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spk05: Greetings and welcome to Superior Drilling Products, Inc. Fourth Quarter 2020 Financial Results. At this time, all participants are on a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during a conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Deborah Palowski, Investor Relations for Superior Drilling. Thank you. You may begin.
spk01: Thanks, Doug, 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. Troy and Chris will go through prepared remarks discussing our fourth quarter and full year 2020 and talk a little bit about the conditions in the market today, and then we will 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. So if you would look at slide two, I will point out that 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 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 GAAP. We have provided reconciliations of non-GAAP with comparable GAAP measures in the tables accompanying earnings release as well as in the slide deck. So with that, I am now going to turn it over to Troy to begin. Troy?
spk03: Thanks, Deb, and thanks everybody for joining us for our fourth quarter 2020 call. Go ahead and let's turn to slide four. Let's talk about some of the accomplishments that we've achieved throughout 2020 and in Q4. So as we look at the highlights for 2020, I'm going to touch on a few of these so that you have an understanding that throughout 2020, we didn't just locked down and try to survive. We've got a lot of things done and not just the strengthening of our balance sheet, but we achieved certification in our ISO 9001, our AS 9100, and this led to the implementation of our QMS system. So company-wide now we have a total QMS system that we've got up and running and it's working very, very well. This was a big achievement through our team for our team throughout 2020. And this will also lead as we talk about our diversification model. As we go forward, this really, really helps getting that put into place. We're able to restructure our international business team. We've had few years over there now, and we've had an opportunity to look at who we have and in what positions, and where's our strengths and weaknesses, and we were able to restructure that team, and we've been able to get service agreements in place with large service providers in multiple countries. The team has done a really good job on still going out there, even though lockdown mode in the Mideast, we couldn't have our boots on the ground in the countries we have already introduced the tool into. Everything was done via phone and email. The team has done a tremendous job on getting the word out there and showing post-run recaps that I sit on a call every Tuesday as we go over the KPIs of our product line and are they being achieved. And I want you all to know that this product line is achieving the KPIs really, really well. So we're very pleased with what we're seeing. We were able to expand the size and scope of this product line. We've added some design enhancements that is going to increase our revenue rental margins as we go forward. And that was a very strong enhancement that our engineering and R&D teams have come up with. It's going to pay. as we go forward. We were able to make some very strong amendments to our legacy contract. Our legacy contract with very large service providers that had our hands tied in some areas that are our expertise, that's now giving us opportunities to look at as we go forward into 2021. So I'm very pleased with the amendments that we were able to make to these contracts. We're still moving forward. I know that we've talked in the past about, you know, introducing another product line and we still move that forward throughout 2020. And it's going to be meaningful as we go into 2021 that we bring on another product offering and we're just not offering the drilling ring. We will support that with another product offering throughout 2021. As we were going through 2020, we saw the collapse of not just the domestic market, but we also seen the collapse of the international market. But through that collapse, we increased our international revenue 43% year over year. So it's a testament to the team that we have and their willingness to get out there and and work hard and work smart. We were able to reduce our cash, our break even. When you look at the reductions, the consolidations that we made throughout our organization, and the goal was by the time we get to year end, we wanted to be at a cash break even, and we've achieved that. We took this opportunity in 2020 to look at our management team. We've got a system that our HR has put in, what they're calling Superior Management University, and the team has refocused on core values. Our managers are stepping up. It was really an opportunity for us throughout 2020 to see our strengths and our weaknesses. I'm here to tell you we've got a very strong management team. They know our products. They have learned our business very well. And I believe strongly that we've got the team in place that is going to really build a solid company throughout 21 and beyond. So I'm excited about those things that we talked about. And I'll talk a little bit more about the future opportunities after Chris gets done on the financial side of things and tell you about some of the neat stuff we've got going looking forward. But, Chris, I'm going to turn it over to you.
