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Edited Transcript of BOOM earnings conference call or presentation 25-Jul-19 9:00pm GMT

Q2 2019 DMC Global Inc Earnings Call

BOULDER Aug 1, 2019 (Thomson StreetEvents) -- Edited Transcript of DMC Global Inc earnings conference call or presentation Thursday, July 25, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Geoff High

DMC Global Inc. - VP of IR & Corporate Communications

* Kevin T. Longe

DMC Global Inc. - President, CEO & Executive Director

* Michael L. Kuta

DMC Global Inc. - CFO

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Conference Call Participants

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* Edward James Marshall

Sidoti & Company, LLC - Senior Equity Research Analyst

* Gerard J. Sweeney

Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst

* James David Brilliant

CM Advisors Family of Funds - CM Advisors Defensive Fund - Portfolio Manager

* James Patrick McIlree

Chardan Capital Markets, LLC, Research Division - Senior Research Analyst of Industrial and Consumer Technology

* Stephen David Gengaro

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst

* Thomas Allen Moll

Stephens Inc., Research Division - Research Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to the DMC Global Second 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, Mr. Geoff High, Vice President of Investor Relations. Thank you, Geoff; you may begin.

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Geoff High, DMC Global Inc. - VP of IR & Corporate Communications [2]

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Hello, and welcome to DMC's second 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 now turn the call over to Kevin Longe. Kevin?

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Kevin T. Longe, DMC Global Inc. - President, CEO & Executive Director [3]

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Thanks, Geoff. Both of our businesses performed well during the second quarter, which enabled DMC to exceed its financial forecasts. Consolidated second quarter sales were a record $111 million, up 37% versus the 2018 second quarter, and up 11% sequentially. DynaEnergetics, our oilfield products business, reported sales of $88.6 million, up 50% from the 2018 second quarter, and up 11% sequentially.

Second quarter sales at NobelClad, our composite metals business, were $22.3 million, up 1% versus the second quarter in 2018, and 10% sequentially. NobelClad ended the second quarter with an order backlog of $38.8 million versus $40.5 million at the end of the first quarter. Trailing 12-month book-to-bill ratio at the end of the quarter was 1.01.

Consolidated second-quarter gross margin was 38%, up from 33% in the 2018 second quarter, and up sequentially from 36%. The increase versus both periods reflects a higher margin product mix at DynaEnergetics, which also benefitted from improved manufacturing and supply chain efficiencies.

DynaEnergetics reported gross margin of 41% versus 37% in the same quarter a year ago and 39% in this year's first quarter. NobelClad's gross margin was 26%, up from 23% in the 2018 second quarter, and flat versus this year's first quarter.

Adjusted operating income was $25 million and excludes $324,000 in restructuring charges at NobelClad. Adjusted operating income in last year's second quarter was $10.4 million. DynaEnergetics reported second quarter operating income of $26.8 million, and NobelClad reported operating income of $1.9 million.

DMC's second-quarter adjusted net income was $17.6 million, or $1.17 per diluted share, versus adjusted net income of $6.6 million, or $0.45 per diluted share in the 2018 second quarter. Adjusted EBITDA was $29 million, up 108% versus last year's second quarter, and up 21% sequentially. DynaEnergetics reported adjusted EBITDA of $28.5 million, while NobelClad reported adjusted EBITDA of $3.1 million.

At June 30th, our trailing 12-month return on invested capital was 30%.

Our second-quarter financial performance reflects continued strong demand for DynaEnergetics' intrinsically safe initiating systems, which we refer to as the IS2 product family, and for its expanding portfolio of DynaStage factory-assembled, performance-assured perforating systems. DynaEnergetics added several new customers for its patented IS2 systems during the quarter. These solid-state devices are unique in the industry, as they contain no internal wiring and will not fire unless they receive a digital key from a control panel [at] surface. Competing products utilize [resistorized] detonators, which are triggered with an electrical current, and by their very nature are more susceptible to electromagnetic interference.

DynaEnergetics added two models to its DynaStage product family during the second quarter. DS Trinity 3.5, which currently is in field trials in the Permian Basin, is a smaller-diameter version of the DS Trinity 4.0. It features three charges on a single plane, with a 7-inch-long carrier that does not require a connecting sub or detonating cord. These compact systems are easy to assemble into a gun string and enables significantly higher perforating intensity than conventional guns.

The second new model, [DSM Line], enables the alignment at surface of all charges within a series of guns. Once the gun string is deployed, it can be oriented within the well bore, so that all charges fire in the preferred direction of the operator.

As unconventional well completions grow in complexity, we are providing customers with unmatched flexibility in the design of the perforating and well completion programs. The DynaEnergetics product portfolio, which includes the IS2 family and a broad spectrum of performance charges and packaging formats, provides customers with thousands of options for configuring their DS factory-assembled, performance-assured perforating systems.

