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DMC Global, Inc. (NASDAQ:BOOM)
Q2 2019 Earnings Call
July 25, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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. If anyone should require operator assistance during the conference, please press *0 on your telephone keypad. 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.

Geoff High -- Vice President of Investor Relations and Corporate Communications

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 will now turn the call over to Kevin Longe. Kevin?

Kevin T. Longe -- Chief Executive Officer, President & Executive Director

Thanks, Geoff. Both of our businesses performed well during the second quarter which enabled DMC to exceed its financial forecast. 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 dollars 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 benefited from improved manufacturing and supply chain efficiencies. DynaEnergetics reported a 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 restricting 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 received a digital key from a control panel at the surface. Competing products utilize resistor zed 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 seven-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 enable significantly higher perforating intensity than conventional guns.

The second new model, DS NLine enables the alignment of surface of all charges within a series of guns. Once the gun string is deployed it can be oriented within the well pour 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. That DynaEnergetics product portfolio which includes the IS2 family and a broad spectrum of performance charges and packing 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 a 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 oil field 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.

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

Michael Kuta -- Chief Financial Officer

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 equivalence 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 use and operating activities were $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 dollars 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 it 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 the 38% reported 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 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 a 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 expect 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 a 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 a 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?

Questions and Answers:

Operator

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press *1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press *2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the keys.

Your first question comes from Tommy Moll with Stephens Incorporated. Please, go ahead.

Tommy Moll -- Stephens Incorporated -- Analyst

Good afternoon and thanks for taking my questions.

Kevin T. Longe -- Chief Executive Officer, President & Executive Director

Yeah. Hi, Tommy.

Tommy Moll -- Stephens Incorporated -- Analyst

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 wireline 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 the 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.

I realize I'm asking you to comment on potential 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.

Kevin T. Longe -- Chief Executive Officer, President & Executive Director

Tom, yeah. Regarding the larger service companies. We view them as important customers or potential customers, not as competitors. They do have their product lines and we certainly have ours. The products from either company fit certain applications better. 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, I think you're probably referring to an increase in shape charges 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 Energetics' sales are growing faster than stage count. I could refer to the Spears data which is an independent third-party that this year has forecasted shape charge volume to go up 22%. So, shape charges overall are going up faster than completions for all companies.

Tommy Moll -- Stephens Incorporated -- Analyst

Thanks, Kevin. That leads me to my follow-up. On the revenue guidance, you've given now for the 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 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 -- and to your earlier comment, you have the completion count which is presumably lower than the stage count which is lower than shape charge count. Any way you can help us triangulate from your revenue expectations to some underlying driver in the market would be helpful.

Kevin T. Longe -- Chief Executive Officer, President & Executive Director

The drivers, if you will, for revenue would be market growth or decline, market share growth or decline, and pricing growth or decline. I've 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. It seems to be supported by a lot of the discussions that are happening in 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. So, we're seeing a market that can turn on and off pretty quick. I think 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 cycles, and the cycles have become much shorter.

Tommy Moll -- Stephens Incorporated -- Analyst

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

Kevin T. Longe -- Chief Executive Officer, President & Executive Director

Thanks, Tom.

Operator

Thank you. Your next question comes from Stephen Gengaro with Stifel. Please, go ahead.

Stephen Gengaro -- Stifel -- Analyst

Thank you and good afternoon, gentlemen.

Kevin T. Longe -- Chief Executive Officer, President & Executive Director

Hi, Stephen.

Stephen Gengaro -- Stifel -- Analyst

Just sort of following up on Tommy's question. Your current outlook, are you seeing a decline yet or are you projecting a decline when you look at 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?

Kevin T. Longe -- Chief Executive Officer, President & Executive Director

I think that we hear a lot of the same things, I'm sure, and read a lot of the same things. 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. I'd have to say it's more discussion than it's actually showing up in terms of our revenue as of today.

Stephen Gengaro -- Stifel -- Analyst

Great. Thank you. 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. 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? Is it purely a safety thing? Is it reliability? What's a little more detail behind the importance of that product differentiation?

Kevin T. Longe -- Chief Executive Officer, President & Executive Director

It's safety, reliability, and operating efficiency. 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. 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. It's all in a small-form-factor package that is shielded. It's quite a bit different than we used to call it a pre-wired system and that terminology has been adopted. 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, but most of the competitive products that we've seen are true wired systems in series with the detonator subject to straight current, straight voltage radiofrequency. And in some cases, the detonators are not included. The detonators are wired in the field. 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.

Stephen Gengaro -- Stifel -- Analyst

Great. Thank you. And 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 is obviously growing faster than the well count but then there's this increased perforating intensity per stage? Are you seeing that? How do your new DS guns play into that?

