Greetings, and welcome to the DMC Global 2018 Fourth Quarter Earnings 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, Mr. Geoff High, VP of Investor Relations. Thank you, Mr. High, you may begin.

Hello, and welcome to DMC's Fourth Quarter Conference Call. Presenting today, our 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 will now turn the call over to Kevin Longe. Kevin?

Thanks, Geoff, and hello, everyone. DMC concluded the most successful year in its history with fourth quarter sales of $90.3 million, which were a quarterly record and exceeded our forecasts. Sales were up 66% versus last year's fourth quarter, and 3% sequentially. DynaEnergetics, our oilfield products business, reported sales of $63.2 million which were at the high end of our forecasted range. The results were up 70% versus last year's fourth quarter, and down 5% sequentially. The sequential decline resulted from the fourth quarter slowdown in North American well completion activity. Sales at NobelClad, our composite metals business, were $27.1 million, up 56% versus the same quarter a year ago, and up 25% sequentially. The results were above our forecast due to the accelerated production of clad plates for a chemical project in China. NobelClad ended the year with an order backlog of $29.9 million, down from $36.3 million at the end of the third quarter. The business reported a trailing 12-month book-to-bill ratio at December 31 of 0.87. NobelClad has seen a pickup in repair and maintenance bookings during the first quarter and currently is betting on several large projects. We expect its book-to-bill ratio will increase as the year progresses. Fourth quarter consolidated gross margin was 35%, up sequentially from 34% in the third quarter and 33% in the 2017 fourth quarter. The increase versus both periods resulted from a more favorable project mix at NobelClad, and improved productivity at DynaEnergetics' new manufacturing facilities in Blum, Texas. At the business level, DynaEnergetics reported gross margin of 39%, up from 37% in the third quarter and 38% in the fourth quarter of the prior year. NobelClad reported gross margin of 25%, unchanged from the third quarter and up from 22% in the comparable prior-year quarter. Adjusted operating income was…

Thanks, Kevin, and hello, everyone. Looking at our fourth quarter expenses, consolidated SG&A was $17.2 million, or 19% of sales, and included $2.5 million in litigation expense. SG&A in last year's fourth quarter was $12.5 million, or 23% of sales. Fourth quarter amortization expense was $579,000, or less than 1% of sales. We ended the fourth quarter with cash and cash equivalents of $13.4 million. Net debt was $28 million, down from $30.4 million at the end of the third quarter and up from $9 million at December 31st, 2017. The increase from the end of last year principally relates to higher working capital requirements associated with growth at DynaEnergetics as well as borrowings to fund DynaEnergetics' capacity expansion. We generated $21.1 million in cash from operating activities during the fourth quarter and $27.6 million during the full fiscal year. Turning to guidance, we anticipate first quarter sales in a range of $82 million to $85 million, up from the $67.3 million in last year's first quarter. DynaEnergetics sales are expected in a range of $64 million to $67 million, versus $49.1 million reported in last year's first quarter. Sales at NobelClad are expected to be approximately $18 million, down slightly from the same quarter a year ago. First quarter consolidated gross margin is expected to be approximately 34%, flat from the year-ago first quarter. We expect SG&A will be approximately $16.5 million versus the $13.4 million reported in last year's first quarter. Amortization expense is expected to be approximately $400,000 and interest expense should be approximately $500,000. First quarter adjusted EBITDA is expected in a range of $14 million to $15 million, up from $11.6 million in last year's first quarter. For the full fiscal year we expect sales in the range of $350 million to $370 million, up…

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from the line of Tommy Moll of Stephens Incorporated. Please proceed with your question.

Kevin, I wanted to start on DS Trinity. It sounds like two of the key aspects to keep in mind are you've got shaped chargers in a single plane, and it's also a lot shorter than conventional guns. So could you just walk us through the benefits of each of those aspects? And then also maybe this one is for Mike -- what kind of growth rate or adoption is embedded in your guidance for the DS Trinity?

