreseeable future.
spk06: And I think in the residential side, we say that that's serving the higher end of the market and less susceptible to higher interest rates. So, you know, we think we're well positioned in both the residential and the commercial.
spk03: Yeah. Okay, great.
spk09: Thank you for the answers.
spk01: You have another follow-up question coming from Jerry Sweeney. Jerry, your line is live.
spk02: Hi. We can't make it a short call, so I figured I'd do a follow-up. Two questions, one probably a little harder than the other, a little bit more in-depth. But, you know, on the Dyna Energetic side, how much visibility do you have with your customers? And not so much – I know the orderings come in as they do, but are you – Are you talking to them of what they're looking at for a second half of this year, but even more importantly into 2023, and have any insight into their plans? Do they come down to that level with you?
spk08: We have short lead times, and we respond quickly to it's a quick-turn business, and that's actually one of the values that we bring to the marketplace with our integrated system that's fully assembled. is that we can respond quickly with our vertical integration to their demand. And so we have visibility that's less than 30 days, and it's usually around three weeks. When it comes to next year, we're more looking at frac stages and how the overall market is rather than a specific customer.
spk02: Got it. I wasn't sure if, you know, especially when things get tighter, if they start reaching out and saying, you know, these are our plans, make sure we're sort of in the queue and be prepared.
spk08: Yeah, with our volume growth, we've, and how that team's done an excellent job in terms of managing its supply chain. And admittedly, it's easier with the vertical integration, particularly integrated switch initiating systems. And So they've been able to meet the demand of our customers.
spk02: Got it. Then legal, you know, that's sort of been in the background and, you know, we've sort of stopped talking about it just because it's there and it's going to be there for a little bit. But, you know, is that starting to perk up or are there, you know, any costs in the quarter on the SG&A side that sort of, you know, we can highlight that they're not, it's not always going to be permanent, but.
spk08: yeah our litigation costs i think year to date are around 4 million um and i think there are 1.7 million in the quarter um and and uh you know we're that's a comfortable rate for us right now that we we we actually see uh probably less spending in the second half of this year compared to the first half of the year primarily because of the court systems and how things are working their way through the court system.
spk02: Got it. And that 4 million on the litigation, that that's really, is that, I mean, you're always going to have some litigation. You're always going to have some, not litigation, but legal costs, I should say, but is that 4 million really litigation?
spk08: That's purely litigation. Right. And Mike, did I get those numbers correct? Um, on the 4 million year to date?
spk02: Yes.
spk08: Okay.
spk09: Okay. I appreciate it.
spk01: Your next question is a follow-up question coming from Cameron. Cameron, your line is live.
spk07: Hey, thank you. I guess we're all doing follow-ups now. We don't want you to go away. Well, I appreciate it. I wanted to circle back on some of the cost items here. in the second quarter and had to think about how those progress, uh, throughout this year in 23 first on Arcadia, um, about, you know, one, one and a half million dollars, a little less than call it 1.25 million jump in GNA, um, at Arcadia in the second quarter. What, um, can you offer some insight into what, what that accounts for? And does it go back to what you had one Q 22 or the third quarter? How should we think about that?
spk06: Yeah, I think the second quarter, you know, we've been putting some people in. It's people, systems, processes, and I think you're going to see that second quarter run rate prevail, you know, on a go-forward basis, and it might even pick up a bit. Okay, got it.
spk07: And then if you, I mean, given all the moving pieces, we've heard you loud and clear about Arcadia's margins just coming down slightly with aluminum prices early in the year. Can you give us maybe a ballpark for the magnitude of the decline we should see in the third quarter for Arcadia?
spk06: I think it's a couple points. To be clear, we'll call it 200 basis points Um, for the quarter, it could, you know, it could be a, a little bit more than that. We might be able to mitigate it. Um, but it could be 300 to 200 to 300, something, something like that. But then we see, uh, margins marching back up.
spk07: Got it. Got it. That's helpful. Okay. Uh, and then maybe just, uh, on, on, on Dinah, um, the cost items. I mean, if I think back to like 2019, right. Um, Your quarterly GNA and selling and distribution expenses were, I don't know, call it nine-ish million. Here in the second quarter, it was about eight and a half. Is that kind of the new norm? Is that, you know, just giving economies a scale as that business grows?
spk06: Yeah, I would say so. I mean, when I look back at 2019 DynEnergetics, SG&A was $34.1 million. And, you know, we're tracking in and around that number for 22 as well. You know, we have had the elevated legal spend and we think we're going to top line is going to continue growing into the existing SG&A number. Yep. Yep.
spk08: We also became more efficient over time, particularly as we exited our Russian location and business back in that time.
spk07: That's right. That's right. Okay. Okay. All right. That's it for me, guys. Thank you.
spk09: Good. Thank you, Cameron.
spk01: Your next question for today is coming from Jim Brilliant. Jim, your line is live.