Kevin T. Longe -- Chief Executive Officer, President & Executive Director

We are seeing it. I mean, our unit volume for systems is up dramatically this year too in the most recent quarter. The number of shaped charges is up more than the revenue growth if you will. A lot of that has to do with the component pricing and the relation between the component pricing to the system itself. 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 for the value that they create. And so, our unit volume is up dramatically.

Stephen Gengaro -- Stifel -- Analyst

Okay. Thank you.

Operator

Thank you. Your next question comes from Gerry Sweeney with Roth Capital Partners. Please, go ahead.

Gerry Sweeney -- Roth Capital -- Analyst

Hey. Good afternoon, Kevin, Mike, Geoff. How are you guys doing?

Kevin T. Longe -- Chief Executive Officer, President & Executive Director

Yeah. Fine, Gerry.

Gerry Sweeney -- Roth Capital -- Analyst

Following up on some other previous questions. If you see a dead horse, it has to be beaten. 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?

Kevin T. Longe -- Chief Executive Officer, President & Executive Director

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. Internationally it's longer than that. So, it's a short window.

Gerry Sweeney -- Roth Capital -- Analyst

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

Kevin T. Longe -- Chief Executive Officer, President & Executive Director

Yeah. It's 80+% of our revenues.

Gerry Sweeney -- Roth Capital -- Analyst

And then talking about there is obviously competition. Your competitors are starting to talk a lot about pre-wired guns maybe a tad 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?

Kevin T. Longe -- Chief Executive Officer, President & Executive Director

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 more on where we're going. 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. 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. We're fine with that. We really prefer the industry to be healthy.

Gerry Sweeney -- Roth Capital -- Analyst

IS2, I'm assuming that's really DynaSelect. Is that correct?

Kevin T. Longe -- Chief Executive Officer, President & Executive Director

It's one of the variations of DynaSelect. Our nomenclature, first of all, 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 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, top fire version, an igniter that has similar technology in it. We have one of the broadest lines of shape charges in the industry if not the broadest. We've introduced our DynaStage in the past. But DynaStage we've renamed DS Infinity. It's available in a whole host of different diameters, length, shape charge configurations. And then we started to introduce this year DS Trinity, DS NLine and we've got four, five, six different other form factors for packaging that are coming out. 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 a thousand different combinations or more of products that are tailored for specific completion duties.

Gerry Sweeney -- Roth Capital -- Analyst

Theoretical question, if a large oil field service 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 from that family, could they do that? Maybe even make an ad hoc DynaStage system themselves where they're using some of their own internal manufacturing capacity but using your technology?

Kevin T. Longe -- Chief Executive Officer, President & Executive Director

We have the IS2 top fire is exclusive to the DynaStage family of products 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 externally wired which you get the benefits of the solid-state initiating system, all the safety reliability and performance aspects of it which 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, 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 one of the ways we onboard people to use our DynaStage system.

Gerry Sweeney -- Roth Capital -- Analyst

Got it. Okay. I'll jump back in the queue. I appreciate it. Thanks.

Operator

Thank you. Your next question comes from Edward Marshall with Sidoti and Company. Please, go ahead.

Edward Marshall -- Sidoti and Company -- Analyst

Hey, guys. Good evening.

Kevin T. Longe -- Chief Executive Officer, President & Executive Director

Good evening, Ed.

Edward Marshall -- Sidoti and Company -- Analyst

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 detonator as the cost of the whole system?

Kevin T. Longe -- Chief Executive Officer, President & Executive Director

First of all, the detonator integrated initiating system, if you will, cost can be a different percentage based on the size and complexity and type of gun. Whether it's a Trinity which is seven or eight inches with three charges or an Infinity that could be four or five feet with multiple charges, whole other multiple. In a smaller gun, it could be half. In a larger gun, it could be 20% to 30% of the selling price just as a ballpark. 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.

Edward Marshall -- Sidoti and Company -- Analyst

Got it. How many of those externally wired systems do you sell today in the $88 million revenue that you did for Q2 roughly?

Kevin T. Longe -- Chief Executive Officer, President & Executive Director

Again, for probably obvious reasons, we don't break out the initiating systems from the fully factory assembled DynaStage systems. But it's growing. The total for the first half of the year was $700,000.

Edward Marshall -- Sidoti and Company -- Analyst

Gun systems?

Kevin T. Longe -- Chief Executive Officer, President & Executive Director

Initiating systems and gun systems.

Edward Marshall -- Sidoti and Company -- Analyst

Okay. Mentioning something to Tommy, you said we plan to hold or maintain share. 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 said that within the comments? I just wanted to make sure we clear that up.

