Q4 2021 DMC Global Inc Earnings Call
Please continue to hold ladies and gentlemen, your conference will begin momentarily. Please continue to hold thank you.
[music].
Good afternoon, ladies and gentlemen, and welcome to the DMC Global fourth 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 Geoff High VP of Investor Relations. The floor is yours.
Hello, and welcome to Dmc's fourth quarter conference call presenting today are president and CEO , Kevin long and CFO , Mike Cuda.
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 risks and uncertain uncertainties 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.
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 turn the call over to Kevin Longe Kevin.
Good afternoon, and thank you for joining us for today's call.
2021 was a transformational year for DMC and was marked by both an important acquisition and the continued resiliency of our dining energetics noble cloud businesses.
Each of which navigated a second consecutive year of challenging market conditions in their core energy markets.
Despite the difficult market conditions, our accomplishments were made possible by the expertise and determination of Dmc's employees.
I am extremely grateful for their efforts.
At December 23, 2021, DMC acquired a 60% controlling interest in privately held Arcadia.
A leading provider of architectural building products.
The transaction doubled Dmc's 2021 pro forma sales to $500 million.
And strengthened our pro forma consolidated gross margin.
It also more than tripled the size of our addressable market, which is now approximately $7 billion.
Arcadia is headquartered in Burbank, California and serves both the commercial building in high end residential markets.
The commercial business provides exterior and interior architectural framing systems.
Curtain and window walls doors and entrance systems at.
It serves a broad range of end markets that include commercial offices healthcare higher education retail and civic facilities.
Our <unk> commercial business serves the western and southwestern United States.
Where it has captured approximately 10% market share.
And serves a loyal customer base that includes more than 2000 commercial construction businesses and general contractors.
The Arcadia accustomed division serves the nations high end residential real estate markets.
Based in Tucson, Arizona Arcadia accustomed.
<unk> highly engineered steel aluminum and wood windows, and doors, which itself through a national network of premium window and door dealers.
The business also works closely with architects and custom homebuilders, who specify our <unk> customers' products.
For the past three years, our <unk> customer had been operating at full capacity to address customer demand.
DMC and supporting our <unk> efforts to improve its operating efficiencies and increase its manufacturing capacity.
These programs include implementation of a new enterprise resource planning system, which will help streamline operations and enhance the buying experience for customers.
Our Katy is also designing and procuring equipment for our new energizing and painting facilities that will add production capacity of the primary manufacturing center in Southern California.
The building products industry is forecasting growth in commercial and residential construction.
Particularly in our <unk> geographic regions and end markets.
The investments they are making today will ensure arcadia is positioned to capitalize on strong customer demand and compelling market dynamics going forward.
During the fourth quarter of 2021.
Dmc's consolidated sales increased 7% sequentially to $71 8 million.
DMC did not begin reporting sales from our carrier and.
Until January one 2022.
Fourth quarter sales of dining energetics, our energy products business increased 15% sequentially to $57 million.
<unk> International sales grew 75% to $8 1 million and included a large order in eastern Europe .
Dynamic <unk> sales in North America increased 7% to $42 $6 million.
And exceeded the 4% fourth quarter increase in U S well completions as reported by the energy information administration.
Fourth quarter sales at <unk>, our composite metals business declined 8% sequentially to $21 2 million.
The decline was a result of delays in receiving medals at our U S and European manufacturing plants.
Fourth quarter consolidated gross margin was 18%.
Down from 25% in the third quarter.
The decline resulted from a $1 1 million inventory reserve adjustment of dynamic <unk>.
A less favorable project mix at <unk>.
Approximately $1 million in post acquisition expenses that were reported in cost of goods sold at Arcadia.
<unk> gross margin was 20% a disappointing result in below our expectations.
<unk> announced a 5% global price increase that went into effect on November 20 <unk>.
However, its impact was offset by higher than anticipated inflation and the exploration of the cares Act.
Dining <unk> recently implemented an additional price increase to begin restoring margins and the full effect of the increase should be evident during <unk>.
<unk> second quarter.
Fourth quarter, adjusted EBITDA was $2 8 million down.
Down from $5 8 million in the third quarter.
For the full year consolidated sales were 24 $261 million up 14% from 2020.
Gross margin was 23% versus 25% in the prior year.
Adjusted EBITDA was $22 million.
Versus $19 1 million in 2020.
On a pro forma basis, which includes contributions from our <unk> two.
<unk> 2021 sales were $505 million.
Pro forma gross margin was 28%.
Pro forma adjusted EBITDA attributable to DMC was $50 1 million.
As we enter 2022, we are encouraged by the strengthening of our end markets and our ability to meet demand.
Well completion activity is increasing as oil and gas prices are at multiyear highs.
<unk> continues to sell the safest and most reliable well perforating systems on the market.
And it takes total responsibility for the performance of its systems.
Our systems are delivered fully assembled just in time to the well site.
And they tie up less working capital and fewer people on location.
In the first quarter <unk> introduced a mobile version of its digital App, which enables customers to configure and purchase products from any location real time.
An overview of the App is available on <unk> website.
We believe dining energetics margin performance will improve significantly beginning in this year's second quarter and will benefit from additional price increases.
Later, well completion activity in North America and increased international demand.
<unk> remains well positioned in its markets and our higher priced commodity environment. It is very effective at passing through higher material costs and maintaining its contribution margins.
