Geoff High - VP, IR Kevin Longe - President & CEO Michael Kuta - CFO.

Edward Marshall - Sidoti & Company Stephen Gengaro - Stifel Gerry Sweeney - Roth Capital Aria Cole - Cole Capital James Brilliant - Century Management.

Greetings, and welcome to the DMC Global 2018 Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Geoff High, Vice President of Investor Relations..

Hello, and welcome to DMC's third quarter conference call. Presenting today are President and CEO, Kevin Longe; 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 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'll now turn the call over to Kevin Longe.

Kevin?.

Thank you, Geoff. DMC today reported another quarter of record financial results, thanks to strong customer demand at DynaEnergetics, our oilfield products business and improving market conditions at NobelClad, our composite metals business.

Consolidated third quarter sales were a record $87.9 million up 68% from last year's third quarter and 9% sequentially from this year's second quarter. DynaEnergetics reported record sales of $66.3 million up 88% versus last year's third quarter and 12% sequentially.

NobelClad reported sales up $21.6 million, which was up 28% versus last year's third quarter and down 2% sequentially. NobelClad ended the third quarter with a trailing 12-month book-to-bill ratio of 1.05 and an order backlog of $36.3 million.

Consolidated gross margin was 34% up from 33% in both last year's third quarter and this year's second quarter. The increase versus both periods resulted from a higher proportion of sales from DynaEnergetics, higher average selling prices at DynaEnergetics and an improved project mix at NobelClad.

At the business level, DynaEnergetics reported gross margin of 37%, which was down from 39% from last year's third quarter and flat versus this year's second quarter.

As we mentioned in our last call, we expect DynaEnergetics' gross margins to trend upward towards the end of the year as we shipped two internal production of key components used in the factory-assembled performance-assured DynaStage system.

NobelClad reported gross margin of 25% up from 21% in the year ago third quarter and 23% in the second quarter. Adjusted operating income was $13.9 million and excludes a $192,000 in restructuring expense at NobelClad and $4.9 million of accrued antidumping penalties at DynaEnergetics.

Adjusted operating income in last year's third quarter was $5.1 million and excludes a goodwill impairment charge at NobelClad of $17.6 million. DynaEnergetics reported third quarter operating income of $9.9 million, which includes the accrued antidumping penalties, while NobelClad reported operating income of $2.1 million.

Third quarter adjusted net income was $10 million or $0.68 per diluted share, versus adjusted net income of $3.2 million or $0.22 per diluted share in the comparable year ago quarter.

Third quarter adjusted EBITDA, which includes $2.2 million in litigation expense was $17.2 million versus $8.6 million in last year's third quarter and $13.9 million in this year's second quarter. At the business level, DynaEnergetics reported third-quarter adjusted EBITDA of $16.4 million, while NobelClad reported adjusted EBITDA of $3.1 million.

Our consolidated third quarter results exceeded our prior forecast due in large part to growing customer adoption of the DynaStage system. DynaStage unit sales recently surpassed the $0.5 million mark and DynaEnergetics continues to onboard new customers for the system in basins across North America.

Our customers state DynaStage is significantly improving their operating performance. A leading international service company recently deployed more than 24,000 DynaStage units for a large exploration and production company operating in South Texas.

The customer achieved a 99.99% perforating success rate on the project, a level that sets a new standard for best-in-class performance. There has been considerable discussion in North America's onshore oil and gas sector about a slowdown in well completion activity.

While DynaEnergetics is entirely immune to this situation, the breadth and geographic diversity of its growing customer base is helping mitigate the situation.

As customer budgets are refreshed in the first quarter of 2019 and takeaway capacity in the Permian increases later next year, we believe DynaEnergetics will be ideally positioned to benefit from an anticipated strong rebound in activity.

Key to addressing this demand is DynaEnergetics' new state-of-the-art manufacturing and assembly center in Blum, Texas, which will be fully operational in November. Our NobelClad business also is reporting improving activity, including increased demand for repair and maintenance work from the downstream oil and gas industry.

The consolidation of NobelClad's European manufacturing operations into our [indiscernible] Germany facility will be complete by the end of the year.

On the legal front, an antidumping case initiated in 2015 at DynaEnergetics has been resolved and while we are disappointed by the outcome of the penalty phase, we decided to end the appeals process and put the issue behind us.

We fully accrued for the penalty during this year's first and third quarters and will tender the full $8 million penalty this quarter. We also recently announced the DynaEnergetics won its third consecutive defense of a patent infringement allegation brought by a competitor.