NobelClad also delivered a solid second-quarter performance. I am very encouraged by NobelClad's consistently strong contribution margins, and by the progress the business is making to expand its composite metals offering and establish new applications for its clad metal plates. In light of current oil prices and the near-term slowdown in North American well completion activity, we believe demand at DynaEnergetics could soften during the second half of the year. However, the medium and longer-range prospects for continued growth remain very strong. Our research and development teams have developed a robust pipeline of new products and technologies that will enable DynaEnergetics to maintain its leadership position in the oilfield products industry.

I'd like to thank our customers for their business and continued confidence in the company. I also want to thank our employees around the world for delivering another strong quarter for DMC and its stakeholders.

And now, I'll turn the call over to Mike for further detail on our second-quarter financial results and a look at our guidance. Mike?

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Michael L. Kuta, DMC Global Inc. - CFO [4]

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Thanks, Kevin. Looking at our second quarter expenses, consolidated SG&A was $16.7 million, or 15% of sales, versus SG&A of $15.5 million, or 19% of sales, in last year's second quarter.

Amortization expense was $397,000, or less than 1% of sales.

We ended the second quarter with cash and cash equivalents of $14.9 million. Net debt was $21 million, down from $28 million at December 31, 2018.

We generated $23.3 million in cash from operating activities during the first six months of the year. In the comparable period last year, cash used in operating activities was $1.6 million.

Turning to guidance, we anticipate third quarter sales in a range of $96 million to $102 million versus the $87.9 million we reported in last year's third quarter. DynaEnergetics is expected to report sales in a range of $76 million to $80 million, versus $66.3 million reported in last year's third quarter. Sales at NobelClad are expected in a range of $20 million to $22 million, versus the $21.6 million that reported in the same quarter a year ago.

We expect third quarter consolidated gross margin in a range of 35.5% to 36.5%, up from 34% in the 2018 third quarter. The forecasted sequential decline versus a 38% report in the second quarter reflects less favorable fixed manufacturing overhead absorption from anticipated lower sales at DynaEnergetics, and a less favorable project mix at NobelClad.

We expect SG&A will be approximately $17.5 million, versus the $15.1 million we reported in last year's third quarter. Amortization expense is expected to be approximately $400,000, and interest expense should be approximately $400,000.

Third quarter adjusted EBITDA is expected in a range of $20 million to $24 million, up from the $17.2 million in last year's third quarter.

As Kevin noted, we expect to see a moderate slowdown in North American well completion activity during the balance of the year. We therefore are revising our prior full-year sales guidance, but are maintaining our forecast for adjusted EBITDA and are increasing the lower end of our range for anticipated adjusted net income.

We currently expect full-year sales in a range of $400 million to $415 million, up from the $326.4 million we reported last year, and down from our previously forecasted range of $405 million to $425 million. Sales at DynaEnergetics are expected in a range of $315 million to $325 million, versus the $237.4 million reported last year, and the prior forecasted range of $325 million to $340 million. Sales at NobelClad are expected in the range of $85 million to $90 million, versus the $89 million reported last year, and the prior forecasted range of $80 million to $85 million.

We expected consolidated full-year gross margin in a range of 36% to 37%, up from the 34% reported last year, and up from our prior full-year forecast of 35%. The anticipated increase reflects our sustained focus on improving manufacturing efficiencies and achieving product margins that reflect the value of our technologies.

SG&A is expected in the range of $64 million to $67 million, up from $61.2 million reported last year, reflecting higher expected spending on sales and marketing programs within both of our businesses. Our expected full-year amortization expense remains at approximately $1.6 million, down from $2.9 million in 2018.

Our estimate for full-year interest expense is now $1.5 million, down from a prior forecast of $2 million to $2.25 million. We are maintaining our expected effective tax rate of approximately 30%, reflecting a higher expected rate during the second half of the year, primarily due to geographic sales mix.

Full-year adjusted EBITDA remains in the expected range of $90 million to $100 million, up from $59.6 million in 2018. We expect full-year adjusted net income per share in the range of $3.55 to $3.70. Previously, the low end of our forecasted range was $3.40. Last year, we reported adjusted earnings per share of $2.07.

Capital expenditures are expected to be approximately $30 million, which was the high end of our previously forecasted range.

With that, we are ready to take any questions. Operator?

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Questions and Answers

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Operator [1]

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Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Your first question comes from Tommy Moll with Stephens Inc.