Kevin T. Longe -- Chief Executive Officer, President & Executive Director

In the marketplace, there's the product performance, 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 de-emphasize 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, we expect to grow but we're going to grow by earning it with the performance of the products that we're introducing. We still feel that we have runway. But in a 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. So, to us, maintaining a healthy price for our products and margin is most important.

Edward Marshall -- Sidoti and Company -- Analyst

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

Kevin T. Longe -- Chief Executive Officer, President & Executive Director

You know, I think that 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. We're focused on a few leading customers and that's really what's defining our share. And so, yeah. We'd like it to get up in the 25% to 30% range. It's pretty tough in almost any market to get 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.

Edward Marshall -- Sidoti and Company -- Analyst

Got it. 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 what's going into that, embedded in that number? Is there a catch up on compensation or something like that?

Michael Kuta -- Chief Financial Officer

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 the sales continuing the sales and marketing efforts on the new products that we have introduced.

Edward Marshall -- Sidoti and Company -- Analyst

Okay. Good. Thanks, guys. Appreciate it.

Kevin T. Longe -- Chief Executive Officer, President & Executive Director

Yep. Thanks, Ed.

Operator

Thank you. Your next question comes from Jim McIlree from Chardan Capital. Please, go ahead.

Jim McIlree -- Chardan Capital -- Analyst

Thanks, and good afternoon, guys. 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?

Kevin T. Longe -- Chief Executive Officer, President & Executive Director

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

Jim McIlree -- Chardan Capital -- Analyst

Great. Secondly, the changes that you refer to in DynaEnergetics in this second half. Is that concentrated in any customer or basin or is it kind of everywhere with everyone?

Kevin T. Longe -- Chief Executive Officer, President & Executive Director

It's really more of a broader, general assessment of seeing and hearing and reading what's happening in the marketplace. I think that we're cautiously optimistic that they dynamics in our industry are such that '19 is going to be better than '18 and '18 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 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.

Jim McIlree -- Chardan Capital -- Analyst

Got it. Okay. Lastly, Mike, can you talk about what your plans are for the line of credit? Is this kind of the level that you're comfortable with or is it too low, too high?

Michael Kuta -- Chief Financial Officer

We're going to continue paying down debt. In the second half, what you can expect is a similar run rate as the second quarter in terms of cash from operations. It should 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 0 by the end of the year. So, that's where we want to be.

Jim McIlree -- Chardan Capital -- Analyst

Great. All right. Thanks a lot, guys. Good luck.

Kevin T. Longe -- Chief Executive Officer, President & Executive Director

Yep. Thank you.

Operator

Thank you. Once again, if you wish to ask a question, please press *1 on your telephone and wait for your name to be announced. Your next question comes from Tommy Moll with Stephens Incorporated. Please, go ahead.

Tommy Moll -- Stephens Incorporated -- Analyst

Thanks for letting me back on.

Kevin T. Longe -- Chief Executive Officer, President & Executive Director

More than welcome, Tommy.

Tommy Moll -- Stephens Incorporated -- Analyst

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. I think I'm right in that's the fundamental difference of what you manufacture versus every other competitor. If you could just lay out again the fundamental difference in those two configurations and then what the safety, also, what we haven't hit on as much today, the efficiency benefit of that is.

Kevin T. Longe -- Chief Executive Officer, President & Executive Director

That's a complicated answer to all of that for a conference call. 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 of 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. The benefits of it accrue not just in the assembly, the supply chain, how fast they go together in the field. There's a smaller form factor and there's less resistance putting it down the well. Really, the biggest benefit is the saving of the non-productive time because of the ability to do parallel operations and be safe in an environment around a well site that's increasing in its electromagnetic interference.

So, the topic of late over the last few months has been 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 doing and is it a well-orchestrated ballet, which you get with our gun system. We have our mobile marketing trailer which we call our Boom1 which we've updated with our latest product offerings and a picture is worth a thousand words. We probably need to do a better job of 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 as we go forward.

Tommy Moll -- Stephens Incorporated -- Analyst

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 or defend their market share with accommodative pricing or not at this point?

Kevin T. Longe -- Chief Executive Officer, President & Executive Director

I can't say that we've really felt or seen a lot of that. Sometimes it's tough to lower a 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. I believe one of the things that I'm very encouraged by is the discussion of I think perforating is increased in terms of its airtime in a number of conference calls. And technology and integrated systems is increased in terms of its airtime. I think there's a lot of room for differentiation and value creation. 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. I think that the price aspect to protect market share has not proven itself to be a successful path and sustainable path in this industry over time.

Tommy Moll -- Stephens Incorporated -- Analyst

Thanks for your time. That's all for me.

Operator

Thank you. The next question comes from Jim Brilliant with Century Management. Please, go ahead.