I'm encouraged by the substantial progress we've made through the first nine months of the year. Our accomplishments are attributed to the hard work and cooperation of everyone on the DMC team. I look forward to a strong finish to 2018 and believe we are well positioned for continued growth in the coming year.

I'll now turn the call over to Mike for additional detail on our third quarter financial performance.

Mike?.

Thanks Kevin and hello everyone. Looking at our third quarter expenses, consolidated SG&A was $15.1 million or 17% of sales and included $2.2 million in litigation expense. SG&A in last year's third quarter was $11 million or 21% of sales. Third quarter amortization expense was $769,000 or 1% of sales.

We ended the third quarter with cash and cash equivalents of $11.1 million. Net debt was $30.4 million versus $28 million at the end of the second quarter and $9 million at December 31, 2017.

The increase principally relates to higher working capital requirements associated with continued growth at DynaEnergetics as well as borrowings to fund DynaEnergetics' capacity expansion. We generated $8.1 million in cash from operating activities during the third quarter.

Looking at guidance, we anticipate fourth quarter sales will be in a range of $82 million to $85 million versus the $54.5 million we reported in last year's fourth quarter. DynaEnergetics sales should be in a range of $60 million to $63 million versus $37.1 million reported in last year's fourth quarter.

The expected sequential decline from the $66.3 million DynaEnergetics reported in the third quarter, relates to the slowdown in the Permian Basin that Kevin referenced earlier as well as exhausted customer budgets in other North American basins.

NobleClad sales are expected to be approximately $22 million versus the $17.4 million reported in last year's fourth quarter. We expect consolidated gross margin in a range of 33% to 34% versus the 33% in last year's fourth quarter. We expect SG&A will be approximately $17.5 million, which would include approximately $3 million in litigation expense.

SG&A was $12.5 million in last year's fourth quarter. Amortization expense is expected to be approximately $600,000 down from $1 million in the fourth quarter last year. Interest expense should be approximately $500,000.

Fourth quarter adjusted EBITDA, inclusive of the $3 million of litigation expense is expected in a range of $13 million to $14 million up from $7.7 million in last year's fourth quarter.

We are maintaining the full year financial guidance we provided at the end of the second quarter, with the exception of adjusted net income per share and our tax rate. We now expect diluted income per share in a range of a $1.95 to $2.05. This is up from a prior range of a $1.80 to $2.

The increase relates to our stronger-than-expected third quarter earnings per share, which were primarily by higher sales volumes and lower SG&A expense. Our full-year tax rate is now expected in a range of 33% to 36%.

The range is higher than previously forecasted due to the antidumping penalties and restructuring costs incurred in 2018, which are not tax-deductible. Excluding these charges, the adjusted or normalized tax rate is expected within the 28% to 30% range we previously forecasted. With that we're ready to take any questions.

Operator?.

[Operator Instructions] Our first question comes from Edward Marshall, Sidoti and Company. Please proceed with your question..

Hey guys. Good afternoon..

Good afternoon, Ed..

So wanted to start, talking about on the guide for DynaEnergetics and as I start to think about maybe the fourth quarter and into 2019. Hearing customers, hearing peers and what they're talking about, I mean one specifically said that the customer may even take breaks before Thanksgiving.

When you look at the guidance, I would've expected a larger step down.

What might be you guys think differently than some of the other service customers out there?.

I think that our revenue is spread over more basins and so we're less dependent upon the Permian and we are seeing an increase in systems in the market versus components. And it's those two things Ed..

And then when I -- when we look at the 2019 cadence, as we think about the cadence of the recovery, a lot of it's due to the takeaway capacity.

How do I think about maybe first half versus second half kind of production rates at DynaEnergetics? Do we repeat kind of what we're seeing kind of in the fourth quarter into the first or do we see a step up there may be can help us out with that?.

I think first of all 2018 is turning out to be a very good year and we believe 2019 is going to be a very good year also. The fourth quarter is flat to down from a completion standpoint.

Some of that may carry over into the first quarter, but we're expecting a very good year for 2019 and so we're less concerned on the quarterly basis than we are in the year-over-year, which we're expecting.

I guess if I reference some of the data out of the industry association, our analysts, we're expecting a market that's going to be up 14% plus next year..

And would you -- would you be surprised if you saw a much stronger second half in '19 versus the first half?.

I would expect a stronger second half than the first half..

