Q3 2021 DMC Global Inc Earnings Call
[music].
Good afternoon, ladies and gentlemen, and welcome to the DMC Global third quarter earnings call.
At this time all participants are in a listen only mode and 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.
<unk> of Investor Relations, Sir the floor is yours.
Hello, and welcome to Dmc's third quarter Conference call.
<unk> today are president and CEO, Kevin long 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 statements.
<unk> assumes no obligation to update forward looking.
Has that become untrue because of subsequent events.
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 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.
Call over to Kevin Longe, Kevin.
Thank you, Jeff and good afternoon, everyone activity in Dmc's primary end markets continued to improve during the third quarter.
However, the recovery was accompanied by various short term challenges that negatively affected our operational and financial.
Statements performance.
Supply chain bottlenecks and travel restrictions impact.
Impacted international sales are dine energetics are energy products business.
The delayed deliveries of metal plates slowed manufacturing activity at <unk>, our composite metals business.
These factors led to consolidated third quarter sales that were 4% or $2 $8 million below the low end of our forecasted range.
An important development during the quarter was the improved demand diner experience and its U S onshore oil and gas market.
Third quarter unit sales of <unk> fully integrated factory assembled perforating systems.
Increased 19% versus the second quarter.
This was well above the increase in unconventional well completions, which were up 6% sequentially accord.
<unk> to the U S energy information administration.
As unconventional completion activity accelerates.
The superior safety efficiency and reliability of our DS systems becomes increasingly important to our customers.
This is especially true in a tight labor market.
Since.
Since these systems are delivered just in time to the well site our customers.
Streamline the supply chain eliminate.
<unk> eliminated assembly operations and reduced the number of people on location.
While well completion activity improved during the quarter pricing pressure remains a significant challenge.
Rising labor and raw material costs have only intensified the pressure on margins.
Crude prices have increased approximately 75% since the start of the year and have significantly improved the health of the exploration and production industry.
Operators are now increasing their capital spending budgets.
In anticipation of the coming year, and we believe this should help improve the health and profitability of the industry that supports these E&P companies.
On Tuesday, <unk> announced a 5% global price increase that will take effect on November 20 <unk>.
The increases are intended to offset.
Our labor and input costs as well as the anticipated wind down of the cares Act.
Dining energetic substantial investments in new technologies have resulted in a robust product portfolio that is improve the safety efficiency and effectiveness of our customers operate.
At <unk>.
And has led to increased productivity profitability and job creation in our industry.
The significance of these investments is reflected in the approximately 80 patents we have been granted in the more than 400 patent applications, we have filed.
Our pattern.
<unk> is designed to protect our investments and provide transparency so others can innovate without violating our intellectual property.
Despite this a number of competitors are selling products that we believe infringe on dine energetics patents.
During the third quarter, we intensified our legal.
<unk> construction against several of these companies spending $2 $3 million on patent litigation.
We intend to continue these expenditures until the issues are resolved.
Our commitment of resources to this process reflects our belief that intellectual property is not protected.
The incident.
<unk> access to innovative loss and the sustainability of the industry is threatened.
The outlook in dining energetics international markets is improving.
<unk> recently entered into a global supply agreement with a large international service company.
And also was awarded.
Incent middle Eastern projects.
Projects that will be shipped over the next few quarters.
Based on current activity all indications are that 2022 will be a strong year for dining energetics international business.
At Novo cloud interest continues to grow for the new debt.
Good to make product offerings, and we anticipate initial orders by early next year.
In addition pricing continues to strengthen for various clouding metals and <unk> improved its commercial organization.
And strengthened its sales team and market specialists.
We are encouraged by the.
Net of funding and economy.
Improving demand in our key markets.
We have maintained a strong financial position and operate two highly innovative businesses that continue to lead their industries.
With that I'll turn the call over to Mike for a review of our third quarter financial results and a look at fourth quarter guided.
The strength Mike.
Thanks, Kevin third quarter sales were $67 $2 million up 3% sequentially and up 22% versus last year's third quarter.