Jim Brilliant -- Century Management -- Analyst

Yeah. Hi, guys. How are you doing?

Kevin T. Longe -- Chief Executive Officer, President & Executive Director

Yeah. Fine, Jim.

Jim Brilliant -- Century Management -- Analyst

You know, Kevin, we haven't really talked much about your new products the Trinity 4.0 and then the new 3.5. What are the benefits that an operator would have with the shorter guns? That's number and then number two I guess would that even be possible if you didn't have your solid-state detonator?

Kevin T. Longe -- Chief Executive Officer, President & Executive Director

The benefit of those guns is the simplicity of putting a number of guns together and having a higher concentration of perforating charges get a 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 I'm sure have and will come up with workaround situations but they're not quite as elegant as ours and you don't quite get the safety and operational benefits that were discussed earlier in the call. So, you get all the performance of our initiating system in a smaller form factor for a perforating gun then you can pack more charges for a given lateral length. Depending on the design of the completion and how many charges and where they're orientated toward the direction that they're orientated and the size of the charges themselves will determine the completion effectiveness and the oil recovery. So, we have just a greater degree of freedom and flexibility to work with service companies to design the right kind of completion programs.

Jim Brilliant -- Century Management -- Analyst

Okay. So then the increase focus by the industry on perforating is really trying to address the parent-child problems and the fact that we've maybe reached our limits on pushing more sand down a hole 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?

Kevin T. Longe -- Chief Executive Officer, President & Executive Director

Yeah. I mean, you don't want perforations that aren't effective. That's not a double negative. And so, there's an orientation. There's a size of the charge. There's the location in the formation itself. All these things create a number of complex factors that go into the design of a perforating gun. And the perforating gun, 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, 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 toward integration and value-add and in selling an 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.

Jim Brilliant -- Century Management -- Analyst

Okay. On the idea of market share, there's been a lot of talk about share shifting and share gains and all of that. 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.

Kevin T. Longe -- Chief Executive Officer, President & Executive Director

Agreed.

Jim Brilliant -- Century Management -- Analyst

Okay. Finally, I've heard that a 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 industry is the ease at which you can put it into the gun system as well as all the other benefits you get.

Kevin T. Longe -- Chief Executive Officer, President & Executive Director

Yeah. The ease is the smallest value part of it, but it enables a bunch of things.

Jim Brilliant -- Century Management -- Analyst

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

Kevin T. Longe -- Chief Executive Officer, President & Executive Director

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 shape charges.

Jim Brilliant -- Century Management -- Analyst

Okay. The 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 the increase in revenues and how much of it is due to the more recent capital spending and equipment you've deployed?

Kevin T. Longe -- Chief Executive Officer, President & Executive Director

Very little of it is absorption. We're 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 the investment that our board enabled us to make beginning in '17 carried through '18 and '19, we're now seeing the operating efficiencies 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'd targeted being above 40% gross margin. We had a very good gross margin in the quarter, and it all came together. I'm just very appreciative of our employees and the organization in order to have it all come together this quarter.

Jim Brilliant -- Century Management -- Analyst

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.

Kevin T. Longe -- Chief Executive Officer, President & Executive Director

Yes. And quite frankly, that's kind of a nice situation. Make more with less activity. It's a good combination.

Michael Kuta -- Chief Financial Officer

Less wear and tear on all of us.

Jim Brilliant -- Century Management -- Analyst

Yeah. Right. Okay. Thanks, guys. I appreciate it.

Kevin T. Longe -- Chief Executive Officer, President & Executive Director

Yep.

Operator

Thank you. Your next question comes from Stephen Gengaro with Stifel. Please, go ahead.

Stephen Gengaro -- Stifel -- Analyst

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

Kevin T. Longe -- Chief Executive Officer, President & Executive Director

It is and we're primarily talking about North America here. 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. In deep sea, the design of the wells is such that it's more difficult to do that. But we would see the North American and land-based market move primarily toward 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.

Stephen Gengaro -- Stifel -- Analyst

Great. That's very helpful. Thank you.

Operator

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.

Kevin T. Longe -- Chief Executive Officer, President & Executive Director

Thank you, everybody. 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.

Operator

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

Duration: 64 minutes

Call participants:

Geoff High -- Vice President of Investor Relations and Corporate Communications

Kevin T. Longe -- Chief Executive Officer, President & Executive Director

Michael Kuta -- Chief Financial Officer

Tommy Moll -- Stephens Incorporated -- Analyst

Stephen Gengaro -- Stifel -- Analyst

Gerry Sweeney -- Roth Capital -- Analyst

Edward Marshall -- Sidoti and Company -- Analyst

Jim McIlree -- Chardan Capital -- Analyst

Jim Brilliant -- Century Management -- Analyst

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