Okay. And while we're on DynaEnergetics, I just wanted to talk about what happened in the quarter? I saw a step change in Dyna's SG&A to a much lower run rate.

Is that anything to do with was there a litigation in that or was there something else that you might be seeing?.

Well, there was $2.2 million in litigation in the DynaEnergetics number I believe in the third quarter. Some of the other changes have to do with investment in some of the marketing programs that we have going forward, but they're primarily -- it's a little litigation expense step down..

Got it. And then when I think about cladding the results showing somewhat of a fixed SG&A even sales are increasing and can you kind of talk about maybe what you're doing in the control.

Maybe your SG&A cost, but also is this kind of a fixed am I right to think that this might be somewhat fixed on a SG&A basis?.

Well, I think we're excited about both of our businesses and as an example when the oil and gas industry went into a downturn in '15, we kept investing in SG&A in our DynaEnergetics business and as the NobelClad business drifted down over the last couple of years, we kept the SG&A relatively flat.

In fact, we also increased investment in SG&A in NobelClad based on our belief in the longer-term health of that business and so as we see revenues start to pick up in NobelClad, you will see that SG&A percentage come down. We treated it relatively fixed over the past couple of years and quite frankly invested in our people and our team..

Got it. And the final question just a point of clarification. I think about the duties I know you accrued for them now.

Do I anticipate cash out Q4 or Q1 just curious?.

Cash out Q4..

And may I add that we're very happy to get that issue behind us..

Of course. Thanks very much guys. I appreciate it..

Our next question comes from Stephen Gengaro, Stifel. Please proceed with your question..

Thank you. Good afternoon, gentlemen. A couple things if you don't mind.

The first you mentioned in the press release the higher average selling prices on the DynaEnergetics side, Is that a -- was that a sequential comment or year-over-year comment or both and how is your price outlook currently as we go forward here?.

It is both sequential and year-over-year. And we seen or are starting to see some pressure on pricing as the activity slows a little bit in the fourth quarter. However, it is important to note that we're selling the system at a premium price compared to most if not all of our competitors who are selling component.

And the price -- the challenging pricing that we're seeing is on component sales, not so much on the system sales..

Can you give a rough percentage of the DynaEnergetics' revenue, which is systems versus components?.

It's 75% plus of systems..

Okay. This morning one of your competitors talked about an acquisition they made that seemed to me would enhance their ability to maybe compete over time on the system side, I think the company revolves [ph] on Guardian. I think [indiscernible] bought Guardian.

Do you have any sense for that and how that or could that change the competitive landscape at all?.

Guardian is a small company. However, we respect its founder, Ian Beckstead quite a bit. They basically make setting tools in an addressable switch. An addressable switch is one of those components that's being used more and more in the perforating market. We're seeing the addressable switch percentage of the market increase.

Its greater than half the market today where was a small part of the market years ago. And so I can't speak on behalf of our competitors that they clearly made a make versus buy decision when they looked at Guardian in terms of investing in this addressable switch area.

The addressable switch is necessary, but not sufficient in order to complete the system and compete with our DynaStage and so we feel very good about our position with our DynaStage system..

Great. That's useful color and then just finally as we think about the DynaEnergetics business and the litigation, you are three for three in lawsuits as the recent judgment.

How will those expenses trend in '19?.

We have one more patent defense in Germany in the first quarter 2019 but we're hopeful that we can resolve that before it goes to trial and we expect our legal expenses to trend down significantly in 2019..

Okay. Great. Thank you, gentlemen..

Our next question comes from Gerry Sweeney, Roth Capital. Please proceed with your question..

Good afternoon, Kevin, Mike and Geoff. Thanks for taking my call. I wanted to circle back to talking about the slowdown in the completions market.

Obviously you guys always talk to your customers and I am curious as to what their views are, what they're telling you because as we look at the market, the market is extrapolating potentially something more different than what you're implying?.

We do see or sense a slowdown in overall activity but just keep in mind, this is on a year that was up significantly from the prior year and we view it as just a temporary situation Gerry as to me it's somewhat -- there is a lot of discussion about the fourth quarter maybe the first, but we're looking at a very good 2018 and we're anticipating a very good 2019..

Okay.

How -- at what point would customers order a DynaStage system if they need -- or if they had plan to use it? so they're drilling X well and would it be a week before, two weeks before? Would some of your customers even with budgets exhausted today, would they even go out a month or two and say hey our budgets are done now, but looking at Q1, this is our schedule we're looking at doing this set of wells, puts us on order for X amount of DynaStage systems and so we're prepared?.

