Good day, ladies and gentlemen, and welcome to your DMC Global Third Quarter Earnings Call. All lines have been placed on a listen-only mode and the floor will be open for your questions and comments following the presentation. At this time, it is my pleasure to turn the floor over to Geoff High, VP of Investor Relations. Sir, the floor is yours..

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 risk 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 and good afternoon everyone. DMC reported third quarter sales that exceeded the high end of our guidance. The results were driven by improved customer demand at DynaEnergetics, our Oilfield Products business, as well as better than expected shipments at NobelClad, our Composite Metals business.

Our performance also reflects the efforts of our employees around the world who have performed exceptionally well in the face of a global pandemic, a very challenging oil and gas market for DynaEnergetics, and project delays within a variety of end use markets that pushed out orders at NobelClad.

DynaEnergetics benefited from an improvement in North American well completions after a very weak second quarter and from strong third quarter international sales.

The increase in activity in North America coupled with DynaEnergetics efforts to align with leading operators and service companies led to a 122% sequential improvement in North American revenue, albeit off a very low second quarter base.

DynaEnergetics DS Factory-Assembled, Performance-Assured perforating systems, which we delivered just in time to the well site are enabling North American customers to respond quickly to increasing demand. Tuesday evening of this week DynaEnergetics received a call from a service company that was in a jam using field assembled components.

The field assembled guns were not meeting the needs of its E&P customer and the service company placed an emergency order for DS systems. The following morning, 400 of our DS systems were delivered to the customer's wellsite and have already been deployed.

The E&P customer was pleased with the switch to our DS systems and has already committed to deploying several thousand more over the coming months demonstrating the quality of our systems and just-in-time business model. DS systems require fewer people at the wellsite and less infrastructure and inventory.

They enable customers to reduce the capital intensity of their operations and improve the returns on invested capital. In addition, the safety, performance and reliability of our systems improves the effectiveness of our customers' completion programs and the performance of their wells.

We are cautiously optimistic that the bottom of the market is behind us and are encouraged by the modest improvement in well completions we saw during the third quarter. We believe this increase will be sustained through the end of the year.

The activity improvement has accelerated the reduction of low priced inventory in the market and the industry is closer to being back in balance. We expect the inventory overhang will be depleted during the first half of next year. And this should lead to improved demand for our DS systems.

On the international front, we anticipate a seasonal sales decline during the fourth quarter and an improved order volume beginning early next year. NobelClad continues to deliver steady top line results and improved profit margins despite the impact of several order delays related to the COVID-19 pandemic.

NobelClad's unique know-how and composite metal production has helped it establish a loyal customer base within several large and stable end markets. This is particularly valuable given the inherent volatility in our core energy markets.

NobelClad continues to invest in the development of new applications and is pursuing opportunities in a broad range of industrial processing, transportation and alternative energy industries. During the third quarter NobelClad shipped its first clad plates to a customer in the engineered wood industry.

The plates are being used to reduce maintenance costs and extend the life of the customers' wood presses, which are exposed to high temperatures and corrosive glues and resins. This order resulted from two years of efforts by NobelClad and we are optimistic it will lead to additional opportunities in the global engineered wood industry.

In July, Antoine Nobili was promoted to President of NobelClad. Antoine has developed strong application expertise and business acumen during his 25 years with NobelClad and he has been instrumental in expanding the global market for our composite metal plates.

We further strengthened our balance sheet during the third quarter and ended the period with cash and cash equivalents of $24.6 million. Total debt at September 30 was $12 million and our $50 million revolving credit facility is undrawn and fully available.

Earlier today we filed a prospectus supplement with the SEC to establish an at-the-market offering program. Under the program we may from time-to-time sell shares of our common stock for aggregate proceeds of up to $75 million.

We plan to use the proceeds for general corporate purposes, which may include working capital, debt repayment and potential acquisitions or investments in businesses, products or technologies. Details about the program are availability to prospectus supplement.

I'll now turn the call over to Mike for a review of our third quarter financial performance.

Mike?.

Thanks, Kevin. Third quarter sales were $55.3 million, up 28% sequentially and down 45% versus last year's third quarter. DynaEnergetics reported third quarter sales of $34.2 million, up 45% sequentially and a decline of 56% versus the same quarter last year.

As Kevin mentioned, North America sales increased 122% sequentially which partially was offset by a decline in international sales due to order timing. Sales at NobelClad were $21.1 million, up 8% sequentially and down 7% versus last year's third quarter.

