Good afternoon, ladies and gentlemen and welcome to the DMC Global first quarter earnings call. At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions and comments following the presentation. It is now my pleasure to turn the floor over to your host, Geoff High, VP of IR. Sir, the floor is yours.

Hello and welcome to DMC's first quarter conference call. Presenting today are President and CEO, Kevin Longe and CFO, Mike Kuta. I would like to remind everyone that matters discussed during this call may include forward-looking statements that are based on our estimates, projections and assumptions as of today's date and are subject to risks and uncertainties that are disclosed in our filings with the SEC. Our business is subject to certain risks that could cause actual results to differ materially from those anticipated in our forward-looking statements. DMC assumes no obligation to update forward-looking statements that become untrue because of subsequent events. A webcast replay of today's call will be available at dmcglobal.com after the call. In addition, a telephone replay will be available approximately two hours after the call. Details for listening to the replay are available in today's news release. And with that, I will now turn the call over to Kevin Longe. Kevin?

Thank you Geoff and good afternoon everyone. Our first quarter sales of $55.7 million came in at the low end of our forecasted range and were impacted by the push out of $1.7 million in orders at NobelClad, our composite metals business and by a winter storm in Texas that led to a nearly two week halt in U.S. customer activity at DynaEnergetics, our energy products business. Consolidated gross margin was 23% and also was within our forecasted range. Margins were impacted by lower absorption at DynaEnergetics due to the shutdown of our Blum, Texas manufacturing center following the winter storm and by higher spending on patent filings at DynaEnergetics. During the quarter, we spent approximately $1 million on patent litigation, which relates to legal action taken against several companies we believe are violating DynaEnergetics' patents. We are confident in our position and have the determination to see these cases through to a successful resolution for DynaEnergetics. DMC finished the first quarter with a strong balance sheet that included cash and marketable securities of approximately $67 million. We repaid in full the $11.8 million balance on our term loan, ended the quarter with zero long term debt and raised net proceeds of $25.3 million by selling shares in an at-the-market equity program. Our end markets continue to improve and we are encouraged by our prospects for stronger financial results during the second quarter and back half of 2021. NobelClad entered the second quarter with an order backlog of $43 million, several large international order opportunities and a new product offering expected to be commercialized later this year. At DynaEnergetics, well completion activity recovered rapidly following the February winter storm. Frac spreads, which are a key barometer of completion activity, are seeing increased demand. After declining to fewer than 50 spreads in May of last year, the industry was approaching 200 frac crews operating in unconventional U.S. basins by the end of the first quarter. The number of active spreads has continued to increase in April. DynaEnergetics implemented a 5% price increase on all products effective March 30 and we are beginning to see the impact of the increase in average selling prices month-to-date. Integrated perforating systems, which are less than 2% of the cost of completing a well, enable safer, significantly more efficient frac operations at a much lower total cost than conventional field assembled systems. After a challenging year, our businesses are again operating at full speed and our teams are back in the market visiting customers and meeting with suppliers. I want to thank our employees for their continued diligence, creativity and dedication to the success of DMC. I will now turn the call over to Mike for a review of our first quarter financial performance and a look at second quarter guidance. Mike?

