Good afternoon, ladies and gentlemen and welcome to the DMC Global Second Quarter Earnings Call. At this time, all participants have been placed in a listen-only mode and the floor will be open 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. Sir, the floor is yours.

Hello and welcome to DMC's second quarter conference call. Presenting today are President and CEO, Kevin Longe and CFO, Mike Kuta. I would 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?

Thank you Geoff and good afternoon everyone. DMC second quarter sales of $65.4 million were up 18% sequentially and 51% versus the second quarter of 2020. The increase reflects improved economic conditions within several of our end markets. DynaEnergetics our energy products business reporting greater demand for DS perforating systems due to stronger energy prices and a corresponding increase in well completions. NobelClad our composite metals business reported increased product shipments and the receipt of a large order from the chemical industry. Fundamentals in the oil and gas industry are improving and leading operator and service companies are accelerating their adoption of fully integrated perforating systems that simplify operations, reduce costs and enhance well performance. DynaEnergetics is led a technical revolution in the perforating industry in recent years and it's IS2 initiating system initiating systems and DS factory assembled integrated perforating systems remain the safest, most efficient and best performing solutions on the market. Integrated perforating systems delivered just in time to the well site lower manufacturing and assembly costs, reduced personnel and trucks, lower the cost and complexity of the supply chain and increase overall service quality and result in better performing wells for the operator. During the downturn, several machine shops took advantage of the industry's instability and incomplete transition to integrated systems by introducing low cost undifferentiated carrier assemblies. The components for these pre-wired carriers are supplied by various shaped charge and energetic manufacturers that have not fully commercialized their own integrated perforating systems. We believe many of the pre-wired carriers in the market incorporate features that violate DynaEnergetics patents, and we are taking aggressive legal action against the companies that make these products. DynaEnergetics has made significant investments in technologies and products that have improved the safety, efficiency and performance of its customers well completions and…

Thanks, Kevin. Second quarter sales were $65.4 million, up 18% sequentially and up 51% versus last year second quarter. DynaEnergetics reported second quarter sales of $42.3 million, up 11% sequentially and 79% versus the same quarter last year. International sales increased 13% sequentially while North America sales increased 10% sequentially. Sales at NobelClad were $23.2 million, up 33% sequentially and 18% versus last year second quarter. Consolidated gross margin in the second quarter was 26%, up from 23% in the first quarter of 2021 and 15% in last year second quarter. The increase from the year ago second quarter primarily relates to better fixed costs absorption and receipt of employee retention credits under the CARES Act. DynaEnergetics reported second quarter gross margin of 25% versus 22% in the 2021 first quarter and 8% in last year's first quarter. The margin improvement from last year primarily relates to improve fixed costs absorption, higher average selling prices, CARES Act credits. NobelClad reported second quarter gross margin of 28% versus 26% in the first quarter and 25% in year ago second quarter primarily due to improve project mix. CARES Act credits also contributed to higher gross margin versus last year. Looking at our second quarter expenses consolidated SG&A of $14 million increase 6% versus the first quarter and 15% versus a year ago second quarter. We reported consolidated operating income of $2.7 million in the second quarter. Second quarter net income was $1.7 million or $0.10 per diluted share, versus a net loss of $5.6 million or $0.38 per diluted share in last year second quarter. Adjusted EBITDA was $7.5 million, versus negative $1.8 million in last year second quarter. DynaEnergetics reported second quarter adjusted EBITDA of $5.3 million while NobelClad reported adjusted EBITDA of $4.3 million. We ended the second quarter with…

Thank you. Ladies and gentlemen the floor is now open for questions. [Operator Instructions] Your first question is coming from Stephen Gengaro. Your line is live.

Thanks and good afternoon, gentlemen.

Good afternoon Stephen.