Consolidated gross margin in the third quarter was 25%, up from 15% from the second quarter of 2020 and down from 36% in the third quarter of 2019. The decline from last year primarily relates to the year-over-year sales decline and lower average selling prices at DynaEnergetics.

DynaEnergetics reported third quarter gross margin of 24% versus 8% in the 2020 second quarter and 39% in last year's third quarter. NobelClad reported third quarter gross margin of 26% versus 25% in the second quarter and 26% in the year ago third quarter.

Looking at our third quarter expenses, consolidated SG&A of $11.6 million declined 5% versus the second quarter and 32% versus the year ago third quarter. We reported consolidated adjusted operating income of $1.6 million, which excludes $143,000 in restructuring charges.

Third quarter adjusted net income was $1.2 million or $0.08 per diluted share versus adjusted net income of $13.4 million or $0.90 per diluted share in last year's third quarter. Adjusted EBITDA was $6 million versus $23.2 million in last year's third quarter.

DynaEnergetics reported third quarter adjusted EBITDA of $4.2 million while NobelClad reported adjusted EBITDA of $3.4 million. We ended the third quarter with net cash of $12.6 million as compared with net cash of $4.5 million at the end of the second quarter.

Looking at guidance, fourth quarter sales are expected to be in range of $50 million to $55 million versus the $55.3 million reported in the 2020 third quarter. At the business level, DynaEnergetics is expected to report sales in range of $30 million to $33 million versus the $34.2 million reported in the 2020 third quarter.

We expect demand in North America to be modestly above third quarter demand. However, we anticipate a drop in international activity due to seasonality. We do expect international orders to pick back up in early 2021. NobelClad sales are expected in a range of $20 million to $22 million versus the $21.1 million reported in the 2020 third quarter.

Consolidated gross margin is expected in a range of 20% to 23% versus 25% in the third quarter. We expect this sequential decline is due to project mix at NobelClad and the decline in international orders at DynaEnergetics.

Fourth quarter selling, general and administrative expense is expected to be approximately $12 million versus the $11.6 million reported last quarter while amortization expense is expected to be approximately $370,000. Interest expense is expected to be in a range of $150,000 to $200,000.

Adjusted EBITDA is expected in a range of $2 million to $4 million versus $6 million in the 2020 third quarter. Fourth quarter capital expenditures are expected in a range of $2 million to $3 million. With that, I'll turn the call back over to Kevin..

Thanks, Mike. We have navigated the very difficult time in the industry and our businesses are well-positioned to capitalize on an expected improvement in demand. DynaEnergetics and NobelClad have established leadership positions in their respective industries and both have developed innovative products that generate true value for their customers.

DMC is in a strong financial position enabling us to stay focused on our long-term strategy of building a diversified portfolio of innovative solutions that create value for our customers and superior returns for our shareholders.

Our accomplishments are the outcome of the creativity and efforts of the entire DMC team and I want to again thank our employees for their hard work and dedication. With that, we are ready to take questions..

Thank you. [Operator Instructions] And we'll take our first question from Tommy Moll with Stephens. Please go ahead..

Good afternoon and thanks for taking my questions. Kevin, I wanted to start on the inventory overhang that you referenced for your DynaEnergetics business.

Am I hearing correctly that it might be up to three more quarters or through middle part of next year before you have some visibility to balance there? And if I am hearing that correctly, can you give us any kind of visibility you've had in recent weeks on the pricing dynamic? Has it actually gotten worse? Should we think about maybe being able to hold pricing and margins even while that inventory is run out? And what I'm really trying to get to is -- you're looking at an industry that's probably inflicting for the better once you get to 2021, but I just want to kind of balance that with your comments about the inventory that may still be out in the market?.

Yes, Tommy. I mentioned that we felt that it's the first half of 2021 before balance. I wouldn't say balance, before the inventory is consumed and so there is a little bit of an overhang. That is pulled up. It's probably more in the middle of the first quarter, but it's not going to impact all companies equally.

Some will get rid of their inventory faster, others will take longer. And so the six-month is really probably the last of it to come out. But I would most likely indicate the first quarter would be for the majority of the inventory. Regarding pricing, pricing, we think is stabilized. We don't see it going down from here.

It'd be very difficult for it to go down. We do expect in the first quarter to starting to see pricing improve. We need the inventory to come down -- excess inventory of others in the marketplace. And demand to stay where it's at or improve hopefully from where it's at. And then we'll start seeing pricing recover.

So we would expect pricing to start to recover. We're not guiding yet for 2021, but we see it coming back in the second quarter to the third quarter of 2021 where we sit now..

