DMC Global Inc. (BOOM) Q2 2019 Earnings Report, Transcript and Summary

Greetings and welcome to the DMC Global Second Quarter Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Geoff High, Vice President of Investor Relations. Thank you, Geoff. You may begin.

Hello and welcome to the DMC’s second quarter conference call. Presenting today are President and CEO, Kevin Longe; and CFO, Mike Kuta. I’d like to remind everyone that matters discussed during this call may include forward-looking statements that are based on our estimates, projections and assumptions as of today’s date and are subject to risks and uncertainties that are disclosed in our filings with the SEC. Our business is subject to certain risks that could cause actual results to differ materially from those anticipated in our forward-looking statements. DMC assumes no obligation to update forward-looking statements that become untrue because of subsequent events. A webcast replay of today’s call will be available at dmcglobal.com after the call. In addition, a telephone replay will be available approximately 2 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?

Thanks, Geoff. Both of our businesses performed well during the second quarter, which enabled DMC to exceed its financial forecast. Consolidated second quarter sales were record $111 million, up 37% versus the 2018 second quarter, and up 11% sequentially. DynaEnergetics, our oilfield products business reported sales of $88.6 million, up 50% from the 2018 second quarter, and up 11% sequentially. Second quarter sales at NobelClad, our composite metals business were $22.3 million, up 1% versus the second quarter in 2018 and 10% sequentially. NobelClad ended the second quarter with an order backlog of $38.8 million versus $40.5 million at the end of the first quarter. Trailing 12 month book-to-bill ratio at the end of the quarter was 1.01. Consolidated second quarter gross margin was 38% up from 33% in the 2018 second quarter and up sequentially from 36%. The increase versus both periods reflects the higher margin product mix at DynaEnergetics, which also benefited from improved manufacturing and supply chain efficiencies. DynaEnergetics reported gross margin of 41% versus 37% in the same quarter a year ago and 39% in this year’s first quarter. NobelClad’s gross margin was 26% up from 23% in the 2018 second quarter and flat versus this year’s first quarter. Adjusted operate income was $25 million and excludes $324,000 in restructuring charges at NobelClad. Adjusted operating income in last year’s second quarter was $10.4 million. DynaEnergetics reported second quarter operating income of $26.8 million and NobelClad reported operating income of $1.9 million. DMC second quarter adjusted net income was $17.6 million or $1.17 per diluted chair versus adjusted net income of $6.6 million or $0.45 per diluted share in the 2018 second quarter. Adjusted EBITDA was $29 million, up 108% versus last year’s second quarter and up 21% sequentially. DynaEnergetics reported adjusted EBITDA of $28.5 million, while NobelClad reported adjusted EBITDA of $3.1 million. At June 30, our trailing 12 month return on invested capital was 30%. Our second quarter financial performance reflects continued strong demand for DynaEnergetics intrinsically safe initiating systems which we refer to as the IS2 product family. And four it’s expanding portfolio DynaStage Factory-Assembled, Performance-Assured perforating systems. DynaEnergetics added several new customers for its patented IS2 systems during the quarter. These solid state devices are unique in the industry as they contain no internal wiring and will not fire unless they receive a digital key from a control panel at surface. Competing products utilized, resistorized detonators which are triggered with an electrical current and by their very nature are more susceptible to electromagnetic interference. DynaEnergetics added two models to its DynaStage product family during the second quarter, DS Trinity 3.5, which currently is in field trials in the Permian Basin is a smaller diameter version of the DS Trinity 4.0. It features three charges on a single plane with a 7-inch long carrier, it does not require a connecting sub or detonating cord. These compact systems are easy to assemble into a gun string and enable a significantly higher perforating intensity than conventional guns. The second new model DS NLine enables the alignment of surface of all charges within a series of guns. Once the guns string is deployed, it can be oriented within the wellbore so that all charges fire in the preferred direction of the operator. It’s unconventional well completions grow in complexity. We are providing customers with unmatched flexibility in the design of the perforating and well completion programs. The DynaEnergetics product portfolio, which includes the IS2 in a broad spectrum of performance charges and packaging formats, provides customers with thousands of options for configuring the DS Factory-Assembled, Performance-Assured perforating systems NobelClad also delivered a solid second quarter performance. I’m very encouraged by NobelClad’s consistently strong contribution margins and by the progress, the business is making to expand its composite metals offering and establish new applications for its clad metal plates. In light of current low oil prices in the near term slowdown in North American well completion activity, we believe demanded DynaEnergetics could soften during the second half of the year. However, the medium and longer range prospects for continued growth remain very strong. Our research and development teams have developed the robust pipeline of new products and technologies that will enable DynaEnergetics to maintain its leadership position in the oilfield products industry. I’d like to thank our customers for their business and continued confidence in the company. I also want to thank our employees around the world for delivering another strong quarter for DMC and its stakeholders. And now, I’ll turn the call over to Mike for further detail on our second quarter financial results and a look at our guidance. Mike?

