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Operator
Good afternoon, ladies and gentlemen, and welcome to the DMC Global Third Quarter Earnings Call. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your 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.
Jeff High
Hello, and welcome to DMC's Third Quarter Conference Call. Presenting today, our 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 turn the call over to Kevin Long. Kevin?
Kevin Long
Good afternoon, and thank you for joining us for a review of DMC's third quarter financial results. Our third quarter sales and profitability were above our guidance. reflecting continued strong demand within the end market served by our three asset-light manufacturing businesses. Consolidated third quarter sales were a record $174.5 million, which were up 5% from the second quarter and up 160% from the third quarter last year. Excluding $80.7 million in revenues from Arcadia, in which we acquired a 60% controlling interest last December, third quarter sales increased 5% sequentially and 40% versus the third quarter of 2021. The growth reflects stronger sales at DynEnergetics, our energy products business, which is benefiting from healthy activity in the global wealth completion industry. DynEnergetics third quarter sales were $70.4 million, up 4% sequentially and up 59% versus last year's third quarter. The safety, performance, and efficiency of Dyna Energetics' fully integrated DS perforating systems continues to drive increased adoption by North America's exploration and production companies and service providers. This year Dynaergetics has already surpassed the 1 million unit mark for shipments of its factory assembled performance assured DS perforating systems. It is the first time a million units have been shipped in a single year since the product was launched in 2015. The on-time delivery rate of these systems is 99.93% and they were deployed by our customers at a success rate of 99.98%, which we are very proud of. The systems also were deployed without a single safety incident in the seven-year commercial history of the DS system. We have shipped nearly 4 million units without a reported safety issue. Arcadia, our architectural building products business, reported third quarter sales of $80.7 million, up 6% sequentially, and up 24% versus pro forma sales in last year's third quarter. The improvement reflects higher selling prices, which were implemented to offset a sharp increase in aluminum costs earlier in the year. Aluminum prices actually rose faster than Arcadia increased prices for its products. Additionally, Third quarter orders that shipped out of backlog were quoted before the price increases took effect. Combined, these factors reduced Arcadia's gross margin to 30% from 34% in the second quarter and 36% in last year's third quarter. We expect it will take another quarter for the balance of the high-priced aluminum inventory to move through Arcadia's service centers, at which time we expect Gross margins will return to normalized levels in the low to mid-30% range. Demand for commercial products in Arcadia's western and southwestern U.S. territories remains healthy, and Arcadia's commercial team is working on booking a diverse collection of projects that include hotels, educational facilities, and casinos. Arcadia is also investing in resources to support future growth. We've been working on the implementation of a new enterprise resource planning system since the beginning of the year. In addition, Arcadia has hired sales and manufacturing personnel at its new service centers in Dallas and Houston, two large markets that we believe will fuel strong long-term growth. Arcadia Custom, which serves the high-end residential market, also is reporting strong demand and is working through a large-order backlog. It is adding production capacity at its Tucson, Arizona facility and investing in sales and marketing resources that will create demand for its differentiated product offering. Third quarter sales at Nobleclad, our composite metals business, were $23.4 million, up 7 percent sequentially and up 2 percent versus last year's third quarter. Novoclad's rolling 12-month bookings increased to $97.7 million, up from $92.5 million at the end of the second quarter. Order backlog increased to $48 million from $46.8 million in the prior quarter. The outlook at Novoclad continues to improve, and we are beginning to see several of the large industrial projects Novoclad has been pursuing moved to the award phase. We made significant progress during the third quarter, and I'd like to thank DMC's employees for their continued hard work and commitments to the company. DMC is well positioned to deliver long-term growth, improved returns for our shareholders, and opportunities for our employees. Now I'll turn the car over to the call over to Mike for a review of our third quarter financial results and a look at fourth quarter guidance. Mike?
