Greetings and welcome to the DMC Global Third Quarter Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Geoff High, Vice President of Investor Relations. Thank you, Geoff. You may begin.

Hello and welcome to DMC's third quarter conference call. Presenting today are DMC's Chief Executive Officer, Mike Kuta; and Chief Financial Officer, Eric Walter. 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. Today's earnings release and a related presentation on our third quarter performance are available on the Investor page of our website, located at dmcglobal.com. A webcast replay of today's presentation will be available at our website shortly after the conclusion of this call. And with that, I'll now turn the call over to Michael Kuta. Mike?

Good afternoon, everyone. DMC's third quarter was marked by both strategic accomplishments and operational challenges. We reported consolidated sales of $172 million, flat versus last year's third quarter and below our prior forecasts. Sales at Arcadia, our building products business, were $72 million, down 11% year-over-year. Steady customer activity at Arcadia's primary regional service centers, as well as healthy sales at its ultra-high-end residential business, were offset by pricing pressure associated with lower raw material costs, soft demand for commercial interior products, and a brief operational slowdown related to the transition to a new ERP system. DynaEnergetics, our energy products business, reported sales of $73 million, up 4% year-over-year, but down 14% sequentially. The US drilling and completion industry idled additional rigs and frac crews during the quarter, and the Energy Information Administration reported a 10% sequential decline in US well completions. Dyna's US sales also were impacted by customer project delays late in the quarter. Soft sales in the US were partially offset by continued strong demand at Dyna's international business, which expects to deliver record full-year sales in 2023. Sales in NobelClad, our composite metals business, improved 18% to $28 million versus last year's third quarter. NobelClad's results reflect outstanding execution on a demanding petrochemical project, as well as continued strong demand for pressure vessel plates and specialized transition joints. NobelClad ended the third quarter with an order backlog of $61 million versus $64 million at the end of the second quarter. Rolling 12-month bookings were $111 million, up sequentially from $108 million, and the book-to-bill ratio was 1.1. Our consolidated third quarter adjusted EBITDA attributable to DMC was $25 million or 14.3% of sales, and was within our forecasted range, despite the lower-than-expected sales. DMC's long-term focus is to position each of its businesses to deliver adjusted…

Thanks Mike. As previously mentioned, our consolidated third quarter sales were $172 million, down 1% from the third quarter last year. Consolidated gross margin was 30.6%, up 110 basis points from our 2022 third quarter, due to a more favorable project mix at NobelClad combined with margin recovery at Arcadia. Our third quarter SG&A expense of $29 million was 16.7% of sales, down from 17.5% in the third quarter of last year, driven mostly by lower litigation expense at Dyna. Third quarter adjusted EBITDA attributable to DMC increased by 13% year-over-year to $25 million. The improvement was primarily driven by higher sales and gross margin at NobelClad. Inclusive of the Arcadia non-controlling interest, consolidated adjusted EBITDA was $30 million, or 17.4% of sales, up 220 basis points versus the prior year quarter. At the business level, Arcadia reported third quarter adjusted EBITDA of $13 million, of which $8 million, or 60%, was attributable to DMC. Compared with the prior year, Arcadia's adjusted EBITDA rose 11% and expanded 390 basis points as a percentage of sales. While Arcadia's pricing has moderated this year, aluminum costs have declined at a faster pace and contributed to the recovery in EBITDA margin. Dyna reported third quarter adjusted EBITDA of $13 million or 17.2% of sales. Lower absorption of manufacturing overhead costs and a less favorable customer mix led to a sequential and year-over-year margin contraction. NobelClad reported adjusted EBITDA of $6 million, which was 23.1% of sales and up 850 basis points compared to the third quarter of 2022. EBITDA margin improved due to a more favorable project mix, better absorption of fixed manufacturing overhead costs, and lower SG&A. Adjusted net income attributable to DMC was $10 million during the third quarter of 2023. Adjusted EPS attributable to DMC was $0.50, up over 40%…

[Operator Instructions] Thank you. Our first question is from Gerry Sweeney with ROTH Capital Partners. Please proceed with your question.

