Q2 2021 DMC Global Inc Earnings Call
[music].
Good afternoon, ladies and gentlemen, and welcome to the DMC Global second quarter earnings call.
At this time, all participants have been placed on listen only mode on the floor will be opened for your questions and comments following the presentation.
It is now my pleasure to turn the floor over to your host Geoff High VP of Investor Relations, Sir the floor is yours.
Hello, and welcome to Dmc's second quarter conference call presenting today are president and CEO, Kevin Longe and CFO, Mike Cuda I'd.
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 todays 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.
<unk>.
<unk> 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 DMC Global Dot com. After the call. In addition, a telephone replay will be available approximately 2 hours. After the call details for listening to the replay are available on todays news release and with that.
I will now turn the call over to Kevin Kevin.
Thank you, Jeff and good afternoon, everyone.
Dmc's second quarter sales of $65.4 million were up 18% sequentially and 51% versus the second quarter of 2020.
The increase reflects improved economic conditions within several of our end markets.
<unk>, our energy products business reported greater demand force.
<unk> perforating systems due to a stronger energy prices and a corresponding increase in well completions.
Global cloud, our composite metals business reported increased product shipments.
And the receipt of a large order from the chemical industry.
Fundamentals in the oil and gas industry are improving and leading operator and service companies are accelerating their adoption of fully integrated perforating systems that simplify operations reduce costs.
An enhanced well performance.
<unk> has led a technical revolution in the perforating industry in recent years and its eyas to initiating systems and DS factory assembled integrated perforating systems remain the safest most efficient and best performing solutions on the market.
Integrated Perforating systems delivered just in time to the well site.
Lower manufacturing and assembly costs reduced personnel on trucks, lower the cost and complexity of the supply chain and increase overall service quality and result in better performing wells for the operator.
During the downturn several machine shops took advantage of the industry's instability and incomplete transition to integrated systems.
Introducing low cost on differentiated carrier assemblies.
The components for these pre wired carriers are supplied by various.
Shaped charge, an energetic manufacturers that have not fully commercialize their own integrated perforating systems.
We believe many of the pre wired carriers in the market incorporate features that violate dine energetics patents.
And we are taking aggressive legal action against the companies that make these products.
<unk> has made significant investments in technologies and products that have improved the safety efficiency and performance of its customers well completions and have enhanced the effectiveness and profitability of the industry as a whole.
Our patent strategies designed to protect these investments and provide transparency so others can innovate without violating our intellectual property.
As we previously have stated if intellectual property is not protected the incentive to innovate is lost and the sustainability of our industry is at risk.
DMC second quarter sales were approximately 2% below our forecasted range and this shortfall was directly related to continued weak pricing across north America's oilfield services industry.
In February dynamic <unk> took an initial step towards restoring margins by announcing a 5% price increase that was implemented at the beginning of the second quarter.
However by the end of the quarter. It became apparent few if any other manufacturer supported have returned to acceptable margins and we decided to push full implementation of the increase into the second half of the year.
North America's exploration and production industry is healthier today than it has been in several years.
Many operators have said they are anticipating price increases from their service providers, particularly in light of escalating raw material costs.
We expect price increases during the second half of the year will hold especially for companies selling differentiated products and services.
That significantly improve the performance of the industry.
During the second quarter <unk> was awarded an $8.8 million dollar order for titanium clad plates that will be used to fabricate specialized pressure vessels and heat exchangers there.
This equipment will be used in the construction of a chemical plant in southeast Asia that will produce PTA.
As an organic compound used in a variety of products, including polyester.
The European firm that engineered the plant's selected <unk> based on its ability to meet the end users exact exacting manufacturing specifications and tight delivery schedule the.
The place will be produced at <unk> per day.
Product, Pennsylvania facility, then shipped to China for fabrication.
Shipments are scheduled for this year's third and fourth quarters.
The order is 1 of several large projects <unk> been pursuing over the last several quarters and we are optimistic there will be several more to follow.
A side effect of the COVID-19 pandemic has been a slowdown in <unk> repair and maintenance work, which is principally performed for the downstream energy industry <unk>.
Activity in this sector tends to lag the cycles of the broader economy. So the timing of the large PTA order will help offset the effects of the slowdown.
We expect downstream activity will begin to recover during the coming year.
This week <unk> announced a new cloud pipe product designed to provide greater fracture toughness and better overall performance versus solid zirconium or titanium pipe.