Well, first of all, the Trinity is part of our DynaStage product line and it includes our DynaSelect detonator, the intrinsically-safe detonator. And by packaging the shaped charges in the same plane, that shortens the gun significantly from a length standpoint. And the way that we've incorporated our detonator into the connection for the adjacent guns also shortens the length of the gun significantly. And what that does, is allows us to get more shaped charges in a given space, and the perforating intensity of the lateral allows for greater oil recovery -- oil or gas recovery. It also, by reducing the length of it, it significantly reduces the operational friction and constraints that go into moving guns up and down the well, and makes the wellsite assembly much easier. Regarding the guidance, it is included in the guidance. It's being -- we just introduced the product. We're beginning to receive orders for it. We'll -- we've done the testing and had extremely good results. We'll start shipping this product in March and April, but the numbers will be included in our DynaStage revenues going forward as well as units. We're not going to break it out separately because it's just really a packaging of the components in a new and different way.

For a follow-up, I wanted to ask for any more details you can give us on the Blum facility. Just any kind of anecdotes about what the ramp-up has looked like there, what you think the net impact might be for any gross margin progression throughout the year, and then also you mentioned some of the CapEx budget for the year will be dedicated to some more upgrades at Blum? If you could just let us know how much of the CapEx is reserved for Blum, and what the upgrades involve? Thank you.

Sure. First of all, the facility as of January is fully operational. It included gun assembly and gives us the capacity that we need to match demand. It also included the addition of 15 CNC-controlled machining centers, which were there, which were purchased for insourcing our TSA components. Those are still coming up to design capacity. We're going slow on the ramping up, the usable time until we get the scrap rate to where we'd like it to be. And we expect that to be fully-operational in meeting our design capacity and metrics by the end of March. Those systems, in -- when it comes to predicting the gross margin, there's a couple of influences. We're seeing increased efficiency operationally. The -- even though we're not at design capacity with the TSAs, we are getting the benefits for the units that we're producing and that's adding or improving our gross margin. The fourth quarter and going into early in the first quarter, January, we saw severe pricing pressure in the market, not from like systems but from our customers coming under pressure. And we supported our customers, those who support us, to help them in competitive situations. And so we see some degradation of margin on pricing, which we expect to be behind us after the first quarter. And so between the pricing and adjusting to some of the things that we've seen from the competitive situation to the improved gross margin on the in-house manufacturing, it's somewhat of a wash. But we expect to return to over 40% gross margins before mid-year.

Our next question comes from the line of Stephen Gengaro of Stifel. Please proceed with your question.

Two things, and just talking on the margin front, and I was just curious. As I think about the two segments, and obviously you sound like an acceleration of deliveries at NobelClad that helped the fourth quarter. But when I think about the two segments, am I right in assuming that the margin ramps you'll see are almost completely DynaEnergetics in 2019? Kind of on a year-over-year basis, that's where you're getting the growth in the incrementals, would be pretty healthy as you kind of get through this first quarter? Is that the right way to think about the margin progression in the two segments?

It is. And we're, I think, guiding to revenue in the same neighborhood for NobelClad. And NobelClad is a very efficient business. It's a good margin business from a contribution margin standpoint. And so we don't see operational improvements, necessarily, it's strictly a volume -- and their volume is in the same ballpark as 2018 going into 2019.

Yes, so the incremental margins are coming from DynaEnergetics.

All DynaEnergetics, yes.

And NobelClad's margins, I mean, on a year-over-year basis you're guiding revenue down a little but operating income probably kind of in the same ballpark?

Correct.

And then the second question, just from a competitive perspective, it's probably a two-part question. But I mean, you delivered strong DynaEnergetics results in the fourth quarter in the face of a tough completions market, and you've gained share, clearly. What are you -- how are you looking at -- two of your big competitors are obviously behind you and trying to catch up, one through acquisitions and the other through some internal development. What's your sense of the market as you kind of get into the second and third quarters, and it sounds like your product's evolving as well. But how do you sort of think about that internally, from a competitive position in the back half of 2019 and 2020?