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Thomas Allen Moll, Stephens Inc., Research Division - Research Analyst [2]

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So in recent days, there's been some chatter in the marketplace about some competitive trends. On the one hand, there's a pretty large captive wire line company advertising a preassembled gun that they've gone to market with that's a decent chunk of their guns, now that they shoot, but it's unclear if that's a competitor of yours or a customer of yours, or maybe both. And then, on the merchant side, one of your competitors appeared at least in second quarter to outpace the market and potentially take some share, but there it's unclear if it's from a new gun system that they've recently introduced into the market or just components. So I realize I'm asking you to comment on, potentially, dynamics outside of the DMC Global scope, but to the extent you could shine a light on either of those situations, or maybe just the broader competitive marketplace generally, that would be helpful. Thank you.

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Kevin T. Longe, DMC Global Inc. - President, CEO & Executive Director [3]

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So regarding, you know, the larger service companies, we view them as important customers, or potential customers, not as competitors. And they do have their product lines, and we certainly have ours, and the products from either company fit certain applications better. And so, we view them more as a customer, rather than a competitor, on a longer-term basis. And we respect their technology and their engineering that goes into their products, and they respect ours.

Regarding the marketplace, you know, I think you're probably referring to an increase in shaped charges for the year, or for the quarter. And it's important to remember, in the North American land-based business, that stage count is growing faster than completions, and energetic sales are growing faster than stage count. And, you know, I could refer to the [Spears] data, which is an independent third party, that this year's forecasted shape charge volume to go up 22%. And so shape charges, overall, are going up faster than completions for all companies.

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Thomas Allen Moll, Stephens Inc., Research Division - Research Analyst [4]

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Thanks, Kevin, and that leads me to my follow-up. On the revenue guidance you've given now for third quarter, and reiterated--or rather, adjusted--for the full year to where we kind of can infer what the fourth quarter might look like, it looks like a low double-digit sequential decline for DynaEnergetics in the third quarter, going to a, call it mid-singles decline in the fourth quarter. I wonder, as you come up with those outlooks, what is your assumption on the underlying market growth, whether you use the--and to your earlier comment, you've got the completion count, which is presumably lower than the stage count, which is lower than the shaped charge count. But, any way you can help us triangulate from your revenue expectations to some underlying driver in the market would be helpful.

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Kevin T. Longe, DMC Global Inc. - President, CEO & Executive Director [5]

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Yes, the drivers, if you will, for revenue would be market growth, if you will, or decline, market share growth or decline, and pricing growth or decline. I'd stated in previous calls that DMC is committed in all of our companies to receive value for the products that we sell. We're not expecting any decline in price in the third and fourth quarters, and we expect to maintain and hold our share. So what we're forecasting, or at least looking at going forward, is the actual activity in the marketplace softening relative to the first half of the year. And it seems to be supported by a lot of the discussions that are happening in I guess this quarter's earnings calls.

Having said that, in the third quarter of '18, we didn't see the softness coming in the fourth quarter. In the fourth quarter of '18, we didn't see the strength that was coming in the first quarter of '19 to the degree that it was. And so, you know, we're seeing a market that can turn on and off pretty quick, and I think that that's the new reality of land-based unconventional, which is why it's important for us just to ride that volume activity in terms of market growth and focus on share and fair value for our products, and to keep a strong balance sheet so that we're healthy throughout the cycle. And the cycles have become much shorter.

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Thomas Allen Moll, Stephens Inc., Research Division - Research Analyst [6]

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I've got more, but I'll get back in the line, and maybe there's more time later.

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Operator [7]

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Your next question comes from Stephen Gengaro with Stifel.

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Stephen David Gengaro, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [8]

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So, just sort of following up on Tommy's questioning, were you--your current outlook, are you seeing a decline yet, or are you projecting a decline when you look at kind of your monthly progress? I mean, we're a third of the way through the quarter already. Are you seeing a change, or is this sort of an expectation, based on what you're hearing in the market?

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Kevin T. Longe, DMC Global Inc. - President, CEO & Executive Director [9]

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I think that we hear a lot of the same things, I'm sure, and read a lot of the same things, and so it is impacting our view that the third and fourth quarter could be softer than the first half of the year. However, we have a very short window of activity in DynaEnergetics in particular, and so, as you can see from the recent quarter, it exceeded our expectations. And so, I'd have to say that it's more discussion than it's actual showing up in terms of our revenue as of today.

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Stephen David Gengaro, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [10]

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And then, can you maybe--one of the obvious points of discussion that we hear a lot and continue to get is sort of the differentiation in your product relative to peers, and you talked about the solid-state design. Can you expand on that a little bit and sort of how it changes the operator's approach in the field, or is it purely a safety thing? Is it a reliability sort of--what's a little more detail behind sort of the importance of that product differentiation?