Thanks Kevin. First quarter sales were $55.7 million, down 3% sequentially and down 24% versus last year's first quarter. DynaEnergetics reported first quarter sales of $38.2 million, up 8% sequentially and a decline of 28% versus the same quarter last year. International sales increased 65% sequentially while North America sales, which were impacted by the February storm in Texas, increased 1% sequentially. Sales at NobelClad were $17.5 million, down 20% sequentially and 14% versus last year's first quarter. Consolidated gross margin in the first quarter was 23%, up from 21% in the fourth quarter of 2020 and down from 33% in last year's first quarter. The decline from the year ago first quarter primarily relates to lower average selling prices at DynaEnergetics. DynaEnergetics reported first quarter gross margin of 22% versus 24% in 2020 fourth quarter and 37% in last year's first quarter. NobelClad reported first quarter gross margin of 26% versus 18% in fourth quarter and 25% in year ago first quarter. The increases reflect a more favorable project mix. Looking at our first quarter expenses. Consolidated SG&A of $13.2 million increased 5% versus the fourth quarter and declined 21% versus the year ago first quarter. We reported a consolidated adjusted operating loss of $583,000, which excludes $127,000 in restructuring charges at NobelClad. First quarter adjusted net income was $559,000 or $0.04 per diluted share versus adjusted net income of $5.3 million or $0.35 per diluted share in last year's first quarter. Adjusted EBITDA was $4 million versus $11.3 million in last year's first quarter. DynaEnergetics reported first quarter adjusted EBITDA of $3.5 million, while NobelClad reported adjusted EBITDA of $2.7 million. As Kevin noted, we repaid our $11.8 million term debt in full during the first quarter and raised an additional $25.3 million under our at-the-market equity program bringing our total cash and marketable securities balance to $66.8 million. Looking at guidance. Second quarter sales are expected to be in a range of $67 million to $72 million versus the $55.7 million reported in the 2021 first quarter. At the business level, DynaEnergetics is expected to report sales in a range of $44 million to $47 million versus the $38.2 million reported in the first quarter. NobelClad sales are expected in a range of $23 million to $25 million versus the $17.5 million reported in 2021 first quarter. Consolidated gross margin is expected in a range of 25% to 26% versus 23% in the first quarter. Second quarter selling, general and administrative expense is expected to be approximately $14 million to $15 million versus the $13.2 million reported last quarter. The sequential increase primarily is due to an anticipated $1.5 million of litigation expense at DynaEnergetics, investments in digital transformation, resuming business related travel and restoring variable compensation. Amortization expense is expected to be approximately $300,000. Interest expense is expected to be in a range of $90,000. Adjusted EBITDA is expected in a range of $6 million to $8 million versus $4 million in the 2021 first quarter. With that, we are ready to take any questions. Operator?

The operator provided instructions for posing questions. Your first question is coming from Tommy Moll. Your line is live.

Good afternoon and thanks for taking my questions.

Good afternoon Tommy.

Kevin, I wanted to start on DynaEnergetics. You are up quarter-over-quarter again. Guidance for second quarter calls for another sequential increase which would be four in a row, I believe. So the industry is moving in the right direction here. You have announced a pricing increase. It sounds like you have started to realize some benefits from that. On the other hand, in recent quarters you have talked to the inventory overhang across the whole competitive landscape, so potentially a crosscurrent there. So I wonder if you could unpack for us some of the competitive dynamics that you are seeing in the marketplace right now? Thanks.

Yes. I think you have captured it well, Tommy. The inventory overhang has pretty much worked its way through the system. There is still some inventory but it's not across the board. It's with certain companies. We actually believe that from where we are today going forward that people are going to be building for demand and anticipating a greater level of demand going into the second half of this year compared to the first half. Pricing is, we are out in front with the price increase. We are seeing some positive results in terms of our average selling prices going into April, albeit it's still early in April. And activity, as it picks up, will support margins. The one thing that we are always conscious of and still need to see improvement on in the market is the profitability of our customers. And it's also necessary for our customers to improve their profitability for us to improve our pricing and our margins over time.

Thank you Kevin. That's very helpful. I wanted to pivot to the balance sheet. So all your debt's been repaid. You have continued to build the cash, in part through the offering that you called out in the earnings release. So again, just hoping you could help us read the tea leaves here. Should we think about potential acquisitions near term? Any potential change in capital allocation strategy that might be forthcoming? Or should we view this more as conservatism on the heels of a pretty severe downturn and just wanted to protect the balance sheet?

We believe our two businesses are sustainable from a cash flow and cash generation standpoint. Month-to-month or quarter-to-quarter, depending on a capital project, they may consume or generate cash. But all-in-all, we expect our two businesses to generate cash and fund themselves as we go forward. The ATM, the building of our cash balance is to help our two businesses look within their markets for opportunities from a bolt-on acquisition standpoint, companies or areas that would improve their competitive position, expand their total available market and leverage their sales channels to the markets that they are in. And it's also part directed towards future activities, looking at businesses that we could add to our portfolio. At the end of the day, DMC is a holding company for technical businesses in niche markets and the way for us to grow is to expand our total available market through adding new product lines or businesses. And so we are working towards M&A as we go forward.

Thank you Kevin. And if I could toss one more in. There is a new administration in Washington that's talked about potentially incentivizing plugging old wells. You have got a system DynaSlot that can do that for operators. So realizing it's early in the process here, but any comment you would want to offer for a system that investors may be less familiar with, just in terms of the capabilities and the potential opportunity that you see here?

Yes. I mean there is thousands actually, potentially hundreds of thousands of abandoned wells that have not been plugged properly that leak methane and greenhouse gases and it's prudent for the industry to invest into capping those so that they no longer contribute to the greenhouse gas situation. And so we are pretty excited about the fact that the new administration is dedicating resources to this area, which should benefit our customers and should benefit the product line that we have that is a very effective tool used in plug and abandonment.

