Q1 2022 DMC Global Inc Earnings Call
[music].
Good afternoon, ladies and gentlemen, and welcome to the DMC Global first quarter earnings call.
At this time, all participants have been placed on a listen only mode, but we will open the floor for your questions. After the presentation.
It is now my pleasure to turn the floor over to your host Geoff High VP.
<unk> of IR.
The floor is yours.
Hello, and welcome to Dmc's first quarter conference call presenting today are president and CEO , Kevin long and CFO , Mike Kuta.
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.
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 statements that become untrue because of subsequent events or.
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 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.
Afternoon, and thank you for joining us for today's call.
I would like to start by addressing some key developments during the first quarter and then turn the call over to Mike.
A review of our financial performance and a look at guidance.
Despite challenges in today's global markets first quarter saw improved dynamics.
Dmc's core energy industrial infrastructure and building products market.
DMC reported.
First quarter sales of $138 $7 million 60.
$68 million came from our Acadia architectural building products business.
We acquired a 60% controlling interest in our PD last December .
Our <unk> sales were above our guidance, reflecting higher selling prices to offset inflation on raw materials.
Arcadia maintained consistent gross profit dollars versus the first quarter last year. Despite.
Despite a more than 20% increase in the cost of aluminum.
Which is our Katy is primary input.
First quarter demand remains strong and our <unk> commercial markets, which primarily consists of low to mid rise buildings throughout the western and southwestern United States.
Arcadia as end markets also includes several counter cyclical industries, such as government <unk> facilities education, and healthcare, which are typically a source of consistent demand.
Even when the economy.
When the broader economy slows.
Demand is also strong at Arcadia, accustomed, which provides the national high end residential real estate market with.
With highly engineered steel aluminum.
Windows and doors.
This upper ended the residential market is generally less affected by rising interest rates.
Then the broader housing market.
Our <unk> operating at full capacity and we are taking steps to address its growth constraints.
These include personnel additions implementation of a new enterprise resource planning system.
And the design and installation of additional paint and the <unk> lines.
We expect the new manufacturing capacity will be operational around the middle of next year.
I am pleased by the progress we have made integrating our <unk> people processes and systems.
And by the efforts to align our culture.
Dining energetics, our energy products business saw an inflection point in its core geographical market during the first quarter.
After two years of being oversupplied.
We believe the North American market for perforating equipment is back in balance.
Growth in unconventional well completions is leading to increased demand at dine energetics and is demonstrating the value of our fully integrated DS perforating systems.
These systems are delivered fully assembled just in time to the wall site.
And they are the safest and most reliable on the market.
They tie up less working capital required fewer people on location.
And can reduce the cost of completing a well by more than $200000 compared to other solutions.
Activity in North America was relatively light at the started the year due to a sand shortages and supply chain constraints that impacted the completions industry.
Dining <unk> solid North American demand increased sharply in March.
Resulting in a new monthly shipment record for perforating systems.
This momentum continued into the second quarter as shipments in April were similar to those at March.
Dining <unk> ability to address this rapid demand growth illustrates the strength of its vertically integrated business model.
International demand also improved significantly in the second quarter, and we believe will remain strong through the balance of the year.
On April one dining energetic implemented its second global price increase in six months.
The increase in combination with higher margin international sales.
And improved operating efficiencies is.
As expected to drive continued gross margin expansion during the second quarter.
Dining energetics and markets have improved.
And we believe strong energy prices and increasing U S rig count.
A growing number of North American Frac spreads in.
And increased international activity will lead to continued healthy demand during the remainder of 2022 and into next year.
At <unk>, our composite metals business.
Rolling 12 month bookings at the end of the first quarter was $91 million.
Up from $81 million at the end of last year's first quarter.
Our order backlog at the end of the quarter was $44 million.
Up from $41 million at the end of the fourth quarter.
Activity and double quiet end markets is improving and we believe its performance during the second half of 2022 will begin to reflect the inherent strength of the business.
We made significant recent investments in working capital as we positioned dmc's businesses for future growth.
We are confident the second half of 2022 will bring.
Much improved improved free cash flow was inventory becomes earnings and receivables.