Gross
Thanks, Kevin. Quickly recapping our top line results, third quarter sales were $174.5 million, up 5% versus this year's second quarter. Arcadia's third quarter sales were $80.7 million, up 6% sequentially. Dyna Energetics reported third quarter sales of $70.4 million, up 4% sequentially. Dyna Energetics North American sales increased 6% sequentially, while international sales decreased 5% sequentially. Sales at Nobel Cloud were $23.4 million, up 7% sequentially. Consolidated gross margin in the third quarter was 29%, down from 31% in the second quarter, and up from 25% in last year's third quarter. Third quarter gross margin reflected an expected dip in gross margin at Arcadia, resulting from the recent volatility in aluminum prices. The gross margin improvement compared to last year's third quarter reflects higher sales volume on fixed manufacturing overhead expenses at Dyna Energetics. As Kevin mentioned, Arcadia's third quarter gross margin was 30%, down from 34% in the second quarter. Dyna Energetics reported third quarter gross margin of 30%, flat versus the second quarter and up from the 22% in last year's third quarter. The margin improvement from last year primarily relates to the impact of higher sales volume on fixed manufacturing overhead expenses. Novel CLAD's third quarter gross margin was 27% versus 28% in the second quarter and 30% in the year-ago third quarter, primarily due to a less favorable project mix and the impact of the prior year CARES Act credits, respectively. Looking at our third quarter expenses, consolidated SG&A was $30.5 million and included $12.9 million of SG&A from Arcadia, compared to $15.3 million in the same quarter last year. The year-over-year increase also was attributable to higher variable incentive compensation, the expiration of employee retention credits, and implementation costs associated with the new enterprise resource planning system at Nobel-CLAD. We reported consolidated operating income of $13.4 million. Third quarter adjusted net income attributable to DMC was $6.7 million or $0.35 per diluted share versus adjusted net income of $403,000 or $0.02 per diluted share in last year's third quarter. Adjusted EBITDA attributable to DMC was $21.8 million versus $5.8 million in last year's third quarter. Arcadia reported third quarter adjusted EBITDA attributable to DMC of $7.2 million. Dyna Energetics reported third quarter adjusted EBITDA of $13.9 million, while Nobel-CLAD reported adjusted EBITDA of $3.4 million. We ended the third quarter with cash of $18.5 million versus cash of $30.8 million at December 31, 2021. The decrease was driven by a build and 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 Dyna Energetics due to increased sales volume and at Arcadia from higher input prices and increased lead times. Our total outstanding share count is now 19.5 million. Looking at guidance, Fourth quarter sales are expected to be in a range of $158 million to $168 million versus the $174.5 million reported in the 2022 third quarter. At the business level, Arcadia is expected to report sales in a range of $70 million to $75 million versus the $80.7 million reported in the third quarter. The sequential decline primarily relates to the anticipated impact of seasonality. DynEnergetics is expected to report sales in a range of $68 million to $72 million versus the $70.4 million reported in the third quarter. Nobel-class sales are expected in a range of $20 million to $21 million versus the $23.4 million in the 2022 third quarter. Consolidated gross margin is expected in a range of 27% to 29% versus 29% in the third quarter. Fourth quarter gross margin is expected to be impacted by a less favorable project mix at Novo Plaid and selling through higher priced aluminum inventory at Arcadia. Fourth quarter selling general and administrative expense is expected in a range of $31 to $32 million versus the $30.5 million reported in the 2022 third quarter. Amortization expense is expected to be approximately $3.7 million. The remaining value assigned to Arcadia's acquired backlog was fully amortized during the third quarter. Fourth quarter depreciation expense is expected to be $3.7 million and interest expense is expected to be $2.4 million. Fourth quarter adjusted EBITDA attributable to DMC is expected to be in a range of $15 million to $18 million versus $21.8 million in the 2022 third quarter. Capital expenditures are expected in a range of $6 million to $7 million. With that, we're ready to take any questions. Operator?
Operator
Thank you. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please indicate so by pressing star 1 on your touchtone phone. Pressing star 2 will remove you from the queue should your question be answered. And lastly, while posing your question, please pick up your handset if listening on speakerphone to provide optimum sound quality. Please hold while we poll for questions.