Thank you Kevin. I will turn it back. I appreciate it.

Your next question is coming from Taylor Zurcher. Your line is live.

Hi. Thank you and good afternoon. Kevin, I wanted to start on DynaEnergetics, the guidance for Q2. I mean if we add back the $5 million in sort of lost sales due to the winter storm, there is really not a whole lot of the growth sequentially. And I realize it's not really an apples-to-apples comparison. But just hoping you can help us parse through U.S. versus international. It looks like Canada sales were fairly strong and that will obviously getting pretty hard as we go into spring break up in Q2. But could you help us parse through the U.S. and international as it relates to sequential growth in Q2 within DynaEnergetics?

Yes. One thing I would like to note first is, our two businesses have somewhat behaved differently when there is a market disruption. NobelClad, which makes a product that goes into the construction industry around downstream petrochemical applications, when there is something that misses in their quarter, it goes into the next quarter and it's additive to that quarter, we recover that business. In DynaEnergetics, DynaEnergetics makes a consumable and an integrated system that's delivered fully assembled to the field or to the well at time of consumption, just in time. And we are able to catch up in terms of our ability to manufacture products, but the time that was lost in that one to two week period, by our service companies is time that they have a hard time regaining. And so it doesn't necessarily go from one quarter to the next in DynaEnergetics because it's dependent upon the service companies.

And Taylor, I would just add that the Q1 to Q2 growth is all in North America. We are forecasting international to be flat Q1 to Q2. It's a lumpy business. We expect that to be much stronger in the second half. So all the growth that you are seeing is North America.

Got it. That's very helpful. And my follow-up is in NobelClad. I know that business can be lumpy as well, certainly from a margin standpoint and the margins rebounded nicely this quarter. I am curious as you look out over the balance of 2021 that the backlog is strong and guidance for Q2 was relatively strong as well. From a profitability standpoint, just based on the mix of a backlog and work you have in front of you right now, do you think that the mid-teens EBITDA margin type ballpark that you did in Q1 is kind of the right place to think about that business, at least in the near term future?

Yes. I would say low to mid teens. The first quarter was a highly favorable project mix. So I think that is going to be a business that can be low to mid teens on EBITDA. So yes, I think that's a good ballpark to think about.

Great. Thanks for the answers. I will turn it back.

Your next question is coming from Stephen Gengaro. Your line is live.

Thanks. Good evening everybody.

Yes. Good evening Stephen.

A couple of things. And I guess, you started at Dyna. You have talked about it in the past and when you look at what the customers are doing and I think in 2020, they were in cost cutting mode as the world kind of unraveled. But as you think about this shift towards integrated perf systems versus components and that would tie in to another question about inventories. But what are you seeing there as far as the overall industry trends to kind of reaccelerate the adoption of the integrated perf systems versus the components?

Well, first of all, the recovery is in the very early stages. And somewhat of what we experienced in the back half of 2020 is that when the market is down and down as significant as it was and there is a large inventory of components in the marketplace, the focus was on cash flow in turning those components and turning that inventory into cash. And in systems, somewhat to the back seat to consuming inventory and generating cash for the companies that have a lot of inventory. And to move that inventory in a market that was extremely challenged, price was an important factor in moving it. And so, we are just beginning to return to a more normalized situation where the inventory is out of the market. The companies are having to invest in working capital and manufacturing capability to meet current demand. And there is a number of companies that we see that were consuming components in the downturn that may not go the field of assembled component path as we come out of the downturn.

Got you. Thanks. And along those same lines, you mentioned a little bit on this, that you clearly saw something because you put forth a price increase on the DynaEnergetics side and it sounded like you are seeing some traction on that front. Is that fair?

We have seen some traction. Yes, it's still early. I will say that we probably do not see broad based support in the market as of yet. But we are hoping that the market pricing will strengthen as the activity strengthens going into the second half of the year.

Okay. Great. Thanks. And two questions around the litigation. One is pretty straightforward, I think. The second quarter adjusted EBITDA guidance is $6 million to $8 million, is that after deducting or is that excluding the expected litigation of the about $1.5 million?

That's after our spending on litigation.

So it's $7.5 million to $9.5 million, if you strip

Correct. Yes, if you strip it out, correct.

Okay. Good. I just wanted to check that. And then I know you are probably reluctant to say much, but is this around the charges in the downhole energetics? Or is this around the delivery system?