Thanks, Kevin. Looking at our second quarter expenses consolidated SG&A was $16.7 million or 15% of sales versus SG&A of $15.5 million or 19% of sales in last year’s second quarter. Amortization expense was $397,000 or less than 1% of sales. We ended the second quarter with cash and cash equivalence of $14.9 million. Net debt was $21 million down from $28 million at December 31, 2018. We generated $23.3 million in cash from operating activities during the first six months of the year, in the comparable period last year cash used in operating activities was $1.6 million. Turning to guidance. We anticipate third quarter sales in a range of $96 million to $102 million versus the $87.9 million we reported in last year’s third quarter. DynaEnergetics is expected to report sales in a range of $76 million to $80 million versus $66.3 million reported in last year’s third quarter. Sales at NobelClad are expected in a range of $20 million to $22 million versus $21.6 million reported in the same quarter year-ago. We expect third quarter consolidated gross margin in a range of 35.5% to 36.5% up from 34% in the 2018 third quarter. The forecast is sequential decline versus a 38% report in the second quarter reflects less favorable fixed manufacturing overhead absorption from anticipated lower sales at DynaEnergetics and a less favorable project mix in NobelClad. We expect SG&A will be approximately $17.5 million versus the $15.1 million we reported in last year’s third quarter. Amortization expense is expected to be approximately $400,000 and interest expense should be approximately $400,000. Third quarter adjusted EBITDA is expected in a range of $20 million to $24 million up from the $17.2 million in last year’s third quarter. As Kevin noted, we expect to see a moderate slowdown in North American well completion activity during the balance of the year. We, therefore, are revising our prior – full year sales guidance that are maintaining our forecast for adjusted EBITDA and are increasing the lower end of our range for anticipated adjusted net income. We currently expect full year sales in a range of $400 million to $415 million up from the $326.4 million we reported last year and down from our previously forecasted range of $405 million to $425 million. Sales at DynaEnergetics are expected in the range of $315 million to $325 million versus the $237.4 million reported last year and the prior forecasted range of $325 million to $340 million. Sales at NobelClad are expected in range of $85 million to $90 million versus the $89 million reported last year in the prior forecasted range of $80 million to $85 million. They expect consolidated full year gross margin in a range of 36% to 37% up from the 34% reported last year and up from our prior full year forecast of 35%. The anticipated increase reflects our sustained focus on improving manufacturing efficiencies and achieving product margins that reflect the value of our technologies. SG&A is expected in a range of $64 million to $67 million, up from $61.2 million reported last year reflecting higher expected spending on sales and marketing programs within both of our businesses. Our expected full year amortization expense remains at approximately $1.6 million down from $2.9 million in 2018. Our estimate for full year interest expense is now $1.5 million down from a prior forecast of $2 million to $2.25 million. We are maintaining our expected effective tax rate of approximately 30% reflecting a higher expected rate during the second half of the year, primarily due to geographic sales mix. Full year adjusted EBITDA remains in expected range of $90 million to $100 million up from $59.6 million in 2018. We expect full year adjusted net income per share in a range of $3.55 to $3.70. Previously, the low end of our forecasted range was $3.40. Last year, we reported adjusted earnings per share of $2.07. Capital expenditures are expected to be approximately $30 million, which was the high end of our previously forecasted range. With that, we are ready to take any questions. Operator?

