Good afternoon, ladies and gentlemen, and welcome to the DMC Global Fourth 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. It is now my pleasure to turn the floor over to your host, Geoff High, VP of Investor Relations.

The floor is yours..

Hello, and welcome to DMC's fourth 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 risks and uncertainties 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 turn the call over to Kevin Longe.

Kevin?.

Good afternoon, and thank you for joining us for today's call. 2021 was a transformational year for DMC and was marked by both an important acquisition and the continued resiliency of our DynaEnergetics and NobelClad businesses, each of which navigated a second consecutive year of challenging market conditions in their core energy markets.

Despite the difficult market conditions, our accomplishments were made possible by the expertise and determination of DMC's employees, and I'm extremely grateful for their efforts. On December 23, 2021, DMC acquired a 60% controlling interest in privately held Arcadia, a leading provider of architectural building products.

The transaction doubled DMC's 2021 pro forma sales to $500 million and strengthened our pro forma consolidated gross margin. It also more than tripled the size of our addressable market which is now approximately $7 billion. Arcadia is headquartered in Vernon, California, and serves both the commercial building and high-end residential markets.

The commercial business provides exterior and interior architectural framing systems, curtain and window walls, doors and entrance systems. It serves a broad range of end markets that include commercial offices, health care, higher education, retail and civic facilities.

Arcadia's commercial business serves the Western and Southwestern United States, where it has captured approximately 10% market share and serves a loyal customer base that includes more than 2,000 commercial construction businesses and general contractors. The Arcadia Custom division serves the nation's high-end residential real estate markets.

Based in Tucson, Arizona, Arcadia Custom manufactures highly engineered steel, aluminum and wood windows and doors, which it sells through a national network of premium window and door dealers. The business also works closely with architects and custom homebuilders who specify Arcadia Customs products.

For the past three years, Arcadia and Arcadia Custom have been operating at full capacity to address customer demand. DMC is supporting Arcadia's efforts to improve its operating efficiencies and increase its manufacturing capacity.

These programs include implementation of a new enterprise resource planning system, which will help streamline operations and enhance the buying experience for customers.

Arcadia is also designing and procuring equipment for a new anodizing and painting facility that will add production capacity at the primary manufacturing center in Southern California. The building products industry is forecasting growth in commercial and residential construction, particularly in Arcadia's geographic regions and end markets.

The investments they are making today will ensure Arcadia is positioned to capitalize on strong customer demand and compelling market dynamics going forward. During the fourth quarter of 2021, DMC's consolidated sales increased 7% sequentially to $71.8 million. DMC did not begin reporting sales from Arcadia until January 1, 2022.

The fourth quarter sales at DynaEnergetics, our Energy Products business, increased 15% sequentially to $50.7 million. DynaEnergetics International sales grew 75% to $8.1 million and included a large order in Eastern Europe. DynaEnergetics sales in North America increased 7% to $42.6 million and exceeded the 4% fourth quarter increase in U.S.

well completions as reported by the Energy Information Administration. Fourth quarter sales at NobelClad, our Composite Metals business, declined 8% sequentially to $21.2 million. The decline was a result of delays in receiving metals at our U.S. and European manufacturing plants.

Fourth quarter consolidated gross margin was 18%, down from 25% in the third quarter. The decline resulted from a $1.1 million inventory reserve adjustment at DynaEnergetics, a less favorable project mix at NobelClad and approximately $1 million in post-acquisition expenses that were reported in cost of goods sold at Arcadia.

DynaEnergetics gross margin was 20%, a disappointing result and below our expectations. DynaEnergetics announced a 5% global price increase that went into effect on November 22. However, its impact was offset by higher-than-anticipated inflation and the expiration of the CARES Act.

DynaEnergetics recently implemented an additional price increase to begin restoring margins and the full effect of the increase should be evident during DynaEnergetics second quarter. Fourth quarter adjusted EBITDA was $2.8 million, down from $5.8 million in the third quarter.

For the full year, consolidated sales were $260.1 million, up 14% from 2020. Gross margin was 23% versus 25% in the prior year. Adjusted EBITDA was $20.2 million versus $19.1 million in 2020. On a pro forma basis, which includes contributions from Arcadia, 2021 sales were $500.5 million, while pro forma gross margin was 28%.

Pro forma adjusted EBITDA attributable to DMC was $50.1 million. As we enter 2022, we are encouraged by the strengthening of our end markets and our ability to meet demand.

While completion activity is increasing as oil and gas prices are at multiyear highs, DynaEnergetics continues to sell the safest and most reliable well-perforating systems on the market and it takes total responsibility for the performance of its systems.

Our DS systems are delivered fully assembled just in time to the well site, and they tie up less working capital and fewer people on location. In the first quarter, DynaEnergetics introduced a mobile version of its digital app, which enables customers to configure and purchase products from any location in real time.

