Good afternoon, ladies and gentlemen, and welcome to the DMC Global Third Quarter Earnings Call. At this time, all participants have been placed on a listen-only mode and we will open the floor for your questions-and-comments after the presentation. It is now my pleasure to turn the floor over to your host, Geoff High, Vice President of Investor Relations. Sir, the floor is yours.

Hello, and welcome to DMC's third quarter conference call. Presenting today are President and CEO, Kevin Longe; and CFO, Mike Kuta. I'd like to remind everyone that matters discussed during this call may include forward-looking statements that are based on our estimates, projections and assumptions as of today's date, and are subject to risks and uncertainties that are disclosed in our filings with the SEC. Our business is subject to certain 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'll turn the call over to Kevin Longe. Kevin?

Good afternoon, and thank you for joining us for a review of DMC's third quarter financial results. Our third quarter sales and profitability were above our guidance, reflecting continued strong demand within the end markets served by our three asset-light manufacturing businesses. Consolidated third quarter sales were a record $174.5 million, which were up 5% from the second quarter and up 160% from the third quarter last year. Excluding $80.7 million in revenues from Arcadia in which we acquired a 60% controlling interest last December, third quarter sales increased 5% sequentially and 40% versus the third quarter of 2021. The growth reflects stronger sales at DynaEnergetics our energy products business, which is benefiting from healthy activity in the global well completion industry. DynaEnergetics third quarter sales were $70.4 million, up 4% sequentially and up 59% versus last year's third quarter. The safety performance and efficiency of DynaEnergetics fully integrated DS perforating systems continues to drive increased adoption by North America's exploration and production companies and service providers. This year DynaEnergetics has already surpassed the one million unit mark for shipments of its factory assembled performance-assured DS perforating systems. It is the first time one million units have been shipped in a single year since the product was launched in 2015. The on-time delivery rate of these systems is 99.93% and they were deployed by our customers at a success rate of 99.98%, which we are very proud of. The systems also were deployed without a single safety incident in the seven-year commercial history of the DS system. We have shipped nearly four million units without a reported safety issue. Arcadia, our Architectural Building Products business reported third quarter sales of $80.7 million, up 6% sequentially and up 24% versus pro forma sales in last year's third quarter. The improvement reflects…

Thanks, Kevin. Quickly recapping our top line results. Third quarter sales were $174.5 million, up 5% versus this year's second quarter. Arcadia's third quarter sales were $80.7 million, up 6% sequentially. DynaEnergetics reported third quarter sales of $70.4 million, up 4% sequentially. DynaEnergetics North American sales increased 6% sequentially, while international sales decreased 5% sequentially. Sales at NobelClad were $23.4 million, up 7% sequentially. Consolidated gross margin in the third quarter was 29% down from 31% in the second quarter, and up from 25% in last year's third quarter. Third quarter gross margin reflected, an expected dip in gross margin at Arcadia resulting from the recent volatility in aluminum prices. The gross margin improvement compared to last year's third quarter, reflects higher sales volume on fixed manufacturing overhead expenses at DynaEnergetics. As Kevin mentioned, Arcadia's third quarter gross margin was 30%, down from 34% in the second quarter. DynaEnergetics reported third quarter gross margin of 30% flat versus the second quarter and up from the 22%, in last year's third quarter. The margin improvement from last year primarily relates to the impact of higher sales volume, on fixed manufacturing overhead expenses. NobelClad's third quarter gross margin was 27% versus 28% in the second quarter and 30% in the year ago third quarter, primarily due to a less favorable project mix and the impact of the prior year Cares Act credits, respectively. Looking at our third quarter expenses, consolidated SG&A was $30.5 million and included $12.9 million of SG&A from Arcadia compared to $15.3 million in the same quarter last year. The year-over-year increase also was attributable to higher variable incentive compensation, the expiration of employee retention credits and implementation costs associated with the new enterprise resource planning system at NobelClad. We reported consolidated operating income of $13.4 million. Third quarter…

Thank you. Ladies and gentlemen the floor is now open for questions. [Operator Instructions] And the first question is coming from Cameron Lochridge with Stephens. Your line is live.

Hi, good afternoon, guys. Thanks for taking my questions.

Yes, good afternoon, Cameron.

Kevin, I wanted to start on Arcadia and the geographic expansion efforts you outlined when you purchased the business back in last December. Could you just comment on, how that is progressing? Maybe share your latest thoughts on the efforts there? And any specifics, around markets you're most excited about?

The geographical expansion primarily was Houston and Dallas where over the last 18 months we've opened up two new satellite facilities, to serve the local market. And I believe, they're moving in a healthy direction and we see them as growth opportunities as we move forward.

That's great. Great. Great to hear. Thanks, Kevin. And then maybe flipping to DynaEnergetics. Thinking about the gross margins here, 29% up nicely on a year-over-year basis, but perhaps a little shy of the 30% target we had come to expect, heading into the fourth quarter. Could you just maybe share your thoughts around pricing, and what needs to happen for us to get to that 30% plus range that we had discussed?

