Good afternoon, ladies and gentlemen, and welcome to the ZMC Global Third Quarter Earnings It is now my pleasure to turn the floor over to your host, Jeff High, VP of Investor Relations. Sir, the floor is yours.
Hello, and welcome to DMC's 3rd quarter conference call. Presenting today are President and CEO, Kevin Long and CFO, Mike Cuda. 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 the following statements 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 are fully communicated 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 listen only mode. 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 Long. Kevin? Thank you, Jeff, and good afternoon, everyone. Activity in DMC's primary end markets continued to improve during the Q3. However, the recovery was accompanied by various short term challenges that negatively affected our operational and financial performance.
Supply chain bottlenecks and travel restrictions impacted international sales at DynaEnergetics, our energy products business, while delayed deliveries of metal plates slowed manufacturing activity at NobelClad, our composite metals business. These factors led to consolidated 3rd quarter sales that were 4% or $2,800,000 below the low end of our forecasted range. An important development during the quarter was the improved demand DynaEnergetics experienced and its U. S. Onshore oil and gas market.
3rd quarter unit sales of DynaEnergetics' fully integrated factory assembled DS perforating systems increased 19% versus the 2nd quarter. This was well above the increase in unconventional well completions, which were up 6% sequentially according to the U. S. Energy Information Administration. As unconventional completion activity accelerates, the superior safety, efficiency and reliability of our DS systems becomes increasingly important to our customers.
This is especially true in a tight labor market. Since DS systems are delivered just in time to the well site, our customers can streamline their supply chain, eliminate assembly operations and reduce the number of people on location. While well completion activity improved during the quarter, pricing pressure remained a significant challenge. The rising labor and raw material costs have only intensified the pressure on margins. Crude prices have increased approximately 75% the operators are now increasing their capital spending budgets in anticipation of the coming year and we believe this should help improve the health and profitability of the industry that supports these E and P companies.
On Tuesday, DynaEnergetics announced a 5% global price increase that will take effect on November 22. The increase is intended to offset higher labor and input costs as well as the anticipated wind down of the CARES Act. DynaEnergetics' substantial investments in new technologies have resulted in a robust product portfolio that has improved the safety, efficiency and effectiveness the following portion of our customers' operations and has led to increased productivity, profitability and job creation in our industry. The significance of these investments is reflected in the approximately 80 patents we have been granted in the more than 400 patent applications we have filed. Our patent strategy is designed to protect our investments and provide transparency so others can innovate without violating our intellectual property.
Despite this, a number of competitors are selling products that we believe infringe on DynaEnergetics patents. During the Q3, we intensified our legal action against several of these companies, spending $2,300,000 on patent litigation. We intend to continue these expenditures until the issues are resolved. Our commitment of resources to this process reflects our belief that if intellectual property is not protected, the incentive to innovate is lost and the sustainability of the industry is threatened. The outlook in DynaEnergetics International Markets is improving.
DynaEnergetics recently entered into a global supply agreement with a large international service company and also was awarded 2 Middle Eastern projects that will be shipped over the next few quarters. Based on current activity, all indications are that 2022 will be a strong year for DynaEnergetics International Business. At NobelClad, interest continues to grow for the new identified product offering and we anticipate initial orders by early next year. In addition, pricing continues to strengthen for various cladding metals, InovaClad has improved its commercial organization and strengthened its sales team and market specialists. We are encouraged by the strengthening economy and improving demand in our key markets.
We have maintained a strong financial position and operate 2 highly innovative businesses that continue to lead their industries. With that, I'll turn the call over to Mike for a review of our Q3 financial results and a look at 4th quarter guidance. Mike?
Thanks, Kevin. 3rd quarter sales were $67,200,000 up 3% sequentially and up 22% versus last year's Q3. DynaEnergetics reported 3rd quarter sales of $44,200,000 up 5% sequentially and 29% versus the same quarter last year. North America sales increased 14% sequentially, the International sales decreased 38% sequentially. Sales at NobelClad were $22,900,000 down 1 sequentially and up 9% versus last year's Q3.