An overview of the app is available on DynaEnergetics website. We believe DynaEnergetics margin performance will improve significantly beginning in this year's second quarter and will benefit from additional price increases, greater well completion activity in North America and increased international demand.

NobelClad remains well positioned in its markets. And at a higher price commodity environment, it is very effective at passing through higher material costs and maintaining its contribution margins. NobelClad is the strongest company in its industry and benefits from a global application engineering team and a global manufacturing footprint.

We believe NobelClad's bookings and financial performance will improve once supply chain disruptions ease and customer order activity accelerates in current as well as new end-use applications. As I noted, Arcadia and Arcadia Custom both have developed innovative product portfolios, strong brands and have a strong leadership and employee base.

Their markets are healthy and expected to grow over the next several years. We have strengthened DMC's portfolio of innovative asset-light businesses serving the energy, industrial and building products markets. And I'm confident in our prospects for margin improvement and long-term revenue growth.

With that, I'll turn the call over to Mike for a review of our fourth quarter financial results and a look at first quarter guidance.

Mike?.

Thanks, Kevin. Looking at fourth quarter expenses, consolidated SG&A at $16.3 million increased 6% versus the third quarter and 30% versus the year ago fourth quarter. The sequential increase primarily relates to step-up in PAT litigation expenses at DynaEnergetics. Fourth quarter operating loss was $5.5 million.

Adjusted operating loss was $1.9 million and excludes $1.6 million in acquisition expenses and $2 million in sub period operating expenses at Arcadia between December 23, 2021 and December 31, 2021. Adjusted operating loss in last year's fourth quarter was $736,000. Fourth quarter net loss attributable to DMC was $2.8 million.

Following the acquisition of the 60% controlling interest from Arcadia, the calculation for net earnings per diluted share must account for the change in redemption value of the 40% redeemable noncontrolling interest in Arcadia.

Redemption value is estimated at the end of each quarter based on the formula used to calculate a put and call option in the operating agreement. During the fourth quarter, the adjustment was $4.4 million.

When added to the $2.8 million net loss attributable to DMC stockholders, the resulting net loss were $7.2 million or $0.38 per diluted share based on 18.8 million diluted shares outstanding.

Fourth quarter adjusted net income attributable to DMC was $840,000 or $0.05 per diluted share versus adjusted net loss of $825,000 or $0.05 per diluted share in last year's fourth quarter. Adjusted EBITDA was $2.8 million versus $3.6 million in last year's fourth quarter.

DynaEnergetics reported fourth quarter adjusted EBITDA of $4 million, while NobelClad reported adjusted EBITDA of $2.1 million. Debt to adjusted EBITDA leverage ratio at December 31, 2021 was 3.0. The Company's debt to adjusted EBITDA leverage ratio covenant at the end of the quarter was 3.50.

DMC's net debt to adjusted EBITDA at the end of the fourth quarter was 2.3. Our total outstanding share count is now 19.3 million. Looking at guidance. First quarter 2022 consolidated sales are expected to be in the range of $125 million to $135 million.

At the business level, Arcadia is expected to report sales of $57 million to $62 million, while DynaEnergetics is expected to report sales in a range of $48 million to $52 million, and NobelClad sales are expected in a range of $20 million to $21 million. Consolidated gross margin is expected to be in the range of 25% to 27%.

First quarter selling, general and administrative expense is expected in the range of $25.5 million to $26.5 million. First quarter amortization expense is expected to be approximately $13.5 million and relates principally to the acquired trade gains, customer relationships and backlog of Arcadia.

Amortization expense is expected to decline significantly once the value assigned to Arcadia's backlog has been amortized, which is expected in the third quarter. For the balance of 2022, amortization expense is expected to be approximately $13.5 million in the second quarter, $7 million in the third quarter and $4 million in the fourth quarter.

After amortizing the backlog value, 2023 quarterly amortization expense is expected to be approximately $4 million. First quarter 2022 depreciation expense is expected to be approximately $4 million, and interest expense is expected to be $1 million.

First quarter adjusted EBITDA attributable to DMC after deducting the 40% noncontrolling interest in Arcadia is expected to be $8 million to $10 million. Capital expenditures are expected to be $2 million to $4 million. With that, we're ready to take any questions.

Operator?.

[Operator Instructions] The first question is coming from Cameron Lochridge from Stephens..

So Kevin, I was hoping we could start at a high level, talking about Arcadia. It looks like CapEx this quarter is going to come in around $2 million to $4 million. One of the things, if I'm remembering correctly, you all highlighted that you would bring to the table when you acquired Arcadia was capital and investment in the business.

So just wondering if you could speak a little bit to what you expect that to look like this year, specifically around Arcadia? Any incremental detail you could give us there would be helpful..

Yes. So, well, first of all, we plan in the range of $8 million to $10 million this year in CapEx for Arcadia. We've already released a purchase order to support their installation of a Microsoft D365 system and all the associated hardware, software and consulting services.