Good afternoon Mike, Eric, Geoff. Thanks for taking my call.

Hey Gerry.

Starting with Arcadia, can you break out, you have the service center work, which I think, for lack of a better term, that sticks that go to a lot of sort of storefronts, different pedestal type operations of buildings, ultra-high-end, and then the commercial interiors. It sounded like the commercial interior business was slow, but I wanted to see how that compared with the other two businesses. Were the other two businesses in line? Was it entirely commercial interiors? Just wanted to dig in a little deeper on that front.

Yes. thanks Gerry. So, the commercial interiors, which is our smallest business, we see that within Arcadia. That's in a valley right now, at least the work that we're seeing with commercial interior buildout. The commercial exteriors business has been relatively, I'd call it, flat, resilient, seeing a little bit of softening in some of the longer cycle projects. But the short cycle projects, which, there's a lot of diversification in our end markets there, is holding up pretty well.

Got it. And I wanted to talk about -- you've been at capacity in that business, and you also have -- you've added areas like Houston and Dallas, and these are my words, not yours, maybe underserved because of capacity issues. You're adding paint capacity to sort of expand that. How do we look at some of the little softness on the longer projects versus short cycle versus adding capacity and sort of maybe investing in new locations? How does that all come together in terms of growth and opportunities?

Yes. On the West Coast, we're definitely in a bit of a softer market. You look at the ABI readings, sub 45, but there's still a lot of opportunity in a lot of our markets where we're still seeing some strength. So, we're moving around some of the project business into some of our service centers that might be seeing a little less activity and pushing on the gas pedal on areas where activity remains strong. So, I think that if we go into a softer market, I think there's going to be an opportunity to drive the topline at still favorable margins. So, this paint capacity that we're putting in place, we've done some industrial engineering there. We've got more of a paint capacity we can put in by mid-next year. I think we're going to be able to sell it through.

Got it. And then, just last question on Acadia. How much was sort of the ERP -- how much did the ERP implementation impact the quarter?

Yes. Gerry, so we probably lost two to three days with our service center or short cycle business, and that unfortunately were canceled orders. So they're not going to come into Q4. So, when you think about the impact to Q3 revenues, that was as meaningful of an impact as the other two drivers that we talked about.

Got it. So, a third, a third, a third. Got it. One question on Dyna, and then I don't want to monopolize this. But I think you said completions IEA or EIA were down 10%. I think you were down 14%. In this market, obviously, things have slowed down. Everybody is looking at 2024 expectations, completions are up. Are we sort of in this market where a similar market for the third quarter, maybe even the fourth quarter that was similar to a couple of years ago where everybody knows the benefits of Dyna? It's a premium product, but they've got crews and they're sort of idling them a little bit. There's no sense in paying up for the benefit that Dyna brings when there's a little bit of softness and they have capacity. Is that what we're potentially seeing?

Yes, I think, Gerry, what we're seeing is, we just finished a pretty strong October, and I think we'll see some seasonality at the end of the year. So, I think, Dyna is going to look in the fourth quarter, maybe similar to the third quarter that's in our guidance. Eric, you can speak to that, but I think some of the initiatives we're taking in DynaEnergetics are really going to drive results also as we go into 2024, and I think we'll see a bit better of a market as well.

Yes. And I think just to augment what Mike said, so some of the softness in Q3 was due to some projects that were pushed out. We believe that those projects are going to materialize in Q4. So, while the topline may be relatively flat, we haven't lost that business, it just skipped out one quarter.

Got it. That’s helpful too. Okay, I'll jump back in line. Thank you.

Thanks Gerry.

Thank you. Our next question is from Stephen Gengaro with Stifel. Please proceed with your question.

