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00:03 Good afternoon, ladies and gentlemen, and welcome to the DMC Global Third Quarter Earnings Call. At this time, all participants are in a listen-only mode, and the floor will be opened for your questions and comments following the presentation. 00:16 It is now my pleasure to turn the floor over to your host, Geoff High, VP of Investor Relations. Sir, the floor is yours.

00:25 Hello, and welcome to DMC’s third quarter conference call. Presenting today are President and CEO, Kevin Longe; and CFO, Mike Kuta. 00:34 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. 01:03 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. 01:18 And with that, I will now turn the call over to Kevin Longe. Kevin?

01:22 Thank you Geoff, and good afternoon, everyone. Activity in DMC’s primary end markets continued to improve during the third quarter. However, the recovery was accompanied by various short-term challenges that negatively affected our operational and financial performance. 01:42 Supply chain bottlenecks and travel restrictions impacted international sales at DynaEnergetics, our energy products business, while delayed deliveries of metal plates slowed manufacturing activity at NobelClad, our composite metals business. These factors led to consolidated third quarter sales that were four percent, or $2.8 million, below the low end of our forecasted range. 02:10 An important development during the quarter was the improved demand DynaEnergetics experienced in its U.S. onshore oil and gas market. Third quarter unit sales of DynaEnergetics’ fully integrated factory-assembled DS Perforating System increased nineteen percent versus the second quarter. This was well above the increase in unconventional well completions, which were up six percent sequentially according to the U.S. Energy Information Administration. 02:45 As unconventional completion activity accelerates, the superior safety, efficiency and reliability of our DS Systems becomes increasingly important to our customers. This is especially true in a tight labor market. Since DS systems are delivered just in time to the well site, our customers can streamline the supply chain, eliminate assembly operations and reduce the number of people on location. 03:14 While well completion activity improved during the quarter, pricing pressure remained a significant challenge. Rising labor and raw material costs have only intensified the pressure on margins. 03:28 Crude prices have increased approximately seventy-five percent since the start of the year and have significantly improved the health of the exploration and production industry. Operators are now increasing their capital spending budgets in anticipation of the coming year, and we believe this should help improve the health and profitability of the industry that supports these E&P companies. 03:53 On Tuesday, DynaEnergetics announced a five percent global price increase that will take effect on November 22. The increase is intended to offset higher labor and input costs as well as the anticipated wind-down of the CARES Act. 04:11 DynaEnergetics' substantial investments in new technologies have resulted in a robust product portfolio that has improved the safety, efficiency and effectiveness of our customers' operations and has led to increased productivity, profitability and job creation in our industry. 04:31 The significance of these investments is reflected in the approximately eighty patents we've been granted and the more than four hundred patent applications we have filed. Our patent strategy is designed to protect our investments and provide transparency, so others can innovate without violating our intellectual property. Despite this, a number of competitors are selling products that we believe infringe on DynaEnergetics' patents. 05:00 During the third quarter, we intensified our legal action against several of these companies, spending $2.3 million on patent litigation. We intend to continue these expenditures until the issues are resolved. Our commitment of resources to this process reflects our belief that if intellectual property is not protected, the incentive to innovate is lost and the sustainability of the industry is threatened. 05:30 The outlook in DynaEnergetics' international markets is improving. DynaEnergetics recently entered into a global supply agreement with a large international service company and was also awarded two Middle Eastern projects that will be shipped over the next few quarters. Based on current activity, all indications are that 2022 will be a strong year for DynaEnergetics' international business. 05:59 At NobelClad, interest continues to grow for the new DetaPipe product offering, and we anticipate initial orders by early next year. In addition, pricing continues to strengthen for various cladding metals and NobelClad has improved its commercial organization and strengthened its sales team and market specialists. 06:21 We are encouraged by the strengthening economy and improving demand in our key markets. We have maintained a strong financial position and operate two highly innovative businesses that continue to lead their industries. 06:36 With that, I'll turn the call over to Mike for a review of our third quarter financial results and a look at fourth quarter guidance. Mike?