That will range in the $3 million to $5 million expenditure over a two-year period of time. And we also are in the early stages of designing a new anodizing and painting facility that will be in the $7 million to $10 million range also over a two-year period of time.

And then we have some associated positions that we're putting into the organization and -- which will show up as operating expenses. But from a capital standpoint, they were in pretty good shape to begin with. We are adding these systems, which will add both operating efficiency as well as manufacturing capacity to the Company..

Great. That's very helpful. On the top line for Arcadia. So 2021 down a little bit. If I'm looking at the right numbers here, we'd see $240 million was the number, $240 million for 2021, if I'm correct. It looks like 1Q will be up slightly versus 4Q. If you could just talk a little bit to the seasonality in the business.

And just directionally, what we can expect going forward as the year progresses, that would be helpful..

Yes. There's very little seasonality to it, primarily based on the markets that they serve. And right now, I think the way to look at the revenues and if you look at the revenues over the last two to three years, they've been in the $240 million to $250 million range.

And they're capacity constrained by this anodizing and painting and also supply chain access to extrusions. And the extrusion market is loosening up, but we do need to add anodizing and painting. As well as on the Arcadia Custom side of it, they've done a great job building that company.

And now we need to add some people resources to it, which we will begin to see some of their expansions later in our -- revenue growth later in the year and into next year. But you'd probably anticipate it being fairly constant this year based on historical performance -- most recent historical performance with the exception of price increases.

They're very good at managing selling prices. Jim Schladen in particular leads the organization to make sure that the cost inflation that we have is being passed on and he does that very effectively. And as you might expect, aluminum costs are going up, and that's probably going to drive most of the revenue increase over the next year..

Got it. That's helpful. If I can maybe just squeeze in one more, switching to Dyna.

It looks like a $1.15 billion in funding the Biden administration is going to pass on to cleanup some orphan wells in the U.S., I was wondering just if you could speak to the potential opportunity that might provide for Dyna and what you could expect to see there?.

Cameron, this is Geoff. The states have all been allocated a certain amount typically in the $25 million range, I believe, for this -- in this initial slug.

But that -- those funds have not yet been -- I mean they're just kind of finding their way to the state agencies, which will then work with the operators or the wireline companies to work on these wells. So it's -- we're still waiting to see what the opportunity is, but the fact that the money has been allocated is an encouraging step forward..

The next question is coming from Stephen Gengaro from Stifel..

A couple of things. Just to start with, the DynaEnergetics 1Q guide seems light to me. But I'm curious if that is international versus U.S. mix. And any sense for the U.S.

piece of that?.

The international is pulling back a little bit in the quarter and the U.S. is about constant to slightly up. We're reading about some sand constraints and activity constraints. We don't expect that to last very long. The well economics are increasing faster than well cost and inflation despite some of the things that are going up in the marketplace.

And so we actually think the activity is going to start picking up but it's going to be more in the second quarter rather than the first.

Mike, do you want to add anything to that?.

Yes, Stephen, just real quick. You're absolutely correct. There is a step down of about $2.5 million in international from Q4 to Q1. And then we see international stepping up significantly Q2 through Q4. But we do see North America up sequentially Q4 to Q1 in the order of 10%.

So we see that stepping up, but it's really -- it's being masked by lumpy sales in international..

And Mike, was the international -- was it $13 million in the fourth quarter? Is that....

Fourth quarter for DynaEnergetics was 8.1%..

International? So you're including Canada in the U.S.

number?.

Yes. We do. We go by North America and international, so everything other than North America, correct. So we've got 8.1% for international..

Okay, okay. That's -- that is helpful. The -- when we think about the Arcadia business, I think based on their initial presentation, the D&A was like $2 million for a full year or something like that.

Can you give us guidance on sort of how to think about the all-in EBITDA margins for Arcadia?.

Yes, absolutely. So the all-in margins, they've been a run rate of around $60 million in sales. And they've been in a run rate somewhere between $11 million and $13 million in EBITDA. So that's about a 20% adjusted EBITDA business all in, and we obviously own 60% of that..

Got you.

And that D&A number I threw out is right, right? It's about $1.8 million to $2 million a year?.

Yes. Right now, the D number is a couple of million bucks a year as it stands. So they're a very capital-light business. The A number, amortization, as I mentioned in my commentary, we're going to have significant step-up amortization for the trade names and tangibles, customer relationships and backlog.

So amortization for the first couple of quarters is going to be in the $13 million range. The longer-term run rate on amortization will be $4 million. So D&A on a longer-term basis will be $6 million. And as we put capital into the business, you'll see the D number go up..

Okay. But just so -- I just want to make sure I got it.

Your first quarter, just making this up, if you did $13 million of EBITDA from Arcadia, you do zero on opt-in because of that amortization step-up?.

Yes, correct. Right..

Okay. That's how you guide, okay.

Just want to make sure I was understanding that, that step-up in amortization was, in fact, part of the guidance numbers that you gave, right?.