Thanks. Good afternoon everybody. I guess, a couple on the Dyna side. The first is just around what you're seeing from a pricing perspective now versus a couple months ago and any expectations going forward?

Yes. So, we cited sales down, absorption, customer and pricing mix. So, you've seen a little bit more pressure on price with the market down 10%. Hopefully, we're going to see pricing stabilize here. And I think, going into 2024, we'll see where things shake out, but I would think that we'd be in a pretty stable pricing environment.

Okay. Thank you. And when we think about what has gone on the US land side and particularly the pressure pumpers have consolidated, you've got four holding a lot of the capacity. More of them have their own internal wireline capacity. Is that -- how should we think about the integration of wireline and frac within -- or the impact it has on you? Is it positive? Is it negative? Is it neutral? Is there any read-throughs from that?

Yes, I think the frac and wireline is just very focused on the basics, right, quality, on-time delivery, delivering the best tech in the industry. And if we can do that and continue to do that, I think we're going to be okay there.

All right. And then just one final, when we think about the quarter, the third quarter results and as we lead into the next quarter and the next year, how do we think about incremental margins or margin trajectory in Arcadia and Dyna as you get into 2024? And we're kind of assuming some level of recovery and tracking completion activity next year. But as you get growth in the businesses, is there a way to kind of think about the incremental margin contribution or margin trajectory in those two businesses?

Yes, I'll start and Eric will finish. I think with Arcadia, it's a pretty high variable cost-type business. So, we're going to -- we're in the right ZIP code now from a margin standpoint. We should probably be operating in that area for Q4 and beyond. DynaEnergetics, a bit more absorption impact there. We've got a lot of projects that we're doing to drive margin from an internal standpoint. And we've cited some of them, but lean initiatives, automation, we've done some cost reductions as well. So, we think we can drive margin -- continue to drive margin into 2024, probably flat Q3 to Q4, but we've got a lot of things that are in the -- kind of in our project plan for 2024 to continue to drive margins, things that are under our control.

Yes, the only thing I would add to what Mike said is that for Dyna, the focus really is going to be more on their EBITDA margins as opposed to the gross margins. Gross margins will always be important. But some of the initiatives that Mike pointed to around SG&A control, they're really going to manifest themselves in the EBITDA margin line as opposed to gross margin. And we continue to believe that this is a 20%-plus EBITDA margin business and want to make sure that we put in these initiatives so that we not only get back to that, but we stay there.

Okay. Thanks. I'll get back in line here. Thank you.

Thank you. Our next question is from Katie Fleischer with KeyBanc Capital Markets. Please proceed with your question.

Hi, good afternoon. I'm on for Ken Newman today.

Hi.

Hi. I wanted to talk a little bit about your capital allocation. So, free cash flow is pretty strong in the quarter. Can you just talk about expectations for free cash flow generation going forward? And then what some of your capital allocation priorities would be?

Yes, thanks for the question. So, for Q4 and what I would say going into 2024, we're really trying to drive the businesses to have a higher free cash flow conversion. So, if you did the math for Q3, we would be up around 70%. I'm not sure that we can do that every quarter, but typically in the second half of the year because of seasonality, we tend to be around that range. So, in Q4, we would be looking to be up in that ballpark as well. And then, going forward into next year, a lot of the things that Mike was talking about earlier when he answered the question about initiatives, they have a P&L impact, but they also have a cash flow impact as well, whether it's reducing SG&A or driving higher inventory turns. So, we would look to try to build on that momentum and make sure that we can keep the conversion at a higher rate. And in terms of how we allocate the capital, we are looking to continue to delever the balance sheet. So, that's going to be one area, but we're also putting CapEx back into the business. So, for Arcadia, Mike mentioned the paint line where we're going to be looking to do some industrial engineering. We're also going to be looking at making some investments in the anodizing area as well, which will help broaden margins for the Arcadia business. And for Dyna, it's going to be mainly focused on a lot of the internal initiatives around automation and trying to make sure that we can produce our products as efficiently as possible, which should also have an impact on sustainable quality levels. So, I think, in terms of where we want to be from a cash flow standpoint, we have a good Q3. We want to make sure that that's not just a onetime type of performance, but we can continue that going forward. And then, in terms of the allocation, we're going to be looking to continue to delever, but also reinvesting back in the business in some of these important initiatives.