Thank you. So we will now be conducting a question-and-answer session. [Operator Instructions] Your first question comes from Tommy Moll with Stephens Incorporated. Please go ahead.

Good afternoon and thanks for taking my questions. So in recent days, there’s been some chatter in the marketplace about some competitive trends. On the one hand, there’s a pretty large captive wireline company advertising a preassembled gun that they’ve gone to market with it’s a decent chunk of their guns now that they shoot, but it’s unclear, if that’s a competitor of yours, or a customer of yours or maybe both. And then on the merchant side, one of your competitors appeared at least in second quarter to outpace the market and potentially take some share, but there is unclear if it’s from a new gun system that they’ve recently introduced into the market or just components. So I realize, I’m asking you to comment on potentially dynamics outside of the DMC Global scope, but to the extent, you could shine a light on either of those situations or maybe just the broader competitive marketplace generally? That would be helpful. Thank you.

Yes. So regarding the larger service companies, we view them as important customers or potential customers not as competitors. And they do have their product lines and we certainly have ours and the products from either company fit certain applications better. And so we view them more as a customer rather than a competitor on a longer term basis. And we respect their technology and their engineering that goes into their products and they respect ours. Regarding the marketplace, I think you’re probably referring to an increase in shaped charges for the year or for the quarter. And it’s important to remember and the North American land based business that stage count is growing faster than completions and energetic sales are growing faster than stage count. And I could refer to the Spears data which is an independent third-party that this year has forecasted shaped charge volume to go up 22% and so shape charges at overall are going up faster than completions for all companies.

Thanks, Kevin. And that leads me to my follow up, on the revenue guidance you’ve given now for third quarter and reiterated or rather adjusted for the full year to where we kind of can infer what the fourth quarter might look like. It looks like a low double-digit sequential decline for DynaEnergetics and the third quarter going to call it mid singles decline in the fourth quarter. I wonder as you come up with those outlooks, what is your assumption on the underlying market growth? Whether you use the – and to your earlier comment, you’ve got the completion count, which is presumably lower than the stage count, which is lower than the shape charge count. But any way you can help us triangulate from your revenue expectations to some underlying driver in the market would be helpful?

Yes. The drivers if you will for revenue, would be market growth if you will or decline. Share – market share growth or decline in pricings, growth or decline. I’d stated in previous calls that DMC is committed in all of our companies to receive value for the products that we sell. We’re not expecting any decline in price in the third and fourth quarters and we expect to maintain and hold their share. So what we’re forecasting, or at least looking at going forward is the actual activity in the marketplace softening relative to the first half of the year. And it seems to be supported by a lot of the discussions that are happening and I guess this quarter’s earnings calls, having said that, in the third quarter of 2018, we didn’t see the softness coming in the fourth quarter. In the fourth quarter of 2018, we didn’t see the strength that was coming in the first quarter of 2019 to the degree that it was. And so we’re seeing a market that has – you can turn on and off pretty quick. And I think that that’s the new reality of land based unconventional which is why it’s important for us just to ride that volume activity in terms of market growth and focus on share and fair value for our products and to keep a strong balance sheet, so that we’re healthy throughout the cycle and the cycles have become much shorter.

Thank you, Kevin. I’ve got more, but I’ll get back into line and maybe there’s more time later.

Okay. Thanks Tom.

Thank you. Your next question comes from Stephen Gengaro with Stifel. Please go ahead.

Thank you and good afternoon, gentlemen. So just sort of following up on the Tommy’s questioning, when you – your current outlook, are you seeing a decline yet? Or are you projecting a decline? When you look at kind of your monthly progress, I mean we’re a third of the way through the quarter already. I mean, are you seeing a change? Or is it sort of an expectation based on what you’re hearing in the market?