Yes, correct. When we talk adjusted EBITDA, $8 million to $10 million on the guide, we're adding back that amortization. And so what we're -- yes, yes, exactly. And we're deducting our adjusted EBITDA as adjusted EBITDA is attributable to DMC. So it eliminates the 40% that's attributable to the noncontrolling interest..

So the $8 million to $10 million would be representative of a full $11 million or $12 million from Arcadia? Or is it -- does it excludes the amortization?.

Excluding. It will exclude the EBITDA from that business..

The $8 million to $10 million?.

Yes, correct. So hypothetically, if we're forecasting $10 million consolidated 100% Arcadia EBITDA, when we roll up our $8 million to $10 million, we're giving ourselves credit for $6 million of their $10 million..

Okay. Okay. So you're -- I mean, to me, you're really easy.

You're guiding your DynaEnergetics and your NobelClad EBITDA to what range in the first quarter?.

So DynaEnergetics is in that $4 million to $5 million range. NobelClad's in the $2 million range. Arcadia is in the $10 million range, you eliminate $4 million for noncontrolling interest and you've got $3 million in corporate expense. And if you walk that across, you get to $9 million, which is the midpoint of $8 million to $10 million..

Great. Now that helps a lot, okay. And the only other just quick one is, maybe it's not quick depending on how much detail Kevin wants to give.

But what are you seeing on the pricing side in Dyna and the competitive behavior?.

So I can tell you what we're planning and we saw -- yes, we implemented a 5% price increase in November, late November. A part of that took place in December. And we'll see that 5% on our -- if you will, in our income statement in Q1. However, our margins declined for two reasons.

We had an inventory reserve in the fourth quarter, which was a couple of percentage points. And then we had CARES Act that was taken away that was in previous guidance and also inflation that occurred in the quarter.

And so that -- if you will, that totaled roughly between the inventory reserve and the CARES Act and inflation of about six percentage point degradation. And it was only offset slightly -- very slightly by our price increase in Q4 but we'll see some of that in Q1.

So we are actually implementing another price increase in the quarter that we've announced, and we're informing customers of this. That will take effect in Q2. And we fully expect to achieve both price increases.

We may -- I would suspect the inflation that we're having, the CARES Act for some of our competitors, they're experiencing similar costs, probably even higher because they're not vertically integrated in all the components like we are. And so we would expect that they will make decisions to follow or to implement their own price increases.

We expect to achieve ours, we really are less focused on the competition at this point. Our systems are delivered just in time to the well site. We manage the supply chain, and they require fewer people, less working capital and they perform better.

And when you step back and look at it, the type of price increases that we're looking at for the year cumulative in the first half of the year are in the total of the 12% to 15% range. And on completing a well, that's relatively insignificant $20,000 per well completion.

And the inflation that is coming on other commodities that don't have the differentiation that we have is extremely high. And so this is not a big change in terms of the well costs and the well economics are very strong. And so we're less concerned about our competition in a strong market bringing prices down.

To me, one of our #1 objectives this year is to cover inflation in all three businesses and restore margin in DynaEnergetics, and we firmly believe we're going to see that..

The next question is coming from Taylor Zurcher from Tudor, Pickering & Holt..

I just wanted to first circle back on the margin profile at Arcadia. If I heard you correctly, roughly $10 million of EBITDA for Q1 on a 100% allocated basis at Arcadia, at least that's what your consolidated EBITDA guidance would imply. So about 17% EBITDA margins, it's relative to 14% in Q4, but relative to 21% for the full year of 2021.

So I guess, I'm just curious what's driving the downtick in margins at the EBITDA line for Arcadia in the year-end and it sounds like into Q1? And should we get back to that 20% margin profile at the EBITDA line over the back half of 2022?.

Yes, so this is Mike. I think we will. This is a business that we think is going to run in that $11 million to $13 million per quarter EBITDA run rate on that -- on roughly $60 million in sales. What we do expect is, as Kevin mentioned, some top line improvement from pricing.

But we could get the denominator effect of some margin compression, greater dollars, but some margin compression from the denominator effect of increasing aluminum prices.

So I think we're going to be in a healthy range, and this is going to be a business that is going to look similar to -- probably similar to the 2021 full year profile by the end of 2022 with perhaps a better top line, small compression in margins and even to better adjusted EBITDA number in terms of dollars..

Okay. That's very helpful. And just following up on the top line. So if I'm understanding you correctly, the 2022 top line growth for Arcadia that at least you're forecasting today is primarily price-driven.

But at the same time, you're spending some CapEx $8 million to $10 million to, what it sounds like, alleviate some of these capacity constraints that you talked about.

So I'm just curious $8 million to $10 million of what I'd consider growth CapEx, how much incremental revenue do you think you can generate with that sort of capacity expansion via CapEx and maybe in 2023?.