So, I have two or three things that all -- well, I'll just start quickly because Michael was just talking about gross margins in the next quarter and the guidance. Can you give additional color on kind of how you think gross margins can play out over the next several quarters? And I understand the raw material side. And it just -- it seems conservative to me, the third quarter, but it's probably good, I don't have as much color on some of the moving pieces behind the gross margin guide. So, is there anything you can add there to shed some light on?

Yes, Stephen. So, when I gave the guidance 24% to 26% in both businesses, we're getting a bit of unfavorable mix. I'll start with DynaEnergetics. So, that's really geographic mix in the third quarter. If you look at the second quarter, what we call international was essentially $7.5 million international sales. We think that's going to probably be $5.5 million to $6 million in the third quarter. So, you're getting more growth on the North American side, call it 15% to 20%, and then we're going to step back in international. That's more timing of orders. We did pull some forward into the second quarter. So, you're getting that on the DynaEnergetics side and you're also getting that on the NobelClad side. So, a bit better of mix in NobelClad in the second quarter than in the third quarter. Now, there is definitely upside to the margins over the short, medium and long term. And so, we've had it modeled much in the way of price increases in there, and so we should get price increases coming out of the third quarter, fourth quarter and moving forward. So we expect price increases to take hold. So, there is definitely some ability to move up from those numbers of price increases.

You said international Dyna in the second quarter was 6.5?

In the second quarter DynaEnergetics international was 7.5, so that's everything, except the U.S. and Canada was $7.5 million and that's probably going to step to -- that will probably 5.5 or 6 in the third.

Okay. Okay. The other thing, we've seen some consolidation on the wireline front and I was just kind of curious about how you're thinking about the impact of some of that consolidation on your business, like, are you thinking about maybe they get better pricing, which is good for you, but then, I think at least one of the deals, there's a Perth business which came with it. I'm just trying to think about how, how the landscape is evolving and how that plays into DynaEnergetics share and growth as we move forward.

We, Stephen, we fully expect or expected the consolidation to begin taking place in this year. The consolidation is required or needed. And in addition to consolidation, there will be attrition and rationalization of some of the supply in the wireline service market. And that's healthy for the industry. It's healthy for our company. And so, we're pleased to see it happen. And regarding the -- I think they're worth -- there are two acquisitions -- public company in the second quarter were recently announced. Those companies use our products or have used our products. And so, we're encouraged by the strengthening of that business quite frankly.

And just as we think about the share, and may be if you look at the total current market, and then, the integrated systems separately, how do you think your shares evolved and how do you think it does evolve going forward?

Yes. Our share has been fairly constant during this difficult marketplace and it grew quite a bit from 17-18 into 19-20. It's held in 20 and currently held in 2021. And we did not expect to pick up share or increase our share significantly in a market that was in turmoil and price was the primary driver. As we go into the second half of this year and into next, and performance and quality, service, delivery, availability is more important than price, we'd expect to see our share pick up from its current levels. And right now it's plus or minus 20% of the perforating systems market.

Great, thank you.

Your next question is coming from Tommy Moll. Your line is live.

Good afternoon and thanks for taking my questions.

Yes. Hello, Tommy.

Kevin, I wanted to start on the topic of the litigation that you referenced, and you mentioned a couple of times what's going on among the machine shops and some of the large energetics manufacturers in your industry. I guess just on the litigation, what can you provide just to update us on where things stand and what's on the docket looking ahead to the extent you can give us that visibility? And then, as a related point, Kevin, and maybe premature to know but is there a potential pathway here that's a win-win-win for all industry participants that could occur outside the context of that litigation?

So, first of all, the litigation is quite extensive. And so, it's hard to get into any one particular case or situation and nor do we want to do that publicly, at least in an earnings conference call. And we -- the litigation, particularly intellectual property takes time, and we've been involved with this for quite some time. So, we're starting to see more action taking place within the court system. And everything that we've seen to date, we believe supports our position and we're confident that we're going to prevail in the medium to long term on these cases of infringement. We've had a couple of smaller cases settled in the recent quarter, which we are pleased to see and we would expect more of that to take place as we go forward. And we are making every possible effort to arrive at a mutually acceptable solution with those who infringe our technology. And we just feel that we innovated and have the intellectual property and expense in developing better solutions for the market and it's our responsibility to make sure that others don't infringe our innovations.