Well, you see, it's around, yes, there are three areas of intellectual property that are involved. And two of the areas are around the delivery system and the packaging of the shaped charges and one is around the initiating system and the design of that technology.

Okay. Great. And if I could just slide in one more. As you think about the gross margin progression and we have talked about this in the past around your Dyna margins and gross profit margins were ticked above 40% for quarters in 2019 and not to the average, just a touch under 40% in 2019. As activity normalizes and you look into 2022 maybe, one of the things we are seeing in the industry is, as E&Ps are sticking to their capital discipline, I think as an industry, for example, on the pressured pumping side, I think people are not expecting this. They are expecting price improvement as things tighten at some point, I believe, at least some are. But they are not expecting the kind of moves we have seen in prior cycles. And I was just curious in the context of E&P capital discipline, is it reasonable to think that those Dyna gross profit margins can get back to 30%-plus?

Without a doubt. It's one market that we participate in a different part of the ecosystem than some of the other service and product companies. And it's important to realize that we have an asset light, high variable cost business with differentiated products that have a greater value and use for our customers. There is significant cost savings to the companies who organize their business around our products and systems. They have a much lower total cost and a higher value add to their customer. And so our products pay for themselves. And they are integrated perforating systems, which enables the safer and more efficient operations; when you look at the cost of drilling and completing a well they are less than 2% of the cost of the completion of the overall well construction, yet they are a significant contributor to the productivity, safety and efficiency of completing wells. And so it's a whole different thing that if you have overcapacity in assets that need to be utilized and you have a high fixed cost, it's quite a bit different when it's an asset light variable cost business and there is differentiation on the performance of the products in use. So we are cognizant of and sensitive to the profitability of our customers and we are working hard with them to optimize the total cost between our two businesses and our ability with our customers to serve the E&P. And I think that we have got a strong approach that will definitely allow us to return to acceptable margins.

Great. Thanks. I will get back in the line. I appreciate the color.

Your next question is coming from Gerry Sweeney. Your line is live.

Hi. Good afternoon. Thanks for taking my call, Kevin.

Yes. Hi Gerry.

Just following up a little bit, maybe on just DynaEnergetics. And just curious, it's all about, well, I think it's partly about expanding your customer base and I know there was a lot of components in the market and people are sort of chewing through them over the course of the past year, let's say. But would you be able to say, do you have more customers today than you did a year ago? Or specced in? Or however you would want to answer that?

I think we have more E&P companies and operators that are aware of our product line. We have probably a similar number of customers to a year ago. It's really about going deep with those customers. And we are not out chasing low price component business, which is what the market has been for the last essentially four quarters. And so we feel that there is a pretty strong awareness and that we are working with the right people so that when the market does start to improve, we will go deeper with them and you will see the growth in our revenues.

On that front and I didn't want to imply that you were chasing price components. But digging a little deeper, as you said deeper in the customers, is this a function also maybe of your customers, they have a base load of employees and if activity picks up, right, you remove a certain labor constraint and hiring and supply chain. If activity picks up, are they sort at the base where they want to be? And as activity picks up, do they use more of your equipment because you alleviate the need to bring more people on, component upside, right?

Yes. I mean, we are definitely the industry, as it's gone through two once-in-a-lifetime downturns over the last seven years, has fewer people in it, fewer knowledgeable people and skill in the area of assembling explosives into perforating systems. And it doesn't make sense for companies who are not directly integrated in the components themselves and have the engineering and the technology to support aspects around it to, by the very nature, they are going to be less efficient and less skilled and they are assembling systems of components that aren't designed to work together. And so we think that the consolidation that's taking place, the attrition in either people or companies is going to favor the perforating companies and we are just one of them. There is others that will benefit from this. It will favor those that have a medium to longer view investment of the market and the investment to build systems on things that were vertically integrated in doing and in even managing supply changes becoming more complex. And we can do it more effectively and efficiently than people who do it on a part time basis or for a small part of their overall needs.

Got it. Switching gears slightly to NobelClad. How has COVID impacted, or how much has COVID impacted, the sales cycle there? Obviously, these are long lead-time projects that, once they are started, tend to continue, but timelines can shift by several quarters, if not more. Do you have any?

Yes. COVID did not, I mean, it impacted it more around the periphery compared to DynaEnergetics. And because the longer lead time, longer gestation period for these projects, we see things where there has been shipment slowdowns and difficulties on the logistics of either getting metals or shipping composite plates and products, but not in terms of the overall activity. And a lot of what they make goes into markets that are more GDP driven and more stable on a longer term basis.