Yes. I think you'll see that more in 2023 than 2022. We feel that this business has an opportunity to grow at GDP or higher, really construction spending are higher as well as it has a very strong product line in its -- in both businesses. The Custom business is a national business.

The Arcadia [indiscernible] part of the business is a regional business where the regional market share has room to grow. And then there's the Commercial Interior business, Wilson, that also has room to grow.

And the governor on the growth at this point, it's been people in Custom and it's been extrusion capacity, anodizing and painting in [indiscernible] in Wilson Partitions. We -- it's our objective over the next three to five years is to double the size of this company.

But we're working with the leadership team to help them implement their plan and the systems that they would like to implement and make it a strong company and take some of the friction out of the business that exists so that it can begin growing in '23 and '24 and '25.

It's -- we're not yet giving guidance for '23, but our intent is to double the size of this company over the next three to five years, Arcadia. And we also feel that we're going into a good period for DynaEnergetics in healthy growth and margin recovery and as well as NobelClad with our application development..

Makes sense. And one last question for me, just capital allocation, free cash flow and sort of debt management for 2022. So you're adding a business here in Arcadia that's at least on a maintenance CapEx basis, however you want to call it. It's more capital light than your other two businesses.

So I'm just trying to understand on a through-cycle basis or a multiyear basis. What the capital intensity of the business might look like as a percentage of revenues, what the free cash flow profile might look like as a percentage of revenue or percentage of EBITDA.

And if you don't want to comment on that this early, maybe just for 2022, do you have any targets for free cash flow in 2022? And do you plan to use some cash to pay down the debt you incurred as part of this transaction over the course of 2022?.

Absolutely. I mean, I would start with -- from a target for debt-to-EBITDA. We expect through EBITDA growth, debt repayment to be in the 2x, sub 2x range by the end of 2022 on a debt to adjusted EBITDA basis and in the 1.5x range on a net debt to adjusted EBITDA.

So we expect to pay down debt fairly rapidly with EBITDA growth, reduce our leverage profile quite a bit. From a capital allocation and capital standpoint. Again, these are businesses, I think, collectively that are in that 3% to 4% of sales in terms of capital long term for the businesses.

And so the -- on a longer-term basis, we see this as $15 million to $20 million on a consolidated basis for CapEx for all three of our businesses. So again, it's probably in that 3% to 4% range. And quite frankly, early on, it's going to be -- we're going to be focused on the key projects we mentioned at Arcadia and repaying debt..

I would add to that, Taylor, that we -- over the last three to five years, we've completely modernized and consolidated our European manufacturing for NobelClad. We've got a beautiful facility in Liebenscheid, Germany that is very efficient.

We've also significantly -- we introduced our integrated system and expanded our capacity for our intrinsically safe integrated switch detonator. And in Troisdorf, Germany, we've got six production lines where five years ago, we had -- it was a manual process.

And then we have our Blum facility where we actually assembled the components into an integrated system, which was built in '17 and '18. We have completely upgraded our previous two businesses, NobelClad and DynaEnergetics. There's some capital that we need to continue to invest in both.

But the major expenditures taking place, and we feel we're very positioned -- very well positioned to serve the markets going forward at a reduced capital spend than what we've had historically because we took the hit early on in terms of the cash flow in making those investments..

Okay. Next, we have Gerry Sweeney from Roth Capital..

Obviously, DynaEnergetics and the gross margins have been a point of conversation. But curious as to the legal side of that equation.

And does that -- the legal issues need to be rectified or completed before we get back to a margin level that you think the business deserves?.

Yes. The legal expenses are less in gross margin and more in SG&A. They're stepping down in 2022 compared to 2021. I believe we spent about $7 million to $8 million in litigation in 2021. 2022, it's going to be approximately half that. And that's primarily because there's a process in intellectual property called Post Grant Review by the Patent Office.

And the court system has granted -- has stayed the trials of those patents until the Patent Office weighs in on the Post Grant Review for a couple of the patents. And so this is a marathon, not a sprint. It's going to ebb and flow year-over-year.

We -- we're in a pretty good position in terms of how we see this evolving and think that we'll manage expense in the range that we're at for 2022.

And with a significantly increasing EBITDA over the next couple of years, and so it shouldn't -- it should fall back into a normal kind of filing and defending as some of these things work their way through the system. And the court system is very slow, and it takes a long time.

And we'll keep everybody well informed of when the Post Grant Reviews are complete, and this picks up speed a year or two down the road..

I apologize, I probably didn't ask it the right way. I meant, obviously, there's some what you will call infringement on some of your form factors and products and it's putting pressure on pricing, et cetera.

What I probably should have asked is does these -- do these cases need to be rectified to help improve pricing to get you back to margins where you thought?.

No. I mean, quite frankly, the pricing has been more of a situation of an oversupply in the industry. Obviously, there are systems that we feel infringed on our intellectual property. But there's not an apple-to-apple comparison of these systems.