Thank you, Kevin. That's helpful. Shifting gears to capital allocation. You've got substantial dry powder on the balance sheet now, so I wondered if you could give us any insight on capital allocation priorities and specifically around M&A, what do you want folks to know in terms of your current pipeline potential timing on any deals that are in front of you to the extent you could comment? And how it all ties together under the broader platform strategy that you've been pursuing for some time now?

On our capital allocation are two existing businesses DynaEnergetics and NobelClad. They are self-supporting in terms of their growth capital through their earnings. The capital that we've raised through the ATM and the offering that we did in the second quarter, is there for longer-term growth opportunities. We're actively reviewing opportunities. It's not a short-term initiative. It's a medium to longer term initiative. And it's one of those things that the color around it really is quite limited until we have something that we've completed.

Fair enough. I'll turn it back. Thank you.

Your next question is coming from Taylor Zurcher. Your line is live.

Hey guys, thanks for taking my question. I just wanted to first circle back on some of the pricing comments you made, which I think you described pretty well. And I guess my question is, is some of this irrational behavior, if you look at the market today versus maybe a month or two months ago or even three months ago, has the pricing situation improved at all over that trailing three month basis? And if not, just curious if you could flush out how we should be thinking about the competitive landscape from a pricing standpoint over the back half of the year.

So, the industry, during the pandemic, the significant drop in demand and a significant amount of inventory that existed in the marketplace led to very extensive price competition. And in the margins, not just for ourselves, but the other companies in the industry declined during that time period, and now we're in an inflationary market to some degree; labor and materials. And we also see the CARES Act coming off in terms of supporting some of the decisions that other companies have made in the market. We're optimistic that we'll see a net price increase coming in the third and fourth quarter. We attempted to get price in the second quarter. We realized -- we announced 5%. We realized 1.7%, surprisingly. And we did not see or hear of any other oilfield service company following with price increases in the second quarter. We're optimistic that it's going to take place in the third and fourth quarter. It's required. It's needed for the long-term support of capital coming into our companies and into this industry.

Got it. And just to clarify some of the comments you made there. Clearly, there's a lot of inflationary items out in the market today with respect to the supply chain and also labor. So, am I reading your response to my prior question correctly in that you do expect to get some net pricing over the back half of the year, above and beyond the some of these inflationary items that you're seeing today?

We do. And however, we need to see that reflected in actions of the broader industry moving in the same direction that we're trying to pull Poland in and we did not see that in the second quarter.

Understood, thanks for the answer.

Thank you.

Your next question is coming from Matthew Galinko. Your line is live.

Hi, thanks for taking the question. I guess moving to the data pipe business, if we could get a little more color on that. Can you talk about the pipeline that you see for new product that and [how the Gulf] market shapes up, does that add on project work that you're already involved in, is it mostly stand-alone orders that you see yourself getting involved in? And I guess the second follow-on question to that is; how does the margin profile of the pipe business look compared to the consolidated Clad segment? Thank you.

Yes, so that product is just being announced. It goes into applications that we're currently working on for other plate like products. And so, we're very close to this market, and it has a very strong value proposition versus solid zirconium or titanium. So, we expect to -- as we work with companies to adopt this product, we feel that it's going to be successful. And the development period is relatively long when you're going into process environments. And so, it will take time to ramp. But we do see this product and several of the other applications that we've been working on increasing the market for us, for NobelClad, in the range of 20 plus percent on a longer term basis. And the margins are at or above the current contribution margins that NobelClad is currently achieving, which are in the low to mid 40s.