<unk> is the strongest company in its industry and benefits from our global application engineering team and our global manufacturing footprint.
We believe <unk> bookings and financial performance will improve once supply chain disruptions ease and customer order activity accelerates in current as well as new end use applications.
As I noted, our <unk> and our <unk> accustomed both have developed.
Innovative product portfolios.
Strong brands can have strong leadership and employee base.
The markets are healthy and expected to grow over the next several years.
We have strengthened <unk> portfolio of innovative asset light businesses, serving the energy industrial and building products markets.
I am confident in our prospects for margin improvement and long term revenue growth.
With that I'll turn the call over to Mike for a review of our fourth quarter financial results and a look at first quarter guidance Mike.
Thanks, Kevin looking at fourth quarter expenses consolidated SG&A of $16 $3 million increased 6% versus the third quarter or 30% versus the year ago fourth quarter.
The sequential increase primarily relates to the step up in patent litigation expenses at Dawn energetics.
Fourth quarter operating loss was $5 5 million.
Adjusted operating loss was $1 9 million and excludes $1 6 million in acquisition expenses.
$2 million in stub period operating expenses at our Canadian between December 2003, 2021, and December 31 2020.
Adjusted operating loss in last year's fourth quarter was $736000.
Fourth quarter net loss attributable at DMC was $2 8 million following the acquisition of the 60% controlling interest in our media the calculation for net earnings per diluted share must account for the change in the redemption value of the 40% with <unk> non controlling interest in Arcadia.
Redemption value is estimated at the end of each quarter based on the four nearly used to talk to that a put and call option in the operating agreement.
During the fourth quarter, the adjustment was $4 $4 million when added to the $2 8 million net loss attributable to D&C stockholders, the resulting net loss of $7 2 million.
Or <unk> 38 per diluted share based on $18 8 million diluted shares outstanding.
Fourth quarter adjusted net income attributable to DMT was $840 <unk> per diluted share versus adjusted net loss of $825000 or <unk> <unk> per diluted share in last year's fourth quarter.
Adjusted EBITDA was $2 8 million versus $3 6 million in last year's fourth quarter <unk> reported fourth quarter, adjusted EBITDA of $4 million, while Novo flat reported adjusted EBITDA of $2 1 million.
Debt to adjusted EBITDA leverage ratio at December 31, 2021 was.
Three zero the company's debt to adjusted EBITDA leverage ratio of covenants at the end of the quarter was $3 five zero.
Pmt's net debt to adjusted EBITDA at the end of the fourth quarter was $2 three.
Our total outstanding share count is now $19 $3 million.
Looking at guidance first quarter 2022, consolidated sales are expected to be in a range of 125 million to $135 million.
At the business level at Arcadia is expected to report sales of 57 million to $62 million.
While that energetic is expected to report sales in a range of $48 million to $52 million.
<unk> sales are expected in a range of 20 million to $21 million.
Consolidated gross margin is expected to be in the range of 25% to 27%.
First quarter, selling general and administrative.
<unk> is expected to range of $25 5 million to $26 5 million.
First quarter amortization expense is expected to be approximately $13 5 million and relates principally to the acquired trade names customer relationships and backlog of our key amortization.
Amortization expense is expected to decline significantly once the value assigned our key as backlog has been amortized which is expected in the third quarter.
For the balance of 2022 amortization expense is expected to be approximately $13 5 million in the second quarter $7 million in the third quarter and $4 million in the fourth quarter.
After amortizing the backlog value 2023 quarterly amortization expense is expected to be approximately $4 million.
First quarter 2022, depreciation expense is expected to be approximately $4 million.
And interest expense is expected to be $1 million.
First quarter adjusted EBITDA attributable to the EMC after deducting the 40% Noncontrolling interest in Arcadia is expected to be 8 million to $10 million.
Capital expenditures are expected to be 2 million to $4 million.
With that we're ready to take any questions operator.
Yes.
Yes.
Thank you ladies and gentlemen, the floor is open for questions. If you have any questions or comments. Please indicate so by pressing star one on your Touchtone phone.
<unk> start to remove you from the queue should your question be answered and lastly, while posing your question. Please pickup your handset and listening on speaker phone to provide optimum sound quality. Please hold while we poll for questions.
The first question is coming from Cameron Lochridge from Stephens. Your line is live.
Hi, there good afternoon, thanks for taking my questions.
Yes, good afternoon Kamran.
So Kevin I was hoping we could start at.
At a high level talk about Arcadia, it looks like Capex. This quarter was going to come in around $2 million to $4 million one of the things.
I'm remembering correctly.
You all highlighted that you.
You would bring to the table when you when you acquired or KVM was capital and investment in the business. So just wondering if you could speak a little bit too would you expect that to look like this year.
Specifically around Arcadia.
Any incremental detail you can give us there would be helpful.
Yes, so well first of all we plan.
And the range of.
$8 million to $10 million this year and Capex for Arcadia.
We have already.
Released the purchase order to support their installation of.
Microsoft D 365 system.
And all the associated hardware software and consulting services.
That will range in the $3 million to $5 million expenditure over two year period of time.
And we also are in the early stages of designing.
New Ana dicing and painting facility.
That will be in the 7% to $10 million range also over two year period of time.
<unk>.
And then we have some associated positions that we're putting into the organization.
Which will show up as operating expenses, but from a capital standpoint.
They were in pretty good shape to begin with.