Our customers are very efficient and also they rely on our ability to serve them quickly and so the majority of our lead times are in the one to three week range and so they're not inventorying guns or ordering an advance.

In fact one of the benefits of the DynaStage system is that compared to buying components and assembling the guns themselves, we take on that responsibility and that shortens the lead time and it moves the focus on the working capital to DynaEnergetics and to DMC.

And so it's enabling our customers to operate much more efficiently and in order to their market and demand needs rather than inventory..

And I certainly get that obviously it's sort of drop ship, but I was just curious if they actually gave you a little bit more inside look into their completion schedules, so you have a little bit more visibility as to what they were planning to fill so?.

Well we prefer to partner and we're not trying to be all things to all people, but we want to make sure that we're all things to our customers that are doing business with us and so we get inside to their activity. However, the ordering is very close to the consumption of our perforating guns..

Okay.

So does that partnering and insight into that activity also give you confidence to potentially next year just this is just a budget issue, not expended budget as opposed to anything else?.

Yes, we feel very confident in terms of 2019..

Got it. I'll leave it there and then another question, in the prepared remarks you talked about expanding customer base even in the third quarter.

Can you maybe qualitatively or even quantitatively discuss how much that base has changed quarter-over-quarter and are there additional companies that are looking to either new companies on board or companies if existing customers looking to onboard maybe new regions etcetera? Just to get an idea of how much demand or how much opportunity there is still out there so to get market penetration?.

Well when we bring on a customer because it's a factory-assembled performance assured system, we're doing the assembly of the perforating gun and one of the operational benefits to our customers is that they can redeploy the that they have both people and capital to other activities.

And so with that comes a responsibility on our part is to make sure that they don't have to put those resources back in place. And so we've been very careful not to bring on more customers than what we can serve properly. We feel that there's many more customers that we can bring on.

We also feel that we still need to spend more time explaining the benefits to the exploration and production company and so we're very excited about the opportunities that this business has in front of it and we see the customer base growing, but it's growing at our ability to make sure that we meet their needs in a timely fashion and that we don't leave them empty-handed when they need our product.

And so we brought on roughly a third more customers in the fourth quarter, excuse me, the third quarter and that's part of what's giving us confidence going into the new year..

Got it. That's great. That's good color. And then margins in DynaEnergetics, the main drivers as we move forward are you're bringing in I think TSA milling work in-house integrating on that as well as Blum comes on board and gets ramped up, there's a cost savings from importing or freighting the charges from Germany.

I think you had mentioned getting gross margins upwards above 40% I think on the last call. I may be incorrect, but that's just my memory.

Is that still an opportunity from those two items?.

Very much so. Our gross margins above 40% are an objective for that business and the management team. We expect to get there as the inefficiencies dissipate with our added manufacturing capacity both shaped charge assembly and TSA production. All three of those are being addressed immediately.

We actually are starting production this week in our new facility in Blum, Texas. And so in addition to the other accomplishments for the quarter, we've completed the assembly of our new production capacity..

Got it. I'll jump back in queue, thanks very much. Greatly appreciate it..

[Operator Instructions] Our next question comes from Edward Marshall, Sidoti & Company. Please proceed with your question..

Just two quick follow-ups if I may. The fourth quarter shows a relatively wide variance of about 25%.

I am just curious what are you trying to prepare for? What's the -- why so wide through October just about, I am just curious as to what the thought process is with the wide gap there?.

Gap in terms of revenue?.

The math implies a range of $0.33 to $0.43 in earnings in the fourth quarter. So a $0.10 range on a $0.43 about 25% variance.

I am just kind of trying to understand why so wide, considering you pretty much know what's coming already for the fourth quarter?.

Yeah Ed, we put a wider than normal range on that just because in certainly on the volume side, on the DynaEnergetics business..

Okay. And then are you seeing any price or do you expect any price pressures? I know you've been taking price recently. I'm curious if you hear a lot from the competitors, from your customers that have been saying that there are pricing elements in the market that are unfavorable.

Is that affecting you or any of your equipment?.

Again we were selling to system where the majority of our competitors are selling components and so it's a little bit of an apples-to-orange comparison and our objective is a premium for our product over other alternatives and -- but less than the value that it creates for our customers.

And so ours is a value proposition and an economic proposition to the end-user versus a supply-chain component kind of cost comparison.