Diana Energetics reported third quarter sales of $44 $2 million up 5% sequentially and.
And 29% versus the same quarter last year.
North America sales increased 14% sequentially, while international sales decreased 38% sequentially.
Sales at Nobel <unk> were $22 $9 million down, 1% sequentially and up 9% versus last year's third quarter.
<unk> consolidated gross margin in the third quarter was 25% down from 26% in the second quarter of 2021 and flat compared to last year's third quarter.
Third quarter gross margin benefited from improved project mix at <unk>, which was offset by a decline in international sales and higher material cost of dine energetics.
Diane Energetics reported third quarter gross margin of 22% versus 25% in the 2021 second quarter and 24% in last year's third quarter.
Gross margin in all 2021 quarters includes the effects of employee retention credits related to the cares Act, while last years third quarter benefited.
<unk> margin international sales that were approximately $4 6 million greater than this year's third quarter.
Nobel clad reported third quarter gross margin of 30% versus 28% in the second quarter and 26% in the year ago third quarter, primarily due to improved project mix.
From higher Cares Act credits also contributed to higher gross margin versus last year.
Looking at our third quarter expenses consolidated SG&A of $15 $3 million increased 9% versus the second quarter and 32% versus the year ago third quarter.
The sequential increase primarily relates to step.
Mix patent litigation expense of Dine energetics.
We reported consolidated operating income of $1 1 million third quarter net income was $403000 or <unk> <unk> per diluted share.
Adjusted net income of $1 2 million or <unk> <unk> per diluted share in last year's third quarter.
Up and to EBITDA was $5 $8 million versus $6 million in last year's third quarter.
<unk> reported third quarter, adjusted EBITDA of $3 $6 million, while Novo cloud reported adjusted EBITDA of $4 6 million.
We ended the third quarter with cash and marketable securities of 182 million.
Adjusted for raising $123 $5 million and the equity offering in May our total outstanding share count is now $18 7 million.
Looking at guidance fourth quarter sales are expected to be in a range of $68 million to $74 million versus the $67 2 million reported in the 2021 third quarter.
Hi.
At the business level Dine energetics is expected to report fourth quarter sales in a range of 46 million to $50 million versus the $44 $2 million reported in the third quarter, we anticipate that international sales will bounce back in the fourth quarter <unk>.
<unk> sales are expected.
Quarter to $22 million to $24 million versus the $22 $9 million.
Reported in the 2021 third quarter.
Nobel Class fourth quarter sales forecast includes $8 $8 million related to a previously announced order from the chemical industry receipt of the raw materials required to produce the order had been delayed due to supply chain model.
<unk> and <unk>, while <unk> still expects to receive the materials and ship the order during the fourth quarter. There remains a risk that some or all of the shipment will occur after year end.
Consolidated gross margin is expected in a range of 23% to 24% versus 25% in the third quarter.
Fourth quarter, selling general and administrative expense is expected to be approximately $15 million to $16 million versus the $15 3 million reported last quarter.
Amortization expense is expected to be approximately $200000.
Adjusted EBITDA is expected to range of $5 million to $6 million versus the $5 eight.
$8 million in the third quarter of 2021.
The fourth quarter adjusted EBITDA forecast includes litigation expense of $2 million and assumes the previously enacted cares act legislation remains in effect through year end.
Fourth quarter capital expenditures are expected in the range of 2 million to $4 million <unk> full.
X rate as expected in a range of 31% to 33%.
With that we're ready to take any questions operator.
Ladies and gentlemen, the floor is now open for questions.
If you have any questions or comments. Please press star one on your phone now.
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Your first question is coming from Tommy Moll.
Your line is live.
Good afternoon, and thanks for taking my questions.
Yes, good afternoon Tommy.
Kevin I wanted to start on the price increase you recently announced for <unk> energetics specifically.
If you could give us an update on the industry and competitive environment. There. What gave you the confidence to go ahead and move forward again with implementing the increase and then in terms of the timing I noted.