Well first of all, we respect our competitors. They're good companies. Having said that, their product line is not really new or different. What we're really hearing from them or reading -- or hearing in the marketplace, is that they're just moving the assembly of their perforating gun from the wireline service company to their own crews. And there's a significant difference between DynaStage and the guns that we're hearing, that are being developed. Theirs are not intrinsically-safe. They don't have the operating efficiency or reliability of DynaStage. They cannot be surface-tested or verified before they go down the well, so the reliability is less certain. They cannot operate concurrently because they're not having the intrinsically-safe detonator. They require an interrupt for transport or field wiring at the well. They're not fully-disposable. It requires increased personnel at the wellsite compared to DynaStage, which requires less. And so they're really -- it's really not different than what the market has today. It's just what's changing is who's doing the assembly. Ours is truly a unique product, and so it's kind of interesting -- we feel that we, in addition to the safety and increased reliability, our goal is to have fewer people at the wellsite, not more. And that's a different process than what our competitors are looking at.

And then just one final -- I know you've talked a little bit about the increasing and improving sort of the technical aspect of your sales force, and maybe if not selling directly to you but getting the E&Ps more linked into the conversations. How is that process evolving?

We've -- quite well. I'm very pleased with the team and the additions to the team that we have, and we are moving to a more technical sale, to the service companies. And we promote the product to the E&P and we pull it through the service company who's buying our product and putting it down the well. And I think the quality of the sales team is stepped up, and that's not to take anything away from the team before -- we've added to this team and we've added skills in the technical sale area, and the results are kind of showing for themselves.

Our next question comes from the line of Edward Marshall of Sidoti [sic] & Company.

Just had a quick question on the facility, the Blum facility. You mentioned previously the shaped charges, you mentioned the TSA. I'm just curious, which capacity addition was this?

Okay. So in fact, I could add to an earlier question too on the CapEx. In 2018 we added 74,000 square feet. That 74,000 square feet included a significant amount of space dedicated to assembly of the DynaStage guns. It had room -- it has room for 12 out of the 15 CNC controlled machines. And it included room for two shaped charge lines. We see shaped charges actually, demand for shaped charges, increasing even faster than guns themselves. And one of those lines, for the shaped charges, came on-stream in January. It was part of 2018 CapEx, the production literally started up the first week of January. When we built the facility, we built the facility to take two additional shaped charge lines, and that second line is being -- arrives in June and will be operational in July. Second, new shaped charge line. And that CapEx is part of the 2019 CapEx so there's $10 million to $12 million in carryover for a shaped charge line, additional TSA machines because they were not all delivered, 6 out of the 15 are coming in 2019. And critically-important, we have two automated intrinsically-safe detonator lines in Germany. We added one in 2018, and we have two additional lines coming in 2019. And then that's the majority of the CapEx plus we have, as Mike mentioned earlier, we're investing in our digital transformation.

So what does this do to your physical capacity?

We -- it gives us the capacity for the demand that we see for 2019 and 2020.

Do you think, if you had them online right now -- and I think I've asked this question before -- but if you had the investment on the ground, operational today, what utilization rate would you be operating at? I'm trying to get a sense as to what type of demand you have that's maybe not showing up in the numbers as of yet.

Yes, I think -- so I would say that the fourth quarter of 2018 and the first quarter, our guidance for 2019, are reflecting the demand for the product at the prices that we find acceptable.

And so bringing on the additional capacity does what, reduce pricing for your existing guns and shaped charges, or --

Yes. The TSAs, I mean, the TSA is actually a make-versus-buy, that's a margin improvement and also quality improvement. And we've got the capacity to match the demand in the marketplace, and we can scale with the market for the foreseeable future.

And then if I could ask, on competing technologies, I had to step away for a second so I'm not sure if you addressed. But maybe competing technologies, I know there's been one of your close competitors mentioned something on their conference call recently. And I'm trying to get a sense on how pricing might get affected by maybe not as good of technology, but what that might do to your pricing and what kind of feedback you're getting from your sales force, etc.?