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Kevin T. Longe, DMC Global Inc. - President, CEO & Executive Director [11]

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It's safety, reliability, and operating efficiency. You know, we have a system that does not require wiring in the field. We drop our integrated initiating system into a perforating gun, and then we screw the adjacent gun together with no wiring whatsoever. And the initiating system has a detonator, and it also has a solid-state circuit board connected to that detonator with the controls for operating the perforating gun, and it's all in a small form-factor package that is shielded. And so, it's quite a bit different than--you know, we used to call it a pre-wired system, and that terminology has been adopted. And we perhaps were referring to it inappropriately, because it's not a wired system at all. We meant that the gun was put together so that it didn't have to be wired in the field.

Most of the competitive products that we've seen are true-wired systems in series with a detonator, subject to stray current, stray voltage, radio frequency. And in some cases, the detonators are not included. The detonators are wired in the field. And so, there's quite a bit of difference between our product offering and those of our competitors, yet a lot of the terminology is adding to some of the confusion.

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Stephen David Gengaro, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [12]

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And then, just one final quick one. Earlier today on a conference call, Core Labs talked about perforating intensity, and we've heard this increasingly come up in conversations. Are you seeing that same level of increase in perf intensity, where the stage count's obviously growing faster than the well count, but then there's this increased perforating intensity per se. Are you seeing that, and is that--how do your new DS guns play into that?

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Kevin T. Longe, DMC Global Inc. - President, CEO & Executive Director [13]

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We are seeing it. I mean, our unit volume for systems is up dramatically this year. So, too, in the most recent quarter are the numbers--shaped charges up more than the revenue growth, if you will. And a lot of that has to do with the component pricing and the relation between the component pricing to the system itself. But, as you can see, our revenue is up dramatically, and behind that, we do sell our systems at a premium, but they're competitive with existing systems, you know, for the value that they create, and so our unit volume is up dramatically.

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Operator [14]

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Your next question comes from Gerry Sweeney with Roth Capital Partners.

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Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [15]

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Just following up on some of the previous questions, (inaudible) see a dead horse it has to be beaten, but how much visibility do you get from your customers? In other words, is this on-demand ordering, or are they giving you a little bit more insight into some of their completion programs and schedules?

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Kevin T. Longe, DMC Global Inc. - President, CEO & Executive Director [16]

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It's different international versus North American. North American, it's a very short window, sometimes one to three weeks, in that range, maybe four weeks. You know, internationally, it's longer than that, so it's a short window.

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Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [17]

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And North America is the lion's share, correct?

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Kevin T. Longe, DMC Global Inc. - President, CEO & Executive Director [18]

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Yes, it's 80%-plus of our revenues.

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Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [19]

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Then talking about--you know, there's obviously competition. Your competitors are starting to talk a lot about pre-wired guns, maybe (inaudible) trying to come after this market in different ways, or at least talk it up. Have you seen any type of products that would give you pause to maybe take market share, or anything like that?

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Kevin T. Longe, DMC Global Inc. - President, CEO & Executive Director [20]

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Well, I mean, we respect our competitors quite a bit. They're good companies, and they have good teams, also. So it's always something that we're watching, but we're really more focused on where we're going from a product standpoint, and we've got quite a pipeline of products that we've begun to introduce this year. And so, we're not standing still, and we're focused on more where we're going.

You know, one of the things that we like about what's happening in this industry is that I think universally, whether it's our competitors or the larger service companies, we're all recognizing, or have recognized, that we can, as manufacturers, assemble systems that perform better, more reliable, and probably more competitively than it can be done in the field in a fragmented way. And we have one of the leading systems in the market, and so as the market moves more toward systems, that really is something that benefits us. It benefits our competitors, too, and we're fine with that. We really prefer the industry to be healthy.

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Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [21]

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I'm assuming that's really DynaSelect. Is that correct?

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Kevin T. Longe, DMC Global Inc. - President, CEO & Executive Director [22]

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It's one of the variations of DynaSelect. I think we--you know, our nomenclature, first of all, it took me a year or two before I could say DynaEnergetics properly, let alone DynaStage and then DynaSelect and DynaSlot, and all the things that went with it. But it wasn't just the tongue-twisters of the names themselves, but the words [connotated] a simple, you know, one-trick-pony product line. And our initiating systems are really a family of initiating systems. DynaSelect was one product we actually have an externally wired version, a top fire version, an ignitor that has similar technology in it. We have one of the broadest lines of shaped charges in the industry, if not the broadest. And we've introduced our DynaStage in the past, but DynaStage was really--we've renamed DS Infinity. It's available in a whole host of different diameters, lengths, shaped charge configurations. And then we started to introduce this year, you know, DS Trinity, DS [Endline], and we've got four, five, six different other form factors for packaging that are coming out.

And so, you know, the terminology that we were using before didn't really support the breadth of the product line, because literally, depending on how you combine these components, we can tailor rock-optimized solutions and have 1,000 different combinations or more of products that are tailored for specific completion duties.