And receivables become free cash flow.
A strengthening of our balance sheet and stronger returns for our stakeholders.
With that I'll turn the call over to Mike for a review of our first quarter financial results and a look at second quarter guidance Mike.
Thanks, Kevin first quarter sales were $138 7 million.
Excluding the <unk> acquisition consolidated sales were $70 7 million.
A sequential decrease of 2% an increase of 27% versus the first quarter of 2021.
Arcadia reported first quarter sales of $68 million.
<unk> reported first quarter sales of $48 9 million.
Down, 4% sequentially and up 28% versus the same quarter last year.
North American sales increased 2% sequentially, while international sales decreased 33% sequentially.
Sales at Novo Plaid were $21 $9 million up 3% sequentially and up 25% versus last year's first quarter.
Consolidated gross margin in the first quarter was 27% up from 18% in the fourth quarter of 2021 and 23% in last year's first quarter.
First quarter gross margin benefited from the acquisition of Arcadia, She had a higher gross profit percentage then.
Dnc's legacy business units as well as the impact of higher sales volume on fixed manufacturing overhead expenses at dine energetics.
These improvements were offset by project mix at <unk>.
A decline in high margin international sales and higher material costs at Dine energetics.
And the exploration of the employee retention credit under the cares Act, which benefited the first quarter of 2021.
Arcadia reported first quarter gross margin of 30%.
Bye and energetics reported first quarter gross margin of 26% versus 20% in the 2000, <unk> fourth quarter and 22% in last year's first quarter.
The margin improvement from last year, primarily relates to the impact of higher sales volume on fixed manufacturing overhead expenses.
<unk> first quarter gross margin declined to 19% from 20% in the fourth quarter and 26% in the year ago first quarter, primarily due to less favorable project mix and the prior year Cares Act credits.
Looking at our first quarter expenses consolidated SG&A was $27 8 million.
And included $9 9 million of incremental SG&A from Arcadia.
The year over year increase also was attributable to higher litigation expenses that guy and energetics, which were related to actions against companies that we believe infringe on bioenergetics patents.
Higher noncash stock compensation expense.
And higher salaries benefits and other payroll related costs due in part to the expiration of the cares Act credits.
We reported a consolidated operating loss of $3 9 million.
First quarter adjusted net loss attributable to D&C was $3 1 million or.
Or <unk> 16 per diluted share.
Versus adjusted net income of $559000 or <unk> per diluted share in last year's first quarter.
Adjusted EBITDA attributable to D&C was $10 $5 million versus $4 million in last year's first quarter.
<unk> reported first quarter adjusted EBITDA attributable to D&C at $6 9 million diner.
China Energetics reported fourth quarter, adjusted EBITDA of $5 $3 million, while nobody flat reported adjusted EBITDA of $1 7 million.
We ended the first quarter with cash of $15 4 million versus.
Versus cash of $30 8 million at December 31, 2021.
The decrease was driven by a build in working capital.
Principal payments on long term debt and quarterly cash contribution quarterly cash distributions to our Canadian joint venture partner.
Working capital increase primarily reflects higher required inventory levels at our Canadian Dine energetics.
From higher input prices increased lead times, and an expected sales ramp in the second quarter.
Our total outstanding share count is now $19 5 million.
Looking at guidance.
Second quarter sales are expected to be in a range of 142 million to $152 million.
Versus the $138 $7 million reported in the 2020 to first quarter.
At the business level Arcadia is expected to report sales in a range of $68 million to $72 million.
Versus the $68 million reported in the first quarter.
The anticipated increase reflects higher pricing to address inflation on raw materials.
<unk> is expected to report sales in a range of 54 million to $58 million.
Versus the $48 9 million reported in the first quarter.
Diana Energetics expect significantly higher international sales and improved pricing in North America during the second quarter.
Expect it to be approximately $1.3 million.
Second quarter adjusted EBITDA attributable to DMC is expected to be in the range of $15 million to $18 million versus 10 $5 million in the 2022 first quarter.
Capital expenditures are expected to arrange a 4 million to $6 million.
With that we're ready to take any questions operator.