Ken Newman
Once again, that's star one if you have a question or a comment. And the first question is coming from Cameron Lockridge with Stevens. Your line is live. Hey, good afternoon, guys. Thanks for taking my questions. Yes, good afternoon, Cameron.
Stevens
Kevin, I wanted to start on Arcadia and the geographic expansion efforts you outlined when you purchased the business back in last December. Could you just comment on how that is progressing? Maybe share your latest thoughts on the efforts there and any specifics around markets you're most excited about?
Kevin Long
The geographical expansion primarily was Houston and Dallas, where over the last 18 months, we've opened up two new satellite facilities to serve the local market. And I believe they're moving in a healthy direction, and we see them as growth opportunities as we move forward.
Stevens
That's great. Great to hear. Thank you, Kevin. And then maybe flipping to Dyna Energetics, thinking about the gross margins here, 29%, up nicely on a year-over-year basis, but perhaps a little shy of the 30% target we had come to expect heading into the fourth quarter. Can you just maybe share your thoughts around pricing and what needs to happen for us to get to that 30% plus range that we had discussed?
Kevin Long
There are two factors that will positively impact the gross margin as we move forward from where it is today. In the second half of this year, primarily we've been working through what was slow moving inventory on our books for the last couple of years. And in a strong market, we were able to move that through, albeit at a lower price, lower gross profit. The underlying gross profit of the existing sales is stronger, and we'll see that as we go into the fourth quarter and exit the fourth quarter. Pricing is an iterative process. We've seen some good price movement throughout the year. However, we have a business practice where our best customers get our best prices and our best customers have also increased their purchases from us and have a larger share of our overall business. So the gross margin has moved a little bit slower in terms of its increase because of the customer mix. However, as we go into the new year and further into what we think will be a decent market for the energy area, we'd expect to see the growth in pricing accelerate in the first half of the year.
Gross
Hey, Cameron. Cameron, this is Mike. Just a note, too. For the nine months, we were at 29%. We finished for the third quarter at 30% margin in DynEnergetics, and our guidance currently contemplates low 30s, so call it in that 31, 32% range for DynEnergetics. So we see that marching up.
Stevens
Got it, and thank you, Michael. Mike, I missed that, but I appreciate it, and thanks for the answers, guys. I'll turn it back.
Operator
Okay, the next question is coming from Ken Newman with KeyBank Capital Markets. Your line is live.
Ken Newman
Hey, guys. Nice quarter. Thank you, Ken.
Ken
So maybe just I wanted to dig in a little bit more on the pricing aspect here and just within Arcadia specifically, any color, just how much price was taken relative to the revenue growth in the quarter? and just how much is being assumed in the fourth quarter revenue guide?
Gross
Yeah, so what we're seeing, Ken, is in the third quarter, the revenue growth is driven by price versus volume. What we are seeing in the third and fourth quarters, though, is that the margin has contracted, you know, because we're shipping the backlog out where raw material prices about pace selling prices in particular stuff, things that we're shipping out of backlog. We, what we expect is that as we exit Q4 and get into the first half of 2023, you're going to see a return to normal caught low to mid 30s. and gross margin in Arcadia. Yeah.
Ken
Well, I guess what I'm trying to better understand here is it sounds like price outpaced volumes in 3Q, and I get the point on seasonality for the fourth quarter, but I would assume that the expectation for price is going to be relatively stable, if not higher, depending on where costs go in the fourth quarter. So maybe give us a little bit more color on seasonally. What's the typical seasonality from a volume standpoint in Arcadia, 3Q to 4Q, and just how much of that gap is being covered by higher pricing? And is there a risk that maybe the fourth quarter guidance is potentially too conservative if you have to raise prices more?