We are adding these systems, which will add both operating efficiency as well as.
<unk> manufacturing capacity to the company.
Great that's very helpful.
Okay on the topline for Arcadia, So 2021.
Down a little bit.
Looking at the right numbers here with the $2 40 was the number.
The $40 million for 2021 correct.
It looks like <unk> will be up slightly versus <unk>.
Can you talk a little bit to the.
<unk>.
Seasonality in the business and just Directionally, what we can expect going forward as the year progresses.
That would be helpful.
Yes.
There is very little seasonality to it primarily.
Based on the markets that they serve.
And.
And right now I think the way to look at the revenues and if you look at the revenues over the last two to three years.
<unk> been in that $2 40 to $2 50 range.
They're capacity constrained by.
The standardizing painting and also supply chain.
Access to extrusion.
The extrusion market is.
Loosening up.
But we do need to add amortizing and painting.
As well as on the Arcadia custom side of it they've done a great job building that company.
And now we need to add.
Some people resources to it.
We will begin to see some of their expansions later in our revenue growth later in the year and into next year, but you can probably anticipate.
<unk> being fairly constant this year based on historical.
Performance over most recent historical performance with the exception of price increases.
They're very good at managing selling prices.
Jim slot in particular.
Leads the organization to make sure that.
The cost inflation that we have is being passed on and he does that very effectively.
And as you might expect.
Back to aluminum costs are going up and that's probably going to drive most of the revenue increase over the next year.
Got it that's helpful. If I could if I could maybe squeeze in one more.
Switching to Diana.
It looks like one point or $1.15 billion.
$1 billion in funding by the administration is going to.
Pass on to clean up some orphan wells in the U S. I was wondering if you could speak to the potential opportunity that Mike.
Provide for Diamond, which you could expect to see there.
Yes, I mean this is Jeff.
The states have all been allocated a certain amount typically in the $25 million range I believe for this in this initial slug.
But that those funds have not yet been there just.
Kind of finding their way to.
The state agencies, which will then work with the operators or the wireline companies to work on these wells. So it's we're still waiting to see what the opportunity is but the fact that the money has been allocated as is an encouraging step forward.
Definitely alright, thanks, guys I'll turn it back.
Thank you Cameron.
Okay. Next question is coming from Steven Gen Garo.
From Stifel. Your line is live.
Thanks, Good morning, gentlemen.
Hi, Stephen how are you I am good thanks.
I Hope you guys are doing well.
A couple of things just to start with the Diana Energetics <unk> guide.
Seems light to me, but I am curious if that is international versus U S mix.
And any sense for.
The U S piece of that.
The.
The international is pulling back a little bit in the quarter and the U S is.
<unk> constant to slightly up.
We're reading about.
Some sand constraints and activity constraints, we don't expect that to last very long.
The well economics are increasing faster than well cost and inflation.
Despite some of the things that are going up in the marketplace and so.
We actually think the activity is going to start picking up but it's going to be more in the second quarter rather than the first.
Mike do you want to add anything to that.
Stephen just just real quick you are absolutely correct. There is a step down.
About $2 5 million in international from Q4 to Q1, and then we see international stepping up significantly Q2 through Q4.
But we do see North America.
<unk> Q4 to Q1.
And the order of.
10%, so we see that we see that stepping up but it's really it's being masked by Ed.
Lumpy sales.
International.
And Michael was international was at $13 million.
In the fourth quarter does that.
For fourth quarter for diet Energetics was $8 one.
International So youre, including Canada, and the U S.
Yes, we didn't we go by North American and International is everything other than North America correct. So we've got $8 one four.
International.
Okay. Okay.
That is helpful.
The.
When we think about the <unk>.
<unk>.
Arcadia business.
I think based on their initial presentation of the DNA. It was like 2 million Bucks for a full year or something like that.
Can you give us guidance on sort of.
How to think about.
The all in.
EBITDA margins for Arcadia.
Yeah, absolutely so the all in margins they've been.
Our run rate of around $60 million in sales.
Ed.
They've been in our run rate somewhere between 11 and $13 million in EBITDA. So that's about a 20% adjusted EBITDA business all in and we obviously on 60% of that.
Got you and that DNA number I throw out is right right. It's about it's about $1 2 million a year.
Yes, right now the.
The D number is a couple million bucks a year as it as it stands so theyre very capital light business VA number amateurs nation as I mentioned in my commentary, we're going to have significant.
Step up amortization for the trade names intangibles customer relationships in backlog so amortization for the first.
Couple of quarters is going to be in the $13 million range longer term run rate on amortization will be $4 million. So DNA on a longer term basis will be six.
And as we as we put capital into the business, you'll see that number go up.
Okay.
I just want to make sure I got your first quarter.
Just making this up if you did $13 million of EBITDA from our Katy do zero in Op, Inc. Because of that amortization step up.
Yes, correct correct right okay.
You guys just want to make sure I was understanding that.
Step up in amortization was in fact part of the guidance numbers that you gave right.
Yes, correct when we when we talk adjusted EBITDA $8 million to $10 million on the guide, we're adding back that amortization.
Okay. Okay.
And so what we're yes, yes, exactly where and we're deducting our adjusted EBITDA adjusted EBITDA attributable to <unk>. So it eliminates a 40%.
Thats attributable to the Noncontrolling interest.
So the eight to 10.
Will be representative of a full 11 or $12 million from.
From Acadia or is it.