Got it. Okay. I appreciate it. That's it from my end. Thank you.

Your next question is coming from Matthew Galinko. Your line is live.

Hi. Good afternoon. Thanks for taking my questions. Maybe first on the patent litigation. Can you give us a rough sense of timeline? And how should we expect litigation expenses to hit as we move through that litigation process?

Yes. I think intellectual property, IP litigation is more of a marathon than a sprint with the way the discussions take place, the filing takes place and then the response to the filings. And we expect it to continue throughout 2021 and into 2022, without a doubt. I will say that we have had litigation happening kind of in the background for a couple of years now. It's just accelerated, both as our patent portfolio has grown and as the strength of our designs have been recognized. So we had a step up in September, October of last year in terms of sending letters to those that we believe are infringing. We have had a mixed bag of responses. And we started filing infringement suits. Unfortunately, we do not enjoy this. We wish we did not have to take this path. But we started filing those in December. And so we are just early in the innings of some of the two out of the three areas that we have intellectual property and one we have been in it for quite some time. And it's a long process.

And Matt, when we think about the $1.5 million in Q2, we expect that run rate currently right now to be there for Q3 and Q4 as well.

Got it. So I mean, if we get to the point of a trial, would we expect a run up at that point. So if we get scheduled for a trial in 2023 and you are not able to figure something out or maybe 2022, I guess just generally do you have a sense of, at what point do you get to a trial? Is it 2022? Is it 2023? Just how far backlog are the courts now? And has COVID created any challenge there? And do you expect to see a bump up to those expenses as you get to a trial?

A trial certainly would put bump up the expenses. But we are communicating with all parties right now. They understand how we believe they infringe. We are open to discussions for resolving this outside of court and hope that we can avoid going to court. But we are also organized very efficiently on this. And it's important and we knew this was a potential and necessary action that may have to be taken when we filed the patents in the first place. And so there is an obligation on our part when we feel that infringement is happening and it's impacting us in the marketplace that we have to defend the intellectual property that we filed in the first place. And so we are very focused on this and committed to seeing it to successful conclusion. But the path, we believe, is straightforward. But there is a lot of jockeying to get to where we need to be.

Got it. That makes sense. And just I guess as a follow-up, the backlog in NobelClad business was a pretty nice move sequentially. I am just curious how much of that do you put on market development efforts that you have been engaging in over the last couple of years?

Well, I think the market development, a small amount. One of the other things that we measure in addition to our backlog is our book-to-bill. And our book-to-bill has just seen a modest increase over the past year. And so the backlog is quite a favorable backlog but it doesn't reflect some of the projects that we hope to start landing over the next few quarters. We are pretty excited about some of the new applications and products that NobelClad is now commercializing and it takes a long time to commercialize in a construction related product or process related product. And so we feel pretty good that they will have a modest improvement this year over last. But it should get stronger from here on out.

Great. All right. Thank you.

Your next question is a follow-up coming from Stephen Gengaro. Your line is live.

Thanks. Two quick ones. But one is, any color on the LoneStar system that you guys started talking about I think on last quarter's call? And any other new products worth highlighting that are gaining traction?

Yes. We are seeing a great deal of interest in the LoneStar. And we have rolled it out cautiously so that we get time in the market and the bugs worked out a bit. But it's a pretty powerful perforating system that's gaining a lot of interest. And so the areas that we see right now are the LoneStar and also our oriented perforating systems. Those would be the two areas that have our Gravity system that has the strongest level of interest right now.

Another quick one. I think Mike mentioned earlier the international business has been a little bit lumpy on DynaEnergetics. And I struggle to sort of think that how to model it. But last year, I believe that did about $35 million for the year. Is that a reasonable place to start as international revenue target for 2021 in Dyna?

Stephen, when we say international, it's everything but U.S. and Canada. And last year, I believe that was $31 million and that $30 million to $35 million range, low 30s is where we see that going this year. And again it did about $7 million in Q1 and we have got it forecasted for $7 million in Q2.

All right. Thanks. I was actually including Canada by mistake there. But thanks for that. All right. That's all I have. Thank you gentlemen.

We have no further questions from the lines at this time. I would now like to turn the floor back to Kevin Longe for closing remarks.

We would like to thank everybody for joining us for this call. As I mentioned earlier, the further we get into this year, the stronger we believe our markets are expected to be and we look forward to discussing this with you in July. And thank you very much.

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.