Okay, thank you. That's helpful context and leads to the second point I wanted to ask about, which is on DynaEnergetics margins. You've done a phenomenal job through this downturn showing the resiliency of the margins there which to be sure of have compressed.

But they're still well into the positive territory and above what a lot of the peers would be able to show.

So as we come into next year and let's just imagine a scenario where activity levels are improving through the first part of next year; how much of the cost that's been taken out this year comes back in or would you be able to frame for us the kind of incremental margin opportunity that's reasonable? Again assuming, we're in an industry environment that's improving as we work through the first part of next year..

Yes. Tommy, we were in a fortunate position that a lot of the costs that came out of our business were activity-driven costs. We have a high variable cost model, relatively low fixed costs and very proud of our team.

And that we've restructured our business when the market was good and our restructurings this year other than the activity based costs have been minimal, particularly relative to our competition and others in the industry. As the volume picks up from here we will add back in the activity costs in our variable cost model.

But we don't see ourselves adding back little -- actually we'll add back little if any fixed cost and so we should see an expansion in the margins. And our contribution margin is not where we would like it to be on DynaEnergetics. It's very strong in NobelClad even at the low volumes.

Roughly getting back to '19 kind of margins would be roughly one-third absorption of our overheads, including our SG&A and two-thirds pricing..

That's helpful Kevin. Thank you. I'll turn it back..

And our next question comes from Taylor Zurcher with Tudor Pickering and. Please go ahead..

Hey, thanks, and good afternoon. First question is on some of these new well designs out there. It seems like many E&Ps are looking to up space or elongate the distance between frac stages, it's really an effort to save costs.

And so one, are you seeing that? And then, are you seeing more clusters are perf shoots offset those potential reduce stage counts? So kind of summing it all up if stage count trends lower on the margin are you seeing gun count per well continue to increase on average?.

We are. We see it actually moving up roughly 20% this year and with closer spacing and the longer laterals doesn't necessarily add to the -- it adds more perforation per completion or lateral but not more.

In total, it does save on the drilling part of it, but really is moving the needle on perforating is the closer spacing of their perforating guns and the charges..

Okay, got it. Okay. And then also at Dyna, the North American performance in Q3 was exceptionally strong. When we think about Q4, you're basically guiding towards the flattish quarter in North America for Dyna.

Embedded in that guidance, are you contemplating any sort of sharp falloff in sales in North America towards the year-end like you saw last year and you've seen in years past, such that the first part of the quarter is much better than last or how should we think about that guidance for North America in Q4?.

We don't anticipate a fall off. The fall off typically in the fourth quarter has to do with budget exhaustion and some slowdown around the holidays.

But I can assure you that most of those budgets were cut in the second quarter of this year and so we think that we won't see the budget exhaustion this year that it will -- that the activity that we're at right now will continue into the fourth quarter..

Understood..

Yes..

Okay, got it. That's all I had. Thanks guys..

Okay, thank you..

And our next question comes from Stephen Gengaro with Stifel. Please go ahead..

Thank you. Good afternoon, guys. So, just following up on the prior question, I assume, and maybe this is a wrong assumption. But I assume that throughout the third quarter, you saw monthly improvements and given the ramp, you talked about in North America it just feels like the fourth quarter is building in some conservatism or some seasonal fall.

I just wanted to see if you could give us a little.

I know you just responded but I was just trying to see if that thought process on the third quarter was correct? And if in fact, October was better than any months in the third quarter?.

Yes, Stephen. This is Mike. That's correct. I mean, we're actually seeing our Americas business or North America up probably in the 10% range in the fourth quarter off of the third quarter and what you're seeing on the top line for DynaEnergetics is a seasonal downturn in the international business that we think will pick back up early on in 2021..

That makes that makes sense. The other question around the third quarter, it feels like one of the things that you were hurt by earlier this year, was this -- what I kind of classify as a market share gain for components over integrated systems.

And I think you addressed that in response to Tommy's question earlier, I think about the inventory overhang but -- and you provided an anecdote on the call about a customer.

But can you give us is sense are you seeing the share shift back to integrated systems maybe sooner than you expected or is that too strong a statement at this point?.

No, it's not too strong of a statement I think that when we look at the second quarter, Stephen we chose not to chase the low price component business and we were willing to give up share in order to price our products responsibly and maintain value for our shareholders. We have come down in price.

We can't avoid it because we need to support our service customers who've moved their business to our systems and they have to compete in the marketplace.