They're -- the heart and soul of the DynaEnergetics strategy is an integrated system with its intrinsically safe and -- detonator. And that's where the systems stand on their own in terms of their performance, less working capital, greater efficiency, fewer people, that the value that they create in use is where the price recovery will be.

We've had two years of very low industry volume and a lot of competition. It's going to be harder for people to make an integrated system going forward and meet demand as volume picks up. And that's why we're committed to restoring our margins through price recovery. The litigation helps, I don't want to say it won't help.

It reduces potentially some of the systems that infringe our technology. But there's not a single company that incorporates all the features and benefits that we have in our overall our DynaStage system..

Okay. The next question is coming from Marisa Hernandez from Sidoti..

So a couple of questions on Dyna and NobelClad.

So first of all, I wanted to confirm if the 5% price increase that you implemented in November, was that taken across the board by all customers of Dyna's or not really?.

Not -- so that was implemented or announced for implementation on the 22nd of November. We -- to the general market, we have supply agreements with certain customers that delayed the implementation based on the amount of notice that we give them.

And so in the fourth quarter, there was less than one percentage point improvement of margin associated with the price increase. We expect by the end of the first quarter, all 5% of that to be in our revenues and also hopefully margins. And we're putting in an additional price increase on top of that.

Again, it layers in because of our supply agreements with customers. It doesn't all layer in at the same time. But by midyear, we would expect to see both price increases fully implemented..

So the second price increase that you plan to push through now in the second quarter, did I get it correctly, I have heard you mentioned 12% to 15% increase in inflation that you were looking to offset with this price increase. I'm trying to confirm if that's correct..

No. The inflation, I think, is already baked into our -- we're seeing four or five percentage points in inflation throughout the year, year-over-year. And that includes the reduction in the CARES Act.

And we're implementing by the end of the year that we fully implemented price increases in the 12% to 15% total which would include the 5% in November, plus an additional 8% to 10%, if you will, between April 1 and the end of the year or when that first price increase took effect..

And that's net pricing..

And that -- and we expect that to be net pricing because inflation is -- we feel that the inflation that we expect is already in our numbers..

Got it. And of the different drivers there for -- or weighing on the gross margin during the quarter, how much of the decline was due to cost inflation? And where are you seeing that? Is it on the metal side which you have issues on labor, transportation costs? If you could elaborate a little bit on that, that would be great..

Yes. So compared to what we were originally guiding for, we have stringent inventory management policies in the Company with the decline in activity in 2020, 2021. Some of the inventory that we had was running into a born-on date limitation.

So we took -- there was a two percentage point reduction in the fourth quarter to an inventory reserve that we took. I will say that, that inventory we still have and expect to sell them -- the applications that it applies to come back, and we expect those to come back by the end of the year.

We're seeing a two to three percentage point reduction in margin year-over-year in the -- for the size company, the DMC is, the CARES Act that was in place in 2021 that won't be in place in 2022. Having said that, we're glad that the CARES Act is expiring.

We benefited from it on one hand, but we were hurt by it on another with some of the dynamics that have put into workforce and competitive situations. And we have -- there's about two margin -- two points of -- one to two points of inflation above and beyond the CARES Act that has to do with wage inflation and material inflation.

And as you might expect, the cost of labor is going up and the cost of everything from eating out to staying in hotels and traveling, and we are back traveling significantly as a company, which was down in '20 and '21. And so it's a little bit of everything.

And in inflation, by the way, it's less of the DynaEnergetics story as is margin recovery for the price declines that happened over the last 18 to 24 months with the dynamics that have taken place, both with the drop in -- overall activity and the increase in price focus but with oversupply in the market.

So the market is moving from supply -- oversupply to availability. And the price increases that we're asking for are modest, particularly when you take into account the value that we create for our customers..

So is it fair to assume that your time have come in? How much of -- would you characterize the market as still in an oversupply, balanced or getting tight?.

I would say it's -- there's very short lead times in perforating equipment.

Ourselves and our competitors are happy to respond to very short lead times because the inventory, particularly one of the things that we're advocating is let us manage your working capital and supply chain, not tire customers up with working capital and supply chain expenditures. And so lead times are going down. Response is going up.

The supply chain is -- for us, the response is going up relative to our competition because of our vertical integration and controlling everything. And so it's moving from -- there's plenty of manufacturers out there, but they're not all doing the same thing.

We see a lot of our -- a couple of our traditional competitors moving to just really being shaped charge manufacturers and the integrators of the shaped charges and to the perforating guns are now being done a lot by machine shops.

And they just -- they're just not vertically integrated in the components, and they're buying and having to resell components that we make.

And I think that, that just gets harder going into a market where that's increasing rapidly and demand is now out in front of -- it's not oversupply, but it's -- but the response times are becoming more of a factor than just the supply itself.

And when -- I'll share with you that the cost of perforating guns on a well completion per well is less than $100,000. And we're looking at $15,000 to $20,000 price increase on a total completion of a well where you see other expenditures that are in $300,000, $400,000 and $500,000 or greater individually.