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Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [23]

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Theoretical question: if a large oilfield services company that is also maybe a customer/competitor had some of their own manufacturing and just wanted to buy maybe IS2 systems, which I think would be an ignitor or detonator or in that family, could they do that and maybe even make a ad hoc DynaStage system themselves, where they're using some of their own internal manufacturing capacity, but using your technology?

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Kevin T. Longe, DMC Global Inc. - President, CEO & Executive Director [24]

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Well we have the IS2 [Top Fire] is exclusive to the DynaStage family of products, where it's the--and it has to be, because it's an integrated gun that needs to be able to receive the initiating system in order to have it fully assembled and not have wiring in the field. But we do have what's called the IS2, now -- excuse me, IS2 externally wired, which you get the benefits of the solid-state initiating system, all the safety, reliability, and performance aspects of it, which a service company, any service company, can buy from us to assemble in the field or in their shops, but still get the operating benefits of our initiating system.

So, you know, we can go either way. In fact, we entered this product area selling the initiating system to service companies in the marketplace, and it's actually--

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Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [25]

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(inaudible)

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Kevin T. Longe, DMC Global Inc. - President, CEO & Executive Director [26]

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We onboard people to use our DynaStage system.

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Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [27]

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I'll jump back in the queue.

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Operator [28]

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Your next question comes from Edward Marshall with Sidoti & Company.

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Edward James Marshall, Sidoti & Company, LLC - Senior Equity Research Analyst [29]

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So I was actually going to focus on that as well, the externally wired switch detonator and whether or not you sell that to customers. I'm going to take it one step further and ask, of a gun system, how much does the switch detonator, as far as the price of that product, cost? What's the percentages of switch (inaudible) of the whole system, the cost of the whole system?

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Kevin T. Longe, DMC Global Inc. - President, CEO & Executive Director [30]

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Well, first of all, the detonator integrated, you know, initiating system, if you will, cost can be a different percentage, based on the size and the complexity and type of gun, whether it's a Trinity, which is 7 or 8 inches with three charges, or an Infinity that could be 4 or 5 feet with multiple charges, a whole (inaudible) multiple. But in a smaller gun, it could be half, and in a larger gun, it could be 20% to 30% of the selling price, just as a ballpark. You know, we don't give out our cost model, but people can somewhat back into it if they were to buy the IS2 externally wired product. And that happens in a number of cases, where people assemble that into their own gun.

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Edward James Marshall, Sidoti & Company, LLC - Senior Equity Research Analyst [31]

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Got it. And how much of--how many of those pre-wired or wired--externally wired systems do you sell today in the revenue--in the $88 million in revenue that you did for 2Q, roughly?

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Kevin T. Longe, DMC Global Inc. - President, CEO & Executive Director [32]

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Yes, and again, for probably obvious reasons, we don't break out the initiating systems from the fully, factory-assembled DynaStage systems. But, you know, it's growing. The total for the year, or for the first half of the year, was [$700,000].

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Edward James Marshall, Sidoti & Company, LLC - Senior Equity Research Analyst [33]

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(inaudible) systems?

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Kevin T. Longe, DMC Global Inc. - President, CEO & Executive Director [34]

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Initiating systems and gun systems.

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Edward James Marshall, Sidoti & Company, LLC - Senior Equity Research Analyst [35]

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Mentioning something to Tommy, you said, we plan to hold or maintain share. Is that--I just want to clear that up a little bit. Are you saying you're no longer expecting to gain market share, or was that just kind of--you just said that within the comments? I just wanted to make sure we cleared that up.

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Kevin T. Longe, DMC Global Inc. - President, CEO & Executive Director [36]

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You know, in the marketplace, there's the product performance, you know, quality, service, delivery, safety, relationship, price. We choose to focus on performance. We expect to gain share going forward, but it's going to be through the value that our products create in use. We deemphasize price as a competitive tool. We recognize that we need to be competitive, but we also need to get a healthy margin for our products to reinvest in technology and product development. And so, you know, we expect to grow, but we're going to grow by earning it with the performance of the products we're introducing. And, you know, we're not--we still feel that we have runway, but in a soft market--softer market--there's a tendency for companies at times to focus on price, and that's not the game that we're going to play. And so, to us, maintaining a healthy price for our products and margin is most important.

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Edward James Marshall, Sidoti & Company, LLC - Senior Equity Research Analyst [37]

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I think last call you mentioned you wanted to gain roughly 25% to 30% of the market. Is it still your goal?