I think that we hear a lot of the same things I’m sure and read a lot of the same things. And there – and so it is impacting our view that the third and fourth quarter could be softer than the first half of the year, however we have a very short window of activity in DynaEnergetics in particular. And so as you can see from the recent quarter, it exceeded our expectations. And so I’d have to say that it’s more discussion than it’s actual showing up in terms of our revenue as of today.

Great. Thank you. And then can you – maybe one of the obvious points of discussion that we hear a lot and continue to get is sort of the differentiation in your product relative to peers. And you talked about the solid state design. Can you expand on that a little bit and sort of the – how it changes the operators approach in the field, or is it purely a safety thing? Is it a reliability sort of – what’s a little more detail behind sort of the importance of that product differentiation?

It’s safety, reliability and operating efficiency. We have a system that does not require wiring in the field. We drop our integrated initiating system into perforating gun, and then we screw the adjacent gun together with no wiring whatsoever. And the initiating system has a detonator, and it also has a solid state circuit board connected to that detonator with the controls for operating the perforating gun. And it’s all in a small form factor package that is shielded. And so it’s quite a bit different than – we used to call it a pre-wired system and that terminology has been adopted. And we perhaps were referring to it inappropriately because it’s not a wired system at all. We meant that the gun was put together so that it didn’t have to be wired in the field. But most of the competitive products that we’ve seen are through wired systems in series with the detonator subject to the straight current, straight voltage radio frequency. And in some cases the detonators are not included, the detonators are wired in the field. And so there’s quite a bit of difference between our product offering and those of our competitors. Yet, a lot of the terminology is adding to some of the confusion.

Great. Thank you. And then just one final quick one, I just want. When you want to – earlier today on a conference call, Core Labs talked about perforating intensity and we’ve heard this increasingly come up in conversations. Are you seeing that same level of increase in perf intensity where the stage counts obviously going faster than the well count, but then there’s this increased perforating intensity per se. Are you seeing that and is that – and how does your new – how do your new DS guns play into that?

We are seeing it. I mean, our unit volume for systems is up dramatically this year. So in the most recent quarter are the numbers shaped charges up more than the revenue growth, if you will. And a lot of that has to do with the component pricing and the relation between the component pricing to the system itself. And but our – and you can see our revenue is up dramatically and behind that we do sell our systems at a premium, but they’re competitive with existing systems for the value that they create. And so our unit volume is up dramatically.

Okay. Thank you.

Thank you. Your next question comes from Gerry Sweeney with ROTH Capital Partners. Please go ahead.

Hey, good afternoon Kevin, Mike, Geoff. How are you guys doing?

Yes. Fine, Gerry.

Following up on some other previous questions that we see that horse, it has to be beaten. But does how much visibility? Do you get from your customers and how it works? In other words, this is on-demand ordering or are they giving you a little bit more insight into some of the completion programs and schedules?

Its different international versus North American. North American, it’s a very short window. Sometimes one to three weeks in that range, maybe four weeks. We internationally, it’s longer than that. So it’s a short window.

North America is the lion’s share, correct.

Yes, 80% plus percent of our revenues.

Yes. And then talking about there’s obviously competition, new competitors are starting to talk a lot about prewired guns maybe attach on the – come after this market in different ways, or at least talk it up. Have you seen any type of product that would give you pause to maybe take mortgage share or anything like that?

Well, I mean, we respect our competitors quite a bit there. There are good companies and they have good teams also. So it’s always something that we’re watching and but we were really more focused on where we’re going from a product standpoint and we’ve got quite a pipeline of products that we’ve begun to introduce this year. And so we’re not standing still and we’re focused on more where we’re going. And one of the things that we like about what’s happening in this industry is that I think universally, whether it’s our competitors or the larger service companies, we’re all recognizing or have recognized that we can– as manufacturers assemble systems that perform better, more reliable and probably more competitively than it can be done in the field in a fragmented way. And we have one of the leading systems in the market. And so as the market moves more towards systems, that really is something that benefits us. It benefits our competitors too. And we’re fine with that. We really prefer the industry to be healthy.