Thank you.
Ladies and gentlemen, the floor is now open for questions. If you would like to join the queue to ask a question you May press star one on your telephone keypad now to join the queue. We ask if listening on speakerphone. This afternoon to please pick up your handset while asking your question to provide optimal sound quality once.
Again, ladies and gentlemen, you May press star one on your telephone keypad now to enter the queue to ask a question. Please hold a moment, while we poll for questions.
And the first question say is coming from Steven <unk> from Stifel.
Given your lines lie. Please go ahead.
Thank you and good afternoon everybody.
Yeah, Hi, Stephen.
Hi, Kevin So I guess two things should be.
You mentioned sort of of March record sales.
Of the.
Integrated <unk> system in the U S and then as I sort of think Baca tire.
Sales levels and the revenue associated with that.
Is the difference in that price or am I am I missing part of the equation to hot.
Try and get our.
How are we should think about.
The pricing of that product relative to where it was at prior peaks Coupla years back and how we should think about how that translates the revenue.
Yeah, So it's both the price and.
Product mix previously we were selling components.
Primarily or.
Integrated switch that Nader.
Without the shaped charges in the gun bodies.
And.
That was.
That was not in this quarter that was during a transition where we were switching from components to systems and so this is a system revenue.
We're talking about being a record.
It doesn't include the other products.
Okay, great and as we.
Given that commentary.
Sort of been expecting and waiting for kind of our reacceleration.
The option waited till they seemed like people were buying a lot of components and I know you have these lawsuits out so that you don't want you really can't comment on but just in general.
Are you seeing kind of a re acceleration in the adoption of these integrated systems coming out of over the last couple of quarters is that is that what's driving us.
Both for D M C or dining energetics, it's 100% system revenue in our North American business.
Perforating side of it.
E. If I look at the last couple of orders her last year in particular.
Saw some of our competition.
Pull back from systems and go more towards components.
And.
And so.
It's certainly a trend for us that systems are up but it may not necessarily be for our.
Specific competitors in the market in general.
We are seeing some pre assembled carriers.
That are <unk>.
Symbols by machine shops, the wholesale by the shape charges from from some of our traditional competitors.
Ship them to the customer or to the web site.
But that's still.
More of a component model and it is a system model. The E&P is seeing the system, but the delivery.
The supplier to the E&P, we're still in the lead from a system standpoint.
Okay, Great and if you don't mind, one final one when I looked at your guidance for the second quarter.
Tried to piece together.
Mental margins and just sort of different pieces. It seemed like the biggest sequential growth driver or is the dawn energetics business cause the EBITDA lines versus.
Two segments thinking about that correctly.
Yes, you are in fact, if you think of double cloud in Arcadia.
We've seen inflation adjusted pricing.
Offset material costs.
<unk>.
Dining energetics, we've seen.
Inflation earlier in the year, but the pricing moves and volume are primarily margin improvement.
Great. Thank you for the color.
Thank you once again as a reminder, ladies and gentlemen, if you would like to join the queue to ask the question. At this time you May Press Star one on your telephone keypad to join the queue.
Your next question today is coming from Cameron Lockridge from Steven.
Okay I'm in your line is like please go ahead.
Hi, there. Thanks for taking my question is good afternoon.
You're welcome camera.
So Kevin since the Arcadia acquisition.
Late last year, we fielded quite a few questions just on.
Competitive dynamics of the business in the industry the market that it operates in.
One thing that's come across is is not a great comp out there for a Katie in terms of what they do is certainly not in the public realm and potentially not in the private room.
And I think that probably speaks to just the niche nature of the offering of Arcadia is offering.
I was hoping you could just take a few seconds to speak to the competitive dynamics in the market that Arcadia operates in.
And and then related what are some of the things.
Again that you can do to drive share in that market and I realize we may have touched on some of this and previous call. So I just.
For folks.
Folks that are trying to wrap their arms around the business I think it will be helpful.
First of all the Arcadia is in three general market segments. If you will the commercial exteriors commercial interiors.
The high end residential.
The commercial exteriors can be broken down into <unk>.
Everyday business and projects business.