There are two factors that will positively impact the gross margin as we move forward from where it is today. In the second half of this year, primarily we've been working through what was slow-moving inventory on our books for the last couple of years. And in a strong market, we are able to move that through albeit, at a lower price lower gross profit. The underlying gross profit of the existing sales is stronger than -- and we'll see that as we go into the fourth quarter and exit the fourth quarter. Pricing is an interim process. We've seen some good price movement throughout the year. However, we have a business practice where our best customers get our best prices. And our best customers have also increased their purchases from us and have a larger share of our overall business. So the gross margin has moved a little bit slower in terms of its increase because of the customer mix. However, as we go into the New Year and further into what we think will be a decent market for the energy area, we'd expect to see the growth in pricing accelerate in the first half of the year.

Hey, Cameron this is Mike. Just a note too for the nine months we were at 29%. We finished for the third quarter at 30% margin in DynaEnergetics, and our guidance currently contemplates low 30s. So call it in that 31%, 32% range for DynaEnergetics. So we see that marching up.

Got it. Thank you Michael -- Mike, I missed that, but I appreciate it and thanks for the answers guys. I'll turn it back.

Okay. The next question is coming from Ken Newman with KeyBanc Capital Markets. Your line is live.

Hey guys, nice quarter.

Thank you Ken.

So maybe just -- I wanted to dig in a little bit more on the pricing aspect here. And just within Arcadia specifically, any color on just how much price was taken relative to the revenue growth in the quarter? And just how much is being assumed in the fourth quarter revenue guide?

Yeah. So what we're seeing Ken is in the third quarter, the revenue growth was driven by price versus volume. What we are seeing in the third and fourth quarters though is that the margin has contracted, because we're shipping the backlog out where raw material prices have outpaced selling prices in particular things that we're shipping out of backlog. We -- what we expect is that as we exit Q4 and get into the first half of 2023, you're going to see a return to normal call it low to mid-30s in gross margin in Arcadia.

Yeah. Well, I guess what I'm trying to better understand here is you've -- it sounds like price outpaced volumes in 3Q. And I get the point on seasonality for the fourth quarter. But I would assume that the expectation for price is going to be relatively stable if not higher depending on where costs go in the fourth quarter. So maybe give us a little bit more color on seasonally -- what's the typical seasonality from a volume standpoint in Arcadia 3Q to 4Q? And just how much of that gap is being covered by higher pricing? And is there a risk that maybe the fourth quarter guidance is potentially too conservative if you have to raise prices more?

Yeah. Again I mean a lot of what we're doing is shipping out of that backlog where it's already been priced. So -- but we think there's going to be a significant flywheel effect again in the first half. As far as your comment around the seasonality, we're talking a seven days for the holidays. And so we're just looking at less days to ship in Arcadia for the fourth quarter. It's not any demand disruption that we're seeing in the marketplace, it's strictly the holiday season that's why we've guided $70 million to $75 million versus the $80.7 million.

Yeah. And I'll add to that Ken that we typically take a week at the end of the quarter and for holidays between Christmas and New Year's where we're doing inventories and that's impacting the revenues.

Got it. That's helpful. We've heard from a few other -- I won't call them perfect comps, but a few other building product peers and others who have exposure to commercial non-residential projects that there have been some modest delays mostly on supply chain. You maybe have touched on it just in the answer just now, but I'm curious if you have any color or just on conversations with your customers regarding commercial non-res?

We haven't seen a slowdown in the order input except for lead time related issues associated with our backlog. And there's significant amount of uncertainty probably more in the back half of 2023 and into 2024. But we feel reasonably strong about the Western market of the United States for the commercial business and in the markets in which we have our satellites.

Okay. Maybe one more. And I know this is just a longer-term type of question. But just given where you've seen the demand for DynaEnergetics this quarter your expectations for better margins and then kind of comparing that to what we're seeing in the macro for well completion activity and what seems to be still some holdbacks on CapEx budgets. I mean, do you have -- maybe just some color on customer conversations on where they're looking for well completion activity as we enter 2023?

Most of the customers that we're talking to if not all of them are looking at a strong exit to the year and start to the New Year. And so we continue to see probably a good market for most of 2023. And our volume is actually picking up we had a record shipment of our DS perforating systems in the month of October. And so it's -- we feel pretty good about it.

Very good. Thank you.

Okay. The next question is coming from Alec Scheibelhoffer with Stifel. Alec, your line is live.

Good afternoon, everyone. Can you hear me, okay?

Yes.

Excellent. Congrats on the quarter.

Thank you, Alec.

Just -- I was curious if you can just provide some color on how you've seen the competitive landscape evolved with the integrated perf systems versus components versus machine shops assembling products? And just kind of your thoughts around what you're seeing in that space?