06:46 Thanks, Kevin. Third quarter sales were $67.2 million, up three percent sequentially and up twenty-two percent versus last year's third quarter. 06:56 DynaEnergetics reported third quarter sales of $44.2 million, up five percent sequentially and twenty-nine percent versus the same quarter last year. North America sales increased fourteen percent sequentially, while international sales decreased thirty-eight percent sequentially. 07:15 Sales at NobelClad were $20.9 million, down one percent sequentially and up nine percent versus last year's third quarter. 07:24 Consolidated gross margin in the third quarter was twenty-five percent, down from twenty-six percent in the second quarter of 2021 and flat compared to last year's third quarter. Third quarter gross margin benefited from improved project mix at NobelClad, which was offset by a decline in international sales and higher material cost at DynaEnergetics. 07:45 DynaEnergetics reported third quarter gross margin of twenty-two percent versus twenty-five percent in the 2021 second quarter and twenty-four percent in last year's third quarter. 07:58 Gross margin in all 2021 quarters includes the effects of employee retention credits related to the CARES Act, while last year's third quarter benefited from higher-margin international sales that were approximately $4.6 million greater than this year's third quarter. 08:14 NobelClad reported third quarter gross margin of thirty percent versus twenty-eight percent in the second quarter and twenty-six percent in the year-ago third quarter primarily due to improved project mix. The CARES Act credits also contributed to higher gross margin versus last year. 08:31 Looking at our third quarter expenses, consolidated SG&A of $15.3 million increased nine percent versus the second quarter, and thirty-two percent versus the year-ago third quarter. The sequential increase primarily relates to a step-up in patent litigation expense at DynaEnergetics. 08:50 We reported a consolidated operating income of $1.1 million. Third quarter net income was $403 thousand or $0.02 per diluted share versus adjusted net income of $1.2 million or $0.08 per diluted share in last year's third quarter. 09:06 Adjusted EBITDA was $5.8 million versus $6.0 million in last year's third quarter. DynaEnergetics reported third quarter adjusted EBITDA of $3.6 million, while NobelClad reported adjusted EBITDA of $4.6 million. 09:22 We ended the third quarter with cash and marketable securities of $182 million after raising $123.5 million in the equity offering in May. Our total outstanding share count is now 18.7 million. 09:36 Looking at guidance, fourth quarter sales are expected to be in a range of $68 million to $74 million versus the $67.2 million reported in the 2021 third quarter. 09:47 At the business level, DynaEnergetics is expected to report fourth quarter sales in a range of $46 million to $50 million versus the $44.2 million reported in the third quarter. We anticipate that international sales will bounce back in the fourth quarter. NobelClad sales were expected in a range of $22 million to $24 million versus the $20.9 million reported in the 2021 third quarter. 10:14 NobelClad’s fourth quarter sales forecast includes $8.8 million related to a previously announced order from the chemical industry. Receipt of the raw materials required to produce the order have been delayed due to supply chain bottlenecks. While NobelClad still expects to receive the materials and ship the order during the fourth quarter, there remains a risk some or all of the shipment will occur after year end. 10:39 Consolidated gross margin is expected in the range of twenty-three percent to twenty-four percent versus twenty-five percent in the third quarter. Fourth quarter selling, general and administrative expense is expected to be approximately $15 million to $16 million versus the $15.3 million reported last quarter. 10:58 Amortization expense is expected to be approximately $200 thousand. Adjusted EBITDA is expected in a range of $5 million to $6 million versus the $5.8 million in the third quarter of 2021. The fourth quarter adjusted EBITDA forecast includes litigation expense of $2 million and assumes the previously enacted CARES Act legislation remains in effect through year end. 11:21 Fourth quarter capital expenditures are expected in range $2 million to $4 million. DMC’s full year tax rate is expected in a range of thirty-one percent to thirty-three percent. 11:30 With that, we're ready to take any questions. Operator?

11:36 Ladies and gentlemen, the floor is now open for questions. Your first question is coming from Tommy Moll. Your line is live.

12:02 Good afternoon and thanks for taking my questions.

12:04 Yes. Good afternoon, Tommy.

12:07 Kevin, I wanted to start on the price increase you recently announced for DynaEnergetics. Specifically, if you could give us an update on the industry and competitive environment there? What gave you the confidence to go ahead and move forward again with implementing the increase? 12:24 And then in terms of the timing, I noted it looks like it's set to become effective late November, so not a whole lot of volumes there in the rest of the year. Should we think of this strategically as a message for the customer base to really start thinking toward their 2022 outlooks, because given that's right around when there will be a big budget planning season for next year on presumably a much higher crude deck than currently in place?