And so the wins that we're getting and that we got in the third quarter that are continuing into the fourth are really based on the integrated system, the quality of having a system where all the components are designed to work together, factory assembled, no wiring in the field and easy, quick and fast to go down the well.

And I think what's happened is, we haven't moved our prices down between the -- in the third quarter or into the fourth.

We're seeing the dissatisfaction that's coming from the older model of having operations -- having buying components, assembling those components, putting them together in the field wiring in the detonator and putting them down the well and that is a people-intensive and capital-intensive endeavor.

And in a market where fewer people and less capital tied up in your perforating operations is beneficial.

We're starting to see people move not focused on the transactional price of the buying components, but they're looking at the cost of the whole ecosystem to build perforating guns and we're starting to win back share based on a better quality system and the lower capital intensity when people use our products..

Great. That's very helpful commentary. Thank you..

[Operator Instructions] And we'll move next to Gerry Sweeney with ROTH Capital. Please go ahead..

Hey, good afternoon, Mike, Kevin, Geoff. Thanks for taking my call. I wanted to talk a little about some of the newer products. I see DS Trinity, NLine that built upon the original DynaStage.

Just curious as to how much sort of market uptake you're seeing on that? And are they driving new adoption, new customers or are they bringing some older DynaStage customers along to a new level? What I'm trying to get at obviously longer term is you've been prolific in investing in new technology.

You're keeping the pedal down, I assume on the marketing, etc.

How does this all translate into market share as we look a little bit further out in the curve?.

We're seeing an increase in directional perforating if you will, and our NLine has been a very successful product line in the third quarter.

There seems to be greater focus on the orientation of the perforations and also the accuracy and the consistency of the perforations and we excel in both accuracy, consistency and also the channel that's being created. So the NLine, we've seen being very well embraced and adopted in the marketplace.

The order that I mentioned earlier this week, where we were able to respond quickly, we are able to use our Trinity system and the feedback from the E&P to the service company has been what we would expect and very complementary and so Trinity is probably a little slower in the quarter relative to NLine, but we just saw a recent pickup in it..

And then, just on the mining applications. I mean, if my memory serves correct -- that's not -- you worked with Newcrest. And I think there was a potential for some sizable orders for an extended period of time from Newcrest.

But there's also an opportunity in other mining applications and I'm assuming it's actually a pretty tasty margin type of profile.

Any idea on what's happening on that front or you can provide any update on that front? How we look at that?.

Yes, it's still in the very early stages of being adopted by our customer and we're moving at the pace that they're mining operations are moving out. And it's a relatively new product that is very high temperature in the mining industry and so it's a niche application within the overall mining industry.

But it's a -- we think it'd be a decent sized application and so it has very strong margins. But you would have only just seen a small part of it in the NobelClad results for the third quarter. And so that's not what's really driving NobelClad yet. We expect that to be stronger in 2021 and 2022..

Got it. Okay, that's it from me. I appreciate it. Thank you..

And our next question comes from Matt Galinko with Sidoti. Please go ahead..

Hi, good afternoon. Thanks for taking my question. I guess, just curious about how you think about timing on market development and engineered wood for NobelClad. It sounds like you got an initial order.

But how do you think about follow-on and sort of building from that?.

What's interesting about the engineered wood marketplace, it's a very large 10s of billions of dollars market. I think possibly $40 billion in product revenue and there is approximately 50 companies globally that make engineered wood.

And so with the applications that we've developed in the adoptions and basically we improve their operational costs -- lower their operational costs by lengthening the maintenance and service work that they have to do to their presses and the plates. And so this is just for us, right at the very beginning.

We've got orders coming in from a customer that we worked with and we're currently out marketing to these other companies and it's a fairly strong value proposition. So we expect that to pick up more also in '21, '22 and that's just to support the industry as it exist today..

Got it. Thank you..

And we have a follow-up question from Stephen Gengaro with Stifel. Please go ahead..

Thanks. Kevin, one more thing I want to just address. Do you see any opportunity with the Liberty One spin transaction and my sense would be that Schlumberger with somebody who is more up to be internally developed in a system and the release.

You're kind of a truly a leader on the technology side, in the press business but I'm not so sure they're doing much on the integrated perf guns.

Is that something that has come up? Is that a potential opportunity with Schlumberger may be getting out of the game a little bit as we think about the competitive landscape?.

Well, I don't know if Schlumberger is getting out of perforating. I think they've moved or will move one of their business units over to Liberty. And so we view it as from a supply standpoint, market neutral and we would be focused on both Schlumberger and Liberty like we would the broader market for selling our systems..