Consolidated gross margin in the 3rd quarter was 25%, down from 26% in the Q2 of 2021 and flat compared to last year's Q3. 3rd quarter gross margin benefited from improved project mix at NobelClad, which was offset by a decline in international sales and higher material costs at DynaEnergetics. DynaEnergetics reported 3rd quarter gross margin of 22% versus 25% in the 2021 second quarter and 24% in last year's Q3. Gross margin in all 2021 quarters includes the effects of the employee retention credits related to the CARES Act, while last year's Q3 benefited from higher margin international sales that were approximately $4,600,000 greater than this year's Q3. NobelClad reported 3rd quarter gross margin of 30% versus 28% in the 2nd quarter and 26% in the year ago Q3, primarily due to improved project mix.
The CARES Act credits also contributed to higher gross margin the the Q2 and 32% versus the year ago Q3. The sequential increase primarily relates to step up in patent litigation expense at DynaEnergetics. We reported consolidated operating income of $1,100,000 3rd quarter net income was $403,000 or $0.02 per diluted share the versus adjusted net income of $1,200,000 or $0.08 per diluted share in last year's Q3. Adjusted EBITDA was $5,800,000 versus $6,000,000 in last year's Q3. DynaEnergetics reported 3rd quarter adjusted EBITDA of $3,600,000 while NobelClad reported adjusted EBITDA of $4,600,000 We ended the Q3 with cash and marketable securities of $182,000,000 after raising $123,500,000 in the equity offering in May.
Our total outstanding share count is now 18,700,000. Looking at guidance, 4th quarter sales are expected to be in a range of $68,000,000 to $74,000,000 versus the $67,200,000 reported in the 2021 Q3. At the business level, DynaEnergetics is expected to report 4th quarter sales in a range of $46,000,000 to $50,000,000 versus $44,200,000 reported in the 3rd quarter. We anticipate that international sales will bounce back in the 4th quarter. NobelClad sales are expected in a range of $22,000,000 to $24,000,000 versus the $22,900,000 reported in the 2021 Q3.
NobelClad's 4th quarter sales forecast includes $8,800,000 related to a previously announced order from the chemical industry. Receipt of the raw materials required to produce the order have been delayed due to supply chain bottlenecks. While NobelClad still expects to receive the materials and ship the order during the Q4. There remains a risk that some or all of the shipment will occur after year end. Consolidated gross margin is expected in a range of 23% to 24% versus 25% in the 3rd quarter.
4th quarter selling, general and administrative expense is expected to be approximately $15,000,000 to $16,000,000 versus the $15,300,000 reported last quarter. The Amortization expense is expected to be approximately $200,000 Adjusted EBITDA is expected in a range of $5,000,000 to $6,000,000 $5,800,000 in the Q3 of 2021. The 4th quarter adjusted EBITDA forecast includes litigation expense of $2,000,000 assumes the previously enacted CARES Act legislation remains in effect through year end. 4th quarter capital expenditures are expected in a range $2,000,000 to $4,000,000 DMC's full year tax rate is expected in a range of 31% to 33%. With that, we're ready to take any questions.
Operator?
Your first question is coming from Tommy Moll. Your line is live.
Good afternoon and thanks for taking my questions.
Yes. So good afternoon, Tommy.
Kevin, I wanted to start on the price increase you recently announced the for DynaEnergetics, specifically, if you could give us an update on the industry and competitive environment there, What gave you the confidence to go ahead and move forward again with implementing the increase? And then in terms of the timing, I noted, looks like it's set to become effective late November, so not a whole lot of volumes there in the rest of the year. Should we think of this strategically As a message for the customer base to really start thinking toward their 2022 the outlooks because that just given that's right around when there will be a big budget planning season for next year on a presumably a much higher crude deck They're currently in place.
Yes. Tommy, I think you've read that well. It is messaging. The Prices need to go up in our industry. The price increase that we announced in the Q1 to take effect in the 2nd quarter, actually we did not get support from the industry on that price increase.
And so we ended up rolling that back, Which impacted our initially impacted our volume in the second and the beginning of the third quarter. We rolled it back and you can see what happened to our North American land based business in the Q3. And the The price increase is sorely needed. Prices are down significantly from where they were the previously and where it is healthy for our industry. We are seeing labor and material cost increases, supply chain cost increases and there is a CARES Act that and for some companies, we'll fall off in the beginning of the year.
And so this will be the first of will probably be 2 or 3 price increases over the next 12 to 18 months.
That's helpful, Kevin. Thank you. Also, I was hoping we could get an update on your M and A pipeline. Any way you could characterize it for us in terms of number of deals you've looked at, the potential timing, any update on priority end markets, anything you could offer would be helpful.