And it also can be broken down by product into.
Aluminum framing systems or windows doors and.
And more of a complete system.
And our Cadia in the commercial.
Area is in the framing systems.
Mid rise.
Buildings, primarily and also focuses on healthcare and institutional work.
And.
And has a very strong everyday business and so it's.
They're very efficient at.
Serving customers locally with abroad.
Product mix and being very responsive.
To a high number of small orders, which gives them.
Target market and the strength from a pricing standpoint.
That supports their margins.
The Wilson business is it.
As an architect driven business also has a local component to it.
But its architects and building owner driven.
And the residential high end, which.
It goes beyond aluminum framing participated which is primarily in the commercial area. We go into high end steel.
Wood.
And also aluminum, but there we are it's a national market, where they're providing.
Products and.
And less of a product line in more of a product capability for a high end homes that are.
Are being engineered or are curious engineering their products to fit those homes.
So the.
Asian of the three markets.
Three market segments, and how they participate in those market segments.
<unk> graphical footprint.
Me too.
A competitive business model that is well suited for.
Arcadia and for DMC.
There is.
There are good competitors and strong competitors in the market, but they have either.
Different product and market focus.
Or <unk>.
<unk> different priorities and it's really how it all comes together to create the business model that Arcadia has in the team that they have that.
Sure.
The segments that they participate in that separates them from other companies.
That's helpful. Thank you, Kevin I guess as it related.
Hello up there could you maybe just touch on some of the benefits of the diversification aspect of having Arcadia under the D. M C global roof, and just what what D&C brings to the table.
That really.
Makes a lotta sense for a business like Arcadia, which differ from your traditional and markets why it makes sense to have that business under the D. M C global roof.
First of all are all three of our businesses are manufactured products and an asset light business models, where there is.
Either or know how.
And noble cloud.
A system approach versus a component approach and dining energetics.
Or a combination of the.
The different products and end markets that are Kitty offerings.
So they're they're.
Businesses that are tailored for their individual market segments.
And.
And we focus in each of our markets I'm being a market leader, which we defined not just by volume we try to focus.
The gross margin dollars that we get out of these market segments.
And and then DMC and turn gets behind the leadership and the management teams of each of these businesses.
Two.
B, a discussion partner and help them to.
To clarify their <unk>.
Competitive differentiation.
They go to market and and provide the resources and support to help.
Help them to operate very efficiently and effectively.
You look at our.
<unk> and the addition of Arcadia to our portfolio brings us into a different.
Markets.
We were in.
Architectural framing systems and building products, both both on the commercial and the residential.
That augments or industrial markets that we serve.
With.
Noble cloud and and obviously the energy market that we served with with dining energetics and.
The diversification.
Makes it a stronger ecosystem if you will.
And.
And I think that.
<unk> focus on.
Market leadership, either through product or business model.
Excellence and what we do is.
What differentiates us.
From our competition, we focused on how well we execute.
And how well we take care of our customers.
Thank you Kevin that's that's all very helpful.
I guess, maybe if I could squeeze one more than just touch on the supply chain kind of switching gears here a little bit.
Is there any one business of your three businesses journey, one that is being affected more so than the others as it relates to the supply chain.
And then this maybe touch on what some of the steps to your ticket mitigate that.
And then specifically on diner.
Pricing has really come on strong is there any risk to gross margins going forward and reaching that.
Ultimate exit right.
Instead of the thirties as far as the gross Diana gross margin.
Goes in donna's any risk to that as you see it today.
Well.
Our <unk>.
Particularly integrated.
And our components.
From raw materials, and explosives, if you will or shape charges.
<unk> switched detonators.
And and deck court.
We're also vertically integrated we've been invested in the capacity for all the machining and assembly operations.
And so we actually.
Have less of a supply chain issue and dining energetics than any one of our businesses.
And quite frankly, it goes to the.
Being a competitive advantage because we handle the supply chain the working capital requirements adjustment time delivery and we can ramp quickly with our customers as they ramp.
And and so it's.
Lower total cost business model.
If people take into account all of the things that we do for them.
This is <unk>.
<unk> wouldn't components are buying.