And so to me, it's less of a price, it's more about the value that you create..

And to finish up on the [indiscernible] margin team here. When you talk about margin recovery in 2022, when I look at your historical margins, I see in '21, you had one quarter of 25%, but it was -- in '19 and early '20 before the pandemic, it was even higher.

So what are we talking about when we talk about margin recovery in 2022 for Dyna?.

So our peak -- and maybe a way of explaining this, our peak gross margins in 2019 were about 40%. And that 40% was made up of our DS systems, which are, I'd say, medium margins, less than the 40%.

But we also were selling some components at the time separately, the integrated switch detonator which we have customers who are buying that and incorporating it into their own systems. Now we are only providing in North America -- or primarily providing our DynaStage system, which is fully integrated.

And so our revenues will go up per system, but our margins will go down because we're not having the very high-margin 70%, 80% that we had on the components that we were selling in our integrated switch detonator.

We still have that margin, but it's incorporated into the perforating gun that has the shaped charges and the carriers and the tandem subassemblies and so on and so forth. And so when you think of our margins, if we get back to a 34%, 35%, we're quite -- gross margin, we're quite happy with that, and that compares to 40% in '19.

And -- but our revenues are going to be higher per detonator sold, if you will. And we expect to get back in the -- sooner, obviously, in the mid- to upper 20s and certainly by the end of the year in the 30-plus percent gross margin range and coming close to the 34% to 35% that we would like to be in..

The next question is coming from Ken Newman from KeyBanc Capital Markets..

I just wanted to go back to the comment about doubling the size of Arcadia over the next five years. And I'm curious if you could just build that comment out a little bit in terms of the cadence of that growth and just how you plan to achieve that. And obviously, I think we're up against some pretty tough comps on the residential housing starts side.

And obviously, there's some more conversations about rising interest rates.

So just how do you balance this idea of cyclical inflation versus Arcadia's ability to grow?.

Yes. First of all, on the residential side, they are in the highly custom, very expensive homes, primarily. And that is less about the gross housing starts and more about the mix within certain areas. And as an overall company there in the residential, they're small relative to the size of that overall market.

And so there's a change in -- the demographic that they're focusing on is less interest rate sensitive, is probably the best way of stating that. And there's a change that's happening in terms of both the types of houses being designed in more modern doors and windows as well as the renovations that are taking place.

Yes, we would expect the residential business to double but that is a smaller part of Arcadia. And we would expect their geographical market share in the Inc.

business to double over the next five years, which is consistent probably with their 10-year growth, and there's still not a large -- they're one of the -- they'll be one of the larger factors in their market that's still at 20% or under in terms of market share. And then there's the Wilson Partition part of their business.

They're really in three segments. And the Wilson Partition, which is internal commercial systems is somewhat countercyclical to the new construction. And that is a little bit more constant year-over-year in terms of its market potential, but we've got some work we could do there with architects and designers to -- as well as product expansion.

There's a whole host of things. Obviously, there's a handful of companies, a lot of companies that are competing for this market space. And we just feel that through our product design and our business design that we are capable of serving this market in a way that will enable the growth..

Is it fair to say that, that this is mostly an organic type of initiative? There's not -- you don't necessarily need to do M&A to kind of reach that growth target over the longer term?.

Not at all. We're focused on -- we had ourselves M&A in the last six months and the last couple of years, if you will. And now it's -- we're excited to be settling down and settling in. We really enjoy the team at Arcadia and we want to help them to achieve their objectives and support their growth.

And to us, it's all about taking -- being a better business and taking the friction out of -- and some of the constraints out of how we do business today and just allowing their business model and their people to drive the growth of that company..

Got it. One more for me. I know it's a fluid environment and that it's a small part of NobelClad. But I do think that do have some revenue exposure to Russia.

And just given some of the impact that you've seen in Europe from tighter supply chains, I'm just curious what's kind of embedded from a risk perspective in the 1Q guide for NobelClad revenue? And just how do you think about the supply chain in Europe just given all the geopolitical fluctuations we've seen over the last couple of weeks?.

Yes. Mike may want to add to this, but we're very thankful that -- I know you're new to the DMC story, but we had a facility in Kazakhstan. We had one in Tyumen, Siberia that for both our DynaEnergetics business primarily. Our NobelClad business exports into Russia and certain applications.

And we're -- we've decided four or five years ago, and it took three years to exit that area. And so we -- today, our presence there is much more limited than it used to be. And we do export there. We have an order in-house right now for the Ukraine. We are not in-house, we have a normal $2.5 million to $3 million that we sell into the Ukraine.

We had a couple of million dollar order, I believe, in 2021 that went into Russia. Obviously, those are at risk, that business is at risk.

But their new application development and their value proposition, NobelClad's value proposition on clad plates, when there's commodity inflation in the underlying metals, their value proposition gets stronger than making a lot of solid high nickel alloy materials. And so we'll see some puts and takes.