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Kevin T. Longe, DMC Global Inc. - President, CEO & Executive Director [38]

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You know, I think that there's--we're not out to corner the market. We do have good competitors. We're out to really support the leading service companies in the market and help them to be competitive, not just on the perforating operations, but we believe that our initiating systems and our DynaStage guns help the whole completion process around a well to be more like a ballet. Everything runs more efficiently. And so, you know, we're focused on the few leading customers, and that's really what's defining our share.

And so, you know, yes, we'd like it to get up in the 25% to 30% range. It's pretty tough in almost any market to get to more than that, when you have strong competitive dynamics. We do think that we've got a talented team that works well together, and has for an extended period of time, and that's what's creating a robust product pipeline for us. That, and choosing the right partners in terms of customers, is what's going to determine our share.

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Edward James Marshall, Sidoti & Company, LLC - Senior Equity Research Analyst [39]

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Final one for me, Mike, if you don't mind, the SG&A for Q3, $17.5 million looks a little high. Can you talk about maybe what's going into that, embedded in that number? I mean, is there a catch-up on compensation or something like that?

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Michael L. Kuta, DMC Global Inc. - CFO [40]

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We've got some of that, but it's primarily just investing in some of the patents that we're building out in our portfolio of products that are going to be rolling out over the next several years. So we're investing in that, as well as continuing the sales and marketing efforts on the new products that we have introduced.

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Operator [41]

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Your next question comes from Jim McIlree from Chardan Capital.

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James Patrick McIlree, Chardan Capital Markets, LLC, Research Division - Senior Research Analyst of Industrial and Consumer Technology [42]

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Kevin, I think you addressed this, but I'd like it to be specific if you can. It sounds as if the product introductions that you're contemplating are not changing, given the deceleration in growth that you're talking about. Instead, the new product introductions that you had contemplated at the beginning of the year, you still are full speed ahead on those in the second half. Did I hear you correctly on that?

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Kevin T. Longe, DMC Global Inc. - President, CEO & Executive Director [43]

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You heard us correctly. I mean, we have a very clean balance sheet for a purpose. This market cycles up and down and around, and we're focused on the medium to long term, and we're investing at even a faster rate going forward with some of the opportunities that we see.

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James Patrick McIlree, Chardan Capital Markets, LLC, Research Division - Senior Research Analyst of Industrial and Consumer Technology [44]

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And then, secondly, the changes that you referred to in DynaEnergetics in the second half, is that concentrated in any customer or basin, or is it kind of everywhere with everyone?

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Kevin T. Longe, DMC Global Inc. - President, CEO & Executive Director [45]

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It's really more of a broader general assessment of seeing and hearing and reading what's happening in the marketplace. And I think that we're cautiously optimistic that the dynamics in our industry are such that they're going to be stronger. You know, '19's going to be better than '18, and '18 hopefully--or was certainly better than '17, and we expect '20 to be better than '19; however, I can't really pin it down to which quarter. But I think that we're in what appears to be a softer period of time for the next quarter, and then we get into the--you know, what's become a budgeting season in the fourth quarter that had an impact last year. Will it have an impact this year, or was it pulled forward into the third quarter? Time will tell, as the quarter unfolds.

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James Patrick McIlree, Chardan Capital Markets, LLC, Research Division - Senior Research Analyst of Industrial and Consumer Technology [46]

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And then, lastly, Mike, can you talk about what your plans are for the line of credit? Is this kind of the level that you are comfortable with, or is it too low, too high?

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Michael L. Kuta, DMC Global Inc. - CFO [47]

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We're going to continue paying down debt. I mean, in the second half, I think what you can expect is a similar run rate as the second quarter in terms of cash from operations if you generate about $16 million, CapEx on a similar run rate. So we should have probably cut our debt in half and have net debt close to zero by the end of the year. That's where we want to be.

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Operator [48]

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(Operator Instructions) Your next question comes from Tommy Moll with Stephens Inc.

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Thomas Allen Moll, Stephens Inc., Research Division - Research Analyst [49]

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So there's been some discussion on the call, and also in your release, about the difference in the integrated switch detonator versus just taking an addressable switch and wiring it to a [resistorized] detonator. But I think I'm right in that that's the fundamental difference of what you manufacture versus every other competitor. So if you could just lay out again the fundamental difference in those two configurations, and then what the safety--and also, what we haven't hit on as much today, the efficiency benefit of that is?

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Kevin T. Longe, DMC Global Inc. - President, CEO & Executive Director [50]

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That's a complicated answer to all that for a conference call. But, again, it's not just the switch. The switch is necessary, but not sufficient, to have a fully integrated system. You also need the detonator, and ours is a low voltage system. Others are using a [resistorized] detonator, and that's wired together to the switch. And the resistor is a weaker point; the wiring is a weaker point. The shielding of those products is a weaker point, and the ability to ship a gun with all that fully assembled is very difficult. And not all of our competitors are vertically integrated in detonators, let alone switches, let alone having the technology that they can have a fully assembled gun where the initiating system is installed in the field without wiring.