Components from other companies and so we actually use the supply chain, it's a significant competitive advantage and dining energetics and we saw that.
In March we already seen it in April .
Previously we were.
Just north of 250 260000.
Perforating guns.
A quarter.
We're operating at over 100000, a month the last couple of months and so.
Our ability to respond quickly.
Just in time delivered to the web site managing the supply chain has been a real competitive advantage.
In novel Class.
We buying metals, we combined them.
Using a proprietary knowhow.
We are subject to the.
The delivery of those models.
And they come from.
Unique sources, depending on the chemical composition and size of the project.
Lead times are longer.
Freight.
Is higher and travel time longer.
And so we have to plan.
Further out.
So where were.
We're seeing a lag in.
And our revenues picking up because of managing the supply chain, but we feel that that's going to be went into our back as we go into the second half of the year.
And then on Arcadia Arcadia.
The primary raw material, there that they too raw materials.
Richardson and manage.
Is aluminum.
That goes in all three of our markets.
Primarily the commercial market.
Aluminum has been.
In short supply high demand high energy price.
Feeds into making the products. So it's end up.
Being very.
Very high costs a lot of inflation.
Aluminum.
I have to compliment the team they've done very well at implementing price increases and.
The commercial market.
The aluminum goes up.
The price increase gifts.
Later than in steps, so there's a little bit of a lag.
Not to mention the backlog, but they have but I have to compliment the.
The leadership team of Arcadia as being one of the.
The best companies that I've seen in terms of managing costs and passing.
Uhm costs to their their customer.
Real time, which is really.
Been a pleasure to watch and learn from.
And.
And so.
We've got different characteristics and each one of our different markets and businesses.
But.
I think our teams are very.
Agile and responding to the competitive situation in the supply situations in their industries.
Thank you Kevin that's that's all helpful and I will I will turn it back.
Thank you.
And we have a follow up question from Stephen gender from Stifel Keith.
Keeping your line of life. Please go ahead.
Thank you and thanks for taking the follow up.
You mentioned in your prepared remarks, or maybe maybe it might be but the about the price increases.
I think you mentioned two can you give us.
Four.
Well, they're sticking and.
And also is this something that starts to show up your margins with too few or three Q.
Yeah.
First of all they're they're they're sticking because we're.
We would rather we don't need practice, if you will making procreating guns, we do.
Pretty well at it.
And and we're in in the market to to create value for our customers. We feel that we've created superior value for our customers.
And that.
Over the last couple of years when demand collapsed due to COVID-19 the.
The markets were very much in disarray, and and a lot of excess capacity.
And pricing was very <unk>.
Very challenging and we sell at a premium.
And we continue to settle the premium but when the markets were oversupplied.
And others were competing against our technology on price, we had no choice, but to be responsive to support our customers.
Maintain our delta, but but followed up market.
The market is is hidden inflection point, where.
Demand is quite strong.
Difficult to manage the supply chain that I mentioned earlier difficult to hire.
And retain good people in our systems.
Simplify the supply chain and require fewer people with the web site.
And we've got the capacity and placed around.
And that's part of the R R value add to our customers.
Not to mention we feel that they perform better and more efficiently and safer.
And so we're holding on our prices prices.
I will say in last.
Last year, the beginning of this year it was harder to do now we're holding quite firm.
With the two increases that we've had the first one.
If you will is absorbed.
Inflation and raw materials.
And other things.
Where we stand today.
Its margin recovery and I will say that.
We had a record another record bumped in.
Okay.
Grading systems in April and that's with a higher price that we've implemented and so when you look at the diner <unk> in the <unk>.
Second quarter of this year.
It's pricing that's driving the margin improvement which were guiding.
We are.
A third of the way into the quarter and feel reasonably confident that.
We're going to have a very good quarter in there.
Great. Thank you and.
You have a question I was curious about.
I'm not exactly sure sure how to ask this but when you think about the web site.
Fish and cheese and.
And what's going on from a frac perspective with pressure pumping equipment being very tight.
More assignment cracks in zipper fraction.
So I'm trying to figure out if I.
Would think that would help the demand for the integrated product because of the efficiencies of breaks our web site.
