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spk06: Greetings and welcome to the Superior Building Products third quarter 2020 financial results. 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 star zero on your telephone keypad as a reminder that the conference is being recorded. It is now my pleasure to introduce your host, Deborah Pawlowski, Investor Relations. Please go ahead.
spk05: Thanks, Stacey, and hello, everyone. We certainly appreciate your time today and your interest in Superior Drilling Products. On the call with me are Troy Meyer, our Chairman and CEO, and Chris Cashin, our Chief Financial Officer. They're going to review our prepared remarks discussing the quarter, the third quarter, and a little bit of our outlook, and then open the call for questions. You should have a copy of the financial results that we released before the market this morning. And you should also have the slides that will accompany our conversation today. You can find both of those documents on our website at www.sdpi.com. As you are aware, we may make some forward-looking statements during the formal discussion as well as during the Q&A session on today's call. These statements apply to future events that are subject to risks and uncertainties as well as other factors that could cause the actual results to differ materially from what is stated here today. These risks and uncertainties are provided in the earnings release, the slides, and other documents filed by the company with Securities and Exchange Commission. All of these documents can be found on our website or at sec.gov. I want to also point out that during today's call, we will discuss some non-GAAP financial measures, which we believe will be useful in evaluating our performance. You should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAPs. We have provided reconciliations of non-GAAP with comparable GAAP measures in the tables accompanying the earnings release as well as in the slide deck. So with that, I'm going to turn it over to Troy to begin.
spk02: Troy? Thanks, Deb. Thanks, everybody, for joining us today. Let's go ahead and turn to slide four in your slide deck. There's three things that I'd like everybody to take away from today's call, and number one, I'd like to talk about our international growth and how that's going and how that's expanding and how our tools are performing there. It's very, very encouraging. And two is the diversification and what we're doing here to essentially create a stronger foundation in the core business. And then number three, the managing of our costs. I think that's very important in these times, and our team is doing a very good job at that. So let's start off with what we're doing and the traction we're getting internationally. The drilling, as you all know, we introduced it over in the Mideast a couple years ago, and we're really seeing it now where the operators see the benefit and the value that the tool gives. And as we look at what's going on internationally and how we're being pulled into new opportunities, into new countries, we're being pulled in there by large SERVCOs that run the tool, you know, in countries like Kuwait and the UAE, and they recognize the value and they recognize how much that tool is helping their performance. and requesting these tools in places like Iraq and Ukraine, Qatar, Oman. So we're very excited about that. We have challenges with logistics that we're being educated on and working through. As you all know, when these tools run, they've got to be dull graded, they've got to be serviced, and we've got a good team working on it, and they're doing a great job. So you look at the five different countries right now of expansion after North America, and it's going very, very well. We're also seeing opportunities with a slim hole product line that is allowing operators to exit existing wellbores, cutting a window and exiting those wellbores, and going through that window with a drill and ring tool. as they go with smaller size bottom hole assemblies, this drilling is now allowing large operators that are well known to get in and out of these well bores as they deepen existing wells or sidetrack out of existing wells. It's a good opportunity for us going forward. When we look at the diversification that we'll be talking about, As you all know, we've been – our team has been working on getting ISO 9001 certified as well as AS 9100 certificates. And we're going through audits as we speak. We actually have them in our facility today. And we're looking to wrap all of that up by year end. And I really think that we can probably have it done probably before December. And what that allows us to do is go after some work that really fits into the wheelhouse of our machines. As you all know, we have some large CNC machining centers here, and right now they're very busy making small parts, and we'd like to get them very busy making large parts. And this certification is going to help us do that. So we're excited about being able to look at the defense industry and some of these other industries that require large parts to be machined. And this ISO certification and the AS certification will really help us get that done. When you look at how we're managing our cost, I want you to be aware that we've reduced our monthly cash burn to 700,000. It's down dramatically from from where we started the year, we've gone into a phase three of our cost containment. And, you know, it's, it's going to be year end going into 2021. We believe that the cash burn will be gone. So we're looking for a cash break even going into 2021, and I feel very good that we're going to achieve that. But with that being said, I'm going to go ahead and turn it over to Chris. Chris?