12:54 Yes. Tommy, I think you've read that well. It is messaging. Prices need to go up in our industry. The price increase that we announced in the first quarter to take effect in the second quarter—we actually did not get support from the industry on that price increase. And so, we ended up rolling that back, which initially impacted our volume at the beginning of the third quarter. We rolled it back and you can see what happened to our North American land-based business in the third quarter. 13:39 And so, the price increase is surely needed—prices are down significantly from where they were previously and where it is healthy for our industry. We are seeing labor and material cost increases and supply chain cost increases. And there's the CARES Act that—for some companies will fall off in the beginning of the year. And so, this will be the first of what will probably be two or three price increases over the next twelve to eighteen months.

14:19 That's helpful, Kevin. Thank you. Also, I was hoping we could get an update on your M&A pipeline. Any way you could characterize it for us in terms of number of deals you’ve looked at, potential timing, any update on priority end markets, anything you could offer would be helpful?

14:39 I think the only thing that we can say there, Tommy, is that we’re active and we've looked at some interesting things. It's less quantity than it is quality and strategic with our company. But we don't have anything that we can talk about at this time.

15:01 Fair enough. And if I could slip one more in. This is probably for Mike. Mike, just looking at your full year guidance on the tax rate, if I'm doing my math correctly, I've got to assume a pretty high rate in Q4. And I just want to understand—maybe I've missed something there—if there's something specifically about the fourth quarter that you could clarify just as it will impact everyone's EPS assumption for the next quarter?

15:29 Yes. Tommy, our tax rate is back-end loaded because we have discrete items in the first half of the year that drive the rates down. So therefore getting back to a thirty-one to thirty-three percent rate requires a higher back-end rate. So you're reading that right.

15:51 That's very helpful. Thanks for the time and I'll turn it back.

15:56 Thank you, Tom.

15:59 Your next question is coming from Stephen Gengaro. Your line is live.

16:05 Thanks. Good afternoon everybody.

16:09 Good afternoon, Stephen.

16:11 So a couple of things, and wanted to just follow-up on Tommy's first question. With the price increase you announced earlier this week or the push to get it through November, are you seeing a change in behavior from your peers yet? Like, are you seeing higher activity expectations? What's given you the confidence that, A, you can get this through; and then B, your subsequent comment that you expect a couple more in the next twelve months?

16:43 We have seen and are hearing both through earnings calls and some activities in the marketplace that a couple of our major competitors also feel they need to increase prices to return margins where they should be. So, I think that we're going to see generally more support from a market standpoint. And the ultimate end-use markets for our E&P customers are strong. 17:18 I think the lack of being able to push through a price increase to date has more been driven by our customer market. The wireline service companies have been oversupplied and relatively fragmented. There's been a lot of competition among our customers on price. And so, we've seen a lot of buying on price from the general market and there are a number of service companies who have not fully adopted the just-in-time delivered-to-the-well-site model—where they maintained the vertical integration in building perforating guns. The industry has kind of reverted to a component industry and a low-priced market. 18:17 We haven't seen as much system sales from the major companies and we've seen a lot of smaller machine shops that are making partially assembled carriers and carrying the litigation risk, if you will, by violating our IP, be a larger part of the market. We think that part of the market is going to be challenged not just by our legal actions, but also by their own lack of profitability and rising material costs. And so, we feel we're in a pretty good position. It has taken longer for some of the attrition and consolidation that we think is necessary in our market to take place. 19:12 But at the end of the day, our systems are lower in cost for our service company customers, even though the initial price may be higher. We do get a premium over other systems, but we are supporting our customers right now who are competing against other wireline service companies that have a more commodity-like component mentality at this time.

19:45 Okay. And then as we think about—on the 4Q guide, I mean, you mentioned—and I think Mike mentioned—international recovering a bit, which kind of sounds like that means U.S. Dyna is pretty flat. That's a little surprising given the activity growth we're seeing. Is that seasonality, or is there something else I should be thinking about?

20:15 There's a little bit of seasonality in North America, but the underlying volume of operating systems that we're making is pretty healthy. What we need to see is the price increase starting to take hold. And we also expect the number of completions to accelerate going into 2022. There's somewhat been a slowdown in completions with the drilled-but-not-completed inventory declining dramatically over the last couple of quarters and CapEx moving more towards drilling. That bodes well for completions in the new year. We're very excited about the hand that we have going into the new year.