Eliminating the amortization excluding it.
It will it excludes the EBITDA from that business.
The eight to 10.
<unk>.
Yes, correct so hyped.
Hypothetically, if we're forecasting 10 million consolidated 100% Arcadia EBITDA, when we roll up our 8% to $10 million.
We're giving ourselves credit for six of their tenants.
Okay. Okay. So you're.
Okay.
I know youre really youre guiding your dining energetics and your normal clat EBITDA per watt range in the first quarter.
So.
<unk> energetics is.
In that $4 million to $5 million range.
<unk> <unk> and the $2 million range.
Arcadia is in the $10 million range, you eliminate $4 million.
For Noncontrolling interest and you've got $3 million.
In corporate expense and if you work that across you get to nine which is the midpoint of eight to 10.
That helps a lot okay. Thank you.
Just a quick one as well maybe it's not quick depending on how much detail Kevin wants to give but.
What are you seeing on the.
Racing side.
In diner in the competitive behavior.
So this so.
I can tell you what we're planning and.
We saw.
We implemented a 5% price increase in November late November a part of that took place.
In December .
And we will see that 5%.
On our.
If you will in our income statement in Q1.
However, our margins declined for two reasons we had.
Inventory reserve in the fourth quarter, which was a couple of percentage points.
And then we had.
Cares Act that was taken away that was in previous guidance and and also inflation that occurred in the in the quarter.
So that if you will.
That totaled roughly between the inventory reserve in the cares act and inflation of about six percentage points.
Degradation.
And it was only offset slightly very slightly by.
Our price increase.
In Q4, we will see some of that.
Q1.
So we are actually implementing another price increase.
In the quarter that we've announced and we're informing customers of this.
That will take effect in Q2.
And we fully expect.
To achieve both price increases.
We may.
Suspect the inflation that we're having but <unk>.
Cares act for some of our competitors.
They're experiencing similar costs.
Probably even.
Higher because they're not vertically integrated in all the components like we are.
And so we would expect that they will make decisions to two.
Okay.
Paolo ordering implement their own price increases.
We expect to achieve ours, we really are less focused on the competition at this point.
Our systems are.
Deliver just in time to the well site manage.
The supply chain.
And they require fewer people less working capital and they perform better.
And when.
When you step back and look at it.
Type of price increases that were looking at four.
The year cumulative in the first half of the year or in the total of the 12% to 15% range.
And completing a well.
That's.
Relatively insignificant.
$20000 per well.
<unk>.
And the inflation that is coming on other commodities.
Don't have the differentiation that we have is extremely high.
And.
And so this is not.
Not a big change in terms of the well cost and the well economics are very strong.
No.
We are less concerned about our competition.
Strong market.
Bringing prices down to me one of our number one objective. This year is to to cover inflation in all three businesses and restore margin dine energetics.
We firmly believe we're going to see that.
Great. Okay. Thank you for the color Kevin.
Okay.
The next question is coming from Taylor Zurcher from Tudor Pickering Holt Your line is live.
Hey, Kevin and team. Thanks for taking my question I just wanted to.
Circle back on the margin profile at Arcadia.
Okay.
I heard you correctly, roughly $10 million of EBITDA for Q1, 100%.
Allocated basis.
Arcadia or at least that's what your consolidated EBITDA guidance would imply so.
About 17% EBITDA margin relative to 14% in Q4.
But relative to 21% for the full year of 2021, So I guess I'm just curious what's driving the downtick in margins at the EBIT line for Arcadia into year end and it sounds like into Q1.
And should we get back to that 20% margin profile at the EBIT line over the back half of 2022.
Yes. So this is Mike I think we I think we will.
This is.
A business that we think is.
That's going to run in that 11% to $13 million per quarter.
EBITDA run rate on that roughly $60 million in sales, what we what we do expect as.
As Kevin mentioned some top line.
Improvement from pricing, but we could get the denominator effect of some margin compression greater dollars, but some margin compression from the denominator effect.
Increasing aluminum prices, so I think we're going to be.
Healthy range and this is going to be a business that.
It's going to look similar to.
Yes.
Similar to the 2021 full year profile by the end of 2022 with perhaps.
A better top line.
Small compression in margins and a.
Even to better adjusted EBITA number in terms of dollars.
Okay, that's very helpful.
Just following up on the top line, so if I'm understanding you correctly.
22 topline growth for Acadia.
At least you're forecasting today is primarily.
Price driven.
But at the same time, you're spending some capex $8 million to $10 million.
What it sounds like alleviate some of these capacity constraints that you talked about.
I'm, just curious $8 million to $10 million.
What I would consider growth capex, how much incremental revenue do you think you can generate with that sort of.
Capacity expansion via Capex and maybe in 2023.
Yes, I think youll see that more in 2023% in 2022.
We feel that this business has.
An opportunity to grow at GDP or higher really construction spending or higher.
As well as it has a very strong product line.
And it's in both businesses.
The custom business is a national business.
Our PDI, Inc. Part of the business is a regional business, where the regional market share has room to grow.
And then Theres the commercial interior business Wilson that also has room to grow and the governor on the on the growth at this point, it's been people in custom and it's been.
Extrusion capacity in <unk> and <unk>.
Inc, and Wilson partitions.
It's our objective over the next three to five years is to double the size of this company.
But we're working with.
The leadership team too.
Them implement their plan and the systems that they would like to implement.
