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Operator: Good day, everyone, and welcome to the DMC Global Fourth Quarter Earnings Call. At this time all participants have been placed on a listen-only mode and the floor will be opened 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, Investor Relations. Sir, the floor is yours.

Geoff High: Hello, and welcome to DMC’s fourth quarter conference call. Presenting today are Co-CEOs, David Aldous and 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, the 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 now turn the call over to David Aldous. David?

David Aldous: Thank you, Geoff, and thank you for joining us on today’s call. For those of you who aren’t familiar with my background, I’ve been a member of DMC’s Board of Directors since 2013, and I’ve served as Chairman of the Board for the past five years. In the decade I’ve been affiliated with the company, DMC has never been stronger than it is today. Our strategy is sound and our three asset-light manufacturing businesses are leaders in their respective markets both in terms of market share and profitability. These leadership positions were built on the differentiated products and services offered by our businesses and the culture of innovation that permeates our organization. 2022 was a milestone year for DMC and included record consolidated sales, adjusted EBITDA that exceeds our forecast and several strategic accomplishments at Arcadia, DynaEnergetics, and NobelClad.

As we entered 2023, our primary objective is to improve returns for DMC’s stakeholders. We have sharpened our focus on operational excellence and are making strategic investment decisions that we believe will generate the strongest returns for the company. Our highest near-term priorities are to accelerate the integration of Arcadia and expand its manufacturing capability, strengthen the profitability of DynaEnergetics, ensure the commercial success of NobelClad’s new products and improve DMC’s cash flow through targeted cost reductions and more effective capital €“ working capital management. On January 20th, we announced Eric Walter was joining DMC as our new Chief Financial Officer. He is with us today and will officially assume the CFO role next Tuesday.

Eric joined us from Jacobs, where he was CFO of the company’s largest division. He spent the past month working closely with Mike and our finance team, and it’s already clear that he’s an excellent fit with DMC’s people and culture. We are excited to have him as part of the team. I’ll now turn the call over to Mike for a review of our operations and financial performance. Mike?

Mike Kuta: Thanks, David. And I do also want to welcome Eric. In the month we have worked together, he’s already made important contributions to the finance and leadership organizations. It is clear he is an outstanding addition to the DMC team. As David noted, 2022 was marked by important achievements across DMC, and each of our businesses delivered a strong finish to the year. At DynaEnergetics, full year unit sales of the fully integrated DS perforating system were more than 40% higher than the prior full year record established in 2019. The accomplishment reflects strong demand from North America’s well completion industry, improved efficiencies and expanded capacity at our Blum, Texas manufacturing facility and outstanding execution by our teams in North America and Germany.

DynaEnergetics reported a 10% sequential sales increase during the fourth quarter, a period often marked by a year-end slowdown. It was DynaEnergetics’ strongest quarterly sales performance since the second quarter of 2019. The sales growth reflects the recent addition of three large customers in North America and continued strong demand in DynaEnergetics’ international markets. DynaEnergetics fourth quarter gross margin was up 8 percentage points versus the year ago fourth quarter, but below our objectives. The shortfall was principally due to inventory write-offs and reserves. We believe a series of planned process improvements, combined with the introduction of three new premium products, improved product mix and expected price increases, will collectively improve margins to low-30% range during 2023.

DynaEnergetics is an outstanding business that has transformed North America’s well perforating industry. We intend to make it even stronger by maintaining our investments in technology, product innovation, and improved support for our customers. Arcadia, our Architectural Building Products business, had a solid first year as a DMC company. Full year sales were up 25% versus 2021, and fourth quarter sales increased 31% versus the comparable quarter in 2021. The improvements in both periods were driven by price increases implemented to address higher raw material costs. As we have previously discussed, a spike in aluminum prices during the first half of 2022 led to second half gross margins that were below historic averages as Arcadia’s price increases lagged the increases in raw material costs.