Like it's set to become effective late November so not a whole lot of volumes there.
First of the year should we think of this strategically is.
And the message for the.
For the customer base and really start thinking toward their 2022 outlooks, because thats just given thats right around when that there'll be a big budget.
Ladies and for next year on presumably a much higher crude deck.
Currently in place.
Yes.
Tom Tommy I think you've read that well it is a messaging.
Prices need to go up in our industry.
The price increase that we announced.
Planning in the first quarter to take effect in the second quarter actually we did not get.
Support from the industry on that price increase and so we ended up rolling that back.
Which.
And impacted our initially impacted our volume in the.
The second in the beginning of the third quarter.
We rolled that back and you can see what happened to our North American land based business in the in the third quarter.
And so.
The.
Price increases is surely needed prices are down significantly from where they were.
We're <unk>.
Previously.
There it is healthy for our industry.
We are seeing labor and material costs increases of supply chain cost increases.
And there is a cares act that.
And for some companies will fall off.
And the.
In the beginning of the year and so this will be the first of what will probably be two or three price increases over the next 12 to 18 months.
That's helpful. Kevin Thank you.
Also hoping we could get an update on your M&A pipeline any way you could.
And for US in terms of number of deals you've looked at potential timing any update on on priority end markets anything you could offer would be helpful.
I think the only thing that we can say there.
Tommy is that we're active.
And we've looked at some interesting things.
Characterize less quantity than it is quality and strategic fit with our company.
And.
But we don't have anything that we can talk about at this time.
Fair enough and if I could slip one more and this is probably for Mike.
Mike just looking at.
Our full year guidance on the tax rate.
Im doing my math correctly, I've got to assume a pretty high.
In Q4.
And I just want to understand if maybe I missed something there or if there's something squarely about the fourth quarter that you could clarify.
As it will impact everyone EPS assumption for the next quarter.
Yes.
Tommy our tax rate is back end loaded because we have discrete items in the first half of the year that drives the rate down.
So therefore getting back to a 31% to 33% rate requires a higher back end right. So you are.
Reading that right.
That's very helpful. Thanks for the time and I'll turn it back.
Okay. Thank you Tom.
Your next question is coming from Steven Chin Garro.
Your line is live.
Thanks, Good afternoon everybody.
Good.
Stephen So a couple of things and wanted to just follow up on <unk>.
Tommy's first question.
With the price increase you announced earlier this week or the push to get it through November.
Are you.
Are you seeing a change in behavior from your peers yet.
Afternoon is it higher activity expectations.
What's giving you the confidence.
Hey, you can get this through and then be your subsequent comment you expect a couple more in the next 12 months.
Yes.
We have seen.
Our hearing both through.
What's his calls and some activities in the marketplace.
A couple of our <unk>.
Our major competitors, who also feel that they need to increase prices to return margins to where they should be.
So I think that we're going to see generally more support from.
Learning from a market standpoint.
And the ultimate end use markets for our E&P customers are strong.
I think the.
The lack of.
Being able to push through a price increase to date has more been driven by our.
Customer market.
<unk> the wireline service companies has been oversupplied relatively fragmented.
There's been a lot of competition among our customers on price.
And so we've seen a lot of buying on price from.
From the general market.
And Theres a number of service companies.
From a fully adopted.
Adjusted time.
<unk> delivered to the well site model, where they've maintained the vertical integration.
Building perforating guns.
So so the.
The industry is kind of.
I guess reverted to kind of a component industry in a low price market.
We haven't seen as much system sales from the major companies and we've seen a lot of.
The the smaller machine shops that are.
Megan.
Two of them partially assembled.
Harriers and carrying the litigation risk if you will by violating our IP.
Be a larger part of the market.
And.
And we think that that.
Part of the market is going to be challenge not just by.
Our.
Legal actions.
Making but also by their own lack of profitability.
And rising material costs.
So we feel we're in a.
Pretty good position.
Longer for some of the.
Attrition and consolidation that we think is necessary in our market to take place.
<unk>.
But at the end of the day.