<unk>.
And make it or a <unk>.
Strong company and.
And take some of the friction out of the business that exists so that it can begin growing in 'twenty, three and 'twenty four 'twenty five.
Yes.
We're we're not yet giving guidance for 'twenty three but.
But our intent is to.
As to double the size of this company over the next three to five years Arcadia.
And we also feel that we're going into a good period for <unk>.
<unk>.
Healthy growth and margin recovery.
And as well as mobile cloud application development.
Makes sense. Thanks, Brian one last question for me.
Just capital allocation free cash flow and sort of.
Debt management for 2022.
So youre, adding a business here in Arcadia.
Let me comment.
Maintenance Capex basis, However, you want to call. It is more capital light than your other two businesses.
Just trying to understand on a <unk>.
Through cycle basis on a multiyear basis what the.
Capital intensity of the business.
Look like as a percentage of revenues with the free cash flow profile might look like as a percentage of revenue as a percentage of EBITDA.
And if you don't want to comment on that.
It's early maybe just for 2022 do you have any.
<unk> for free cash flow in 2022, and do you plan to use some cash to pay down.
The debt you incurred as part of this transaction over the course of 2022.
Absolutely I mean, I would I would start with.
From a.
Target.
For debt to EBITDA.
We expect.
Through EBITDA growth.
Debt repayment.
To be in the two X two X.
Range by the end of 2022 on a debt to adjusted EBITDA basis, and in the one and a capex range on a net debt to adjusted EBITDA.
We expect to pay down debt fairly rapidly with EBITDA growth reduce our leverage profile quite a bit from a.
Capital allocation and capital standpoint.
Again. These are these are businesses I think collectively that are.
In that.
Three 3% to 4% of sales in terms of.
Capital long term for the businesses and so.
The.
On a longer term basis.
We see this as.
$15 million to $20 million on a consolidated basis.
For Capex for all three of our businesses. So again, it's probably in that 3% to 4% range.
Quite frankly early on it's going to be we're going to be focused on.
The key projects, we mentioned at Arcadia and repaying debt.
I would add to that tailor that.
Yes.
Over the last three to five years.
<unk>.
Modernized and consolidated our Europe Pn manufacturing for.
Noble Clyde.
We've got a beautiful facility.
We've been shy, Germany that is.
<unk> is very efficient.
Also significantly we introduced.
Our integrated system and expanded our capacity for our.
Intrinsically safe.
Integrated switch detonator.
In Troy Historic Germany, We've got six production lines were five years ago, we had.
It was a manual process.
And then we have our Blum facility, where we actually assemble the components into an integrated system, which was.
Built in 17 and 18, we have.
Completely upgraded our.
Our previous two businesses mobile cloud and dining energetics Theres some capital that we need to continue to invest in both but.
The major.
Expenditures taken place and we feel we're very positioned very well positioned to serve the markets going forward at a reduced.
Capital spend than what we've had historically because we took the hit early on in terms of our cash flow and making those investments.
Yes, it makes sense. Thanks for the detailed response I'll turn it back.
Okay.
Okay next we have Gerry Sweeney from Roth Capital Your line is live.
Okay.
Good afternoon, Thanks for taking my call.
Good afternoon Jerry.
Wanted.
Obviously donna energetic.
And the gross margins have been a.
Point of conversation, but.
Curious as to the legal side.
That equation.
It does.
The legal issues need to be rectified or completed before we get back to.
A margin level.
You think.
Business performance.
Yes.
The legal expenses are less in gross margin and more in SG&A.
There are stepping down in 2022 compared to 2021.
I believe we spent about $7 million to $8 million and litigation in 2021.
2022.
It's going to be.
Approximately half of that.
And Thats, primarily because there is.
There is a process.
Intellectual property.
Post Grant review by the patent office and the court system is granted.
Has stayed.
<unk>.
The.
Trials of the <unk>.
Those patents until the.
Patent office weighs in on the.
The post Grant review for a couple of the patents and so this is a marathon not a sprint.
It's going to ebb and flow.
Year over year.
We.
We're in a pretty good position in terms of how we see.
See this evolving.
And.
I think that we will manage expense in the range that we're at for.
For 2022.
And.
With the <unk>.
Significantly increasing EBITDA over the next couple of years and so it should it should fall back into a normal kind of filing and defending.
Some of these things work their way through the system.
And.
The court system is very slow and it takes a long time.
And we will keep everybody well informed.
When the post grant reviews are complete and this picks up speed.
Year to down the road.
I apologize I, probably didnt ask it the right way.
Sure.
Obviously, there is some what you would call infringement on some of your thoughts there.
There are some products and putting pressure on pricing et cetera, what I probably should have asked.
Okay.
These two these cases need to be rectified.
Improved pricing to get you back to March back to margins.
Yes.
Bob.
No I mean.
Quite frankly, the pricing has been more of a situation of oversupply in the industry.
Obviously, there are systems that we feel.
Infringe on our intellectual property.
But there is not an apple to Apple comparison of these systems there.
The heart and soul of the.
Dining energetic strategy as an integrated.
System with.
It's intrinsically safe and.
Detonator.
And.
Ken.
That's where the systems can stand on their own in terms of.
Their performance.
Less working capital greater efficiency fewer people that the value that they create and use is where the.
Price recovery will be.
We've had two years of very low.
Industry volume and a lot of competition, it's going to be harder for people to make an integrated system.