Flip side, you know they've had some other disruption from track sand shortages other things, creating inefficiency. So I'm just wondering about sort of the the drivers of demand because of the need that the website and have a major evolving.
The integrated system yourself.
Well I think it's important to note that.
When you look at the cost of the perforating system.
From DMC or or how it's put together by other people in the industry.
It's a very small percentage a fraction of the completion costs.
Under 2% if you will yet.
Dining energetics integrated sit.
Systems.
And how we.
They are delivered to the web site.
Assembled they go together fast faster than than any other product on the market there armed.
Safely and quickly and.
And they go down the well more efficiently because they're very.
Very compact systems.
It helps the whole world's site to operate effectively and the and the the.
The the.
The stronger the.
Track crews and the more skilled the frat Cruz.
Better our system is for them because they can they're not waiting on procreating systems that make them, we can run as fast as they can run and.
And that ultimately.
Great value for their customers and we're helping to our customer the great value for their customer.
So.
And a strong market, we believe we are going to gain share.
The weaker markets that we've had over the last couple of years, where we.
We're going to log on price rather than lead price down.
It challenges our market share, but and the type of markets that we see for 2022 in 2023, we believe that.
Place into our suite offices too.
Create a high performing.
Well salt and then a safe and efficient both site for our customers.
Great.
Thank you Kevin.
Thank you the.
The next question is coming from 10 Newman from Keybanc.
Can your line is lie to go ahead.
Yeah I understand the question.
Yeah, Hi, Ken.
Hi, so.
So I guess my first question was.
Can be revolving around arcade yeah, I'm just curious if you just talk a little bit about what you're seeing from order bidding activity within the commercial businesses for that segment, one or you've seen some acceleration or aunts inflation has started to slow right down at all obviously I think as you mentioned. These these are just.
It seemed to be a little bit more resilient too.
And an interest rates essentially moving here, but just curious what you're seeing on the ground in terms of order activity or just indications on a backlog growth.
But we actually have very strong backlogs and both are in all three of our market segments right now and.
And.
And.
We remain pretty optimistic for nonresidential construction spending as this year progresses.
But as as you might expect the.
The macro picture is creating some uncertainty and also the elevated material costs.
But I will say that we haven't seen it in the short term order input or.
We had a very good month and.
April .
We've had a good start to the year.
You will see that.
When you look at our our numbers in that segment that the.
Revenues are up.
And will be up.
More so than volume the underlying volume is.
Is our units if you will is softer.
But it's at much higher prices because of what we're seeing from an inflation standpoint.
But having said that were.
Managing our inventories to the best we can and we.
Up until this point we've had.
Capacity constraints and inflation and raw materials.
Demand is as.
Strong short term budget, there's a lot of things.
On the horizon, it looks like that.
Could create some uncertainty, but we're just not seeing it day in day out.
Yeah.
I understand all of the volatility around raw material costs, an inflationary impacts.
You know obviously, we didn't get prior year number in terms of the quarter revenue and margins, but I'm. Just curious if you could help us think about the go forward operating leverage of this business.
You know what seems to be you know.
That's still pretty strong outlook for demand here in the near term.
Not withstanding some of these macro uncertainties.
Yeah, I would say if there's one thing that we feel that we can improve upon right now is our margins.
Sure.
We're lagging.
We because of our strong backlog.
And and kind of mechanisms firm.
Implementing price increases.
Our margins.
Percentages.
Have softened.
Over the last.
It's up over the fourth quarter, but we feel that.
They should be stronger and the.
Second half of the year compared to the first as we work through our backlog with newer prices mature materials.
And also get our price increases implemented.
So we feel that will continue to do well from a volume standpoint.
And the margin percentages will improve.
And the underlying unit volume.
Will be fairly constant.
It's more of a capacity constraint from suppliers than it is.
An order constraint for for.
For Arcadia.
And.
For us to address that that's a little bit more medium to longer term.
Understood.
And last question for me if you don't mind, you know I think I just wanted to go back to the $4 million to $6 million in Capex for the for the second quarter.