Our systems are lower in cost for our service company customers, even though the initial price may be higher we do.
Get a premium over.
Other systems.
But we are supporting our customers.
<unk> right now who are competing against other wireline service companies that.
Or with a more commodity like.
Component.
Mentality at this time.
Okay, and then as we as we that's helpful and as we think about the <unk> guide.
<unk> you mentioned.
Mike mentioned international recovering a bit, which which kind of sounds like you.
U S dyno pretty flat and Thats, a little surprising given.
Which probably activity growth, what we're seeing as far as rig is that is that year end seasonality concerns are.
We also know that.
I should be thinking about.
There is a little bit of seasonality in North America, but we're actually.
Buying volume mode.
Operating systems that we're making.
Are pretty healthy.
What we need to.
As the price increase starting to take hold.
And.
And we also expect the.
Number of completions to accelerate.
Going into 2022, Theres somewhat been a slowdown in completions with.
See the docs have been drilled but.
Not completed inventory declining dramatically over the last couple of quarters.
And capex moving more towards drilling.
But thats just bodes well for completions in the new year and so we're very excited.
Bob.
The hand that we have going into the new year.
Steven just quickly this is Mike on the international front I mean, we see that.
In the 6% six six to six five range in the fourth quarter up $4 six in Q3, So I still show in North America.
Cited are growing.
The bottom end of kind of what we're thinking North America is going to.
We're going to do for dine energetics. So we still think that's going to be on the bottom end flat to slightly up and with some upside to that.
Okay. Okay. That's helpful.
And then just one more.
More from me.
When you think about.
When you think about your history, and then you sort of look at looking ahead to 2022.
I believe and I've got to check the numbers exactly but your incremental margins your incremental operating margins on the <unk> I guess on both businesses.
<unk>.
I'm thinking specifically.
<unk> been really healthy right they've been kind of.
I think Kevin you sort of referenced like a 40% mark.
When things are normalized.
He is.
Should we expect.
That type of incremental next year as we go through <unk>.
Really.
Pricing XP.
Expectations off of weak pricing plus activity growth.
Sure Dan This is harper.
Yes, I think so.
Youll definitely see the incremental margin improving as the year goes on.
We're.
Given walking into.
Walking through our price increases staging those throughout the year.
And at the same time that the volumes picking up.
I will say too we require.
Significantly fewer people at the well site and in our search.
Company <unk>.
Customers operations and in a tight labor market.
Volume is picking up.
It plays into our.
Integrated systems delivered to the well site both.
Should see.
An improvement in share and in.
<unk> coming in margin as we get the price increases implemented.
We.
So we should see that unfolding as the year.
Continues.
We probably won't get to that 40% by the end of the year, but we should be fairly.
<unk>, Mike you want to yes.
As a reminder, novo applied is usually in that 40% to 45% range and historically on the contribution margin level and dine Energetics has also been in that 40%, 45% range and so I think as we enter 2022.
Early on as we get price increases we're going to be in the low thirty's on that contribution margin as we get a couple of price increases across I think we're going to start to approach at 40% contribution level as we exit.
You can get in the back half of 2022 and exit 2022.
Okay great.
Great.
I'll get back in line. Thank you.
Once again, ladies and gentlemen, as a reminder, if you have any questions. Please press star one on your phone now.
Your next question is coming from Taylor's Archer.
Your line is live.
Hey.
Mike Thanks for taking my question My first one is on.
Daina.
Sure.
Hopefully you guys could just give us a bit more color on the walk down and margins at least at the adjusted EBITDA line Diner Q3 versus Q2, you talked about some of the issues going on internationally and there was a less favorable.
<unk>, which is pretty clear.
But.
In total I suspect that the volumes were up they certainly were in North America.
Essentially so.
Could you maybe talk to what the margin differential is between international and North America and whether.
Margins in North America might have actually taken.
Hey, Kevin Blair sequentially.
Some of these inflationary items.
<unk>.
Kind of ramped up more dramatically than you might have thought previously.