Going forward and meet demand as volume picks up.
And that's why we're committed to restoring our margins through.
Price recovery.
The litigation helps I don't want to say it won't help it reduces.
Potentially some of the systems that infringe our technology, but there is there is not a single company that that incorporates all of the features and benefits that we have in our overall.
Diamond or Diamond state system.
Got it.
Okay. That's it for me thanks.
Yes.
Okay. The next question is coming from Marissa Hernandez from Sidoti Your line is live.
Thank you and good afternoon.
Yes, Hello Marissa.
So I'll ask a couple of questions on the line.
And I'll put platform first of all I wanted to confirm if this.
Despite the.
Pricing.
Q.
Implemented that.
<unk>.
Taken across the board by all customers.
Of diagnosed or not.
Not really.
Not so that was implemented.
Announced for implementation on the 22nd of November .
We.
To the general market, we have supply agreements with certain customers.
<unk> delayed the implementation based on the amount of notice that we give them.
And so so in the fourth.
Fourth quarter, there was less than one.
Percentage point improvement of margin associated with the price increase.
We expect by the end of the first quarter or 5% of that to be.
In our.
Our revenues.
And also.
Hopefully margins and were putting in an additional price increase on top of that.
Again, it layers in because of our supply agreements with customers. It doesn't all layer in at the same time.
But by mid year, we would expect to.
To see both price increases fully implemented.
The second price increase.
That shipment.
Okay.
Now in the second quarter.
Thank you.
Directly.
You mentioned, 12% to 15%.
Increased TD play soon that you were looking to offset with this price increase.
Trying to win.
That's correct.
No no the inflation I think is already baked into our.
We're seeing 45 percentage points.
Inflation throughout the year.
Year over year.
And that includes the reduction in the cares Act.
<unk>.
And we're implementing by the end of the year, but we fully implemented price increases in the 12% to 15%.
Total, which would include the 5% in November plus an additional 8% to 10% if you will between.
April one and the end of the year or when the first price increase took effect and that is net pricing in that and we expect that to be net pricing.
Because inflations, we feel that the inflation that we expect is already in our numbers.
Got it and.
All of this is Frank.
Drivers.
Sure.
Waiting on the gross margin during the quarter.
<unk>.
How much of the decline was due to cost inflation, and then where are you seeing that at all.
On the metal side the key pieces.
On labor transportation costs, if you could elaborate a little bit on that in between.
Yes.
So.
Compared to what we were.
Originally guiding for we have we have stringent inventory management.
Policies in the company with the decline in activity.
22000 2021.
Some of the inventory that we had was running into.
Born on date.
Limitations that we took there was a two percentage point reduction in the fourth quarter to an inventory reserve that we took.
I will say that that inventory, we still have and expect to sell them.
The applications that it applies to come.
Come back and we expect those to come back by the end of the year.
We are seeing a two to three percentage point.
Reduction in margin year over year.
In the.
For the size company.
The DMC is that the cares act.
Was in place.
2021 that won't be in place in 2022.
Having said that we are glad that the cares Act is.
Expiring.
We benefited from it on one hand, but we were hurt by it on another with with some of the dynamics that are put into workforce in competitive situations.
And we have theres about two margin.
Two points of.
One to two points of inflation above and beyond the cares Act.
It has to do with wage inflation and material inflation.
And.
As you might expect.
The cost of.
Labor is going up and.
And the cost of everything from.
Eating out to staying in hotels and traveling and we are back traveling significantly as a company which was down.
In 2020 one.
And so it's.
It's a little bit of everything and.
And inflation by the way has lots of.
The dining energetics story.
<unk> is margin recovery for the price declines that happened over the last.
18 to 24 months with the dynamics that uptick.
Place both.
With the drop in.
Overall activity and the increasing.
A price focused.
With oversupply in the market, but the market is moving from supply.
Oversupply too to availability and.
And the price increases that were asking for are modest.
Particularly when you take into account the value that we create for our customers.
So is it fair to assume that Julie.
Have come in how much of that would you characterize the market the seating oversupply badlands are getting tight.
Yes.
I would say it's it's.
Theres very short lead times and perforating equipment.
Ourselves and our competitors are having to respond to very short lead times, because the inventory, particularly one of the things that we're advocating as let us manage your working capital and supply chain not.
Tire customers up with working capital and supply chain.
Yes.
Expenditures and so so lead times are going down.
Sponsors going up.
The supply chain is for us responses going up relative to our competition because of our vertical integration and controlling everything.
And so.
Yes it.
Moving.
Theres plenty of manufacturers out there, but theyre not all doing the same thing we see a lot of our a couple of our traditional competitors moving to just really being shaped charge manufacturers and.
And the integrators of the shape charges into the.
Perforating guns are now.
Being done a lot by machine shops.
<unk>.
And they just they're just not vertically integrated in the components and they're buying and having to resell components.
We make.
And.
And I think that that just gets harder going into.
A market, where thats, increasing rapidly and demand is now out in front of.
It's not oversupply.
But.
But the response times are becoming more of a factor than just the supply itself.
And.
When I.
I will share with you that the cost of the perforating.
Guns on a well.
<unk>.
Per well is less than $100000.
<unk>.
And we're looking at 15% to $20000 price increase on <unk>.
The completion of a well.
Where you see other expenditures that are in three four and $500000 or for greater individually.
So.
To me, it's less of a price it's more about the value that you create.