Got it. I have to – I think I’m assuming that’s DynaSelect – specifically DynaSelect, is that correct?

It’s one of the variations of DynaSelect. I think – our nomenclature, first of all, it took me a year or two before I could say DynaEnergetics properly, but alone DynaStage and then DynaSelect and DynaSlot and all the things that went with it. But it wasn’t just the tongue twister. Twisters of the names themselves, but it – the words connotated a simple one-trick pony product line and our initiating systems are really a family of initiating systems. DynaSelect was one product. We actually have an externally wired version, top fire version, an igniter that has similar technology in it. We have one of the broadest lines of shape charges in the industry, if not the broadest. And we’ve introduced our DynaStage in the past, but DynaStage was really we’ve renamed DS Infinity, it’s available in a whole host of different diameters, length, shape charts, configurations. And then we started introduced this year, DS Trinity, DS NLine, and we’ve got four, five, six different other form factors for packaging that are coming out. And so the terminology that we were using before, it didn’t really support the breadth of the product line. And because literally depending on how you combine these components we can tailor rock optimized solutions and have a thousand different combinations or more of products that are tailored for specific completion duties.

Theoretical question, if a large Oilfield Service company that is also maybe a customer-sized competitor had some of their own manufacturing and just want to buy maybe IS2 systems, which I think would be igniter or detonator or semi-family, could they do that? And maybe even as big ad hoc DynaStage system themselves, so they’re using some of their own internal manufacturing capacity, but using your technology?

Well, we have the IS2 top fire is exclusive to the DynaStage family of products where it’s – and it has to be because it’s an integrated gun and that needs to be able to receive the initiating system in order to have a fully assembled and not have wiring in the field. But we do have what’s called IS2 now – excuse me, IS2 externally wired, which you get the benefits of the solid state initiating system. All this safety, reliability and performance aspects of it, which a service company – any service company can buy from us to assemble in the field or in their shops, but still get the operating benefits of our initiating system. So we really – we can go either way, in fact, we entered this product area selling the initiating system to a service companies in the marketplace. And it’s actually – we onboard people to use our DynaStage system.

Got it. Okay. I’ll turn back in queue. I appreciate it. Thanks.

Your next question comes from Edward Marshall with Sidoti & Company. Please go ahead.

Hey guys, good evening.

Good evening, Ed.

So I was actually going to focus on that as well. The externally wired switch detonator and whether or not sell that to customers. I’m going take it one step further and ask of gun system. What – how much does the switch detonator as far as the price of that product cost? What’s the percentages of switch detonators and then there is a full, as the whole system, the cost of the whole system?

Yes. Well, first of all, the detonator integrated initiating system, if you will. Cost can be a different percentage based on the size and the complexity and type of gun, whether it’s a Trinity, which is seven or eight inches with three charges, or an Infinity, that could be four or five feet with multiple charges, a whole another multiple. But in a smaller gun, it could be half and larger gun, it could be 20% to 30% of the selling price just as a ballpark. We don’t give out our cost model. But people can somewhat back into it if they were to buy the IS2 externally wired product. That happens in a number of cases where people assemble that into their own gun.

Got it. And how much of – how many of those prewired or wired – externally wired systems do you sell today in the revenue – in the $88 million in revenue that you did for 2Q roughly?

Yes. And again, for probably obvious reasons, we don’t breakout the initiating systems from the fully factory assembled DynaStage systems. But it’s growing. The total for the year or for the first half of the year was $700,000.

And systems?

Initiating systems and gun systems.

Yes. Okay. You mentioning something to Tommy, you said, we plan to hold or maintain share. Is that – I just want to clear that up a little bit. Are you saying you’re no longer expecting to gain market share or was that just kind of – you just said that within the comments? I just wanted to make sure, will you clear that up?