Well, first of all, on the technology side we're not seeing new technology. We're seeing a repackaging of existing technology by our competitors. So we don't necessarily see a change in the competitive dynamics there.

So the other manufacturer, the other internal manufactured gun, is just a rebranding and repackaging?

Well, every gun going down the well is assembled. The question is who's assembling it. And so, we're assembling guns but that's not the differentiation. That's a small part of the differentiation. The real strength has to do with our technology and our energetics, and also in the nervous system, the intrinsically-safe, integrated detonator switch and microelectronics. And that is what gives the operating performance and the reliability and the safety in the field. And the ability to ship a fully-assembled gun from our factory, because when we send it from the factory it doesn't include the detonator. And the design of our detonator, like a battery that you drop into a flashlight, you just push it in, in the field. It takes seconds. Nobody has that. And so there's a lot of -- you know, I don't want to underestimate our competition, because they're good companies, but we're not seeing a challenge on the technology. We see just a different business model on how the assembled gun gets delivered to the well.

And just for conversation's sake, so even second best doesn't necessarily cause any price compression, or you wouldn't anticipate that it would cause any price compression and that you'll be able to kind of maintain pricing in that environment?

You know, that's a business decision on our competitors. We do not lead with price. We lead with technology. And our understanding of what we think they're doing is going to raise their costs, not lower it. And so in their --

Wait, I'm sorry, raise the costs for them? For the manufacturer, or for the user, the supplier, the service company?

It will raise their costs as a manufacturer to compete with DynaStage. And we respect these companies. They manage their business for a healthy margin also. And so we're not trying to corner the market with DynaStage. There's room for everybody and we're not going to compete on price.

Right. And just to be clear, they talked about 30% to 40% market share, which seemed very similar to the kind of numbers you've talked about. Can the industry -- and I understand the math -- but can the industry hold two significant players for perforating guns at those types of market share grabs?

Yes. You know, our market, our target market share, is lower than those numbers. I think the -- everybody will seek their natural place. And I think it would be quite aggressive for anybody to say that they're going to get 40% of the market.

Our next question comes from the line of Gerry Sweeney of Roth Capital. Please proceed with your question.

I wanted to touch a little bit -- you've touched on it a little bit on this call, and specifically in the press release. But at the end of the day, what we're talking about, the key differentiator between DynaEnergetics business and the competition is DynaSelect, the intrinsically-safe initiating system. That core piece of technology that has multiple pieces within it, the initiation, the microchip, etc., that's the key difference between you and your competitors. And as far as you know, you're not seeing similar technology out there in the field currently?

We're not seeing a technology in a single device that has the operational benefits of ours, correct. And as far as assembly, that's a business model thing. You know, we can assemble efficiently because of the technology that we have in the component, and so that's a different aspect of assembling the gun in a controlled environment in a factory and arming it in the field without wiring it. But everything going --

And wiring it's the key aspect, right? I mean, that's where a lot of manual labor comes into play?

And risk, and room for uncertainty, and cost, and skill.

So by some of the competition coming out there and basically saying, we're coming out with our own pre-assembled guns, they're actually taking the cost of the service provider and putting it back on themselves because they're assembling the guns themselves, and they don't have the technology that makes it faster, easier, safer, more efficient and more reliable?

Correct. They're bringing -- they're ramping up their assembly of these guns in the field, moving the cost to them, and introducing the risk into the process itself because there's a number of very good wireline service companies that assemble guns in the field at very high efficiency and safety. And so by the manufacturer moving to do that, it gives them --

They're moving away from a core -- they're taking a core competency away from somebody else and venturing into a non-core.

Correct. That's our read of it. And what's different with ours is, we have a core competency because of the component design that cannot be matched in the field.

Switching gears a hair, can you -- is the Trinity system, is that entirely built around DynaSelect? Could you make the same product if you didn't have that technology? Because I know you've got to get in there. If you don't have the DynaSelect, there's a wiring component, you need some ability to get your hands in there and wire things up. So if I'm looking at it correctly, that's taking another step away from -- further away from the competition by going, the Trinity system is? Is that fair?

