Greetings and welcome to the DMC Global Third Quarter Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Geoff High, Vice President of Investor Relations. Thank you, Geoff. You may begin.

Hello and welcome to DMC's third quarter conference call. Presenting today are DMC's Chief Executive Officer, Mike Kuta, and Chief Financial Officer, Eric Walter. 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 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. Today's earnings release and a related presentation on our third quarter performance are available on the Investor page of our website, located at dmcglobal.com. A webcast replay of today's presentation will be available at our website shortly after the conclusion of this call. And with that, I'll now turn the call over to Michael Kuta. Mike?

Good afternoon, everyone. DMC's third quarter was marked by both strategic accomplishments and operational challenges. We reported consolidated sales of $172 million, flat versus last year's third quarter and below our prior forecasts. Sales at Arcadia, our building products business, were $72 million, down 11% year-over-year. Steady customer activity at Arcadia's primary regional service centers, as well as healthy sales at its ultra-high-end residential business, were offset by pricing pressure associated with lower raw material costs, soft demand for commercial interior products, and a brief operational slowdown related to the transition to a new ERP system. DynaEnergetics, our energy products business, reported sales of $73 million, up 4% year-over-year but down 14% sequentially. The US drilling and completion industry idled additional rigs and frac crews during the quarter, and the Energy Information Administration reported a 10% sequential decline in US well completions. Dyna's US sales were also impacted by customer project delays late in the quarter. Soft sales in the US were partially offset by continued strong demand at Dyna's international business, which expects to deliver record full-year sales in 2023. Sales in NobelClad, our composite metals business, improved 18% to $28 million versus last year's third quarter. NobelClad's results reflect outstanding execution on a demanding petrochemical project, as well as continued strong demand for pressure vessel plates and specialized transition joints. NobelClad ended the third quarter with an order backlog of $61 million versus $64 million at the end of the second quarter. Rolling 12-month bookings were $111 million, up sequentially from $108 million, and the book-to-bill ratio was 1.1. Our consolidated third quarter adjusted EBITDA attributable to DMC was $25 million or 14.3% of sales and was within our forecasted range despite the lower-than-expected sales. DMC's long-term focus is to position each of its businesses to deliver adjusted EBITDA margins of 20% or greater. Our businesses are structuring their operations and making the necessary investments to achieve these objectives on a consistent basis. At Arcadia, additional paint capacity, a new ERP system, and a series of operational enhancements and growth initiatives are expected to drive long-term improvements in sales and profitability. In the North American oil and gas market, where Dyna generates approximately 85% of its sales, we expect continued consolidation by leading operators will sharpen the completion industry's focus on safety, technology, and efficiency. Dyna, which had a challenging third quarter, has taken a number of steps to streamline its cost structure and will incur roughly $1 million in associated one-time expenses during the fourth quarter. These cost reductions are expected to result in approximately $3 million in annualized savings. Dyna is also implementing a series of operational excellence initiatives designed to enhance the safety, quality, and reliability of its perforating systems. These initiatives include greater use of automation throughout Dyna's manufacturing and assembly facilities. NobelClad is focused on expanding the market for its DetaPipe and Cylindra product lines and is pursuing emerging opportunities in lithium and hydrogen production. We expect 2024 will be another strong year at NobelClad. As Eric will discuss in a moment, much improved free cash flow led to further improvements in our financial position during the third quarter. I remain encouraged by the strengths of our differentiated manufacturing businesses and our prospects for profitable long-term growth. DMC's achievements would not be possible without the efforts of our talented workforce, and I want to acknowledge all of our employees for their hard work and dedication. I also want to thank our customers for their loyalty. With that, I'll turn the call over to Eric for a closer look at our third quarter financial results and our guidance for the fourth quarter. Eric?