Having said that, what we compete against is a service company whose is buying component and assembling them and that is keeps an upper limit if you will on the kind of differential that a service company can tolerate in the marketplace..

Got it. And the question about Guardian was brought up earlier and I'm curious, the addressable switch, first I thought your switch detonator was an addressable switch. Is there a meaningful difference between the two offerings? Does this bring your competitor a little bit closer to what you kind of produce? Just turning to get a sense of that..

There is a significant difference in the offerings. Our DynaSelect, which is a detonator integrated switch detonator, it includes the detonator itself, the addressable switch. It includes a circuit board with a microchip that requires a digital key to fire. It's packaged in a way that is radio frequencies straight current, straight voltage saved.

We're on Version 9 or 10 and I don't think I've seen the Guardian switch in the marketplace. So there's a world of difference between the two..

And one last one, is this in any way somewhat defensive or aggressive to kind of go towards "narrowing the gap between the two offerings, between what they offer and what you offer?".

We're pleased to see the component-driven companies move more to a system thought process and again a system has higher technology, higher value add, higher price and quite frankly if they can help expand the market for systems, we welcome them into that part of the marketplace..

Got it. I appreciate it guys. Thanks very much..

Our next question comes from Aria Cole, Cole Capital. Please proceed with your question..

Thank you. And again, we appreciate you doing this call with us today. One question about innovation, clearly the reason your leaders in this industry on the DynaEnergetics side is due to innovation with diverse products you have.

Can you give us an update on your roadmap for introducing maybe a next-generation version of your products that would provide increased functionality and possibly even result in even higher returns for your customers with the use of the products in their wells?.

To give you insight I'm very proud of the DynaEnergetics team led by Ian Graves, [indiscernible], Liam McNelis and they are -- they have very strong technology and product roadmaps, coupled with a market introduction roadmaps and probably the best measure that I can give you is that we've increased our IP portfolio significantly.

It's doubled in the last two years and it's more than quadrupled in the last four years and its related both to component improvements.

I think I mentioned earlier we're on a multigenerational version of our DynaSelect and we're several versions down in our DynaStage system and there's various iterations of those product improvements that are coming in the market over the next couple of years.

We don't want to preannounce them, but it's important for us to share that this is not a one trick pony.

This is an organizational capability that we invested in over many years and it's one of -- somebody asked earlier in the call on SG&A, it's one of the reasons we kept our SG&A intact during the downturn as we continue to invest in new technologies..

Okay. Thank you. And just one follow-up question, as you mentioned on prior calls in DynaEnergetics, you've been a bit demand constrained before the new manufacturing facilities opened, in essence, customers wanted more product than you could deliver.

I'm just trying to better understand just this short-term hick-up here maybe for a couple weeks or months and the December quarter maybe longer in terms of -- I understand there's reduced activity in the U.S. in terms of completions, but you're bringing on a lot of new customers as your capacity has been boosted.

I'm just trying to better understand at least why sales in DynaEnergetics are declining sequentially little bit in spite of the fact that you have a lot of new customers being shipped product for the first time?.

It's a good question. Part of this has to do with how fast we onboard new customers and our capacity is just starting to improve.

We literally moved over our gun assembly from a very capacity constrained facility this past week and we are timing the onboarding of customers and the education training with the capacity and that really is a fourth quarter and first quarter effort that will benefit us for the coming year and hopefully for years to come..

Got it. Great. Well thank you. Best of luck..

Thank you..

Our next question comes from Stephen Gengaro, Stifel. Please proceed with your question..

Thank you. Gentlemen, one follow-up and I'm not sure if you can shed light on this or not, but as we think about the growth in completion activity next year and obviously the fourth quarter has got a lot of headwinds from Permian issues and year-end seasonality we always see in the oilfield.

But if you look at 2019 and you look at completion activity in general, how would you think about your system grow or your revenue growth in DynaEnergetics relative to the growth rate in completions?.

We have not yet -- we're focused on finishing this year. We have not yet prepared our guidance for next year. We certainly would hope that our system approach in revenue will grow faster than the completion rate..

Okay. That's helpful. Because as I think about and obviously you've grown rapidly and you've taken share from somebody right.

So I would imagine the growth rate would continue to sort of outpace the overall market growth rate, but I was curious if you had seen any signs of it changing at all as we go forward? I don't think there is or was just curious as how you thought about that?.