The product called that a pipe will be marketed for use in high pressure high temperature chemical on metal processing environments.
The data pipe introduction is another example of how <unk> product and application development group is successfully expanding our addressable markets.
In recent years. This team has developed innovative solutions for the engineered wood sector and for the gold processing industry, where <unk> titanium clad plates are currently being used to construct.
2 of the world's largest pressure oxidation auto claims.
The improving conditions in our markets is encouraging and dining energetics and notebook Platte are ready to capitalize on the growing demand.
In addition, the follow on equity offering we completed during the second quarter further enhanced our financial position as well as our ability to pursue long term strategic growth objectives.
With that I'll turn the call over to Mike for a review of our second quarter financial results and look at third quarter guidance Mike.
Thanks, Kevin.
Second quarter sales were $65.4 million up 18% sequentially and up 51% versus last year's second quarter.
<unk> reported second quarter sales of $42.3 million up 11% sequentially and 79% versus the same quarter last year.
International sales increased 13% sequentially, while north American sales increased 10% sequentially.
Sales at Nobel clad were $23.2 million up 33% sequentially and 18% versus last year's second quarter.
Consolidated gross margin in the second quarter was 26% up from 23% in the first quarter of 2021.
15% in last year's second quarter, the increase from the year ago second quarter, primarily relates to better fixed cost absorption.
<unk> employee retention credits under the cares Act.
<unk> reported second quarter gross margin of 25% versus 22% from the 2021 first quarter and 8% in last year's first quarter. The margin improvement from last year, primarily relates to improved fixed cost absorption higher average selling prices here's at credits.
Nobel <unk> reported second quarter gross margin of 28% versus 26% in the first quarter and 25% and year. The second quarter, primarily due to improved project mix Cares Act credits also contributed to higher gross margin versus last year.
Looking at our second quarter expenses consolidated SG&A of $14 million increased 6% versus the first quarter and 15% versus the year those second quarter.
We reported consolidated operating income of $2.7 million in the second quarter.
Second quarter net income was $1.7 million or <unk> <unk> per diluted share versus a net loss of $5.6 million or <unk> 38 per diluted share in last year's second quarter.
Adjusted EBITDA was $7.5 million versus negative $1.8 million in last year's second quarter.
Don Energetics reported second quarter, adjusted EBITDA of $5.3 million, while Novo cloud reported adjusted EBITDA of $4.3 million.
We ended the second quarter with cash and marketable securities.
On the $181.3 million after raising $123.5 million and our follow on offering in May.
Our total outstanding share count is now $18.7 million.
Okay.
Looking at guidance third quarter sales are expected to be in a range of $70 million to $73 million versus the $65.4 million reported in the 2021 second quarter.
At the business level Dawn Energetics is expected to report sales on a range of $46 million to $48 million versus the $42.3 million reported in the second quarter.
We expect continued improvement in North America to be partially offset by lower international sales at Diamond Energetics Nov.
<unk> sales are expected in the range of $24 million to $25 million versus the $23.2 million reported in the 2021 second quarter.
Consolidated gross margin is expected in the range of 24% to 26% versus 26% in the second quarter.
Third quarter, selling general and administrative expense is expected to be approximately 14, 5% to $15 million versus the $14 million reported last quarter the sequential.
Increased primarily relates to head count additions for commercial resources digital initiatives restoring variable compensation resuming travel.
Amortization expense is expected to be approximately $225000.
Interest expense is expected to be in a range of $80000.
Adjusted EBITDA is expected in the range of $6.5 million $8.5 million versus $7.5 million on the 2021 second quarter.
Third quarter capital expenditures are expected in a range of $4 million to $6 million.
<unk> full year tax rate is expected in the range of 31% to 33%.
We are not providing full year financial guidance, however, pricing at <unk> is expected to improve during the second half of the year, which should offset the impact of inflation on materials labor and benefits from employee retention credits under the cares Act that are expected to roll off in the fourth quarter of 2021.
With that we're ready to take any questions operator.
Yeah.
Thank you ladies and gentlemen, the floor is now open for questions. If you have any questions or comments. Please press star 1 on your phone now.
We ask that will posing your question you. Please pickup your handset Anthony on speaker phone to provide optimal sound quality. Please hold them on the light pole for questions.
Your first question is coming from Stephens, Inc.
Your line is live.
Yeah.