Thanks, Mike. As previously mentioned, our consolidated third quarter sales were $172 million, down 1% from the third quarter last year. Consolidated gross margin was 30.6%, up 110 basis points from our 2022 third quarter, due to a more favorable project mix at NobelClad combined with margin recovery at Arcadia. Our third quarter SG&A expense of $29 million was 16.7% of sales, down from 17.5% in the third quarter of last year, driven mostly by lower litigation expense at Dyna. Third quarter adjusted EBITDA attributable to DMC increased by 13% year-over-year to $25 million. The improvement was primarily driven by higher sales and gross margin at NobelClad. Inclusive of the Arcadia non-controlling interest, consolidated adjusted EBITDA was $30 million, or 17.4% of sales, up 220 basis points versus the prior year quarter. At the business level, Arcadia reported third quarter adjusted EBITDA of $13 million, of which $8 million, or 60%, was attributable to DMC. Compared with the prior year, Arcadia's adjusted EBITDA rose 11% and expanded 390 basis points as a percentage of sales. While Arcadia's pricing has moderated this year, aluminum costs have declined at a faster pace and contributed to the recovery in EBITDA margin. Dyna reported third quarter adjusted EBITDA of $13 million or 17.2% of sales. Lower absorption of manufacturing overhead costs and a less favorable customer mix led to a sequential and year-over-year margin contraction. NobelClad reported adjusted EBITDA of $6 million, which was 23.1% of sales and up 850 basis points compared to the third quarter of 2022. EBITDA margin improved due to a more favorable project mix, better absorption of fixed manufacturing overhead costs, and lower SG&A. Adjusted net income attributable to DMC was $10 million during the third quarter of 2023. Adjusted EPS attributable to DMC was $0.50, up over 40% compared to last year's third quarter. Underlying improvements in gross margin and SG&A more than offset relatively flat sales performance year-over-year. During the quarter, DMC generated free cash flow of $22 million, which was the highest quarterly level since 2019 and was up from $17 million in last year's third quarter. We used this year's third quarter free cash flow primarily for principal payments on our long-term debt, distributions to our Arcadia joint venture partner, and an investment in marketable securities, which will be used as part of our deleveraging efforts. In terms of liquidity, we ended the third quarter with cash and marketable securities of $36 million and had no amounts outstanding under our $50 million revolver. Our debt to adjusted EBITDA leverage ratio was 1.26 at the end of the third quarter, which was well below our covenant threshold of 3.0 and represents the seventh consecutive quarter of deleveraging the balance sheet. On a pro forma net debt basis, after subtracting cash and marketable securities, our leverage ratio was 0.89 at the end of the third quarter. Now, turning to fourth quarter guidance. Consolidated sales are expected in a range of $170 million to $180 million versus the $172 million reported last quarter. We anticipate Arcadia's fourth quarter sales volume to be relatively flat sequentially. Dyna expects to maintain its share in its core North American markets but does anticipate overall activity levels will remain soft, due in part to year-end seasonality. NobelClad sales are expected to accelerate sequentially as the business benefits from delivery of key projects already in its backlog. Consolidated gross margin is expected in a range of 28% to 30% compared with the 30.6% in the third quarter. Gross margin at Arcadia and Dyna is expected to be relatively flat quarter-over-quarter, while NobelClad's gross margin will moderate based on project mix. Consolidated fourth quarter SG&A expense is expected to range from $28 million to $29 million versus the $29 million reported in the third quarter. Fourth quarter adjusted EBITDA attributable to DMC is expected to be in a range of $20 million to $24 million versus $25 million in the third quarter. Finally, we expect fourth quarter capital expenditures will be in a range of $8 million to $10 million. With that, we're ready to take any questions.

Thank you. Our first question is from Gerry Sweeney with ROTH Capital Partners. Please proceed with your question.

Good afternoon Mike, Eric, Geoff. Thanks for taking my call.

Hey Gerry.

Starting with Arcadia, can you break out, you have the service center work, which I think, for lack of a better term, that sticks that go to a lot of sort of storefronts, different pedestal type operations of buildings, ultra-high-end, and then the commercial interiors. It sounded like the commercial interior business was slow, but I wanted to see how that compared with the other two businesses. Were the other two businesses in line? Was it entirely commercial interiors? Just wanted to dig in a little deeper on that front.

Yes. Thanks, Gerry. So, the commercial interiors, which is our smallest business, we see that within Arcadia. That's in a valley right now, at least with the work that we're seeing with commercial interior buildout. The commercial exteriors business has been relatively, I'd call it, flat, resilient, seeing a little bit of softening in some of the longer cycle projects. But the short cycle projects, which there's a lot of diversification in our end markets there, are holding up pretty well.

Got it. I wanted to discuss that you've reached capacity in that business, and you've also expanded into areas like Houston and Dallas, which may have been underserved due to capacity limitations. You're increasing paint capacity to support this expansion. How should we interpret the slight softness in longer-term projects compared to short-cycle projects, as well as the addition of new locations? How do all these factors contribute to growth and opportunities?

Yes. On the West Coast, we're definitely in a bit of a softer market. You look at the ABI readings, sub 45, but there's still a lot of opportunity in a lot of our markets where we're still seeing some strength. So, we're moving around some of the project business into some of our service centers that might be seeing a little less activity and pushing on the gas pedal on areas where activity remains strong. So, I think that if we go into a softer market, I think there's going to be an opportunity to drive the topline at still favorable margins. So, this paint capacity that we're putting in place, we've done some industrial engineering there. We've got more of a paint capacity we can put in by mid-next year. I think we're going to be able to sell it through.