You know when I think about the free cash flow you I think you mentioned cabinet at the beginning of the call expectations for improving free cash flow.
The end of the year and.
Can you just kind of put some color or helped me kind of quantifying that a little bit.
In terms of you know one how do you think about the working capital billed as we work through some of those higher cost inventory and where are the risks in terms of potential higher capex needed to help integrate in Arcadia as we go forward.
Okay first of all.
I'll I'll dress the Capex and then.
Mike help on the.
The raw materials and pricing.
The the Capex is.
We've already.
[noise] are implementing.
And ERP system.
D M C is a very good.
I T and digital.
Group and is supporting our TDA and the implementation of the new ERP system.
365, Microsoft system.
Which we have in other businesses and.
And there is a there is a an efficiency.
And actually.
Quite a quite an efficiency in the company for that and then we get the fully implemented.
We'll be going live with some of those functions in in November of this year I believe.
And.
B.
So there's there's there's two inefficiencies ones and processes and systems and the other is just a manufacturing capacity.
Anodize in painting.
Painting is a relatively.
Quick thing to add and not that expensive, but anodize and it requires a little bit more thought.
And and that's something that.
We are going to be looking at the beginning of the following year 2023.
This year, we're really focused on.
Processes systems.
Integrating our people and our culture and and.
And working well together and.
Pasadena will follow us as we are more aggressive.
Aggressive in our markets.
But as far as margins and the and the price increase.
Yeah right so.
We think that Q2 from.
From a cash flow standpoint, we're still seeing these elevated raw material.
Costs, and a little bit heavier capex quarter that will probably cash flow.
Free cash flow neutral and Q2.
And I would expect us in Q3 cute or to be in that.
Generating operating cash flow.
15% to 20%.
And range <unk>.
$15 million probably.
Order of the back half of.
A year and yet.
To look at our analytic provided guidance on Q3 Q for.
Capex standpoint, so we'll look at that but.
That should probably relatively consistent with <unk>.
First half of the year, if you look at our guidance it will have some capex rapid data.
First part of 2023 is Kevin mentioned.
Capacity in it.
Hotels.
But we've we've invested in inventory and two of our businesses in the first.
Two quarters of this year that will turn to.
Earnings and receivables and then those receivables will get collected in the third quarter.
And and for Us.
And.
So we're just.
Following that path right now yeah.
<unk> was that just not just just pricing, but he also ramp and expected volume that dynaenergetics, both in North America, where that market is strong right now as well as international.
And I will say in Arcadia will have better matching up the.
The raw material prices with the backlog in with the inventory in the second half of the year, which will lead to a margin improvement.
That's all very helpful color I appreciate it.
Thank you.
And your next question is coming from Jim brilliant from century management Junior lines Lie. Please go ahead.
Hi, guys How're you doing.
Hi, Jim.
Afternoon.
I just wanted to clarify that last point, Mike did you say that Q3 Q forward.
You're looking at $15 million to $20 million per quarter, and free cash flow, so 30% to $40 million a second half.
Operating cash flow 15.
15, $15 million per quarter, and operating cash flow pre cap before capex, we're still evaluating capex.
But it should look like.
Okay.
Capex should look like.
Average the first and second quarters.
Okay.
Okay, Great and then can you guys kind of quantify what you think the.
Maybe characterize the capacity in industry capacity and appropriating market. These days.
I still think that there is.
Half of the.
Has has a time component and efficiency to it.
And.
Yeah.
And we're we're seeing.
Advantages Jim.
It's in our ability to respond quickly to to <unk>.
Increased demand.
And and.
But we're touching on earlier the ability to to orchestrate but.
Wireline and the frat cruise in a very efficient way.
And.
That.
Is easy.
Easier when you're vertically integrated and have the type of system that we have.
And so.
I don't want to say that the capacity for <unk>.
Perforating systems is tight.
It's the performance level of perforating systems is tight.
And that's where we're aligning with our customers and.
Getting behind.
The businesses that are operating most efficiently.
Yeah, I mean, there's.
I guess, that's the effect of capacity right, because you've got labor constraints across the oilfield services.
Business in total and.