At Arcadia’s Commercial division, which generates approximately 85% of Arcadia sales, most of the remaining high-priced aluminum inventory shipped during the fourth quarter. At Arcadia Custom, which serves the high-end residential market, orders that were quoted before price increases went into effect will continue to ship out of backlog into the second half of 2023. As these inventory and pricing issues abate, we expect Arcadia’s margins will trend back to historic levels throughout 2023. Arcadia’s commercial and high-end residential businesses are both reporting healthy demand and strong order backlogs. Our primary objective during 2023 is to better address this demand through improved operating efficiencies and increased capacity. The first phase of Arcadia’s new ERP system is scheduled to go live in the second quarter, and we believe increased painting capacity will be in place by the end of the year.

Our NobelClad business is seeing an anticipated pickup and order activity. Order backlog increased 16% sequentially during the fourth quarter, and now stands at a 10-year high of $55.5 million. The business is seeing strong demand from the liquified natural gas industry for its new Cylindra cryogenic transition joints, and also is tracking a number of large orders that are moving closer to the vendor selection phase. We believe NobelClad is well positioned to participate in these projects and are increasingly encouraged by its growth prospects. And now for a review of our fourth quarter financial performance. Quickly recapping our top line results, fourth quarter sales were 175.1 million flat with this year’s third quarter, but up 36% year-over-year and on a pro forma basis.

All businesses reported strong top line growth compared with the fourth quarter of 2021. Arcadia’s fourth quarter sales were $74.4 million, down 8% sequentially, but up 31% compared to the prior year pro forma sales. The decline from the third quarter was driven by the anticipated impacts of seasonality and maintenance. While the year-over-year growth was primarily due to higher average selling prices, which were implemented to address inflation on key raw materials. DynaEnergetics reported fourth quarter sales of $77.6 million, up 10% sequentially driven by North American market demand compared with a prior year quarter sales grew over 50% driven by a 56% growth in DynaStage system units sold in a modest price increase in North America. Sales at NobelClad were $23.1 million, slightly down sequentially, but up 9% year-over-year.

The growth versus the prior year was driven by an increase in average selling price to offset higher raw material costs. Consolidated gross margin in the fourth quarter was 26%, down from the 29% in the third quarter is all businesses experience margin compression. We expect quarterly margins will improve incrementally throughout 2023. On a pro forma basis, gross margin increased from 23% last year is gained from the DynaEnergetics and NobelClad businesses more than offset margin compression from Arcadia. Looking at our fourth quarter expenses, consolidated SG&A was $30.6 million, which was flat with the previous quarter and up $5.7 million compared with a pro forma fourth quarter in 2021. The year-over-year increase was attributable to higher investments in public company expenses at Arcadia, people related cost to support growth, as well as stock based compensation and travel expenses.

We report a consolidated operating income of $10.6 million. Fourth quarter adjusted net income attributable to DMC was $4.3 million or $0.22 per diluted share versus adjusted net income of $6.7 million or $0.35 per diluted share in last year’s third quarter. Adjusted EBITDA attributable to DMC was $19.6 million, which was down 10% sequentially, but up over 150% compared to the prior year quarter on a pro forma basis. Arcadia reported fourth quarter adjusted EBITDA of $7.1 million of which $4.3 million or 60% was attributable to DMC. DynaEnergetics reported fourth quarter adjusted EBITDA of $14.4 million, which reflects 4% growth quarter-over-quarter and over 260% growth year-over-year. NobelClad reported adjusted EBITDA of $3.4 million, which was flat sequentially and up 60% compared to the fourth quarter of 2021.

We ended the fourth quarter with cash of $25.1 million versus cash of $30.8 million at December 31, 2021. DMC generated free cash flow of $26.4 million. That was used to fund principal payments on our long-term debt associated with the Arcadia acquisition and distributions to our Arcadia joint venture partner. Our debt to adjusted EBITDA leverage ratio at December 31, 2022 was 1.69 well below the covenant threshold of 3.25. Our total weighted average share count is now 19.4 million. Looking at guidance, first quarter sales are expected to be in a range of $168 million to $178 million versus the $175.1 million reported in the 2022 fourth quarter. At the business level, Arcadia is expected to report sales in a range of $70 million to $75 million versus the $74.4 million reported in the fourth quarter.