spk01: Okay. Well, thank you, Troy, and welcome, everyone. Let's continue our discussion by turning to slide six. If you look at the trend in our annual revenue, this slide shows that the value of our drilling ring wearable conditioning tool has been gaining traction internationally. And that's what Troy just kind of walked you through, the various initiatives that we have and how that traction is really picking up. You can see from this chart that we reached a pre-COVID high of $800,000 in Q1 international revenue. Revenue went down in Q2, driven by the impact of COVID. But what we are seeing in Q3 and continue to see in Q4 is the beginning of recovery internationally. And so we're very excited about that. We are now operating in five countries outside of North America, partnering with global oilfield service companies and serving the world's largest production companies. Year over year, our international revenue for the quarter is up $141,000, or 49% up to $429,000 for the quarter, which represents about 28% of our total revenue. So we are rapidly becoming diversified geographically, U.S. and internationally. For the first nine months, our international revenue increased 121%, and this was with a 20% decline in international rigs. In the U.S., revenues down 47%, with the overall U.S. red count down 52%. So the thing that we're really excited about is that in both markets, U.S., international, our tools continues to gain traction and share. The decline in total revenue was about 24% sequentially, or $500,000, compared with year-over-year decline of $3.5 million, or 70%. This is demonstrating improving conditions since the initial impact of COVID-19 on our industry and the geopolitically driven imbalance of supply and demand in the global oil markets. Now, let's turn to slide seven, and we can take a little deeper look at our tool revenue. On this slide, the light blue, which is tool sales and rentals, includes our international revenue that we just spoke about on the previous slide. That $429,000 is contained in that light blue part of the bar. And you can see that with that revenue, it helped mitigate the decline. The overall decline in the revenue was only 11.4% sequentially, which is a much lower rate than the overall market. Once again, just another indication how the drilling ream is gaining share. Given the decrease in this market activity, Our distributors' additions to their tool fleet were minimal in the quarter. Now, the navy blue part of this bar contains what we call our repair revenue and our royalty revenue. And we repair tools as they are placed into operation by our distributor. And so we're still seeing activity with the tool, good activity. As a matter of fact, as we just said, it's better than what the market's doing. And we can see that on this slide. We can see that... Year over year revenue for the recurring revenue stream that we have here, that's that navy blue bar, down 65%, which is less than the decrease in the market of 72%. So significant decreases in the market, but the theme is the same. It's a recurring theme. Our tools continue to outperform the market. Now, I want to continue just to mention, keep everyone understanding that in April of this year, we did provide our distributor a discount. for regular maintenance and repair work. And they often provide that on to their clients. And we do this in consideration of the depressed state of the industry. During the quarter, we saw the U.S. rig count hit its low point in August with a total rig count of 244. And we're excited to see that since then, the number of drilling rigs has been increasing, reaching 296 by the end of October. That's a 21% increase in approximately two months. Now let's go to slide eight and look at our operating expenses. Through Q3 of this year, we have implemented two cost-saving initiatives comprised of headcount reduction, salary reduction, deferral of R&D projects, and closing of our West Texas facility. These actions have resulted in a 58% decline in cost of revenue. As a percent of revenue, Cost of revenue was 56% compared to 41% for the prior year period. Now that increase as a percent of revenue reflects lower absorption of overhead costs and reduced volumes. SG&A, a good strong decline in that spending, down 39%. And that's a function of these cost reduction measures that we've implemented. And of course we implement these as a reaction to what COVID has done to our revenue line. Significantly reductions in our revenue related to the market conditions driven by COVID-19. Now, in October 2020, the company implemented a third round of cost containment measures, as Troy mentioned. Through additional payroll reductions, which has reduced our monthly cash burn to approximately $700,000. This is down approximately $200,000 per month from previously reported cash break-even. The company expects that at this rate, and given expected improvements in monthly revenue, it will enter 2021 at a cash break even. Now let's go to slide nine. Net loss for the quarter, $1.7 million. Adjusted net loss, $1.4 million, 7 cents and 5% per share, respectively. Adjusted EBITDA, which is a measure we use for operational performance, was negative $600,000. For the trailing 12 months, EBITDA was $1 million, or 8% of revenue. These metrics reflect the decline in our revenue, and that decline in our revenue is a result of COVID, the impact it's had on our industry. Now, I think it's important to remember what our business looked like pre-COVID. And so the bars, the right-hand part of this chart, you see 2018 epidemic percent of revenue and 2019 epidemic percent of revenue. Healthy, 21%, 28%. And remember that we were able to generate those kinds of margins while investing in R&D and financing our geographic expansion. So this is what the company will look like as we continue to turn the corner and get back to where we were pre-COVID. Now let's go to slide 10 and look at the cash balance that we ended the quarter, $1.4 