I think the only thing that we can say there, Tommy, is that we're active, and we've looked at some interesting things. It's Less quantity than it is quality and strategic debt with our company. And But we don't have anything that we can talk about at this time.
Fair enough. And if I could slip One more in, this is probably for Mike. Mike, just looking at your full year guidance on the tax rate, If I'm doing my math correctly, I've got to assume a pretty high rate in Q4. And I just want to understand if maybe I've missed something there, if there's something the Q4 that you could clarify just as it will impact everyone's EPS assumption for the next quarter.
Yes. Tommy, our tax rate is back end loaded because we have discrete items in the first half of the year that drive the rate down. So therefore, getting back to a 31% to 33 percent rate requires a higher back end rate. So you're reading that right.
That's very helpful. Thanks for the time and I'll turn it back.
Okay. Thank you, Tom.
Your next question is coming from Stephen Gengaro. Your line is live.
Thanks. Good afternoon, everybody.
Good afternoon, Stephen.
So a couple of things and wanted to just Follow-up on Tommy's first question. With the price increase you announced earlier this week or the push to get it through November, Are you seeing a change in behavior from your peers yet? Like what's Is it higher activity expectations? What's given you the confidence that A, you can get this through and then B, your subsequent comment, you expect couple more in the next 12 months.
Yes. But we have seen our hearing both the follow-up is through earnings calls and some activities in the marketplace of a couple of our the major competitors who also feel that they need to increase prices to return margins to where they should be. So I think that we're going to see generally more support from a market standpoint. And the ultimate end use markets for our E and P customers are strong. I think the lack of being able to push through a price increase to date has more been driven by our customer market, the wireline service companies has been oversupplied and relatively fragmented.
There's been a lot of competition the among our customers on price. And so we've seen a lot of buying on price from the general market. And there's a number of service companies who have not fully adopted adjust in time delivered to the well site model where they've maintained the vertical integration in building perforating guns. And And so the industry is kind of, I guess reverted to kind of a component in a low price market. We haven't seen as much system sales from the major companies and we've seen a lot of the smaller machine shops that are making partially assembled carriers and carrying the litigation risk, if you will, by violating our IP the be a larger part of the market.
And we think that that part of the market is going to be challenged not just by our the legal actions, but also by their own lack of profitability and rising material costs. And so we feel we're in a pretty good position. It's taken longer for some of the the attrition and consolidation that we think is necessary in our market to take place. But at the end of the day, the Our systems are lower in cost for our service company customers. Even though the initial price may be higher, we do the customers right now who are competing against other wireline service companies that are with a more commodity like Component mentality at this time.
Okay. And then as we that's helpful. And as we think about I mean the 4Q guide, I mean, you mentioned I think Mike mentioned international recovering a bit, Which kind of sounds like that means U. S. Dine is pretty flat and that's a little surprising given what's Probably activity growth, what we're seeing as far as rig is that year end seasonality concerns or is there something else in there that I should be thinking about.
There's a little bit of seasonality in North America, but we're actually the underlying volume of the perforating systems that we're making are pretty healthy. What we need to see is the price increase starting to take hold. And we also expect the the number of completions to accelerate going into 2022. There's somewhat been a slowdown and completions with the docks of the drill, but not completed the inventory declining dramatically over the last couple of quarters and CapEx moving more towards the drilling and but that just bodes well for completions in the New Year. And so we're very excited about
the hand that we have going into the New Year. And Stephen, just quickly, this is Mike, on the international front. I mean, we see that the In the 6% to 6.5% range in the 4th quarter off of 4% to 6% in Q3. So I still show North America growing at the bottom end of kind of what we're thinking North America is the going to do for DynaEnergetics. So we still think that's going to be on the bottom end flat to slightly up and with some upside to that.
Okay. Okay. That's helpful. And then just one more for me. When you think about your history and then you sort of look at looking ahead to 2022, I believe and I got to check the numbers exactly, but your incremental margins your incremental operating margins on the diner, I guess on both businesses really, but I'm thinking Donna specifically, they've been really healthy, right?
They've been kind of I think Kevin, you've sort of referenced like a 40% mark, When things are normalized, should we expect that type of incremental Next year as we go through given pricing expectations off of weak pricing plus activity growth Am I missing something?