Okay. Great, that's helpful. And then, on the well completions, do you guys have any sort of, I don't know, it's difficult in this type of environment, but any sort of view in terms of where those are headed as we kind of close out the year and go into 2024?

Yes, I think that what you're going to see is pretty steady through the end of the year, probably hit some seasonality at the end of the year with budget exhaustion and I think then you're going to see a pickup in 2024.

Okay. And then, just one last one, switching to Arcadia here. Can you give a little bit more detail about the ERP system, like how much capacity that can add? Maybe any impacts on costs or margins would be helpful?

Yes. So, the ERP system probably wouldn't add any capacity, but what it's going to allow us to do is to have better controls and better visibility into data. And so, the first one is probably pretty self-explanatory. But the second one, what we mean by that is that we think that it's going to prevent any type of margin leakage between changes in aluminum costs and our ability to pass that through to customers. But another benefit that we're really excited about is, it should also allow us to be more efficient from an inventory turn standpoint. So, if you think about our business model, we've got a hub and satellite type of structure. With this newer ERP system, we're going to have a better understanding of where that inventory is, how it's turning at the different satellites, and how we can transfer it from maybe one satellite where it's moving slower into another one where it's moving faster. So, we're excited about that, and we're just in the early days of going through the implementation, but I think it's going to pay dividends long-term.

Okay. Thanks for the details.

Thanks Katie.

[Operator Instructions] Our next question is from Sean Mitchell with Daniel Energy Partners. Please proceed with your question.

Hi guys. Thanks for taking the question. This obviously revolves around Dyna, but you mentioned earlier in the call that the larger, I think, M&A will sharpen the focus of some of these companies on safety. And then you also talked about for the quarter just having a less favorable customer mix. Is there any way you can kind of help us understand just the customer mix today, and obviously I think where it's going is probably favorable with these kind of larger companies doing bigger deals, and I tend to agree with you, they will focus more on safety? But where are you today? And kind of is it heavier on the private side today, and that's why we saw a little bit more kind of downward pressure in the quarter? Or is it -- give us a little color around the customer mix today and maybe where you think it's going?

Yes, I mean, if we rewind a year or two years ago, it was probably a heavier mix on the private side. It shifted more towards the public side if you're talking about the E&Ps or end users. From a customer standpoint, we feel aligned with the best in terms of end users as well as service companies. And so, I think that this is something that's going to [Indiscernible] our favor, especially we deliver on the -- and I say safety, I say quality, delivery, field service, and technology, particularly as the market moves more towards oriented systems. So, I think that's all going to work well for us.

Got it. Thank you.

Thank you, Sean.

Thank you. Our next question is from Stephen Gengaro with Stifel. Please proceed with your question.

Thank you. Just one quick one. Do you have any preliminary -- I know it's early -- preliminary thoughts on 2024 CapEx?

I think, right now, Stephen, for modeling purposes, I would assume something that's pretty close to the guidance that we've given for 2023. There may be a little bit of an increase for some of the discrete projects that we talked about earlier for anodizing, et cetera. But the run rate that we have this year is probably going to be very similar to that run rate next year.

Okay, great. That was from me. Thank you.

Thank you. There are no further questions at this time. I would like to hand the floor back over to Michael Kuta for closing comments.

Thank you again for joining us today. We remain highly focused on driving performance of DMC's businesses. Our objective is to strengthen our profitability and cash flow and drive improved value for our shareholders. We appreciate your continued interest in DMC and look forward to speaking with you after the fourth quarter. Take care.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.