Gross
Yeah, again, I mean, a lot of what we're doing is shipping out of that backlog where it's already been priced. So, but we think there's going to be a significant flywheel effect, again, in the first half. As far as your comment around the seasonality, you know, we're talking seven days for the holidays, and so we're just kind of looking at less days to ship in Arcadia for the fourth quarter. It's not any demand destruction that we're seeing in the marketplace. It's strictly the holiday season. That's why we've guided 70 to 75 versus the 80.7.
Kevin Long
Yeah, and I'll add to that, Ken, that we typically take a week at the end of the quarter for holidays between Christmas and New Year's where we're doing inventories, and that's impacting the revenues.
Ken
Got it. That's helpful. You know, we've heard, you know, from a few other, I won't call them perfect comps, but a few other building product peers and others who have exposure to commercial non-residential projects that there have been some modest delays, mostly on supply chain. You know, you maybe have touched on it just in the answer just now, but I'm curious if, um, you have any color or just on conversations with your customers regarding commercial non-rides?
Kevin Long
We haven't seen a slowdown in the order input except for lead time related issues associated with our backlog. And there's a significant amount of uncertainty probably more in the back half of 2023 and into 2024, but we feel reasonably strong about the Western market of the United States for the commercial business and in the markets in which we have our satellites.
Ken Newman
Okay.
Ken
Maybe one more, and I know this is just a longer-term type of question, but You know, just given where you've seen the demand for Dyna Energetics this quarter, you know, your expectations for better margins, and then kind of comparing that to what we're seeing in the macro for well completion activity and what seems to be still some holdbacks on CapEx budgets. I mean, do you have maybe just some color on customer conversations on where they're looking for well completion activity as we enter 2023?
Kevin Long
You know, most of the customers that we're talking to, if not all of them, are looking at a strong exit to the year and start to the new year. And so, you know, we continue to see probably a good market for most of 2023. And our volume is actually picking up. We had a record shipment of our DSA. perforating systems in the month of October.
Ken Newman
And so it's, you know, we feel pretty good about it. Very good. Thank you.
Operator
Okay. The next question is coming from Alec Schabelhofer with Stiefel. Alec, your line is live.
Alec Schabelhofer
Hi. Good afternoon, everyone. Can you hear me okay?
Kevin Long
Yes.
Alec Schabelhofer
Excellent. Congrats on the quarter. Just to start off, I was curious if you can just provide some color in how you've seen the competitive landscape evolve with integrated perf systems versus components versus machine shops assembling products, and just kind of your thoughts around what you're seeing in that space.
Kevin Long
We're seeing more and more of the market move towards the integrated system. And that's both provided by ourselves and there are some of the machine shops that are, if you will, providing a factory assembled system of components that they've purchased from other companies as well as make themselves. And so it's moving to more of a product supplied, a system supplied from a component supplied business to the service company. Understood. And we're having a good year. We believe that we're picking up market share. It's driven by the performance of our product, but also the performance of the company on having a fully integrated system where we take full responsibility for the performance of the perforating system. And that's different than a lot of the machine shops. And also, what's driving our revenue and our market share growth is our ability to deliver on time, as well as the performance and safety of our equipment.
Alec Schabelhofer
Understood. Understood. Thanks for the color there. And kind of shifting gears a little bit to Arcadia, moving forward in that business, have you seen any impact from rising interest rates on demand and I guess to that effect, how do you see that evolving through the next several quarters, just given where interest rates have moved?
Kevin Long
We would expect building activity with the higher interest rates as a broad market to slow down. And I know that the residential market is already reporting nationally, the broad residential market, a slowdown. We have not seen a slowdown in the high end luxury home market for residential. And I believe the commercial market tends to lag the residential market. And we haven't seen a slowdown yet, but we would expect there will be a slower market in the back half of the year and into 2024. However, our order input has been greater than our And so in some respects, we feel that we will not mirror the market as much because of the demand for products in the territories in which we serve.
Alec Schabelhofer
Got it. Got it. That's all on my end. Thanks for the call.