And so it leads--and the benefits of it accrue, not just in the assembly, the supply chain, how fast they go together in the field. You know, there's a smaller form factor, and there's less resistance putting it down the well. But, really, the biggest benefit is the saving of the nonproductive time because of the ability to do parallel operations and be safe in an environment around the well site that's increasing in its electromagnetic interference. And so, it's--the topic of late over the last few months has been, you know, we've got an assembled gun, too. Well, every gun going down a well is assembled. It's a matter of what kind of components are going into it, and where is that assembly being done, and is it a well-orchestrated ballet, which you get with our gun system.

So, it's--you know, we have our mobile marketing trailer, which we call our [Boom 1], which we've updated with our latest product offerings. A picture is worth 1,000 words, and we probably need to do a better job getting out there, not only with customers, but with analysts, to really understand the differences when you can see it in a tangible way. We welcome that opportunity to our listeners, you know, as we go forward.

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Thomas Allen Moll, Stephens Inc., Research Division - Research Analyst [51]

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Last one from me today, I promise. There's been a lot of conversation about pricing. Have you seen competitors, potentially some of the merchant players in the market, who are trying to commercialize new systems maybe being aggressive or trying to take some of--take or defend their market share with accommodative pricing, or not at this point?

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Kevin T. Longe, DMC Global Inc. - President, CEO & Executive Director [52]

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I can't say that we've really felt or seen a lot of that. Sometimes it's tough to lower the price on a component to compete with a system. It's an apple and an orange kind of thing. I think that the market understands that that's a very difficult game to win and maintain, and that--I believe--one of the things that I'm very encouraged by is the discussion of--I think perforating has increased in terms of its airtime in a number of conference calls, and technology and integrated systems has increased in terms of its airtime. And I think that there's a lot of room for differentiation and value creation, and we're better for it, our competitors will be better for it, and the industry will be better for it than to focus on price. And I think that the price aspect is--to protect market share has not proven itself to be a successful path and a sustainable path in this industry over time.

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Operator [53]

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The next question comes from Jim Brilliant with Century Management.

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James David Brilliant, CM Advisors Family of Funds - CM Advisors Defensive Fund - Portfolio Manager [54]

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Kevin, we haven't really talked much about your new products, the Trinity 4 and then the new 3.5. What is the benefits that an operator would have with the shorter guns? That's number one, and then number two, I guess, would that even be possible if you didn't have your solid-state detonator?

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Kevin T. Longe, DMC Global Inc. - President, CEO & Executive Director [55]

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So the benefit of those guns are the simplicity of putting a number of guns together and having a higher concentration of perforating charges, given lineal foot, if you will, of well. And so, it's focusing on the oil recovery side of it, not just the cost of assembling a perforating gun.

Our integrated initiating system gives us a degree of freedom, from a design standpoint, that others--they, I'm sure, have and will come up with work-around situations, but they're not quite as elegant as ours. And you don't quite get the safety and operational benefits that was discussed earlier in the call. So you get all the performance of our initiating system in a smaller form factor for a perforating gun, and you can pack more charges for a given lateral length. And depending on the design of the completion and how many charges and where they're orientated towards--direction that they're orientated and the size of the charges themselves will determine the completion effectiveness in the oil recovery. And so, we have just a greater degree of freedom and flexibility to work with service companies to design the right kind of completion programs.

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James David Brilliant, CM Advisors Family of Funds - CM Advisors Defensive Fund - Portfolio Manager [56]

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Okay, so then this--the increased focus by the industry on perforating is really trying to address the parent/child problems in the fact that we've maybe reached our limits on pushing more sand down a hole, and so now it's how much better can you get and what kind of flexibility do you have in perforating. Is that right? Do I understand that right?

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Kevin T. Longe, DMC Global Inc. - President, CEO & Executive Director [57]

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Yes, I mean, you don't want perforations that aren't effective, if that's not a double negative. And so there's orientation, there's the size of charge, there's the location in the formation itself, and all these things create a number of complex factors that go into the design of a perforating gun. And the perforating gun is--the more that it's designed to [tie] with the pressure pumping and the other service areas on the completion part of it, the more effective the overall completion will be.

And so I--you know, there was a tendency for a long time in the industry to separate and isolate different activities, and then choose or compete, either on technology or price, on those non-integrated activities. I think the more that the industry moves towards integration and value-add in selling and outcome, and having all the products and then the components within the products orchestrated, the more efficient and effective the ecosystem is going to be for all of us.