We don't see it. We have smart competitors. I am sure that they are interested in pursuing this systems market and so over time, we would expect more competition, but we feel that we've got quite a lead on this segment and it's not just the additional completions that we're involved with, but it's also we're selling a premium product.

So we expect our revenues to grow faster..

I would agree. Thank you very much..

Our next question comes from James Brilliant, Century Management. Please proceed with your question..

Hi guys..

Hi Jim..

So if we think about this time last year when EMP guys were setting their budgets, in fact I think there is a Wall Street Journal article talking about the expected price of crude being somewhere between $45 and $55. So coming into 2018 that was the expectation and with crude at $70 they kind of blew through their budgets pretty early in the process.

So here we are left with the inability to get spend beyond their cash flows and so here we are with the budgets kind of constrained, but now it's 2019, we've got $65, $70 oil I would expect budgets to be raised based on that and higher hedging.

Are you hearing anything from your customer base yet on the expected increase in budgets going into 2019 based on the current crude price?.

We expect -- what we're hearing is a general optimism that their budgets are going to be greater in '19 versus '18 and I think in a counterintuitive way, the volatility that we're seeing in the price of oil and gas in this fourth quarter actually helps the land-based unconventional to get a larger share of that budget going forward.

So we feel quite confident that it's going to be a good year..

Okay. And so if -- so I think the market expectation you mentioned earlier, market growth is about 14% of the estimated industry growth..

Correct..

Okay..

For land-based unconventional..

Okay. So you got the -- on the one side there is the Permian issue that'll get fixed throughout the year, but since you're beyond just the Permian the rest of it actually happens to do with budget increases.

So coming in for the first half of the year, do you see any reason why you wouldn't be -- the first half of 2019, would it be better than 2018?.

I would expect it to..

You would except it to be better than year-over-year.

Would you expect year-over-year growth?.

In the number of perforating systems that we've sold in the fourth quarter, far exceeds the number of perforating systems we sold in the first quarter or were projected in the fourth quarter compared to the first quarter..

Just to clarify while some in the industry may still see a weaker first quarter because of the Permian issues that's not what you're expecting for your business?.

Not for our business..

Okay. Great. And then on NobelClad since we haven't talked about that, you got industry cash flows that are significantly higher than they have been in many, many years.

Are you seeing a change in the bid funnel for new project work?.

We're seeing a pickup in code activity. We're also seeing a pickup in the backlogs of the engineering firms that do work for the petrochemical downstream capacity and so we're feeling relatively confident that that business is going to improve next year also..

Going together I guess, how significant the change can be?.

Mike and Geoff are shaking their heads. So I'll have to go with no for right now..

Mike and Geoff, maybe you got to get out of the room. that way you can answer no. Okay, but you're looking at a better year and I think one of the questions earlier was around the cost bases there and we shouldn't see too much inflationary cost pressure. So you'd expect some better margins I would hope..

I would hope and I and we're going to be more control of our own supply chain going into the new year..

Okay.

And then cumulatively for the year I think litigation expense was around $10 million, is that what it's going to be?.

It's probably got be in the $8 million to $9 million range..

Okay.

So what's a good run rate for next year then?.

It's probably conservatively half of that -- third to half of that?.

Okay. And then with the additions in Blum, you've added assembly lines, you've added the TSA lines. I think there was if I remember correctly 20 machine centers put in.

Where are we along that?.

Okay. There were 23 machining centers, not all directed towards TSAs something that had to do with our gun capacity and we have six more to be installed..

Okay.

And around the TSA, what was the investment that you had there?.

The CapEx would be approximately $10 million for the TSA machines..

Okay.

And are you able to bring all the TSA in house now so that you have the issues that we had in the first half of the year with supply chain issues and higher cost?.

We don't have supply chain issues any longer with the additional capacity but we're still working through inventory that we purchased at a higher value than what we can make them for and that inventory is starting to deplete this quarter and some will go out in the first quarter, but we expect to see a margin improvement due to the TSAs coming on stream..

What is that on an apples-to-apples basis? What the delta between in sourcing and having to buy outside?.

A couple 100 basis points in gross margin..

Okay. That's all for me. Thanks guys. I appreciate it. Great quarter..

Thank you..

Ladies and gentlemen, we have reached the end of the question-and-answer session. Now I would like to turn the call back to Kevin Long for closing remarks..

Thank you, everybody for joining us today. We look forward to talking with you after the 1st of the year when we report our fourth quarter in our 2018 year-end. Thank you..

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