DynaEnergetics is expected to report sales in a range of $78 million to $82 million compared to the $77.6 million reported in the fourth quarter. NobelClad sales are expected to be in the range of 20 million to 21 million versus 23.1 million in the 2022 fourth quarter. Consolidated gross margin is expected in a range of 27% to 28% compared with 26% in the fourth quarter. First quarter gross margin is expected, improved sequentially at both DynaEnergetics and Arcadia while NobelClad is anticipated to be impacted by a less favorable project mix. First quarter selling, general, and administrative expense is expected in a range of $32 million to $33 million versus the $30.6 million reported in the 2022 fourth quarter. First quarter guidance on SG&A expense includes approximately $2 million of patent litigation expense at DynaEnergetics, but excludes approximately $1.5 of cost related to the resignation of the former DMC CEO.

We expect our SG&A run rate will be below $30 million per quarter by the end of the year, excluding one-time expenses and will also decline as a percent of sales. First quarter amortization and depreciation expense are expected to be approximately 5.8 million and 3.8 million respectively. The sequential increase reflects DMC’s accounting methodology of amortizing the Arcadia customer relationship intangible. It’s important to note that the amortization will be more front end weighted and not straight lined. Additional detail on future estimates of amortization can be found in the 10-K financial statement footnotes. Interest expense is expected to be $2.2 million in the first quarter and our annualized effective tax rate is forecasted to be 28% and 30% for the full year.

First quarter adjusted EBITDA attributable to DMC is expected to be in the range of $17 million to $21 million versus $19.6 million in the 2022 fourth quarter. Capital expenditures are expected in the range of $4 million to $6 million. Full year capital expenditures are expected to be approximately $20 million and will include investments in Arcadia’s ERP system and painting capacity. With that, we’re ready to take any questions. Operator?

Operator: Certainly. At this time, we will be conducting a question-and-answer session. Your first question is coming from Stephen Gengaro from Stifel. Your line is live.

Stephen Gengaro: Thanks and good afternoon everybody.

Mike Kuta: Hi, Stephen.

David Aldous: Hello.

Stephen Gengaro: Hi. So I think if you don’t mind starting with, can you talk about what you’re seeing in the DynaEnergetics business? And I mean we €“ we’ve been hearing and seeing the rig count plateauing and gas markets are sloppy. Can you just give us a sense for €“ I mean, your first quarter guidance seems pretty solid, but I’m just curious what you’re seeing in conversations with customers and if there’s any expectation in your guidance as far as market share gains are concerned?

Mike Kuta: Yes. I mean, Stephen, thanks for your question. We’re seeing a strong start to the year. And so January has been a strong month and that carried into February. As I noted in my comments, we’ve seen some new customers come onboard and adopting the DynaStage system. So we feel pretty good about the first quarter.

David Aldous: Stephen, if I could just add. I think at a macro level, forecast for crude oil production are certainly going to be strong in 2023. And if you look at the IEA reports or the EIA reports, they’re all up couple of million barrels a day. So it’s a pretty strong indicator of the medium-term prospects on crude. And as you know, there is softness in the gas side with gas prices coming down, and that’s somewhat seasonal as well, but we still see strong demand in the marketplace.

Stephen Gengaro: Thanks. And just one more thing on that, how is pricing? I mean have you €“ it seemed like there was a €“ you were gaining some traction, I think last time we spoke. Are you seeing anything positive on the pricing front right now?

Mike Kuta: I mean pricing is pretty stable right now. I mean I’d say that we’ve got a couple of fronts where we think we can improve margin. We’re working on new products that are going to go into the market, kind of these 2.0 versions of some of our specialty gun systems, in particular oriented gun systems. So we’ve got some new design features there that I think are going to win in the marketplace. I think we’re going to see some favorable product mix, some operational efficiencies and we’ll take a look at price as well and hit those opportunities where we see them. So I think it’s a combination of those factors that are going to keep our margins marching north here off a low Q4 and guidance that essentially implies 30% for Q1, but I think we’re going to march up from there Q2 to Q4.