Yes. In the marketplace, there’s the product performance quality service, delivery, safety, relationship, price, we choose to focus on performance. We expect to gain share going forward. But it’s going to be through the value that our products create in use. We deemphasize price as a competitive tool. We recognize that we need to be competitive, but we also need to get a healthy margin for our products to reinvest in technology and product development. And so, we expect to grow, but we’re going to grow by earning it with the performance of the products that we’re introducing. And we’re not – we still feel that we have runway, but in a soft market – softer market there’s a tendency for companies at times to focus on price and that’s not the game that we’re going to play. And so to us, maintaining a healthy price for our products and margin is most important.

I think last call you mentioned you wanted to gain roughly 25% to 30% of the market. Is that still your goal?

I think that there’s – we’re not out to corner the market. We do have good competitors. We’re out to really support the leading service companies in the market and help them to be competitive, not just on the perforating operations, but we believe that our initiating systems in our DynaStage guns help the whole completion process around a well to be more like a ballet, everything runs more efficiently. And so we’re focused on a few leading customers and that’s really what’s defining our share. And so, yes, we’d like it to get up in the 25% to 30% range. It’s pretty tough in almost any market to get to more than that when you have strong competitive dynamics. We do think that we’ve got a talented team that works well together and has for an extended period of time. And that’s what’s creating a robust product pipeline for us. And that in choosing the right partners in terms of customers is what’s going to determine our share.

Got it. Got it. Final one from me, Mike, if you don’t mind. The SG&A for Q3 $17.5 million, looks a little high. Can you talk about maybe what’s going into – embedded in that number? I mean, is there a ketchup on compensation or something like that?

We’ve got some of that, but it’s primarily just investing in our – in some of the patents that we’re building out in our portfolio of products that are going to be rolling out over the next several years. So we’re investing in that, as well as the sales – continuing the sales and marketing efforts on the new products that we have introduced.

Okay. Okay, good. Thanks guys. Appreciate it.

Yes. Thanks, Ed.

Thank you. Your next question comes from Jim McIlree from Chardan Capital. Please go ahead.

Thanks and good afternoon guys. Kevin, I think you addressed this, but I’d like it to be specific if you can. It sounds as if the product introductions that you’re contemplating are not changing, given the deceleration in growth that you’re talking about. Instead, the products – the new product introductions that you had contemplated at the beginning of the year, you still are full speed ahead on those in the second half. Did I hear you correctly on that?

You heard us correctly. I mean, we have a very clean balance sheet for purpose. This market cycles up and down and around and we’re focused on the medium to long-term. And we’re investing at even a faster rate going forward with some of the opportunities that we see.

Okay, great. And then secondly, the changes that you refer to in DynaEnergetics in this second half, is that concentrated in any customer or basin or is it kind of everywhere with everyone?

It’s really more of a broader general assessment of seeing and hearing and reading what’s happening in the marketplace. And I think that we’re cautiously optimistic that the dynamics in our industry are such that they’re going to be stronger in – 2019 is going to be better than 2018 and 2018 hopefully it was certainly better than 2017, and we expect 2020 to be better than 2019. And so, however, I can’t really pin it down to which quarter. But I think that we’re in – it appears to be a softer period of time for the next quarter. And then we get into the – what’s become a budgeting seasons in the fourth quarter that had an impact last year. Will it have an impact this year? Or was it go forward into the third quarter? Time will tell us as the quarter unfolds.

Got it. Okay. And then lastly, Mike, can you talk about what your plans are for the line of credit? Is this kind of the level that you are comfortable with or is it too low, too high?

We’re going to continue paying down debt. I mean in the second half, what you can expect is a similar run rate as the second quarter in terms of cash from operations, as you generate about $16 million. CapEx on a similar run rate. So we should have probably cut our debt in half and have a net debt close to zero by the end of the year. And so that’s where we want to be.

Great. All right, thanks a lot guys. Good luck.

Yes. Thank you.

Thank you. [Operator Instructions] Your next question comes from Tommy Moll with Stephens Incorporated. Please go ahead.

Thanks for letting me back on.

More to welcome, Tony.

So there’s been some discussion on the call and also in your release about the difference in the integrated switch-detonator versus just taking an addressable switch and wiring it to a resistorized detonator. But I think I’m right and that’s the fundamental difference of what you manufacture versus every other competitors. So if you could just lay out, again, the fundamental difference in those two configurations and then what the safety and also what we haven’t hit on as much today the efficiency benefit of that?