Got it. Appreciate that color. And maybe just a follow up. I think you referenced there might -- did I understand correct that you have additional product development at NobelClad, and if so, do you expect those to be unveiled this year or is that for more distant launch?

I think we're starting to see it already enter into our backlog this year for some of those applications. Having said that, the everyday business is low or have been impacted by the effects of the pandemic. We should see it adding to revenues in 2021 and the coming year as we go forward from where we've been historically.

Great. Thank you.

Your next question is coming from Stephen Gengaro. Your line is live.

Thanks. Thanks for taking my follow-up. So, I was just -- I know -- yes – [this question was asked] a little bit earlier, but I was curious, on the equity deal and the potential for consolidation, can you give us any thoughts on either timeframe and or the types of things you're looking for, and whether the market dynamics, since you raised capital, how they've evolved and how things are looking sort of on that front as we think about the timing of something that's in the pipeline or could be in the pipeline?

Yes. The timing will be medium to longer term, Stephen, possibly end of this year, most likely next year. It's a longer-term process. And so, there is nothing right around the corner, I want to be clear on that. And on the things that we look for are things that add to our total available market, have a similar margin profile to what we have in a normalized market with our current products. And we're interested in stable to growing markets, differentiated products, niche market segments, and companies that we can get behind and help to accelerate their growth by going from regional to national, national to global. And people are an important part of it; strong R&D, engineering, and product development capabilities and low cap capital intensity. And we're actively reviewing a number of opportunities. But again, they take time and there is a lot of variables in this process that are outside of our control.

Thank you. And then just one follow-up on the DynaEnergetics business. You guys clearly have a very good product, and we saw this kind of rapid share gain for a couple of years and then you had last year's sort of macro debacle, and then this expectation that we have for kind of a reacceleration and the adoption of integrated systems in general, and then more specifically, yours and maybe one or two other sort of leading the way, but clearly, it looks like, it seems to me you guys have the leadership position. What are you seeing there? What are you seeing as far as the component inventory causing price issues late last year and just sort of a whole dynamic of that business, and whether we should think about your growth trajectory in that business outpacing [completion/fast-paced] growth in the back half of this year, particularly In 2022?

Yes. Well, again, we're pleased that we've held our market share in a very difficult price environment. We do get a premium over most if not all products in this area. When we came out of the last downturn, we had 3% market share that grew to 20, plus or minus our estimates. We've maintained that 20% in a very, very difficult demand situation over the last 18 months. And going into this current cycle where things are improving, we're in a much stronger position today than we were in '17 and '18, both in terms of the breadth of our product line, our manufacturing capability. As you know we've got the capacity in place in the vertical integration and all the components. And we feel we are strongly positioned going into second half of this year and to next year to serve the market in a way that provides the products just in time to the well site at higher performance, lower total cost, less working capital for the people that are deploying those products. It's very a very difficult value proposition to not accept if you're interested in succeeding in this market, and we expect our market share to grow. And we're not trying to be all things to all people, I think that's important. We're -- our objective is to build our market share to roughly a third of the market, which also means two-thirds of the market is available to other people and different technologies. And so, we're very pleased with the position that we have and in the strength of our balance sheet going into what we see is a beneficial up cycle.

Okay, great. And maybe just one quick one for Michael. The costs around the patent infringement lawsuits, are they rising? And then, where are they showing up on the corporate line or in the DynaEnergetics line?

Yes. The DynaEnergetics line and SG&A. So, in the G&A section of SG&A. And there is around $1.250 in the second quarter, about $1 million in the first quarter and we're seeing a run rate. We've been talking about 1 million and a half run rate as we move forward.

Okay, great. Thank you, gentlemen.

Yes, you're welcome.

There are no further questions from the lines at this time. I would now like to turn the floor back to Kevin Longe for closing remarks.

Thank you, everybody for joining us today. We look forward to talking with you again at the end of Q3.

Thank you. Ladies and gentlemen, this does conclude today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.