We're seeing more and more of the market move towards the integrated system. And that's both provided by ourselves and there are some of the machine shops that are if you will provided -- providing a factory assembled system of components that they purchased from other companies as well as make themselves. And so it's moving to more of a product supply to system supply from a component supplied business to the service company.

Understood. Yes.

Yes. And we were having a good year. We believe that we're picking up market share. It's driven by the performance of our products but also the performance of the company on having a fully integrated system where we take full responsibility for the performance of the perforating system and that's different than a lot of the machine shops. And also what's driving our revenue and our market share growth is our ability to deliver on time as well as the performance and safety of our equipment.

Understood. Understood. And kind of shifting gears a little bit to Arcadia. Moving forward in that business have you seen any impact from rising interest rates on demand? And, I guess, to that effect how do you see that evolving through the next several quarters just given where interest rates have moved?

We would expect building activity with the higher interest rates as a broad market to slow down. And I know that the residential market is our reporting nationally the broadened residential market to slowdown. We have not seen a slowdown in the high-end luxury home market for residential. And I believe the commercial market tends to lag the residential market. And we haven't seen a slowdown yet, but we would expect there will be a slower market in the back half of the year and into 2024. However, we've been -- our order input has been greater than our capability. And so in some respects we feel that we will not mirror the market as much because of the demand for products in the territories in which we serve.

Got it. Got it. That's all on my end. Thanks for the color.

[Operator Instructions] Up next we have Samir Patel with Askelakin – excuse me, Askeladden. One moment. Samir, can you hear us?

I can. Yes I was just waiting for you to finish pronouncing the name. My fault for choosing a weird business name. So hey, guys. How is it going?

Yes. Hi, Samir.

I don't really have a question about operating results. It's more, kind of, a big picture platform question for you to answer. So if you look at the price of stock over the past since call it late June it's been trading at or below levels that it did through all of COVID including the day when oil prices were very famously negative $37 or whatever they reached. So I just kind of wanted to give you the opportunity to maybe take a step back from the quarter and just address what do you think that the market is misunderstanding about your story right? Is it they think that for example Arcadia is more cyclical than it is? Is it they think that the oil patch is kind of going to evaporate next year and you're going to go back to not making profits. So just an open-ended question if you have anything to opine about? Thanks.

Samir, this is Geoff, and certainly we're disappointed as well. I think we're seeing as our story has changed we're also seeing a transition in our shareholder base and there have been the departure of a couple of large shareholders. I will say that the interest level that we've seen from new prospective holders I don't think we've seen it this high in an awfully long time and I think we're going through a transition. And I think we all believe that what's going to dictate our performance and our valuation is going to be execution and how we perform. And as Kevin has said, we're confident in where we're headed and in our strategy. And we think that's going to be reflected in our share price.

Yes. And I'd add to that Samir that we're having record shipments in DynaEnergetics. We've got a great project business coming in on NobelClad. We're very pleased with Arcadia, the management team, the employees, the markets they serve. They've got a very strong backlog. You can see that the performance of the company is improving. Second half of the year is stronger than the first half of the year. We expect that to continue. And the stock price will catch up as soon as others recognize the value.

Right. I've just been scratching my head because obviously you keep reporting pretty strong results so. Thanks. I appreciate the time.

Thank you.

Okay. Next we have Ken Newman with KeyBanc Capital Markets. Ken, your line is live.

Hey, thanks. Just I had one last quick follow-up question here, which was around the wraparound pricing benefits maybe into 2023, just given what's been pretty aggressive price increases across the three segments Arcadia, especially. Any color on what that carryover benefit looks like for 2023? Is that like a low to mid-single-digit contributor?

Yes. I mean what I would say is we're guiding 27% to 29% on the gross margin line for the fourth quarter. We expect that to be 30% and plus 30% as we enter 2023 on a consolidated basis. I think the biggest contributor to that is going to be Arcadia followed by DynaEnergetics.

Yes. And Arcadia will be the inventory working its way through the system at the pricing that we have and hopefully can hold. And on the DynaEnergetics side, they've done well with volume and cost improvements, customer mix kind of masked the success that they've had on selling prices and we'd expect the selling prices to also strengthen in the first half of the year and not only just to capture some of the inflation that we've had but also to go to margin improvement. And we view our company as on a longer-term basis, medium- to longer-term basis as a mid-30%s kind of gross profit kind of business.

Got it. Thank you.

Okay. [Operator Instructions] Okay. There are no further questions in queue. I'd like to turn the floor back to Kevin Longe for closing remarks.

Thank you everybody for joining us for today's call and your interest in our company. It's hard to believe that I'm going to say that we're going to talk to you in the New Year, as we finish the fourth quarter and begin a new year for the company. And please have a safe and joyful holiday – holidays. Thank you.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.