That’s a complicated answer to all that for a conference call. But again, it’s not just the switch. The switch is necessary, but not sufficient to have a fully integrated system. You also need the detonator. And ours is a low voltage system, others are using a resistorized detonator and that’s wired together to the switch. And the resistor is a weaker point. The wiring is a weaker point. The shielding of those products is a weaker point in the ability to ship a gun with all that fully assembled is very difficult. And not all of our competitors are vertically integrated in detonators, let alone switches, let alone having the technology that they can have a fully assembled gun where the initiating system is installed in the field without wiring. And so it leads – and the benefits of it accrued not just in the assembly, the supply chain, how fast they go together in the field. There is a smaller form factor and there’s less resistance, putting it down the well. But really it’s the – the biggest benefit is the saving of the nonproductive time because of the ability to do parallel operations and be safe in an environment around the well site that’s increasing and it’s electromagnetic interference. And so it’s – the topic of late over the last few months has been, we’ve got an assembled gun too. Well, every gun going down a well is assembled. It’s a matter of what kind of components are going into it and where’s that assembly being done, and is it a well-orchestrated ballet, which you get with our gun system. So we have our mobile marketing trailer, which we call our BOOM-1, which we’ve updated with our latest product offerings and pictures worth a thousand words. And we probably need to do a better job getting out there, not only with customers but with analysts to really understand the differences when you can see it in a tangible way. And so we welcome that opportunity to our listeners, as we go forward.

Last one from me today, I promise. There’s been a lot of conversation about pricing. Have you seen competitors potentially some of the merchant players in the market who are trying to commercialize new systems? Maybe being aggressive or trying to take some of the – take or defend their market share with accommodative pricing or not at this point?

I can’t say that we really felt per scene a lot of that. Sometimes it’s tough to lower the price on a component to compete with a system. It’s an apple and an orange kind of thing. And I think that, the market understands that that’s a very difficult game to win and maintained. And that I believe, one of the things that I’m very encouraged by is the discussion of – I think perforating is increased in terms of its air time in a number of conference calls and technology and integrated systems increased in terms of its air time. And I think that there’s a lot of room for differentiation and value creation. And we’re better for it, our competitors will be better for it and the industry will be better for it than to focus on price. And I think that the price aspect is to protect market share has not proven itself to be a successful path in a sustainable path in this industry over time.

Thanks for your time. That’s all for me.

Thank you. The next question comes from Jim Brilliant with Century Management. Please go ahead.

Yes. Hi, guys. How are you doing?

Fine, Jim.

Kevin, we haven’t really talked much about your new products, the Trinity 4 and then the new 3.5. What is the benefits that an operator would have with the shorter guns? That’s number one. And then number two, I guess, would that even be possible if you didn’t have your solid state detonator?

So the benefit of those guns are the simplicity, putting a number of guns together and having a higher concentration of perforating charges for given lineal foot if you will of well. And so it’s focusing on the oil recovery side of it, not just the cost of assembling a perforating gun. Our integrated initiating system gives us a degree of freedom from a design standpoint that others – I’m sure have and will come up with work around situations. But they’re not quite as elegant as ours. And that there’s a – and you don’t quite get the safety and operational benefits that was discussed earlier in the call. So you get all the performance of our initiating system in a smaller form factor for a perforating gun and you can pack more charges for a given lateral length. And depending on the design of the completion and how many charges and where they are orientated towards direction that they’re orientated and the size of the charges themselves will determine the completion effectiveness in the oil recovery. And so we have just a greater degree of freedom and flexibility to work with service companies to design the right kind of completion programs.

Okay. So then the increased focus by the industry on perforating is really trying to address the parent child problems and the fact that we’ve maybe reached our limits on pushing more sand down a hole. And so now it’s how much better can you get? And what more – what kind of flexibility do you have in perforating? Is that right? Do I understand that right?