It is. It would be very difficult to do it without our patented technology.

And I don't want to -- I'm not trying to lead you, here, but I think one of the core -- these key things you said was on the Trinity system, I'm actually looking at my notes, was perforating intensity increases and that leads to better oil recovery. So is that actually an added bonus you're getting from a Trinity system versus the legacy DynaSelect?

DynaSelect is used throughout the DynaStage system, whether it's legacy --

Oh, yes, I'm sorry. I meant the DynaStage, I'm sorry. I inverted it. But go ahead, sorry.

Yes. And part of it, too, has to do with the engineering of the lateral, and not every well is --

Created equal?

You know, is a candidate for the Trinity, okay? There's certain applications that it's better suited for than others. And I think the important thing here is that DynaStage is not a single product. This is a product family that combines our shaped charge technology, our initiating technology, and the packaging of the components in different ways in order to have, quite frankly, one of the broadest product offerings in the industry for different applications. And it gives us the ability to tailor our product line towards the application and get the advantages of the intrinsically-safe, the improved reliability and operational efficiency, regardless of what the well type is.

That's it. I really just wanted to focus on where you were versus the competition, and I think that surmises it very well. Thanks guys, congratulations on a great year. I know there was a lot going on and you executed very well. Congrats.

Thank you.

[Operator Instructions]. Our next question comes from the line of Jim McIlree of Chardan Capital. Please proceed with your question.

A few minutes ago you guys were talking about market share. I was hoping you could update us on what your target market share is, and how close you are to achieving or exceeding that?

We feel we're in that 15% to 20% range, and we're comfortable in that range to mid-20s as the market grows.

Okay. So when we're looking at this year, the revenue growth from DynaEnergetics is coming from some combination of pricing up or down, market share gains and industry growth. Can you talk to how you think those three factors are impacting your expectations for this year?

Yes. You know, I don't have it in front of me, the breakdown between market share and price. We do need to recover some margin from a pricing standpoint. We don't feel that our products are properly-valued right now. And the market is, we're looking at low-to-mid single digits for 2019 over 2018. And so the balance would be a combination of price and share, and probably more on the price. We don't want to gain volume for the sake of volume itself. Margin is very important to us.

As far as the Trinity goes, what impact will that have on margins, if any?

You know, the designing of the packaging of our technology into these various applications, are designed to meet our customer needs and at the same time equal or improve our margin from where we are today. And so we would -- they would add to the margin that we have.

Okay. And I just would like a little clarification on the use of Trinity. Is this something that you expect to be adopted widely, in a lot of different scenarios? Or is this more of a niche-ish, maybe a large niche, but more of a niche-ish application?

I'd say it's more of a niche application. A handful of unique customers that have a demand for this type of product that we see.

And my last one -- I'm sorry?

Yes, and I think, I guess what we're trying to get across is our DynaStage is not a single gun. It's a family of guns. We kind of talk about -- we somewhat confuse it as a product or as a product family, and it's really a product family with many different variations.

Understood, okay. So this is filling out the portfolio within that family? Okay.

Correct. And it opens up some new applications for us.

And on NobelClad, you enter this year with a much lower backlog than you entered 2018, and I know you have revenue guidance down a bit. But it seems like you have a lot of either book-and-ship business, or maybe there was just some timing on some orders, and I know you said repair and maintenance has gone up. Just -- I would just like to get a little bit of clarification about that dynamics between the reduced backlog and a lesser reduced revenue guidance?

Sure. And the book-and-ship, which is a lot of replacement and retrofit kind of applications, is more than half of that business; I want to say around 60% today at this lower volume. And then as we get into the balance of our projects, and those projects are relatively large when they -- and you can see that in the fourth quarter when we shipped a large project for China. Our book-to-bill, which we gave was 0.87 for the year, which would have put our bookings in the mid-to-upper 70s range. And the trailing 12-month bookings at the end of January is $84 million to $85 million. And so just in the one month we've come up dramatically in our book-to-bill, and that supports the guidance that Mike shared with you earlier today. So it's -- a project can swing it dramatically, is what I'm stating. And we have confidence, given the trailing 6-month and 12-month bookings, that the guidance is proper.