Got it. And then, just one last question about Arcadia. How did the ERP implementation affect the quarter?

Yes. Gerry, so we probably lost two to three days with our service center or short cycle business, and that unfortunately were canceled orders. So they're not going to come into Q4. So, when you think about the impact to Q3 revenues, that was as meaningful of an impact as the other two drivers that we talked about.

Got it. So, a third, a third, a third. Got it. One question on Dyna, and then I don't want to monopolize this. But I think you said completions IEA or EIA were down 10%. I think you were down 14%. In this market, obviously, things have slowed down. Everybody is looking at 2024 expectations, completions are up. Are we sort of in this market where a similar market for the third quarter, maybe even the fourth quarter that was similar to a couple of years ago where everybody knows the benefits of Dyna? It's a premium product, but they've got crews and they're sort of idling them a little bit. There's no sense in paying up for the benefit that Dyna brings when there's a little bit of softness and they have capacity. Is that what we're potentially seeing?

Yes, I think, Gerry, what we're seeing is, we just finished a pretty strong October, and I think we'll see some seasonality at the end of the year. So, I think Dyna is going to look in the fourth quarter, maybe similar to the third quarter that's in our guidance. Eric, you can speak to that, but I think some of the initiatives we're taking in DynaEnergetics are really going to drive results also as we go into 2024, and I think we'll see a bit better of a market as well.

Yes. And I think just to augment what Mike said, so some of the softness in Q3 was due to some projects that were pushed out. We believe that those projects are going to materialize in Q4. So, while the topline may be relatively flat, we haven't lost that business, it just skipped out one quarter.

Got it. That’s helpful too. Okay, I'll jump back in line. Thank you.

Thanks, Gerry.

Thank you. Our next question is from Stephen Gengaro with Stifel. Please proceed with your question.

Thanks. Good afternoon everybody. I guess, a couple on the Dyna side. The first is just around what you're seeing from a pricing perspective now versus a couple of months ago and any expectations going forward?

Yes. So, we cited sales down, absorption, customer and pricing mix. So, you've seen a little bit more pressure on price with the market down 10%. Hopefully, we're going to see pricing stabilize here. And I think, going into 2024, we'll see where things shake out, but I would think that we'd be in a pretty stable pricing environment.

Thank you. When we consider the developments in the US land market, especially with the consolidation among pressure pumpers, four companies now hold a significant portion of the capacity. Many of them have also integrated their own wireline services. How should we understand the relationship between wireline and fracking services? Is it having a positive, negative, or neutral effect on your operations? Are there any insights we can draw from this?

Yes, I think the frac and wireline is just very focused on the basics, right, quality, on-time delivery, delivering the best tech in the industry. And if we can do that and continue to do that, I think we're going to be okay there.

All right. And then just one final, when we think about the quarter, the third quarter results and as we lead into the next quarter and the next year, how do we think about incremental margins or margin trajectory in Arcadia and Dyna as you get into 2024? And we're kind of assuming some level of recovery and tracking completion activity next year. But as you get growth in the businesses, is there a way to kind of think about the incremental margin contribution or margin trajectory in those two businesses?

Yes, I'll start and Eric will finish. I think with Arcadia, it's a business with quite a bit of variable costs. We are currently positioned well in terms of margins and expect to maintain that for the fourth quarter and beyond. DynaEnergetics is experiencing some absorption impacts as well. We have numerous projects aimed at improving margins internally. We have mentioned some, including lean initiatives and automation, as well as cost reductions. Therefore, we believe we can continue to enhance margins into 2024, likely remaining stable from the third to the fourth quarter, while we have many initiatives planned for 2024 that are within our control to further drive margins.

Yes, the only thing I would add to what Mike said is that for Dyna, the focus really is going to be more on their EBITDA margins as opposed to the gross margins. Gross margins will always be important. But some of the initiatives that Mike pointed to around SG&A control, they're really going to manifest themselves in the EBITDA margin line as opposed to gross margin. And we continue to believe that this is a 20%-plus EBITDA margin business and want to make sure that we put in these initiatives so that we not only get back to that, but we stay there.

Okay. Thanks. I'll get back in line here. Thank you.

Thank you. Our next question is from Katie Fleischer with KeyBanc Capital Markets. Please proceed with your question.

Hi, good afternoon. I'm on for Ken Newman today.

Hi.

Hi. I wanted to talk a little bit about your capital allocation. So, free cash flow is pretty strong in the quarter. Can you just talk about expectations for free cash flow generation going forward? And then what some of your capital allocation priorities would be?