Okay, thank you..

And we do have a question from Jim Brilliant with Century. Please go ahead..

Afternoon, guys.

How are you?.

Yes. Hi, Jim..

Kevin, if we look at kind of roll the calendar back a little bit in the '18 and '19 as you developed new products and more offerings. You certainly separated yourself from the pack with the integrated system. Now we got a downturn and there is this excess inventory in the market that we've got to get through.

But how would you characterize the market going forward from a competitive front and not just from the perforating side, but also from the E&P side and the service side? What do you see different going forward than maybe what we had in the past?.

Well, what we're witnessing and I think the market is witnessing right now is consolidation at the E&P level and we would expect there to be consolidation and attrition at the service and the equipment level particularly for the lower technology component kind of companies, the lower capital intensity and the lower people intensity of integrated system is just too compelling for I think a service company or an E&P company to ignore.

And so I would think that it's going to mostly impact the smaller component manufacturers from the equipment side and it doesn't make sense to be a vertically integrated wireline service company assembling components that you don't have basic or manufacturing capabilities..

The fact that you picked up a lot of business from a competitor that was having problems in the field is kind of interesting to me in that it's a relatively slow time in the industry. Yes, they're having problems with field assembly.

Was that a product issue or is it a labor issue? And I guess what I'm getting at is, is not to get overly excited about the eventual ramp, but how is the field assembled industry going to ramp if they can't do it in a slow-time? What are the dynamics that are causing problems now in that field assembled?.

Yes. Well, there is a lot of people coming out of the industry and expertise and so assembling perforating guns in the field with components that aren't necessarily designed to go together is kind of a difficult process.

And it requires more people and it also requires a coordination of supply chain for all the different products and capacity in this particular case for the size of the projects that were being considered. And so for all of that to come together in a market where there is consolidation, attrition and reduction in force is very difficult.

And so we just feel that we were benefited because of our business model and the integration of our products. I don't want to get into..

So is there something different now in this downturn than say 2016, because there were still those same things, people are coming out of the market and all that? But nonetheless, when the industry ramped up you still had field assembled people ramping up and they got back to businesses.

Is there something different that you think changes that?.

Yes. Margins are lower.

And so you can be inefficient when margins are higher and the savings may at first appear to be lower, but when you get down to this kind of environment where volume is down, margins are down and every completion is a critical completion, you really have to be good at what you do and I think that that's going to favor DynaEnergetics and some of its larger competitors that are also working on integrated systems..

Okay. And then in terms of product roadmap, you've been introducing several new products in various degrees and various areas.

Are you contemplating moving beyond perforating guns and energetics? Are there other things that you're looking at?.

Yes, I mean, well, a lot of the -- we introduced several new products in the late second quarter and beginning of the third. We have two more product lines coming out in the fourth quarter.

The majority of those in terms of number of new product introductions were around perforating and building out an extensive product portfolio that enables us to have a perforating system that designed for different types of completions. That doesn't move the needle on the market size. It just makes us stronger in terms of our product offering.

We did come out with a ballistic released tool, which is new to us.

And a setting tool, which we've been doing a lot of testing in the third quarter and the setting tool increases our total available market by about 20% and the tool that we've introduced has a lot of the safety and performance benefits of our perforating systems and so we're seeing a real quite frankly, strong interest and we feel we're going to have a quick adoption of our setting tool in the marketplace.

Beyond that, we're focused in DynaEnergetics on the lower completions and products associated with lower completions we would obviously have an interest in.

However, we're also, only focused on those that we can bring something to the market in terms of adding value for our customers and improving there in our own value proposition and those are few and far between..

Okay. And then one last question, I know, it may be early for budgeting next year. But what's your CapEx look like for next year.

And is there any anything particularly planned along the way of increased efficiency?.

Yes, we're just in the early stages of budgeting for next year. We would expect our CapEx spending to be modest in the range that we're spending this year, until we see demand and margins start to improve dramatically..

Okay, thanks guys. I appreciate it..

With that there appear to be no further questions. So I'll turn it back over to Kevin Longe for any concluding remarks..

Just would like to thank everybody for joining the call today and we hope you and your families and colleagues are doing well in this very difficult environment. And I'm pleased to say that I think the next time that we'll have an earnings conference call will be 2021 and it will be nice to put 2020 in the record books.

And look forward to talking with you in February. Thank you..

And that does conclude today's conference call. We appreciate your attendance. Please disconnect your lines at this time and have a great day..