21:17 And Stephen, just quickly, on the international front, we see that in the $6 to $6.5 million range in the fourth quarter, up from $4.6 million in Q3. So, I still show North America growing at the bottom end of what we're thinking North America is going to do for DynaEnergetics, so we still think that's going to be the bottom end—flat to slightly up—with some upside to that.

21:47 Okay. That's helpful. And then just one more. When you think about your history and then you look ahead to 2022, I believe your incremental operating margins on Dyna have been really healthy historically—around forty percent where things are normalized. Should we expect that type of incremental margin next year as we go through pricing expectations off weak pricing plus activity growth, or am I missing something?

22:41 Yes, I think you'll definitely see the incremental margin improving as the year goes. We're walking through price increases taking those throughout the year while volumes are picking up. I'll say two things: we require significantly fewer people at the well site and in our service company customers' operations, and in a tight labor market that favors our integrated system delivered to the well site. As volume picks up, we should see an improvement in share and an improvement in margin as we get the price increases implemented. 23:40 We should see that unfolding as the year continues. We probably won't get to that forty percent by the end of the year, but we should be fairly strong. Mike?

23:54 Yes. And just as a reminder, NobelClad is usually in that forty to forty-five percent range historically on contribution margin. DynaEnergetics has also been in that forty to forty-five percent range. As we enter 2022 and get price increases, we're going to be in the low-thirties on that contribution margin initially. As we get a couple of price increases across, I think we'll start to approach that forty percent contribution level as we get into the back half of 2022 and exit 2022.

24:32 Okay. Great. That's helpful. I'll get back in line. Thank you.

24:46 Your next question is coming from Taylor Zurcher. Your line is live.

24:52 Hey, Kevin and Mike. Thanks for taking my question. My first one is on Dyna. Could you give us a bit more color on the walk-down in margins, at least at the adjusted EBITDA line at Dyna, Q3 versus Q2? You talked about some of the issues going on internationally and there was less favorable mix, which is pretty clear. But in total, I suspect that volumes were up—certainly up in North America sequentially. Could you maybe talk to what the margin differential is between international and North America and whether the margins in North America might have actually taken a hit sequentially if some of these inflationary items ramped up more dramatically than you might have thought previously?

25:45 Hi Taylor. When you look at twenty-five percent gross margin in the June quarter versus twenty-two percent in the September quarter, the largest driver was the lower international mix, which does carry higher margins than what we have here in the U.S. We also had supply chain issues and some raw material inflation driving that, but the largest factor was mix driving us from twenty-five percent to twenty-two percent.

26:21 Okay. And as we think about a five percent price increase for November and beyond, does that just keep margins flat on a unit economic basis? Or is there some net momentum embedded in that five percent increase?

26:38 Excluding the CARES Act, there's a fair amount of net momentum in that, Taylor. We're in a fortunate position where we feel that we are managing our supply chain and our operations very well from a cost standpoint. A lot of the inflation that we've seen is already embedded in the margins. We're happy with our volume picking up. One challenge is continuing to walk the industry through the merits of switching from a component-driven business to a systems business—particularly a systems business that is strong in intellectual property—and restoring some of the pricing that our customers are supportive of, but they're competing against other service companies who are less price- and margin-focused. We're in a strong position and we also have the capital in place, not only for the existing demand, but for the demand that we see over the next eighteen to twenty-four months.

27:59 Okay. Last question for me is on international at Dyna. You mentioned a supply agreement with a large international service company and a couple of awards in the Middle East. As we think about the next twelve months or through 2022, it feels like international has a bunch of tailwinds. Can you frame realistic expectations for growth internationally in 2022? Do you think 2022 could get back to where you were in 2020 internationally or is it still a longer-term story?

28:39 We actually feel that 2022 will exceed where we were in 2020 internationally. This quarter was a tough quarter internationally, but the projects are the large tenders that the business has been successful in securing and most importantly, the service agreement with one of the leading international companies is really going to strengthen our international sales. We think we'll exceed quite a bit.

29:19 Got it. Thanks for the answers.

29:22 In fact, when I say quite a bit, we should be up twenty percent to thirty percent over where we were in 2020.

29:30 Makes sense. All right. Thank you.

29:34 Your next question is coming from Gerry Sweeney. Your line is live.

29:39 Hey, good afternoon guys. Thanks for taking my call.