million. That was up from $1.2 million at the end of 2019, but it was down from $2.5 million at the end of the second quarter of 2020. Total debt at the end of the second quarter was $6.7 million, down $200,000. We continue to pay down our debt, down $1.3 million for the year. And just as a reminder, in that debt number is the remaining two principal payments totaling $1.5 million on our hard rock note. Once again, as a reminder, that first payment is due July 2021, the second one October 2022. We're applying for forgiveness on our $900,000 loan from SBA Payroll Protection Program. Regarding our mortgage, which matures in February 2021, we've been in active discussions regarding extending this with our current lender, and we've received email confirmations that they will extend it. And as another option, we are actively pursuing a potential sale and leaseback of our vernal campus. Additionally, the company recognized $41,000 in other income related to a machine tool lease that was under an SBA loan that we had, and that was forgiven as part of the CARES Act. Now let's go to slide 11 and just summarize our outlook and opportunities. Once again, regarding liquidity, With the latest round of fixed cost reductions, we expect to be net cash flow breakeven entering into 2021. We expect our international revenue to continue to grow, driven by the demand we see globally for the drilling ring. And as Troy mentioned, we're working with all the major oilfield service companies who have acknowledged the value of the drilling ring. We have opportunities in our bit remanufacturing business internationally in 2021. As Troy mentioned, we're still working on ISO 9001, and we are close to having that accomplished. As Troy said, auditors are looking over what we've done as we speak. So we expect to have those certifications done by the end of 2020, and that will open up more business to provide precision machining services to the defense industry and for other critical industrial applications. So with that operator, I'd like to Open up the call for questions.
spk06: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 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 star keys. Our first question comes from John Baer with Ascend Wealth Advisors. Please go ahead.
spk03: Good afternoon, gentlemen. Deborah. Good afternoon, John. Got a couple questions here for you. Do you have any potential expansion of your product line in the hard rock markets, for example, precious metals, base metals? I know in their exploratory work, they kind of do diamond core, but very often they do reverse circulation drilling. So I'm just wondering if perhaps you could have any application of your tools or the drill bits, particularly in refurbishment in those markets, if that's a possibility or if you've even looked into that. You know, John, we –
spk02: We've done some custom design and manufacturing work for some of the mining industry. If you look at Kennecott and you look at some of the stuff over in Nevada, we haven't pursued that market with the drill and ream product line. There's some opportunity there with an economic drill bit, if you will, that we've looked at. But no, we have not looked to deploy the drilling ring into that market.
spk03: I'm just thinking with particularly precious metal, well, even base metal prices on the rise here, more activity probably in that market and being domestic might be helpful. So that's interesting. Well, I hope you might consider looking into that if there's application in it. The follow-up question on that is totally unrelated, but you said you're active in five international countries right now. Does that mean that you have five tool assemblies at work right now, or kind of how does that work? And then if you can mention anything about Canada and Mexico activities, North America in general.
spk02: Okay, so if you look at our international activity, we've got a fleet – our inventory sets in Dubai and also Kuwait. And that fleet is servicing the UAE, Kuwait obviously. It will go over and touch into Oman. It goes into Qatar. And now we also have a small inventory, the slim hole opportunities that are in the Ukraine. And so when you talk about what does that look like, there are individual tools that are sent out to do a job and then they come back where they're into a shop where we have a service agreement with a company that will take and clean these tools and then do a dole grade and decide the level of service. goes through a – it's all a web-based system that the team here created. So when we dole grade these tools with this service provider, we're sitting right down with them looking at the tool and identifying what part of that tool needs to be serviced. So it's a very efficient way. I will say, however, the inefficiencies are that we don't have a full-blown Level 3 service center in the Mideast, which we're looking to do the first part of 2021. We'd like to get that done no later than Q2, because right now we have CCANs that are loaded with tools coming back to Vernal where we'll service these tools and put them back into a CCAN and send them over. So, but, you know, you talk a little bit about the opportunities, what we're finding is As we're, like in the swim hole application, as we're sitting down with the engineers of these projects and helping them get their tool assemblies in and out of the well bore that they've cut a window out of the existing well and gone deeper or gone sideways, we're also able to help them and start to identify opportunities for us by looking at what tools they're using downhole, and can we design and build them a better tool? And we believe we can. So as Drill and Ream opens the door for us to these large SERPCOs on some unique projects, we're also identifying some opportunity within the wheelhouse, if you will, of the equipment we have, the expertise we have, to identify additional product lines that we feel that we can get out there and get to them.