Stephen Gengaro: Okay, great. Thank you.

Mike Kuta: Thanks, Stephen.

Operator: Thank you. Your next question is coming from Gerry Sweeney from ROTH Capital. Your line is live.

Gerry Sweeney: Hi. Good afternoon, David, Mike, Geoff. Thanks for taking my call.

Mike Kuta: Hi, Gerry.

David Aldous: Hi, Gerry.

Gerry Sweeney: Just a follow-up on DynaEnergetics and then I’ll move over to the Arcadia. But obviously, you did mention a few customer wins or customers onboarding the products. How does the pipeline of customers look like? How much opportunity you see out there? And what’s the feel that you’re getting on that front?

Mike Kuta: Gerry, one thing I definitely want to mention is that where we’re really winning is with a lot of our existing customers. And so what we’re seeing is we believe we’ve got the best product and excellent partners. So we’re seeing our service partners win on the frac side. And so that’s a big driver. So some of the market share comes through adoption, but more of that actually comes through existing partnerships that we have.

Gerry Sweeney: Got it. So wallet share to some degree. Switching gears to Arcadia, revenue, I think, was up 31% and you specifically highlighted volumes €“ just curious €“ or not volumes, price. Curious, I mean, what happened with volumes? Is there €“ are you growth constrained in the near-term until you get some efficiencies in place? Just curious as to €“ how we’d look at that in the near-term.

Mike Kuta: Yes. For the most part, I mean, you see Q3 was the high-watermark in Arcadia at $81 million. So that’s probably the constrained point. Q4 dipped a little bit to $74.4 million, and we had some seasonality shut down for maintenance. So we’ve got to unlock capacity there, and we’ve got plans to do so. As I mentioned in my comments, we’re putting in a paint line, and I think that’s going to unlock some of that capacity and ability to grow.

Gerry Sweeney: Got it. And then ERP looks €“ it sounds as though it’s coming down in the second quarter. Will that help with some management of the margins, inventory €“ cost of inventory and sort of matching that up?

Mike Kuta: Yes. So we’re breaking that into two phases. We’re going from no ERP system to a full ERP system. So Phase 1 we expect to be done in May, and that’s going to give us a lot of visibility to our product line, product, margins and how we sell products across satellites. So we’ll be able to look at that and close possible price and margin leaks across that business. And so we’re really excited about getting that in place. And then step two, which is by the end of 2023, is putting in more supply chain management tools. So that gets into planning and scheduling, and that’s where we’re going to be able to impact the balance sheet side and the inventory more, and I think we’re going to get more efficient around inventory. So the ERP project and projects, plural, is big deal. I think a lot is going to come out of that.

Gerry Sweeney: Okay, great. That’s it for me. So I appreciate it. Thanks, Mike.

Mike Kuta: Thank you, Gerry.

Operator: Thank you. Your next question is coming from Ken Newman from KeyBanc Capital. Your line is live.

Ken Newman: Hi. Good afternoon guys.

Mike Kuta: Hi, Ken.

David Aldous: Hi, Ken.

Ken Newman: Hey, I’m curious if you could just talk a little bit more about the inventory write-offs in Dyna this quarter and maybe provide some color on how you’re looking at whether that process you think is flushed out, if there’s more work to be done on the inventory side and how you look at inventory build as we move through the quarter or the year, I should say.

Mike Kuta: Yes, Ken, I think we €“ in the fourth quarter, we got to year-end, so we had some inventory cleanup. It’s a combination of just putting some reserves in place and doing our year-end physical inventory. We think we’ve got that sorted and cleaned up. So that €“ and a few other small items, cost us two points in the quarter. So we’re confident that we’re going to get those two points back pretty quickly here, and then for the other reasons mentioned that we can start marching that margin up Q2. And as far as inventory, we’re seeing €“ I think we’ve seen a lot of the inventory build per se in DynaEnergetics. So we’re expecting a better working capital year this year than 2022.