29:43 Yeah. Good afternoon, Gerry.

29:46 I wanted one question on NobelClad. In the last metal cycle, we saw it turn out to be pretty positive. I know part of your customers—either you do the purchasing of metals and pass through the call or there's a markup. Is there an opportunity to see some improvement in NobelClad just from metals pricing if this trend continues?

30:23 Yes. NobelClad has a differentiated product and a very strong history and process for pricing by project and generating about a forty-three percent average contribution margin that's based on the costs of the materials incorporated into the project at that time. 31:06 When they quote a project, the price is dependent on the price of metals at time of order, and then we place orders locked into those metals and it's reflected in a consistent margin for that business. Most of their projects are out several months. We're starting to see higher metal pricing flowing through the quoting process and into orders that are being placed, and it goes right into driving the revenues higher. So, we feel that there's good momentum going into the new year for NobelClad in terms of metals pricing.

31:59 So constant margins—the margins are the same but gross profit dollars up just because the size of the projects costs are up as well. Right?

32:12 Quite a bit. Yes.

32:13 Got it. Okay. That's it for me. I appreciate it. Thank you.

32:20 Your next question is coming from Stephen Gengaro. Your line is live.

32:27 Thanks. Two other quick ones. When you think about the Dyna business and where you were a few years ago as the product started to gain traction, you had a huge run driven by activity and adoption. Looking to 2022 and 2023, which look like they will be pretty strong years based on E&P spending and commodity prices, what's different? Is the competitive landscape different? Is the way customers are taking your technology changing? Or is it just activity growth and the ability to realize the value you bring to the wellsite?

33:29 One thing that's changed is we have a handful of machine shops that are making partially assembled carriers—approximately half the cost of a perforating gun or perforating system—and violating what we believe is our intellectual property by assembling components they buy externally into a perforating system that has some of the features our system has. 34:14 These companies aren't vertically integrated in energetics. Their systems are mismatched components that don't have the same operating safety and performance features as ours. Significantly, they violate our IP and we're actively going after these companies to stop them from using our IP on how they assemble these carriers. We feel we've had solid progress on the legal side. A lot of the legal work has been jurisdictional or procedural, but not substantive, and we expect to positively impact our competitive landscape on our intellectual property over the next year. That will enable our business to continue the same dynamics we had in 2017–2020. We've maintained our position in the market; it's just been an unsettled market over the last couple of years, and we expect it to be more normalized going forward.

35:48 Great. That's helpful. Thank you. And then just one quicker question—the nineteen percent unit sales growth in the U.S. market in the quarter—when we look at activity growth in 2022, would you expect your volume growth to outpace underlying frac stage growth? Obviously pricing will matter, but do you expect to take share?

36:19 We would. We expect to continue to gain share in this marketplace. We see unit volumes going up greater than ten percent, probably in the ten to twenty percent range. We expect pricing to go up another ten percent in the coming year. We're not at the point of giving guidance yet for 2022, but we see share, volume and pricing all benefiting DynaEnergetics in the coming year.

36:56 Great. Thank you for your help.

37:02 Your next question is coming from Tommy Moll. Your line is live.

37:08 Thanks, Kevin. I just wanted to make sure I understood correctly a couple of minutes ago you referenced the contract award for Dyna on the international side should drive some pretty substantial growth internationally next year. I think I heard that correctly. And did I hear you give a range somewhere in the twenty to thirty percent range? Any other context would help?

37:37 Yes, I think we should see twenty percent to thirty percent with three things: two large tenders the business has been successful in securing and a contract with a large service company.

37:54 Great. Thank you for that clarification. I appreciate it. I'll turn it back.

38:01 There are no further questions from the lines at this time. I would now like to turn the floor back to Kevin Longe for closing remarks.

38:09 Thank you, everyone, for joining our call today. While this was a difficult quarter, we believe the fundamentals are improving for our businesses. The recent price increase at DynaEnergetics is an important first step towards improving our margins, and we are encouraged by the strong increase in demand we are seeing for DynaEnergetics' product offering in North America and by the strength in our international business. We also feel quite strong about the pricing dynamics that NobelClad will have for the metals that go into their products in the coming year, as well as the new applications for DetaPipe. 38:53 We remain very confident in the strength of DMC, and we look forward to speaking with you again when we report our fourth quarter results. Thank you.

39:05 Thank you, ladies and gentlemen. This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.