Yes, thanks for the question. So, for Q4 and what I would say going into 2024, we're really trying to drive the businesses to have a higher free cash flow conversion. So, if you did the math for Q3, we would be up around 70%. I'm not sure that we can do that every quarter, but typically in the second half of the year because of seasonality, we tend to be around that range. So, in Q4, we would be looking to be up in that ballpark as well. And then, going forward into next year, a lot of the things that Mike was talking about earlier when he answered the question about initiatives, they have a P&L impact, but they also have a cash flow impact as well, whether it's reducing SG&A or driving higher inventory turns. So, we would look to try to build on that momentum and make sure that we can keep the conversion at a higher rate. And in terms of how we allocate the capital, we are looking to continue to delever the balance sheet. So, that's going to be one area, but we're also putting CapEx back into the business. So, for Arcadia, Mike mentioned the paint line where we're going to be looking to do some industrial engineering. We're also going to be looking at making some investments in the anodizing area as well, which will help broaden margins for the Arcadia business. And for Dyna, it's going to be mainly focused on a lot of the internal initiatives around automation and trying to make sure that we can produce our products as efficiently as possible, which should also have an impact on sustainable quality levels. So, I think, in terms of where we want to be from a cash flow standpoint, we have a good Q3. We want to make sure that that's not just a one-time type of performance, but we can continue that going forward. And then, in terms of the allocation, we're going to be looking to continue to delever, but also reinvesting back in the business in some of these important initiatives.

Okay. Great, that's helpful. And then, on the well completions, do you guys have any sort of, I don't know, it's difficult in this type of environment, but any sort of view in terms of where those are headed as we kind of close out the year and go into 2024?

Yes, I think that what you're going to see is pretty steady through the end of the year, probably hit some seasonality at the end of the year with budget exhaustion, and I think then you're going to see a pickup in 2024.

Okay. And then, just one last one, switching to Arcadia here. Can you give a little bit more detail about the ERP system, like how much capacity that can add? Maybe any impacts on costs or margins would be helpful?

Yes. So, the ERP system probably wouldn't add any capacity, but what it's going to allow us to do is to have better controls and better visibility into data. And so, the first one is probably pretty self-explanatory. But the second one, what we mean by that is that we think that it's going to prevent any type of margin leakage between changes in aluminum costs and our ability to pass that through to customers. But another benefit that we're really excited about is, it should also allow us to be more efficient from an inventory turn standpoint. So, if you think about our business model, we've got a hub and satellite type of structure. With this newer ERP system, we're going to have a better understanding of where that inventory is, how it's turning at the different satellites, and how we can transfer it from maybe one satellite where it's moving slower into another one where it's moving faster. So, we're excited about that, and we're just in the early days of going through the implementation, but I think it's going to pay dividends long-term.

Okay. Thanks for the details.

Thanks, Katie.

Our next question is from Sean Mitchell with Daniel Energy Partners. Please go ahead with your question.

Hi everyone. I appreciate the opportunity to ask a question. This is primarily about Dyna, but earlier you mentioned that the larger M&A activity might enhance the focus on safety among some companies. You also noted having a less favorable customer mix for the quarter. Can you help us understand the current customer mix? I believe it might improve with larger companies pursuing bigger deals, and I agree they are likely to prioritize safety more. Where do you stand at the moment? Is there a heavier emphasis on private clients, which could explain the downward pressure this quarter? Please provide some insights into the current customer mix and your outlook.

If we look back a year or two, the focus was primarily on the private sector. Recently, it has shifted more towards the public sector, particularly for exploration and production companies or end users. From a customer perspective, we feel well positioned with top-tier end users and service companies. This development will likely benefit us as we emphasize safety, quality, delivery, field service, and technology, especially as the market increasingly trends towards oriented systems. Overall, I believe this will work to our advantage.

Got it. Thank you.

Thank you, Sean.

Thank you. Our next question is from Stephen Gengaro with Stifel. Please proceed with your question.

Thank you. I have a quick question. Do you have any early thoughts on 2024 CapEx?

I think, right now, Stephen, for modeling purposes, I would assume something that's pretty close to the guidance that we've given for 2023. There may be a little bit of an increase for some of the discrete projects that we talked about earlier for anodizing, et cetera. But the run rate that we have this year is probably going to be very similar to that run rate next year.

Okay, great. That was from me. Thank you.

Thank you. There are no further questions at this time. I would like to hand the floor back over to Michael Kuta for closing comments.

Thank you again for joining us today. We remain highly focused on driving performance of DMC's businesses. Our objective is to strengthen our profitability and cash flow and drive improved value for our shareholders. We appreciate your continued interest in DMC and look forward to speaking with you after the fourth quarter. Take care.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.