Yes, I think, so you'll definitely see the incremental margin improving as the year goes on. We're walking into walking through our price increases, staging those throughout the year, and at the same time that the volume is picking up. I will say too, we require significantly fewer people at the well site and in our service company customers' operations and in a tight labor market that volume is picking up. It plays into our integrated system delivered to the well site, both we should see an improvement in share and an improvement in margin as we get the price increase is implemented. We so we should see that unfolding as the year the continues.
We probably won't get to that 40% by the end of the year, but we should be Fairly strong. Mike, do you want to Yes.
I mean, and just as a reminder, NovoCloud is usually in that 40% to 45% range and historically on the contribution margin level. And DynaEnergetics has also been in that 40%, 45% range. And so I think As we enter 2022, as we get price increases, we're going to be in the low 30s on that contribution margin. As we get a couple of price increases across, I think we're going to start to approach that 40% contribution level as we exit, and get in the back half of 2022 and exit 2022.
Okay. Great. No, that's helpful. I'll get back in line. Thank you.
Your next question is coming from Taylor Zurcher. Your line is live.
Hey, Kevin and Mike. Thanks for taking my question. My first one is on At Dyna, I'm just hopefully you guys could just give us a bit more color on the walk down in margins, at least at the adjusted EBITDA line at Dyna Q3 versus Q2. You talked about some of the issues going on internationally. There was less favorable mix, which is pretty clear.
But in total, I suspect that the volumes were up. They certainly were in North America sequentially. So, could you maybe talk to what the margin differential is between international and North America and whether the margins in North America might have actually ticked lower sequentially if some of these inflationary items kind of ramped up more dramatically than you might have thought previously?
Yes. So, hi Taylor. I think that when you look at DynaEnergetics 25% gross margin in June quarter versus September quarter of 22%. The largest driver there was really the lower international mix, which does carry higher margins than what we have here in the U. S.
We also had the supply chain issues. We had some raw material the Inflation driving that as well, but the largest factor was a mix driving us from 25% to 22%.
Okay. And as we think about a 5% price increase for November and beyond, I mean, does that just keep margins flat on a unit economic basis or is there some net momentum embedded in that 5% increase?
There, excluding the CARES Act, there's a fair amount of net momentum in that, Taylor. We're in a fortunate position where we feel that we are managing our supply chain and our operations the very well from a cost standpoint. And a lot of the inflation that we've seen is already embedded in the margins. And we're happy with our volume picking up. We have one challenge, one challenge only and that's the call to continue to walk the industry through the merits of switching from a component driven business the to a systems business, particularly a systems business that is strong in intellectual property and restoring some of the pricing that our customers are supportive of, but they're competing against other service companies who are less price focused and margin focused.
And We're in a strong position and we also have the capital in place, not only for the existing demand, but for the demand that we see over the next 18 months to 24 months.
Okay. And last question for me is on international at Edina. You talked about, I think you said a supply agreement with a large international service company and then a few a couple of awards in the Middle East. As we think about the next 12 months or maybe just through 2022, it feels like international has a bunch of at least activity tailwinds the working in its favor for 2022. I was hoping you could maybe just frame some realistic expectations for growth internationally in 2022.
Do you think 2022 could get back to where you were in 2020 from an international sales perspective or is it still a little bit of a longer term story there?
We actually feel that the 2022 will exceed where we were in 2020 internationally. This quarter was a tough quarter internationally, but the projects are the large tenders that we were recently awarded, and most importantly, the service agreement that we have with 1 of the leading customers is international the company is really going to strengthen our international sales and we think exceeded quite a bit.
Got it. Thanks for the answers guys.
And in fact, when I say quite a bit, we should be up 20% to 30% over Where we were in 2020.
Makes sense. All right. Thank you.
Your next question is coming from Gerry Sweeney. Your line is live.
Hey, good afternoon guys. Thanks for taking my call.
Yes. Good afternoon, Jerry.
Wanted to just one real question on NobelClad. Most of the stuff Energex has been picked over. But obviously, some inflationary pressures, metals, etcetera, if we harken back to NobleClad, I don't know, the last sort of metal cycle we saw, it turned out to be pretty positive. I think part of your customers, either you do the purchasing of metals and pass through the costs and there's even a markup on that. Is there an opportunity to See some improvement in NobelClad just from metals pricing if this trend continues?