Thank you about that.
Hey, Scott.
The guidance.
Martin.
Team here.
You talked about my television company in 2022.
Thank you Philip on markets.
'twenty, one you've had one with a 25%.
19 in early 'twenty to point, a pandemic with even higher.
What are we talking about when we talk about marketing the company in 2022 for Diana.
So so our peak and maybe a way of explaining this our peak gross margins in 2019, we're about 40%.
Dan.
And in that 40% was made up of the DS systems, which are.
I would say medium margins.
Less than 40%.
But we also were selling some components at the time.
Separately.
The integrated switch detonator, which we had customers who are <unk>.
Buying that and incorporating it into their own systems now.
Now we are only providing.
In North America.
Primarily providing our diamond stage system, which is fully integrated.
Our revenues will go up.
Curse system, but our margins will go down because we are.
We're not having the very high margin, 70% to 80% that we had.
The components that we're selling in our integrated switch detonator, we still have that margin, but it's incorporated into the perforating gun that has the shaped charges and the carriers.
And the.
Tandem sub assemblies, and so on and so forth.
So when you.
Think of our margins.
If we get back to a $34 35%.
We're quite gross margin, we're quite happy with that and that compares to a 40% in 19.
And but our revenues are going to be higher.
<unk>.
Per per detonator sold if you will.
And we expect to get back in the <unk>.
Sooner obviously in the mid to upper Twenty's and certainly by the end of the year and the 30 plus percent.
Gross margin range of coming close to the 34%.
35% that we would like to be.
Thank you so much.
Yes.
Okay. The next question is coming from Ken Newman from Keybanc capital markets. Your line is live.
Hey, good morning, guys. Thanks for taking my question.
Yes, Hello, Ken Nice to talk to you.
Yeah same here.
I just wanted to go back to the comment about doubling the size of Arcadia over the next five years and I'm curious if you could just build that comment out a little bit in terms of the cadence of that growth.
How you plan to achieve that and obviously I think we're up against some pretty tough comps on the residential housing starts side and obviously there is some more conversations about rising interest rates. So just how do you balance this idea of.
Cyclical inflation versus our <unk> ability to grow.
Yeah first of all on the residential side.
Or in the highly custom.
Very expensive homes, primarily.
And in that.
Is less about the gross.
<unk> starts and more about the.
The mix within certain areas.
And.
In.
As an overall company there.
In the residential there.
There are small relative to the size of that overall market and so there is a change in.
And the demographic that they're focusing on is less interest rate sensitive as probably the best way to stay.
Stating that and there is a change that's happening in terms of both.
Types of houses being designed and.
More modern.
Doors and Windows.
As well as the renovations that are taking place we would expect the residential business to double.
But that is a smaller part of Arcadia, and and we would expect their geographical market share in the ink business too.
To double over the next five years, which is.
Consistent probably with their 10 year growth and Theres still.
Not a large.
They're one of the there'll be one of the larger factors in their market, but still.
At 20% or under in terms of market share.
And.
And then.
Theres the Wilson partition part of their business. They are really in three segments in the Wilson petition, which is an interior of commercial systems is somewhat counter cyclical to the.
So the new construction.
And.
And that is a little bit more constant.
Year over year in terms of its market potential, but we've got some work we can do there with architects and designers to.
As well.
Product expansion.
There is a whole host of things.
Obviously, theres a theres a.
Handful of companies a lot of companies that are competing for this market space.
And we just feel that through our.
Our product design and our business designed that.
We are capable of serving this market in a way that will enable the growth.
Is it fair to say that that.
This is mostly an organic type of initiatives are that you don't necessarily need to do M&A has kind of reached that.
Growth target over the longer term.
Not at all where we're focused on.
Yeah.
We had our fill is it M&A.
Six months.
Okay.
Couple of years, if you will.
And now it's we're excited to be <unk>.
<unk> down in settling in.
We really enjoy the team at Arcadia, and we want to help them to achieve their objectives and support their growth.
And to US, it's all about taking being a better business and taking the friction out of and some of the constraints out of how we do business today, and just allowing their business model and their people to drive the growth of that company.
Got it.
One more from me I know, it's a fluid environment and that is.
It's a small part of normal cloud, but I do think that you do have some revenue exposure to Russia, and just given some of the impact that you've seen in Europe from from tighter supply chain.
I'm just curious what's kind of embedded from a risk perspective in the <unk> guide for novel Cloud revenue and just how do you think about the supply chain in Europe , just given all the geopolitical fluctuations we've seen over the last couple of weeks.
Yes, Mike May want to add to this but we're very thankful that.
I know youre, new to the DMC story, but we.
We had a.
Facility in Kazakhstan, we had one in tomb in Siberia.
For both our dine energetics business, primarily our <unk> business exports into.
Russia and certain applications.
And where we are.
We decided for five years ago and it took.
Three years to exit that area.
And.
And so today our presence there as much.
More limited than it used to be.
And we do export there.
We have.
An order in house right now for the Ukraine.
Our in house, we have a normal two $5 million to $3 million that we sell into the Ukraine.
We had a couple of million dollars order I believe in 2021 that went into Russia.
Obviously those.
Our at risk.
Business is at risk.
But there are new application development.
And their value proposition <unk> value proposition.
On cloud place.
There is commodity inflation in the underlying metals their value proposition gets stronger than making about a solid.
Pi nickel alloy materials and so.