spk03: So on these projects that you're working on, are they multi-well projects then? I'm trying to understand, are they one by one, one well at a time type thing? Or is it like if you're drilling off of a pad in the US, you're doing very often multi-wells. trying to understand a correlation between the type of what they're doing over there versus U.S.
spk02: So what we're seeing is these are what we call turnkey projects. It's where a CERBCO has been asked, you know, they put the bid in to directly be responsible for drilling wells, either in this case Iraq or Kuwait. And so they're in charge of, you know, doing this thing very efficiently. That's how they make – that's how they're going to make their money on it is, you know, this well typically takes 60 days to drill, and that's how they bid that job. And they can come in there and do it for 45. It's a big win for them. And so they ask – that's where the excitement around our tool is really, really being generated is the fact that, This tool, if they use it maybe in Kuwait or UAE and they understand how it's helping them, it is one thing. But when they go to a turnkey project, they really want the tool. And so it's a testimony to the efficiencies the tool is creating. But, yeah, it's, like I say, with the exception of the logistics, We still struggle there because we're such a small company trying to figure out how to get stuff in and out of countries like Iraq and the Ukraine. But other than that, when we get tools in place, the tools are performing well. You know, a very important note is every Tuesday we get together with our international team and we go over the past week's performance reports. We go in and we do a post run report for our customers and we show them the savings that we're creating for them. And without any exception, when you look at our post run performance reports, our KPIs are all checked off. What that customer wanted our tool to do for them is checked. And it's typically three to four different KPIs out of 10 that we offer them. They'll pick three or four for us to help them with, and those are always checked. And so it's – I'm excited about what we're seeing as these SERVCOs are now pulling us into other locations and being able to benefit from, you know, the drill and ream technology in those locations. And it's really exciting for us to start teaming up with these companies that also – have the ability to help us with logistics to get tools to them.
spk03: Well, I would think your big service companies would be the main help in that regard. Am I not right on that?
spk02: You are right on that. You know, we get the tools to Houston and then they can take it from there. And so it's very beneficial for us to to team up with them and they also give us, you know, places, you know, there's opportunities to store tools and to have qualified people dograde these tools and it just opens up every time we start talking and dealing with these companies, we see more and more opportunity all the time and it's an exciting road to go down.
spk03: Very good. What about the outlook right now with, say, Canada, Mexico, and say maybe up in the northeast with the gas market, gas prices have firmed up a little bit. So are you seeing any increased activity, say, in the Marcellus Utica trends?
spk02: You know, we're not forecasting a boom. big increase in activity in North America next year. We have some, you know, but our channel partner, Drilling Tools International, they've done a fantastic job. They've got a great team that, you know, has held their own and actually been able to increase their market share during this downtime. And they're the ones that service Canada and the U.S. And so we figure they're We look at that, and they're doing a good job, and so we've been able to turn our attention to these other markets and other opportunities, but we haven't put a bunch in our forecast for 2021 for North America next year.
spk03: Right. Then I'll get out of the way for anybody else that might want to ask a question. That is, with some of the recent murders reported, announced here, particularly in the Permian and so forth, companies that are heavily involved there. Are there any of those companies that are being, say, acquired that have not been using your tools that might now be prospective clients given the acquiring company has been using your tools?
spk02: Yeah, I mean, that happens. I mean, there's There's times we hear about a company that's going to merge and essentially be managing a new company that has been – or a company that's been running our tools, and so sometimes there's that worry. Will this new management team accept the drill and ream? And we're finding out that they do, but you still got to go back in there and sell a new team on what the product does. So, yeah, there's opportunities as M&As happen. There's good opportunities there.
spk06: As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Our next question comes from John Sturgis with Oppenheimer & Company. Please go ahead.