Yes. And while we're not in the given guidance for the next year yet, NobelClad is a very has a differentiated product and service if you will and they have a very strong history and process for pricing by project in generating a 43% to percent on average contribution margin that's based on the cost of the materials that are incorporated into the project at that time. They when they quote a project, the the project is dependent the price is dependent on the price of metals the at time of order and then we place orders lock into those metals and it's reflected in the a constant margin for that business. They most of their projects are out several months and we're starting to see higher metal pricing flowing through the quoting process and at the orders that are being placed. And it goes right into driving the revenues north, if you will.
So we feel that there's good momentum going into the New Year for NobelClad in terms of metals pricing.
So constant margins, so margins stay the same, but we'll say gross profit dollars up just because the price the the Size of the project costs are up as well, right?
Quite a bit, yes.
Yes, got it. Okay, that's it for me. I appreciate it. Thank you.
Your next question is coming from Stephen Gengaro. You're live
live. Thanks. 2 other quick ones, Kevin, maybe the first was not so quick actually. But When you think about the Dyna business and you look at kind of where you were a few years ago and the product started to gain the Immense traction in the market, right? And you guys obviously had a huge run both driven by activity, but also Kind of an acceleration in the adoption of your technology.
And then you sit here today and you look out to 2022 and 2023, which Look like they're going to be pretty strong years based on E and P spending budgets and where commodity prices are, etcetera. What's different? Is there something that's different, whether it's the competitive landscape, whether it's the way the customers are taking in your technology is there anything that's changing or is it just a matter of activity growth and the And then the ability to kind of realize the value you bring to the wellsite.
One of the things that's changed is we have the final answer is yes, we have a handful of these machine shops that are making the partially assembled carriers, which are approximately half the cost of a perforating gun, to our perforating system and violating what we believe is violating our intellectual property and enabling them to assemble components that they buy externally Into a percolating system that has some of the features that our system has. It's not these companies aren't vertically integrated in the energetics primarily. The The systems are mismatched components that don't have the same operating the safety and performance features is ours. And significantly, they violate our IP and we're actively going after these companies to stop them from using our IP on how they assemble these carriers. And we feel that we've had solid progress on all fronts on the legal side of it.
A lot of the stuff that we've been involved with legally has been jurisdictional or procedural jockeying around, But it hasn't been substantive and we expect to positively impact our competitive landscape on our intellectual property over the next year That will enable our business to continue the same dynamics that we had in the 2017, 2018, 2019, 2020. We've maintained our position in the market. It's just been a very unsettled market over the last couple of years and we expect it to be more normalized going forward. Great.
No, that's helpful. Thank you. And then just one quick one. I think you referenced 19% sales growth, the Unit growth in the U. S.
Market in the quarter. When we look at activity growth in 2022, Would you expect your I mean, obviously, we'll see what happens with price, but would you expect your volume growth to outpace underlying frac stage growth?
We would and we expect to continue to gain share in this marketplace. And so we see unit volumes going up Greater than 10%, probably in the 10% to 20% range. And we expect pricing to go up another 10% in the coming year. But we're not in the point of giving guidance yet for 2022, But we see share volume and pricing all benefiting DynaEnergetics in the coming year.
Great. Thank you for your help.
Your next question is coming from Tommy Moll. Your line is live.
Thanks. Kevin, I just wanted to make sure I understood correctly. A couple of minutes ago, you referenced the contract award for Dyna on the international side should drive some pretty substantial growth Internationally next year? I think I heard that correctly. And did I hear you give a range somewhere in the 20% to 30 the 5% range and just any other context you could give us around that would help.
Yes, I think we should see 20% to 30% the with 3 things. There's 2 large tenders that business has been successful securing and a contract with a large service company.
Great. Thank you for that clarification. I appreciate it. I'll turn it back.
There are no further questions from the lines at this time. I would now like to turn the floor back to Kevin Long for closing remarks.
Thank you everyone for joining our call today. While this was a difficult quarter, we believe the fundamentals are improving for our businesses. The recent price increase of DynaEnergetics is an important first step towards improving our margins, and we are encouraged by the strong increase in demand we are seeing for DynaEnergetics product offering in North America and by the strength that was mentioned earlier on our international business. We also are feel quite strong of the pricing dynamics are that NobelClad will have for the metals that goes into their products in the coming year as well as the new applications for Detapipe. We remain very confident in the strength of DMC and we look forward to speaking we will be conducting a listen only mode.
Thank you.
Thank you, ladies and gentlemen. This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.