We will see some.
Puts and takes but but overall, we expect that business to grow.
Yes.
Near term, we might have an order or two that we're going to miss in that region, but longer term.
The growth.
And the applications and the value proposition will more than offset that.
That's helpful. Thanks for the time.
Okay.
Okay. The next question is coming from Samir Patel from escalating capital Your line is live.
Hey, guys.
Good afternoon.
Can you hear me.
Sure.
Yep Okay.
Sorry. It was just it was cut off for a second my first question is on <unk> and.
In slide 18 of the deal that you had kind of talked a little bit about the exposure to hospitals in education and talking about some exposure to repair and remodel I was wondering if you guys had any more specific statistics in terms of the categories like multifamily versus office or how much goes into new builds versus repair and remodel.
I don't have that at my fingertips, but we'd be talking about the QD ink business, which was.
70% of the.
Perhaps plus or.
Their overall business, which would be the customer.
Exteriors and or excuse me in the longer term.
Carriers.
Yes, commercial part of it and and Thats primarily.
The low.
Low to mid rise.
Commercial buildings and.
Their focus on the low to mid rise serve them well.
Over last two years compared to the high rise.
And the multi story buildings.
But I don't have the mix in terms of the end use applications right now.
But I can get that for you.
Okay, no problem and on the repair on the new versus repair and remodel side.
Yes, yes.
And in that.
Repair remodel.
<unk>.
The building.
Alex industry.
Can be.
Fluctuate between 40% to 60% one way or another depending on the economic environment that we're in.
<unk>.
But we will get that for you also.
But I assume that would be more on the interiors and the exterior you don't typically remodel the exterior of the building all that much.
No, but there is a lot of there's a lot of.
Repair and replacement and.
And there is.
Remodels that do take place.
As.
The design of these remodels to change.
If you just think of that building.
Look around any major city or any city for that matter and look at the <unk>.
Our new construction, that's taking place versus the installed.
Base.
Building.
Stall base of buildings is quite large.
Gotcha that makes sense I have two on diner and I'll try to go as quick as I can the first one is just to clarify something you said in a previous question are you basically saying that for the same number of units solved your margin percentage will now be lower because youre selling the full system, but your overall margin dollars will be higher because.
In addition to selling the.
I think you said it was the switch the integrated detonators switch Youre also selling the other parts of the.
It sounds like.
Per unit like if you sell 1000 units.
Total detonators Youre now getting like more revenue in total and more margin dollars in total, but it's just a lower percentage because it blends in the other parts that are lower margin.
Correct.
Historically.
R R.
Our margins.
Whether it's.
The contribution.
<unk> margin or our gross margin is much higher on our.
Detonators.
They would be the strongest margins that we have.
Followed by our.
S shaped charges and that court, which.
And there is a lot of intellectual property and know how that goes into making.
Making the integrated switch detonators, the shape charges, which are fewer manufacturers than the hardware.
And even fewer that cord manufacturers, then shaped charge manufacturers and so so.
And it's more of a specialized manufacturing.
The more generic.
Is the the machining of subs and the turning the pipe there.
Having.
The heavy metal parts of.
Our perforating system and those gross margins historically have been the lowest out of all the product range.
No.
As we go from.
And also the higher dollar value.
In terms of <unk>.
Percentage of a perforating gun.
And so as we move from components to systems.
Our revenues going up but the margin on those.
Metal turning.
Kind of components is lower and so our blended margin is lower.
But the revenue is much higher overall and.
And again, we're making the integrated system our components are designed.
To work together and Thats, where we get the safety and the performance benefits.
And we have IP not only around the components, but we have it around.
The system design.
And.
What we've kind of seen in the market the last year.
As.
<unk>.
Some of our traditional competitors pulling back from systems or we don't see them solving many systems in the market.
And we see a lot of the machine shops doing the integration.
The shaped charges and the components into the perforating guns.
<unk>.
But it's.
They're.
Good manufacturers, but not necessarily of components, but not necessarily.
System integrators, and they certainly are basic in the energetic part of the perforating system.
And so they're.
Their margins are much lower than ours.
A lot of them are private but they don't have the energetics part of it and the other energetics manufacturers are.
<unk>.
Maybe focusing more on energetics and integrated systems.
So the market is kind of moving around right now.
Long story short our revenues are going up and our margins will.
Percentage wise declining, but the dollars will be greater.
Got it that's helpful and the final question sorry, if you already addressed it because I did join a couple of minutes late but how do you expect completions to trend over the course of 2022.
Up up.
We're expecting.
Yes.
10% to 15% in terms of completions in 10% to 15%, 12% to 15% in terms of price.
Being realized this year.
Okay got it thank you.
Okay. The next question is coming from Jim brilliant from century. Your line is live.
Hi, Jim.
Jim can you hear us.
Okay. It looks like we're getting no audio from Jim's line.
I'd now like to turn the floor back to Kevin Longe for closing remarks.
Okay.
Thank you everybody for joining us for this call.
We appreciate the complexity of the earnings release.
Mike, Jeff and I are.
Round for the analysts.
Who would like to understand more of the details over the next couple of days.
If you'd like and just reach out to Jeff and.
Two our arkady employees and partners who are on the line.
Glad to have you on board and we look forward to working with you and us.
You can see achieving.
And aggressive growth objective.
But thank you everybody for your interest and we look forward to talking with you in the second quarter.