Thanks, and good afternoon gentlemen.
Steven.
So I have 2 or 3 things.
Well I'll just start quickly because Michael was just talking about gross margins in the in the next quarter and the.
Guidance.
Can you give us additional color on kind of how you think.
Gross margins can play out over the next several quarters on I understand.
The raw materials side.
It seems conservative to me.
The third quarter, but that's probably because I don't have as much color on some other moving pieces behind the gross margin guide. So is there anything you can add there too.
Shed some light on.
Yes, Stephen so when I gave the guidance, 24% to 26% in both businesses, we're getting a bit of unfavorable mix I'll start with Don energetics.
So that's really key geographic mix.
In the third quarter, if you look at the second quarter, what we call international.
Was essentially <unk>.
7.5 million.
International sales, we think thats going to probably be 5.5 to 6 in the third quarter, So youre getting more growth.
On the North American side call it 15% to 20% and then we're going to step back and international that's more timing of orders we did pull some forward.
Into the second quarter, so you're getting that on.
The diet energetic side and Youre also getting that on the Nobel clad side, so a bit better of mix and novo upside in the second quarter.
Then in the third quarter.
Now there is there is definitely upside to the margins.
Over the short medium and long term.
So we've.
Haven't modeled much in the way of price increases in there and so we should get price increases.
Coming out on the third quarter fourth quarter and moving forward. So we expect price increases to take hold so.
There is definitely some <unk>.
<unk> to move up from those numbers on price increases.
You said international banner in the second quarter was $6.5.
And the second quarter, Don Energetics International was 7.5 so thats everything except.
The U S and Canada was $7.5 million and Thats, probably going a step to.
That will probably be 556 in the third.
Okay. Okay.
The other thing we've seen.
So on consolidation on the on the wireline front.
And I was just kind of curious about how you're thinking about.
The impact of some of that consolidation on on your business right because we're thinking about maybe they get better pricing, which is good for you, but then I think at least 1 of the deals is up.
PERC business, which came with it I'm just trying to think about how how the landscape is evolving and.
How that plays into Diane organic share in growth as we move forward.
Okay.
Steven.
Fully.
Specter expected the consolidation to begin taking place in this year.
The consolidation is required or needed.
And in addition to consolidation there will be attrition and rationalization of some of the supply.
In the wireline service market and Thats healthy for the industry. It is healthy for our company.
And.
And so we're we're pleased to see it happen.
And.
Regarding the.
I think there were there are 2 acquisitions.
Public company in the second quarter or recently announced.
Those companies use our products or have used our products.
And.
And so we're encouraged by the strengthening of.
That business quite frankly.
And just as we think about.
<unk>.
The share.
<unk>.
And maybe if you look at the total per market and.
And the integrated systems separately, but how do you think your shares.
And how do you think it does evolve going forward.
Yes.
Our share has been fairly constant during this difficult marketplace.
And.
It grew quite a bit.
From 17 to 18 into 19 'twenty it's held.
In 'twenty and current cash.
Currently held in 2021 and we.
We did not expect to pick up share or increase our share significantly.
In a market that was in turmoil and price was the primary driver.
As.
As we go into the second half of this year on into next.
On performance and quality service delivery availability is more important than price, we would expect to see our share pick up from its current levels and right now, it's plus or -20% of the perforating systems market.
Okay.
Great. Thank you.
Your next question is coming from Tommy Moll.
Yes.
Good afternoon, and thanks for taking my questions.
Yes, Hello Tommy.
Kevin I wanted to start on the topic of the litigation that you referenced and you mentioned a couple of times.
What's going on among the machine shops, and some of the large energetics manufacturers in your industry.
So I guess just on the litigation.
What can you provide just to update us on where things stand.
And what's on the docket looking ahead.
To the extent you can give us that visibility and then as it related point Kevin.
And maybe premature to know but.
Is there a potential pathway here.
That's a win win win for all industry participants.
Could occur outside the context of that litigation.
Yeah.
So first of all the.
Litigation is quite extensive.
And so it's hard to get into any 1 particular.
<unk>, our situation and nor do we want to do that publicly at least in on.
On earnings Conference call.
And we.
The litigation.
Particularly intellectual property it takes time.
And we've been involved with this for quite some time, so we're starting to see more action taking place within the court system.
Everything that we've seen to date.
We believe.
Supports our position.
And we're confident that we're going to prevail in.
The medium to long term on these.