spk04: Hey, guys. How you doing? Fine, Jim. Nice to hear your voice. Good to hear you. A couple questions. I just want to clarify one thing. I thought you said back half of the year, but mostly in the fourth quarter, you're looking to exit the year at about a 34% gross margin on DynEnergetics. Did I hear that right?
spk08: Correct. You won't see that in the third quarter, but we hope to exit the fourth quarter, and that's really the layering in of the pricing and the notice that we have given our customers.
spk04: Okay. And is there a recent price increase? Or are you talking about one from April?
spk08: No, it's, they're recent. They're either delayed or recently announced within the quarter. They'll start taking effect in this third quarter. And so it will progress as the quarter goes out. But we got away from the published price increases because it seemed to create a lot more confusion and angst. And we're now talking to customers individually. but we're being fair across the entire group of people that we have.
spk04: Okay. That makes sense. And then just to reset my head on this, what is the kind of the revenue capacity at Dyna Energetics with, you know, the changes you've made over the last several years since, you know, I guess since 2019, you've made a lot of, internal manufacturing enhancements. So what would you say your revenue capacity is these days?
spk08: Yeah. We're operating in the mid-20s in terms of our market share. And I'm talking in terms of unit volume. And we feel that we could operate easily up to the low to mid-30s with the capacity that we have.
spk04: Okay, so maybe can we – so what's your utilization at this point?
spk08: It's – I'd have to calculate it. We're not pushing it right now in terms of – You could add additional shifts and that sort of thing, so. Yeah, yeah. In fact, we're operating probably in the – 80%, 70%, 70% utilization, uh, with the current shifts that we're operating or potentially could operate.
spk04: Okay. And then, uh, kind of backing out to the overall industry. Um, there's been some pretty widespread reports, I guess, of, uh, shortages with integrated circuits, uh, for, uh, certainly not for you guys with your results, but in the industry, how do you see that playing out?
spk08: Yeah, we don't see it. I mean, we have our own electronics group and sourcing for our circuits for the boards that we make. And we have not had any shortages. In fact, we've probably benefited because of our supply chain. And so it, We have heard of shortages from other companies, but we only are aware of that secondhand. We just haven't had any on our own.
spk04: Okay. And then any comment on the upcoming new products coming out of Dyna?
spk08: Not at this time. I mean, we'll have some announcements on it as the features are introduced into the market. They're not going to change the overall size of the market. They make us more competitive, more efficient, more features, if you will, in the perforating systems that we're manufacturing today. And so we believe that they'll help our customers from a performance standpoint, and that probably will help us from a share standpoint over time. It's not expanding the total available market.
spk04: Okay. And then on to Nobleclad. I think you said that it was the first order for your data pipe. Is that right? And what is the end market for that? Which I know you guys have been working on for a while, so congratulations on that.
spk08: Yeah, thank you. It's used by the petrochemical industry in the production of which is used in acrylics, if you will.
spk04: Okay. And so it's the initial order. Are you seeing more work now in the petrochem business? I know it's, you know, we've talked about it for years, and every time, you know, it seems to be going, the cap spending in that industry kept getting pushed to the right, but It appears now that maybe that was finally the time. You see more part of those orders, that sort of thing?
spk08: Definitely. And we feel that they're going into a better market over the next couple of years than what we've experienced over the past couple of years. There is both an onshoring of certain production capacities. but there's also you know the the hard thing in the last um year in particular has been the maintenance work at some of the facilities that are working uh around the clock with some of the supply chain issues and and so we're we hope to see some of the maintenance come back in as well as the the growth in terms of the applications okay and is it too early to get any kind of outlook for 2023 and uh
spk04: Hey, Nobleclad, are you willing to go out on a limb and give us some guidance there?
spk08: No, I'm not willing to go out on a limb on that. I haven't met the guidance I'm given in the town.
spk04: I thought I'd try, Kevin. It's been a long time.
spk08: Yeah, I think we're a show-me story on Nobleclad's growth.
spk04: Yeah, fair enough. Okay, and then on Arcadia, with the aluminum prices coming down, do you get any kind of working capital benefit because of that?
spk08: Yes, we do, both in terms of the value of that inventory, but the pricing may also indicate greater availability of aluminum, so we don't have to carry as much inventory as we have today.
spk04: Okay, so it's easier. You're finding it a lot easier now, and then, of course, just the raw cost of it is going to be lower.
spk08: Yes, I mean, and I guess I should say it. We're pleased with where our leverage ratio is at the end of the quarter, particularly given the significant increase in working capital that we have in both Arcadia and DynEnergetics. And so with that coming down and hopefully an increase in terms in both businesses, we should see a freeing up of capital.
spk04: Okay, great. Okay, that'll do it for me. Thanks. Appreciate it.
spk01: There appear to be no further questions in queue. I would like to turn the floor over to Kevin for any closing remarks.
spk08: I'd just like to thank everybody for their interest in our company, and we look forward to speaking with you again at the end of the third quarter. And have a great day and look forward to talking with you.
spk01: 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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