Operator
Once again, if there are any remaining questions or comments, please indicate so by pressing star one. Up next, we have Sameer Tattel with Askalene, or excuse me, Askadan. One moment. Sameer, can you hear us?
Sameer Tattel
I can, yes. I was just waiting for you to finish trying to pronounce the name. My fault for choosing a weird business name. So, hey, guys, how's it going?
Kevin Long
Hi, Sameer.
Sameer Tattel
So I don't really have a question about operating results. It's more kind of a big picture, you know, platform question for you to answer. So if you look at the price of your stock over the past, since call it late June, it's been trading at or below levels that it did through all of COVID, you know, including the day when oil prices were very famously negative, you know, $37 or whatever they reached. Um, so I just kind of wanted to give you the opportunity to, you know, maybe take a step, take a step back from the quarter and just address, you know, what do you think that the market is misunderstanding about your story? Right. Is it, is it, they think that for example, Arcadia is more cyclical than it is. Um, is it, they think that, you know, the oil patch is kind of going to evaporate next year and you're going to go back to not making profits. So just an open-ended question. If you, if you have anything to opine about, thanks.
Jeff High
Samir, this is, this is Jeff. And, um, You know, certainly we're disappointed as well. I think, you know, we're seeing, as our story has changed, we're also seeing a transition in our shareholder base. And there have been the departure of a couple of large shareholders. I will say that the interest level that we've seen from new prospective holders, I don't think we've seen it this high in an awfully long time. And I think we're going through a transition. And I think, you know, I think we all believe that what's going to dictate our performance and our valuation is going to be execution and how we perform. And as Kevin has said, we're confident in where we're headed and in our strategy. And we think that's going to be reflected in our share price.
Kevin Long
Yeah. And I add to that, Samir, that, you know, we're having record shipments in Dyna Energetics. We've got great project business coming in on Noble Cloud. We're very pleased with Arcadia, the management team, the employees, the markets they serve. They've got a very strong backlog. You can see that the performance of the company is improving. Second half of the year is stronger than the first half of the year. We expect that to continue. And And the stock price will catch up as soon as others recognize the value.
Sameer Tattel
Right. No, I've just been scratching my head because obviously you keep reporting pretty strong results. So thanks. Appreciate the time.
Operator
Thank you. Okay. Up next, we have Ken Newman with KeyBank Capital Markets. Ken, your line's live.
Ken
Hey, thanks. Just had one last quick follow-up question here, which was around the wraparound pricing benefits, maybe into 2023, just given what's been pretty aggressive price increases across the three segments, Arcadia especially. Any color on what that carryover benefit looks like for 2023? Is that like a low to mid-single-digit contributor?
Gross
Yeah, I mean, what I would say is, you know, we're guiding 27 to 29 on the gross margin line for the fourth quarter. You know, we expect that to be 30 and plus 30 as we enter 2023 on a consolidated basis. I think the biggest contributor to that is going to be Arcadia followed by DynEnergetics.
Kevin Long
Yeah, and Arcadia will be the uh, inventory working its way through the system at, at, at the pricing that, uh, that we have and hopefully can hold. And on the dynamic energetic side, um, you know, they've, they've done well with volume and cost improvements, customer mix kind of masked the success that they've had on selling prices. And we'd expect the selling prices to also strengthen in the first half of the year. Um, And not only just to capture some of the inflation that we've had, but also to go to margin improvement. And we view our company as a longer-term basis, medium to longer-term basis, as a mid-30s kind of gross profit kind of business.
Ken Newman
Got it. Thank you. Okay, if there are any final questions, please indicate so now by pressing star 1. Okay, there are no further questions in queue.
Operator
I'd like to turn the floor back to Kevin Long for closing remarks.
Kevin Long
Thank you, everybody, for joining us for today's call and your interest in our company. It's hard to believe that I'm going to say that we're going to talk to you in the new year as we finish the fourth quarter and begin a new year for the company. And please have a safe and joyful holiday. Holidays. Thank you.
Operator
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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