It had some of your competitors go through some big downturns and had to reduce the labor force and that'll wrapping that up there's been some difficulty with some trying to.
Killed enough people for that and and now you've got complete.
Completion, and Frank crews that are.
You know the whole calendar is filled up so.
You know and it's a.
Effectively and efficiently deliver appropriating.
Appropriating guns.
It's gotta be getting tighter.
In that respect and more difficult so.
Your business model, obviously is better position to be able to do that than some of your competitors. So I guess I should I kind of just leads me to the next question. It looks like Q2, Q1 and Q2 the improvements were largely.
Some effective price increases, which.
Top line, but improved margins.
And it more so than volume, but yeah. My hearing incorrectly that now you're starting to see the inflection on both price and volume in the second half more so than you have in the first half.
And I would say our volume is.
Is picking up on our margins are improving more because of pricing and volume as.
As we go into the second half the balance of this year and I will note.
For all our E&P customers out there that again, we're a fraction of a percent.
When we're talking about.
And it's in terms of what it means to the.
Do the.
Cost of completing the well.
If if.
We're talking single digit.
Or.
Mmm.
$10000, a well not.
$200000 of all like you see the sand and other things at times.
Yes, just beyond that beyond that you provide efficiencies that the website. So.
Correct.
But.
Yeah.
So.
We're not part of the inflation, if you will of the well site.
We tend to view our value add is the.
The greater efficiency at the web site.
Better value.
So as the as.
We've heard about.
From all the E&P companies and pharma service guys that.
Everything is booked through the year and they're now looking at longer term.
Contract into 2023 for <unk> and and drilling crews.
So obviously, it's gotten tied all over the place.
Mmm.
And there's no let up and the difficulty of getting labor in that field.
Should we expect now that some of your your volume now gets back up the levels.
Are consistent with the higher <unk> and have that same kind of attach right.
That we've seen in the past.
Well I think I think we're pleased with our volume.
We're not trying to be all things to all people.
We're focused on that.
Full of.
Companies and we do want to be.
All things to them or as much as we can to them.
And and.
And we're like a lot of the other companies in the industry Jim that.
We have capacity we have capacity in place.
To support our.
<unk>.
Yo.
Our dining energetics, we're not going to add capacity unless it's a good margins.
And so we're we're really focused on serving the customers we have been making sure that.
We're getting rewarded for the value that we bring to them.
Uh-huh, Okay equipment Sir.
Moving over Novo clad so you know the.
Certainly the backpack, excluding the <unk>.
Increased prices and so.
Supply chain issues around.
K raw materials.
The demand backdrop as setting up nicely for you guys with.
The.
[noise] strengthen chemicals and <unk> and all the end markets that that is <unk>.
Materials, how do you look at it.
Over the next.
The second half it sounds like it's going to get better but ended 23 24 in terms of some finally getting some project growth through the system.
Yeah, I think I think when we look at this year, we're seeing mostly.
Price of metals entering into.
Yeah.
Potentially higher revenue.
And it.
There are large projects that are long cycle and.
But when we talk things in the second half of this year they fall into next year.
So.
Right now, we're we're working our backlog for the balance of this year mostly.
And.
We thank thee.
Back half of the year will be up over the.
The first half of the year and.
But.
8% to 10% range, but it's mostly pricing.
And then we see 20, we're not giving guidance yet.
For the back half, let alone for 23 and 24, but.
We'll start to see the projects get there then for 23 and 24.
Are you seeing increased.
A bit activity for 23 24.
We are.
We are definitely seeing increased quoting activity.
From from.
A lot of petrochemical from.
From maintenance too.
The larger projects take time, but they're they're being talked about.
Okay.
Alright, Okay, Yeah that does it for me. Thank you.
Thanksgiving.
Thank you and there are no further questions in queue. At this time I would now like to turn the core back to <unk> for closing remarks.
Thank you everybody for joining us for today's call and.
We look forward to getting back together at the end of the second <unk>.
Quarter and.
And later in the year. So thank you.
Thank you ladies and gentlemen, this does conclude today's conference call. You may disconnect. Your phone lines at this time and have a wonderful day. Thank you for your participation.