Yes. I mean, you don’t want perforations that aren’t effective if that’s not a double negative. And so there’s a orientation, there’s a size of charge, there’s the location and the formation itself. And all these things are create a number of complex factors that go into the design of a gun – a perforating gun. And the perforating gun is, the more that it’s designed to tie with the pressure pumping and the other service areas on the completion part of it. The more effective the overall completion will be. And so, there was a tendency for a long time in the industry to separate and isolate different activities and then choose or compete, either on technology or price on those non-integrated activities. And I think, the more that the industry moves towards integration and value add and selling an outcome, and having all the products and then the components within the products orchestrated the more efficient and effective the ecosystem’s going to be for all of us.

Okay. And then on the idea of market share, there’s been a lot of talk about share shifting and share gains and all that. But it seems to me the biggest share change is from field-assembled, the Factory-Assembled. If the industry is only at 25% Factory-Assembled, then there’s a lot of share to be shifted from field-assembled.

Agreed.

Okay. And then finally, I’ve heard – I guess, you guys – it’s solid state detonator is how you refer to yours or detonator system. But I’ve heard other people call it pushing detonators. Is that the same thing? You guys are the only ones that have that. I’ve seen it, it looks kind a like a meat thermometer, if you will, with a tab on the top and the probe going down. But that’s the difference between your initiator and the rest of the industries is the ease at which you can put it into the gun system. And as well as all the other benefits you get.

Yes. The ease is the smallest value part of it, but it enables a bunch of things that there’s…

Well the technology enabling is the biggest thing I would think.

Correct. And so the technology inside the device and then the form factor of the device itself creates a number of packaging opportunities for us, for our industry leading shape charges.

Okay. And then on the last one is, you have especially in the DynaEnergetics division, you had a pretty nice step up and gross margin, sequentially and year-over-year. How much of that is due to some of the – is just the increase in revenues and how much of it is due to the more recent capital spending and equipment you’ve deployed?

It’s a very low little of its absorption. An asset light company, the variable costs are higher than the fixed costs. And so, what we’re seeing is, the technology in terms of the different form factors of the products that we’re coming out with and their ease of manufacturer and the investment that we – that our board enabled us to make in 2017 or beginning in 2017, carried through 2018 and 2019, we’re now seeing the operating efficiencies of – in the learning curve – we’re further down the learning curve. And we’re starting to hit the margins that, I believe even in previous conference calls, we had targeted being above 40% gross margin. We had a very good gross margin in the quarter and it all came together. And I’m just very appreciative of our employees and the organization in order to have it all come together this quarter.

Which has I guess leads us to the final thing. You are adjusting your revenue numbers but the guidance remains the same. So you’re capturing and keeping margin.

Yes. And quite frankly, that’s kind of a nice situation. Make more with less activity. So, it’s a good combination that’s wear and tear on all of us.

Right. Okay. Thanks guys. I appreciate it.

Thank you. Your next question comes from Stephen Gengaro with Stifel. Please go ahead.

Thanks. Just a quick follow up. You kind of hit on this on the last question, but when you look at from your perspective and the sort of penetration of integrated perf guns relative to the overall market. I mean it seems to us it’s still pretty late and its rising rapidly. Have you thought about that and sort of how big that pie might come over the next couple of years? Because it seems like it’s being adopted fairly rapidly.

It is. And we’re primarily talking about North America here and land based on conventional there’s – we don’t see a reason why every gun going into those wells is not a fully assembled intrinsically safe. It’s good for the industry. It’s good for the operators. It’s the most efficient way of doing it. Internationally that’s a different story altogether. And deep sea, the design of the wells are such that it’s more and difficult to do that. But we would see the North American and land-based market move primarily towards the way that we and our competitors are going. And that over time will probably spill into some of the international markets as they move into more unconventional perforating.

Great. That’s very helpful. Thank you.

Thank you. There are no further questions at this time. I would like to turn the floor back over to Mr. Kevin Longe for closing comments.

Thank you everybody and particularly our employees if you’re listening for having an interest in our company and for your efforts. We look forward to talking with you after the finish of Q3. Thank you.