Yes, so by Taylor I think that when you look at <unk>, 25% gross margin in June quarter.
<unk> versus September quarter, a 22%.
The largest driver there was really the lower international mix, which does carry higher margins than what we have here in the U S. We also at the supply chain issues, we had some.
Raw material.
And inflation driving that.
Take a little but the largest factor was the mix driving us from 25% to 22%.
Okay, and as we think about a 5% price increase for November and beyond.
Does that just keep margins flat on a unit economic basis or is there some.
Net.
As winton embedded in that 5% increase.
There.
Excluding the cares Act.
A fair amount of net momentum and that Taylor.
Yes.
We're in a fortunate position, where we feel that we are managing our supply chain.
<unk> very well from a cost standpoint.
And a lot of the inflation that we've seen is already embedded in the margins.
And.
And we're happy with our volume picking up we have.
One challenge one challenge only and Thats too to continue the work the.
Industry through the merits of switching from a component driven business to a systems business.
<unk> systems business.
It is strong and intellectual property.
And.
And restoring some of the pricing.
That our customers are.
<unk> are supportive of but they were competing against other.
Service companies, who are less price focused.
And margin focused and so.
We're in a strong position and.
And we also have the capital in place.
Not only for the.
Our demand, but for the demand that we see over the next 18 to 24 months.
Okay and last question for me is on International and Diana you talked about I think you said a supply agreement with a large international service company and then a few a couple of awards and in the Middle East.
As we think about the next 12 months or maybe just through 2022.
International is a bunch of at least activity tailwind working in its favor for 2022 I was hoping you could maybe just frame some realistic expectations for growth internationally. In 2022 do you think 2022, you can get back to where you were in.
The existing 'twenty from an international sales perspective or.
It's still a little bit of a longer term story there.
We actually feel that 2022 will exceed where we were in 2020 internationally.
Yes.
The.
This quarter was it was a tough quarter.
20 internationally, but whats the.
The projects are the large tenders that were recently awarded and most importantly the.
The.
Service agreement that we have with one of the leading customers.
International companies.
Is really going to strengthen our.
International sales and we think exceeded.
Quite a bit.
Got it thanks for the answers.
And in fact, when I say quite a bit we should be up 20% to 30% over where we were in 2020.
Makes sense alright, thank you.
Okay.
And your next question is coming from Gerry Sweeney.
Your line is live.
Hey, good afternoon, guys. Thanks for taking.
On my call.
Yes, good afternoon Jerry.
Wanted to just one real question.
On <unk> most of the stuff that <unk>.
Picked over but obviously.
Some inflationary pressures metals et cetera, if we hearken back to Novo glad I don't know the last sort of metal cycles. We saw it turned out to be pretty positive I think part of your customers either you do the purchasing of metals and pass through the cost and there is even a markup on that is there an opportunity.
<unk> to see some improvement in <unk> just from metals pricing.
The trend continues.
Yes, and while we're not in the.
Given guidance for the next year yet.
Okay.
<unk> is a.
Very has a differentiated product and service if you will.
<unk>.
And they have a very strong history and.
And process for.
Pricing by project and generating a 43%.
Percent on average.
Contribution margin that is based on the costs of the.
The materials that are incorporated into the project at that time.
<unk>.
<unk>.
When they quota project.
Project is dependent.
The price is dependent on.
The price of <unk>.
Metals.
At time of order and then we place orders locked into those metals.
And it's reflected in.
A constant margin for that business.
The most of their projects are out.
Several months.
And.
We're starting to see.
Higher metal pricing flowing through the quoting process and at the orders that are being placed.
And it goes right into driving.
The revenues North if you will.
So we feel that.
There is good momentum going into.
The new year.
C R.
For <unk> in terms of metals pricing.
So constant margins. So margins are the same but gross profit dollars off just because the price.
Size of the project costs are up as well right.
Quite a bit yeah, yeah got it okay.
That's.
That's it for me I appreciate it thank you.
Okay.
Your next question is coming from Steven Chin Garro.
Your line is live.
Thanks.