Ken Newman: Okay. And to clarify, it sounds like pricing in the segment is generally stable, if I heard you right earlier, but this is €“ we shouldn’t think of this inventory cleanup that you mentioned as maybe getting over your skis on or the pricing environment getting incrementally competitive.

Mike Kuta: No, that’s not what that is.

Ken Newman: Got it. Switching over to Arcadia, I hear you on sequential expectations for improvement in the gross margins there. How should we think about the SG&A leverage for that segment specifically as we move through the year? Obviously, there is some moving pieces, I think, on the amort side, but anything else that we should be aware of?

Mike Kuta: No, I think that, we’ve got some opportunities to work on the SG&A side. I think the operating leverage right there is a bit limited because we’re nearing capacity on the top line. But again, we expect by the end of the year have a paint line in that can get us past, this level of sales we’ve been at, which is in that 70 to 80 range.

David Aldous: And Ken, if I could just add. I think on the industrial engineering side, there’s an opportunity there to get some shorter term wins on the top line, but incremental capacity steps will be more towards the end of the year.

Ken Newman: Yes. And lastly for me, David, you started the call off in your prepared remarks with those three goals accelerating the integration of Arcadia, strengthening the margins in Dyna, and then, more effective working capital management, where €“ what’s the easiest fruit to pick right now? And if you had to choose, you had to force rank those three initiatives, where is the primary priority right now in terms of the biggest bang for the buck ?

David Aldous: Well, I think, let me start, Mike. Can you add in, if you will. The big carrot for us is working on margin, both the Dyna and the Arcadia side, and I think we’ve got solutions as Mike highlighted on operational efficiencies, new products, premium products, product mix and pricing on the Dyna side. Obviously, the raw material high side on Arcadia has already happened. We don’t think we’re going to see aluminum prices up by $1.80 a pound anytime soon. We could be wrong, but we think that they’re relatively stable at this point. And so we think that the business opportunity there is to get back to historical margins and incrementally increased capacity.

Ken Newman: So I’m sorry, just one more clarification here. When I think about those goals, is there anything incremental that you’re spending relative to what we’ve been told? I mean, I know these have always kind of been the objective here over the longer term, but is there anything incremental here that’s changing relative to the fourth quarter on how you achieve those in a quicker capacity?

Mike Kuta: There’s nothing from a call it a SG&A or a CapEx that you need to build in that’s not already covered in our guidance. If that’s the question you’re asking Ken, and in fact, in our guidance, you’ll see from an SG&A standpoint that we’re going to have a higher Q1 level, but then we’re going to be sub €“ we expect to be sub 30 million run rate Q2 to Q4. So this is just executing on our existing initiatives. And there isn’t €“ there’s not a capital slug or SG&A slug that’s not in these numbers.

Ken Newman: Understood. Thanks.

Mike Kuta: Thank you.

David Aldous: Thank you, Ken.

Operator: Thank you. Your next question is coming from Samir Patel from Askeladden Capital. Your line is live.

Samir Patel: Hey guys. Mike, I just had a quick clarifying question on the SG&A guidance. So you said in Q1 it’s going to be 32 to 33, but you also called out 2 million of, I think litigation charges included in that figure. And then you said that for the balance of the year, it’s supposed to head below 30, but that’s excluding one-time items. And so I wasn’t sure if litigation was a one-time item, as if it was, that would not be kind of a material difference. So maybe you could just provide a little clarification on that?

Mike Kuta: Yes, so thanks, Samir. This €“ we’re going to have some ongoing litigation costs. I’m not calling that one time. What I’m saying is one time is the departure costs and restructuring associated with the departure of the CEO. And so we’re going to decrease our legal run rate. We were at about seven €“ right around 7 million in legal litigation, I should say, run rate over the last couple years. And we see that coming down several million dollars. We see that coming down, we call it $3 million. We’re just seeing it in Q1 because we did VHT trial.