But overall, we expect that business to grow and not -- near term, we might have an order or two that we're going to miss in that region. But longer term, the growth in the applications and the value proposition will more than offset that..

The next question is coming from Samir Patel from Askeladden Capital..

Can you hear me?.

Yes..

Okay. Sorry, it was just cut off for a second. My first question is on Arcadia. In Slide 18 of the deal deck, you had kind of talked a little bit about the exposure to hospitals and education and talking about some exposure to repair and remodel.

I was wondering if you guys had any more specific statistics in terms of the categories like multifamily versus office, or how much goes into newbuilds versus repair and remodel?.

I don't have that at my fingertips, but we'll be talking about the Arcadia Inc. business, which was 70% of the -- perhaps plus of their overall business, which would be the custom exteriors and -- or excuse me the....

And the Wilson interiors?.

Yes, commercial part of it. And that's primarily the low to mid-rise commercial buildings. And their focus on the low to mid rise has served them well over the last two years compared to the high rise and the multistory buildings. But I don't have the mix in terms of the end-use applications right now. But I can get that for you..

Okay. No problem.

And on the repair -- on the new versus repair and remodel side?.

Yes, yes. In that repair, remodel and the building products industry can be -- fluctuate between 40% to 60% one way or another, depending on the economic environment that we're in. And -- but we'll get that for you also..

Okay.

But I assume that would be more on the interiors than the exterior, you don't typically remodel the exterior of building all that much?.

No, but there's a lot of repair and replacement. And there is remodels that do take place, that is design of these remodels change.

And if you just think of the building, look around any major city or any city for that matter and look at the new construction that's taking place versus the installed base of buildings, the installed base of buildings is quite large..

Got you. That makes sense. I have two on Dyna, and I'll try to go as quick as I can. The first one is just to clarify something you said in a previous question.

Are you basically saying that for the same number of units sold, your margin percentage will now be lower because you're selling the full system, but your overall margin dollars will be higher because in addition to selling the, I think you said it was a switch, that integrated detonator switch, you're also selling the other parts of the system? So like per unit -- like if you sell, say, 1,000 units of total detonators, you're now getting like more revenue in total and more margin dollars in total, but it's just a lower percentage because it blends into other parts that are lower margin?.

Correct. And I mean, historically, our margins and whether it's a contribution margin or gross margin, is much higher on our detonators.

They would be the strongest margins that we have, followed by our shaped charges and deck core, which -- and there's a lot of intellectual property and know-how that goes into making the integrated switch detonators, the shaped charges which are fewer manufacturers than the hardware.

And even fewer deck core manufacturers than shaped charge manufacturers. And so -- and it's more of a specialized manufacturing. The more generic is the machining of subs and the turning of pipe, the heavy metal parts of a perforating system. And those gross margins historically have been the lowest out of all the product range.

And so as we go from -- and also the higher dollar value in terms of percentage of a perforating gun. And so as we move from components to systems, our revenue is going up, but the margin on those metal turning kind of components is lower. And so our blended margin is lower, but the revenue is much higher overall.

And again, we're making an integrated system. Our components are designed to work together. And that's where we get the safety and the performance benefits. And we have IP not only around the components, but we have it around kind of the system design.

And what we've kind of seen in the market the last year is some of our traditional competitors pulling back from systems or we don't see them selling many systems in the market. And we see a lot of the machine shops doing the integration of the shaped charges and the components into the perforating guns.

And -- but it's -- they are good manufacturers, but not necessarily -- of components, but not necessarily system integrators, and they certainly are basic in the energetic part of the perforating system. And so their margins are much lower than ours. A lot of them are private, but they don't have the energetics part of it.

And the other energetics manufacturers are maybe focusing more on energetics than integrated systems. So the market is kind of moving around right now. Long story short, our revenues are going up and our margins will percentage-wise decline, but the dollars will be greater..

Got you. That's helpful. And the final question, sorry, if you already addressed it, because I did join a couple of minutes late.

But how do you expect completions to trend over the course of 2022?.

Up. We're expecting 10% to 15% in terms of completions and 10% to 15% -- 12% to 15% in terms of price being realized this year..

Okay. The next question is coming from Jim Brilliant from Century..

Jim, can you hear us?.

Okay. It looks like we're getting no audio from Jim's line. I'd now like to turn the floor back to Kevin Longe for closing remarks..

Okay. Thank you, everybody, for joining us for this call. We appreciate the complexity of the earnings release. And Mike, Geoff and I are around for the analysts and people who would like to understand more of the details over the next couple of days, if you'd like. And just reach out to Geoff.

And to our Arcadia employees and partners who are on the line, glad to have you on board, and we look forward to working with you. And as you can see, achieving an aggressive growth objective. And -- but thank you, everybody, for your interest, and we look forward to talking with you in the second quarter..