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James David Brilliant, CM Advisors Family of Funds - CM Advisors Defensive Fund - Portfolio Manager [58]

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Okay, and then on the idea of market share, there's been a lot of talk about share shifting and share gains and all that, but it seems to me the biggest share change is from field-assembled to factory-assembled. If the industry is only at 25% factory-assembled, then there's a lot of share to be shifted from field-assembled.

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Kevin T. Longe, DMC Global Inc. - President, CEO & Executive Director [59]

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Agreed.

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James David Brilliant, CM Advisors Family of Funds - CM Advisors Defensive Fund - Portfolio Manager [60]

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Okay. And then, finally, I've heard the--I guess you guys--it's solid-state detonator is how you refer to yours, or detonator system, but I've heard other people call it push-in detonators. Is that the same thing? You guys are the only ones that have that. I mean, I've seen it; it looks kind of like a meat thermometer, if you will, with a tab on the top and the probe going down. But that's the difference between your initiator and the rest of the industries is the ease at which you can put it into the gun system?

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Kevin T. Longe, DMC Global Inc. - President, CEO & Executive Director [61]

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And--

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James David Brilliant, CM Advisors Family of Funds - CM Advisors Defensive Fund - Portfolio Manager [62]

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As well as all the other benefits you get.

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Kevin T. Longe, DMC Global Inc. - President, CEO & Executive Director [63]

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Yes, the ease is the smallest-valued part of it, but it enables a bunch of things that--there's a number of things--

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James David Brilliant, CM Advisors Family of Funds - CM Advisors Defensive Fund - Portfolio Manager [64]

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Well, the technology enabling is the biggest thing, I would think.

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Kevin T. Longe, DMC Global Inc. - President, CEO & Executive Director [65]

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Correct. And so, the technology inside the device, and then the form factor of the device itself creates a number of packaging opportunities for us for our industry-leading shaped charges.

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James David Brilliant, CM Advisors Family of Funds - CM Advisors Defensive Fund - Portfolio Manager [66]

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Okay, and then last one is, you had, especially in the DynaEnergetics division, you had a pretty nice step up in gross margin, sequentially and year-over-year. How much of that is due to some of the--is just the increase in revenues, and how much of it is due to the more recent capital spending in equipment you've deployed?

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Kevin T. Longe, DMC Global Inc. - President, CEO & Executive Director [67]

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Very little of it's absorption. You know, we an asset-light company. The variable costs are higher than the fixed costs. And so, what we're seeing is the technology, in terms of the different form factors of the products that we're coming out with and their ease of manufacture. And, you know, the investment that our board enabled us to make in '17--or beginning in '17, carried through '18 and '19, we're now seeing the operating efficiencies of--in the learning curve, we're further down the learning curve. And we're starting to hit the margins that I believe even in previous conference calls we had targeted, being above 40% gross margin. We had a very good gross margin in the quarter, and it all came together, and I'm just very appreciative of our employees and the organization in order to have it all come together this quarter.

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James David Brilliant, CM Advisors Family of Funds - CM Advisors Defensive Fund - Portfolio Manager [68]

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Which, I guess, leads us to the final thing of, you've adjusted your revenue numbers, but your EBITDA guidance remains the same, so you're capturing and keeping margin.

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Kevin T. Longe, DMC Global Inc. - President, CEO & Executive Director [69]

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Yes. And quite frankly, that's kind of a nice situation: make more with less activity. It's a good combination. Plus wear and tear on all of us.

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Operator [70]

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Your next question comes from Stephen Gengaro with Stifel.

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Stephen David Gengaro, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [71]

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Just a quick follow-up and you kind of hit on this on the last question. When you look at, from your perspective, the sort of penetration of integrated perf guns relative to the overall market, I mean, it seems to us it's still pretty light and it's rising rapidly. Have you thought about that and how big that pie might become over the next couple years, because it seems like it's being adopted fairly rapidly.

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Kevin T. Longe, DMC Global Inc. - President, CEO & Executive Director [72]

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It is, and we're primarily talking about North America here. And, you know, land-based unconventional, we don't see a reason why every gun going into those wells is not a fully assembled, intrinsically safe gun. It's good for the industry; it's good for the operators; it's the most efficient way of doing it.

Internationally, that's a different story altogether. And deep sea, the design of the wells are such that it's more difficult to do that. But we would see the North American and land-based market move primarily towards the way that we and our competitors are going. And that, over time, will probably spill into some of the international markets, as they move into more unconventional perforating.

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Operator [73]

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Thank you. There are no further questions at this time. I would like to turn the floor back over to Mr. Kevin Longe for closing comments.

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Kevin T. Longe, DMC Global Inc. - President, CEO & Executive Director [74]

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Thank you, everybody, and particularly our employees, if you're listening, for having an interest in our company and for your efforts. We look forward to talking with you after the finish of Q3. Thank you.

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Operator [75]

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