Cases of infringement.
We've had a couple of smaller.
Cases settle in the recent quarter, which we're pleased to see and we would expect more of that.
To take place as we go forward.
And we are making every possible effort to arrive at a mutually acceptable solution with those who infringe our technology.
And we just feel that.
We innovated and have the.
Intellectual property on expense and developing.
Better solutions for the market and it's our responsibility to.
To make sure that.
Others don't infringe our.
Innovations.
Thank you Kevin that's helpful.
Shifting gears to capital allocation.
You've got substantial dry powder on the balance sheet now.
So I wondered if you could give us any insight on capital allocation priorities and specifically around M&A. What do you want folks to know in terms of your your current pipeline.
Potential timing on any.
Any deals that are in front of you to the extent you could comment.
And how it all ties together under the broader platform strategy that <unk> been pursuing for some time now.
Okay.
On our capital allocation, our 2 existing businesses done energetics and notebook cloud are self supporting in terms of their growth capital.
Through their earnings the capital that we've raised through.
The ATM and the offering that we did in the second quarter is there for.
Longer term growth opportunities.
We are actively reviewing opportunities.
It's not a short term initiative, it's a medium to longer term it initiative and.
And it's 1 of those things.
The color around.
Round it really.
It's quite limited until we have something that we.
That we've completed.
Fair enough I'll turn it back thank you.
Your next question is coming from Kevin as our chair.
Your line is live.
Hey, guys. Thanks for taking my question I just wanted to first circle back on some of the pricing comments you made.
Which I think you described pretty well I guess my question is.
Some of this irrational behavior. If you look at the market today versus maybe a bonds or 2 months ago or even 3 months ago as the pricing situation improved at all over the trailing 3 months basis.
And if not just curious if you could.
Flush out how we should be thinking about the competitive landscape from a pricing standpoint over the back half of the year.
Yeah.
So so the industry during the pandemic.
And the significant drop in demand.
And a significant amount of inventory that existed in the marketplace led to very extensive.
Price competition.
And the margins not just for ourselves, but the other companies in the industry declined during that time period.
And now we're in an inflationary market to some degree on labor and materials.
And we also see the cares act coming off in terms of supporting.
Some of the decisions that other companies have made in the market.
We're optimistic that we'll see a net.
Price increase coming in.
The third and fourth quarter.
We attempted to get.
Price in the second quarter, we realized we announced 5% we realized 1.7%.
Surprisingly.
We did not see or hear of.
<unk>.
Any other oilfield service company following with with price increases in the second quarter, we're optimistic that it's going to take place in the third and fourth quarter.
It's.
Required it's needed for the long term support of capital coming into this into our companies and into this industry.
Got it and just to clarify some of the comments you made there.
Clearly, there's a lot of inflationary items.
Out in the market today with respect to the supply chain and also labor so.
Am I reading your response to my prior question correctly and that you do expect to get some net pricing over the back half of the year above and beyond.
Some of these inflationary items that youre seeing today.
We do and however, we.
We need to see that reflected in the actions of the broader industry moving in.
The same direction that we're trying to pull.
Poland.
And we did not see that in the second quarter.
Understood. Thanks for the answer.
Mhm.
Your next question is coming from Matthew is going go.
Your line is live.
Hi.
Question.
I guess moving to the debtor pipe business, if we could get a little more color on that can you talk about pipeline that you see.
For new product on how the market shapes up does that add on project work you're already involved in is it mostly standalone orders that you see yourself getting involved in and I guess the second follow on question to that is how does the margin profile on pipe business look compare.
To the consolidated clad segment. Thank you.
Yes.
Yes.
So that product is just.
Being announced.
It goes into applications that we're currently working on for other.
Plate.
Products.
And so we're very close to this market.
And it has a very strong value proposition versus.
Solid zirconium or titanium.
So we expect to.
As we work with companies to adopt this product we feel that it's going to be successful and the development period is relatively long when youre going into process environments.
And so it will take time to ramp.
But we do see.
This product.
<unk>.
Several of the other applications that we've been working on.
Increasing the market.
For us for <unk> in the range of.
20, plus percent on a longer term basis, and the margins are at or above.
On the current contribution margins than novel Cloud is currently achieving which are in the low to mid forties.
Yeah.
Got it appreciate that color on maybe just a follow up.
I think you referenced there Mike.
Did I understand correctly that you have additional.