Okay. That's great. Thanks a lot. Good luck with everything, and congrats on a great quarter.

Yes. Thank you.

We have a follow-up question from the line of Stephen Gengaro of Stifel. Please proceed with your follow-up.

Thank you. Just one quick follow-up as it pertains to DS Trinity. How does this play into the number of guns per stage dynamic that could help drive some growth going forward?

It's capable of increasing it dramatically, and -- yes.

Oh, go ahead? Sorry.

Yes, it's capable of increasing it dramatically because it's a smaller gun for given shaped charge capability. And so you can add them up pretty quick.

And in a DynaStage system, you may not be able to answer this, but the guns would be roughly what percentage of the cost? I'm just trying to get a sense for if you're -- if there's a rising gun content per system, what that could mean from a -- like, we're not selling -- just because you're selling more guns doesn't mean you're going to sell that many more systems, but there is a multiplier effect I would imagine, on the revenue potential?

Yes. I mean, I don't have the breakout in front of me. The gun cost is not as significant in a DynaStage system because of the integrated switch detonator, the nervous system that controls it and the technology is in the shaped charges. You know, the gun itself is -- it's a reasonable, I'm going to say, 10% to 15% of the overall value. It's also the lower-margin part of it. The gun barrels. And so what we get in the Trinity is more of the higher-value components in a smaller package.

We have an additional follow-up question from the line of Edward Marshall of Sidoti [sic] & Company. Please proceed with your question.

The incremental margins, I'm assuming they're going to change, but for both businesses. And you've made some logical capacity adjustments, some cost-saving adjustments and that capacity with say, TSA and maybe some of the contributions -- the combinations of the European businesses. So I'm trying to get a sense if you could, how the incremental margins might change, and maybe if we could look at it from DynaEnergetics as a whole. And you know, that 30% incremental that you did in 2018, how does that change? And then ultimately, looking at the first quarter around $18 million for NobelClad, my sense is you're probably much better off than you were break-even from an operating perspective in that business as you kind of roll out of Q1. So any thought you could add to that would be helpful.

Yes. Our contribution margins for both businesses are approximately in the 38% to 42% range. And we have significantly reduced our manufacturing footprint over the last several years as we've improved the facilities that we have. And our costs are mostly in place. There's -- we're investing in some digital assets and also market communications and awareness programs because of the growing need to differentiate our products in the marketplace or explain the differentiation to the market. But we always had managed the company for the long term, and we have been building the internal capability to match the products and the technologies that we're introducing. And we're really looking at the next couple of years as years that we can take advantage of all the things that we've worked on for the last three to five years. And so we'll be adding, hopefully, revenue at that 38% to 42% contribution margin range and our fixed costs will be falling in line even better because we feel that we have a lot of those costs in place.

And just to be clear, you're speaking of gross margin with that 38% to 42%? Is that --?

Yes, I'm sorry. Gross margin.

No, that's fine. I just wanted to make sure, because I was originally talking about EBIT but we can kind of -- we can work off that. That's not a problem.

Yes. Let me correct that. It's -- contribution and gross margin are very close for DynaEnergetics. They're further apart for NobelClad, given where they're operating. We reported in the fourth quarter a 25% gross margin, but embedded in that was a 38%, 39%, contribution margin. And so the incremental margin is the contribution margin for that business, not the gross margin. We'll see that gross margin respond as the volume picks up.

Make sense to me. I really appreciate your help and all your comments and allowing me all this air time. Thanks so much.

Yes, you are welcome, Ed.

There are no further questions over the audio portion of this conference. I would now like to turn the conference back over to Mr. Kevin Longe, President and CEO, for closing remarks.

Thank you, everybody, for joining us today. I would like to acknowledge the great effort of our employees in 2018 and their commitment for going forward, and we appreciate everybody's interest in the company on the line, and look forward to talking with you after the first quarter. Thank you.

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time. Have a wonderful rest of your day.