spk04: Good morning, gentlemen. Actually, pretty decent quarter considering you had to come uphill. I'm just curious about the Swimhole product line. It sounds like a new product line. Is it used in conjunction with perhaps Strider or some other tool that you offer?
spk02: No, but if you remember right, we started with the Swimhole Strider line before everything went south this year. We were doing some really neat stuff up in Alaska with the Slim Hole Strider with a very large Servco. And so I think there's opportunity, John, when we look at this Slim Hole application, because what we were doing up in Alaska with Strider is really similar to what we're doing in the Ukraine. two different tools. A strider is an extended reach tool. It's used to get further out in the lateral, where the drilling ream, of course, is a borehole conditioning tool. But when we look at what we're doing with the drilling ream in the Ukraine, in the slim hole, and when we say slim hole, we're typically talking stuff that the four and five inch tool size And so the two tool sizes that we've got over there are the 4 1⁄2 and the 5 1⁄2, so they're new tool sizes for us. And we're identifying other parts of this operation that we're very familiar with, and we've made them parts and we've made them tools in the past, and we really think there's some good opportunity there.
spk04: Okay. This is a broader question. It has to do with basically the condition of the industry. I've seen the U.S. oil production drop about 30% from where it was earlier in the year, but now we have a recount down 70%, and a slight pickup beginning to show itself. We all know that frack wells tend to drop in production profile a lot more quickly, yet on the same On the other hand, we're seeing U.S. consumption rise. So is this a forced, what can I say, a need to meet projected consumption demand? Is that what's forcing up the rate count? Or are people just finding it more advantageous? Have they found other efficiencies? And, you know, I'm just trying to get my arms around what's driving up the rate count.
spk02: You know, when we first started looking at the rig count this year when we were trying to forecast what this looked like, you know, in the second quarter, we, in this industry, we never see an increase in rig count in Q4. It's always the opposite. The efficiencies that they've created today, you know, they budget to drill X amount of wells starting in January. And the efficiencies, those programs usually end sometime in October or November, and those rigs are laid down until January again. So this is something that's new to us. And, I mean, we looked at it in Q3 and thought, you know, these companies are going to have to start drilling some of these leases and start replacing some of this production that these shell wells are famous for. the decline curves on them. You've got these wells that come in like gangbusters, but 12, 18 months out, that production falls off a cliff. We think that some of this has to replace that production that is definitely going to fall off that cliff, but we also know that a lot of the older wells were shut in. The wells that had smaller amounts of production, those were the first ones to get shut in in Q2 and going into Q3. The economics aren't there to bring those back on. All those wells that got closed in that were developing small amounts of production every day that got closed up, they're not going to bring that back on at these prices and they're going to have to they're going to have to chase the rapid decline of their production that comes out of these shell wells. So we believe that's what we're starting to see and why these rig count has got to come up. And so we'd like to see that going up, obviously, and we're excited about it.
spk04: So then that begs the question, is this going to be an up fourth quarter for rig count going against the grain?
spk02: uh do you anticipate yeah i mean you look at the rig count and it's been you know moving up every week a couple more rigs i don't know you know i don't know if if you know something recently is going to stall that out or if this whole covid forecast lasting longer you know makes makes people more leery about bringing these rigs on but but i would i would think that there's there's got to be contracts that are in place for production demands and that people have to supply. So, again, I think that that sharp decline of these shell wells, they're going to have to drill to fulfill their contractual needs.
spk04: Okay. Thank you. That was my impression. I just wanted to see, get a sense of it from you. You're closer to the ground on all this. Thank you.
spk06: Thank you. I would like to turn the floor over to Troy for closing remarks.
spk02: So anyway, thanks again for joining us. We've got a lot of opportunities in this down market. It's obviously a tough market, as you know. I mean, it's brutal. But the team here is doing a great job. There's some tremendous opportunities. We're going to protect our balance sheet. We're going to continue to work on service agreements that we're putting into place with these large servcos. And, you know, we're excited about the uptick in some of our legacy business that we've had for a long time. You know, we're seeing that start to pick up in Q4. So we're excited and we're looking forward to getting 2020 behind us and, you know, getting down to some good business in 2021. And with that being said, thanks, everybody, for joining us, and we'll look forward to talking to you in March.
spk06: This concludes today's conference. Thank you for your participation.
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