On product development.
If so do you.
Those to be unveiled this year is that fair.
More distance.
Launch.
Yeah.
I think.
We're starting to see it already enter into our backlog this year for some of those applications, having said that the everyday business is low.
<unk> been impacted by the.
The effects of the <unk>.
Pandemic.
We should see it adding to revenues in 2021.
On the coming year as we go forward from where we've been historically.
Yeah.
Great.
Okay.
Yes.
Your next question is coming from Steven Chin Garro.
Your line is live.
Thanks, Thanks for taking my follow up.
Yes.
So I was just I know this question you have a little bit earlier, but I was curious.
On the on the the equity deal on the potential for consolidation.
Can you give us any thoughts on either.
Timeframe Andrew.
And youre looking for whether either the market dynamics.
No.
Capital have how they've evolved and how things are looking sort of on that thought as we think about.
So the timing of something.
That's in the pipeline or could be on the pipeline.
The timing will be medium to longer term.
Steven.
<unk>.
Possibly end of this year, most likely next year.
It's a longer term process and.
So theres nothing right around the corner I want to be clear on that.
And.
On the things that we look for are things that add to our total available market have a similar margin profile to what we have in a normalized market with our current products.
And we're interested in stable to growing markets differentiated products niche market market segments.
And company.
Companies that we can get behind and that helped to accelerate their growth by going from regional to national and national to global.
And.
People are an important part of it strong R&D engineering.
In product development capabilities, and low cap capital intensity.
And we're actively reviewing.
A number of opportunities, but again, they take time and.
And Theres a lot of variables in this process there are outside of our control.
Okay.
Thank you.
Yes.
1.
Follow up on the diner energetics business.
Hugh.
You guys clearly have a very good product.
So and we saw this kind of rapid share gains for a couple of years and then you add last years.
Sort of macro debacle and then there's expectation that we have for kind of a reacceleration.
On the acceleration in the adoption of integrated systems in General and then more specifically yours, and maybe 1 or 2 other sort of leading the way, but it looks like.
You guys continue to lean on.
Sure.
What are you seeing there what are you seeing as far the component inventory, causing price issues late last year, and just sort of the whole dynamic of that business and whether we should think about your growth trajectory in that business.
Outpacing.
Completion, slash frac stage growth.
In the back half of this year.
2022.
Yes.
Well again, we're pleased that we've held our market share on a very difficult price environment.
We do.
Get a premium over.
Most if not all.
Products in this area.
When we came out on the last downturn, we had 3.4% market share that grew to 20.
Plus or minus our estimates.
We've maintained that 20% and a very very difficult demand.
Situation over the last 18 months.
And.
Going into this this current cycle, where things are improving.
We're in a much stronger position today than we were in 17 and 18.
Both in terms of the.
Breadth of our product line, our manufacturing capability as you know we we're we've got the capacity in place and the vertical integration and all the components.
And.
And we feel we are strongly positioned going into <unk>.
Second half of this year.
To next year to serve the market.
In a way that.
Provides the products just in time to the well site at.
On higher performance lower total cost less working capital for the people are deploying those products.
It's very it's a very difficult value proposition to.
To not accept if youre interested in succeeding in this market and we expect our market share to grow in.
We're not trying to be all things to all people I think that's important.
We're our objective is to build.
Build on.
Our market share to roughly a third of the market.
Each also means 2 thirds of the market is available to other people and different technologies.
And so we.
We're very pleased with the position that we have.
And the strength of our balance sheet going into what we see is a beneficial up cycle.
Yeah.
Okay, Great and then just 1 quick 1 for.
Michael.
The costs around.
The.
Patent infringement lawsuits.
Or are they rising.
Are they showing up on the corporate line or are they in the Diana <unk>, Inc.
Yes, Don Energetics line and SG&A, So end to end net G&A section of SG&A.
And.
Around $1.2.50 in the second quarter about $1 million in the first quarter and we're seeing.
Run rate, we've been talked about $1 million on a half run rate as we move forward.
Okay, great. Thank you gentlemen.
Yes Youre welcome.
There are no further questions from the lines at this time I would now like to turn the floor back to Kevin long for closing remarks.
Thank you everybody for joining us today, we look forward to talking with you again at the end of Q3.
Thank you.
Thank you ladies and gentlemen, this does conclude todays event you may disconnect at this time and have a wonderful day. Thank you for your participation.
Okay.