Samir Patel: Okay. That makes sense. And as a follow-up there, is that a relatively, as you continue Arcadia, I just want to clarify that SG&A figure. So is that something you think you can hold fixed over the next couple of years, even as you continue to grow the businesses? Or do you think that figure needs to grow to some degree to support revenue growth?

Mike Kuta: Yes, so what I would say is that, what I’d transition the discussion into kind of SG&A as a percent of sales. And I would say that when we are looking at 18% SG&A as a percent of sales for full year 2022, that’s a number we want to get in the 16.5, 17 range. We want to take a point, point and a half off of that and get more operating leverage off of our spend.

Samir Patel: Okay. Makes sense. Thanks for the color.

Mike Kuta: Thank you.

David Aldous: Thank you, Samir.

Operator: Thank you. Your next question is coming from Stephen Gengaro from Stifel. Your line is live.

Stephen Gengaro: Thanks, gentlemen. Two more from me. The first from a modeling perspective, how should we think about working capital in 2023? I’m trying to think about the components of free cash flow and any guidance you could give us would be helpful?

Mike Kuta: Yes. So without maybe getting into the line items, the way I think about 2023 and our goals is that we want to be in that 1x to 1.25x range exiting 2023. And so what that means is that we’re generating probably cash from operations in that 70 million €“ 60 million to 70 million range. You see our CapEx guidance of 20 million. So that’s probably €“ that’s free cash flow of call it $50 million. We have JV partner distributions of 15 million, and then you put the rest against the debt, which would be 15 in principal payments call it 10 to 20 in prepayments. And that gets us in that 1x and 1.25x. So I would talk about it just more broadly in terms of our cash flow, free cash flow goals.

Stephen Gengaro: Okay, great. Thanks. And the other one, and I’m not sure if you can address this, but what maybe the way I’ll ask it is how are you guys viewing the cost benefit analysis of continuing on the lawsuits for IP infringement versus basically the IRR on these lawsuits? How do you think about that? And is there any shift in the way DMC’s thinking about it with new leadership?

David Aldous: Thanks, Stephen. Great question. We clearly have a product leadership strategy. And as that, and being the innovation leaders, we’re going to continue to invest in new products and continue to lead the market in kind of the mini evolution revolution of how perforating gets done. So that’s a space we continue to want to lead in and expect to lead in. Without a continued investment, we need to protect our intellectual property. So we’ll pursue that with trade secrets and patents and as appropriate with litigation, I think we see the need to do that on occasion, but I think we’re going to be maybe a little more discrete and discretionary on litigation going forward. We expect the spend to come down as a result of that. There are key elements of our technology that we will continue to fight for and continue to litigate on. But as we look at the horizon, we see the need to do that coming down.

Stephen Gengaro: Great. No, that’s good color. I appreciate it.

Operator: Thank you. That concludes our Q&A session. I’ll now hand the conference back to David Aldous for closing remarks. Please go ahead.

David Aldous: Thank you, Matthew. And thank you Geoff. And thanks to all of you for joining us today on today’s call. DMC’s businesses have started 2023 with considerable momentum and a clear path forward. DynaEnergetics, the technology leader in the perforating industry, has established the products, the capability, the capacity, and the strategy to maintain its growth and improve its profitability. Arcadia build a compelling business model and broad product portfolio, and we are investing in the systems and capacity that should improve profitability and enable long-term growth. NobelClad’s investments in products and application development have led to a significant pickup in bookings and an encouraging long-range outlook.

Given the strength of our businesses and end markets, we believe DMC is well positioned to deliver improvements in returns for our shareholders. I want to acknowledge our employees for their hard work and dedication and thank our shareholders for their continued support of DMC. Thank you. Stay safe and take care.

Operator: Thank you, everyone. This concludes today’s event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.