Two other quick ones, Kevin maybe maybe the first one is not so quick actually but when you.
When you think about the dine in business and you look at.
Kind of where you were a few years ago.
Alex starting to gain immense traction in the market right and you guys. Obviously had a had a huge huge run both driven by activity, but also kind of an acceleration in the adoption of your technology.
And then you're.
And you look out to 'twenty, two 'twenty, three which look like they are going to be pretty strong years based on E&P spending budgets and where commodity prices are et cetera.
What's different is there something that's different whether it's the competitive landscape, whether it's the way the customers are are.
Taking.
In your technology is there anything that's changing or is it just a matter of.
Of activity growth.
And then the ability to kind of realize the the value you bring to the well site.
One of the things that's changed is we have a.
A handful of.
These machine shops.
That are making.
Partially assembled carriers, which are.
Approximately half the cost of.
Of a perforating gun.
Our perforating system.
And by lighting, what we believe is violating our intellectual property and.
<unk>.
<unk>.
And enabling them to to assemble components.
A.
Buy externally.
Appropriating system that has some of the features that our system has.
Yeah.
Not.
These companies aren't vertically integrated in the energetics primarily.
The systems are.
Matched components.
Don't have the same operating safe.
Safety and performance features as ours and significantly they violate our.
Our IP.
We're actively going after these companies too.
Stop them from.
Using our IP.
On how they assemble these carriers.
And we feel that we have had solid progress on all fronts on the legal side of it.
A lot of the.
Stuff that we've been involved with legally has been.
Jurisdictional, our procedural jockeying around but it hasnt been substantive.
And.
And we expect to.
Positively impact.
Our competitive landscape on our intellectual property over the next year that will.
Enable our business to continue the same dynamics that we have been.
2017, 18 1920.
We've made.
Maintaining our position in the market.
It's just been a very unsettled market.
Over the last couple of years.
We expect it to be more normalized going forward.
Great. That's helpful. Thank you.
And then just one quick one for me.
I think you referenced 19% sales growth.
Unit growth in the in the U S.
In the quarter.
<unk>.
When we look at activity growth from 2022.
Would you expect your.
Obviously, we'll see what happens with price, but would you expect your your volume growth to outpace underlying frac stage growth.
We would and we expect to continue to gain share in this marketplace.
And so we see unit volumes going up.
Greater than 10% probably in the 10% to 20% range.
And we expect price.
<unk> to go up another 10% in the coming year.
But we're not in and the point of getting giving guidance yet for 2022, but we see share volume and pricing all.
Benefiting dynamic <unk> in the coming year right.
Alright.
Thank you for your help.
Okay.
Your next question is coming from Tommy Moll.
Your line is live.
Thanks, Kevin I, just wanted to make sure I understood correctly, a couple of minutes ago you referenced.
The contract award for for Diana on the International.
National side should drive some.
Some pretty substantial growth.
Internationally next year.
I think I heard that correctly and did I hear you gave a range somewhere in the 20% to 30.
<unk> percent range and just any other context, you could give us around that would help.
Yes.
We should see.
20% to 30% with.
Three things, there's two large tenders that that business has been successful securing.
And a contract with a large service company.
Great. Thank you for that clarification I appreciate it I'll turn it back.
Okay.
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 everyone for joining our call today.
While this was a difficult quarter, we believe the fundamentals are improving for our businesses.
The recent price increase a diner.
<unk> is an important first step towards improving our margins and we are encouraged by the strong increase in demand, we are seeing or dining energetics product offering in North America and.
And by the strength that was mentioned earlier.
Earlier on our international business.
We also are feel quite strong.
The pricing dynamics or that.
<unk> will have for the metals that goes into their products in the coming year as well as the new applications for data pipe.
We remain very confident in the strength of DMC and we look forward to speaking with you again when we.
Strong fourth quarter results. Thank you.
Okay.
Thank you ladies and gentlemen, this concludes today's event you.
You may disconnect at this time and have a wonderful day. Thank you for your participation.
Yes.