spk02: Okay. Thank you, Troy. And welcome, everyone. Let's continue our discussion by looking at slide six. This provides an overview of our revenue. And while the impact of the pandemic and the geopolitical supply imbalances and the global oil markets are obvious when you look at our quarter trends, we were very encouraged with how our revenue stabilized in the fourth quarter. In fact, revenue in North America increased 8% sequentially on higher contract services from an increasing rig count. And we ended the year with a U.S. rig count of 351. That's a good strong increase of 44% over the August 2020 low of 244. The increase in market activity resulted in our largest U.S. distributor of the drilling room to begin buying more tools. We received late in Q4 a $225,000 order that we delivered in the first quarter. Through February, we have received an additional two orders totaling $270,000 for new tools. And we are encouraged that this trend will continue throughout 2021. As Troy mentioned, the international markets, they declined. And what we saw is they lagged somewhat in the downturn and now lagging somewhat in the recovery. However, despite a 40% decline in international rigs in 2020, as Troy just mentioned, our international revenue grew 43%. to 1.9 million in calendar year 2020. Today, revenue outside of North America represents about 18 percent of our total revenue. The success of our international strategy and the continued penetration of the drilling ring in the Middle East was certainly a bright spot during a very challenging 2020. We attribute this success to the growing recognition and benefits of using our drill-and-ream wellbore conditioning tool and our go-to-market strategy of partnering with global oilfield service companies and working with the world's largest production companies. We are operating in five countries outside North America, and we are now partnering with six oilfield service companies. Now let's turn to slide seven and take a little deeper look at what we call tool and contract services revenue. Now on this slide, our international revenue is included in the tool sales and rental part of the bar graph. Contract services revenue, as we mentioned, was up $280,000 or nearly 80% sequentially. And once again, just as a reminder, that is our refurbishment business and third party high-end machining sales business, up 80% sequentially. And while that's far from pre-COVID levels, we believe it is now trending in the right direction. Tool revenue was down sequentially as those new tool orders that I referenced did not happen until late in the quarter. And we did receive those orders and we did ship those tools in early 2021. And as we mentioned, international was indeed soft at the end of calendar year 2020. However, other related tool revenues, which includes drill and ring maintenance and repair fees, as well as royalties, held steady from quarter to quarter. In fact, royalty revenue is what held up in Q4. And that's a result of the increasing activity of the drill and ring in the field here in the US. Now let's go to slide eight. On this slide, you'll see the result of the three-phase cost reduction program that Troy alluded to. We executed that throughout 2020, three different phases of continuing to right-size the organization. We took aggressive actions to reduce our costs in response to significantly lower demand from the marketplace. The last phase of the three-phase program we did in October 2020, and that got us down to a monthly revenue cash break-even level of approximately $700,000. In total, fourth quarter operating expenses were $3 million, down 37% from last year's fourth quarter, and were down 3.5% sequentially, reflecting that third phase of cost reductions. For the year, Operating expenses declined 28% to $14.3 million, with a controllable cost reduction for the year totaling $5 million. With the company's monthly cash burn rate of approximately $700,000, we entered 2021, as Troy just mentioned, at a cash break-even operating level. Now let's go to slide 9, which shows our bottom line and adjusted EBITDA results. Net loss was $655,000 in the quarter, or 3 cents per share. This was a marked improvement from a net loss of $1.7 million in the trailing third quarter, largely reflecting the forgiveness of the company's Triple P loan of $892,000 that we reflect as other income in Q4. Adjusted EBITDA, which we used to measure operational performance, was a negative $949,000 in the quarter, which did reflect an improvement sequentially on similar revenue given that third phase of cost reductions that we spoke about earlier. Now let's go to slide 10 and take a look at our cash balances and our debt levels. You can see on this slide that as of the end of 2020, our cash was $2 million, up from $1.4 million at the end of the third quarter of 2020. and up from $1.2 million at the end of 2019. Very pleased about where our cash balances are going into 2021. Now, during the fourth quarter, we completed a sell-leaseback transaction of our Vernal, Utah property, realizing net proceeds of $4.2 million, of which $2.6 million was used to pay the total outstanding balance of the mortgage on our property. We also recognized in 2020 $933,000 of loan forgiveness, which includes the Triple P loan that I just mentioned and an additional $41,000 related to an SBA equipment loan that was forgiven in the third quarter as part of the CARES Act. Long-term debt, including the current portion as of the end of 2020, was down to $2.9 million, our lowest level since becoming a public company in 2014. We have principal payments of $750,000 due to Hard Rock in July of this year, and the final payment in October 2022. So we've got $1.5 million on the balance sheet as of 12-31-20. Half of it will get paid middle of this year, and the last installment on that will be in the fourth quarter of next year. Now, a little more detail on the sell-leaseback transaction. That transaction includes three repurchase options, one at the end of the fifth year, one at the end of the 10th year, and one at the end of the 15th year. And so we accounted for that as setting up a $4.2 million financial obligation, which is related to the future minimum lease payments. So as a long-term lease, The financial obligation is not considered debt, and with a 15-year term, approximately $4 million of that $4.2 is considered long-term. This transaction significantly improved our liquidity from a negative working capital of $2.6 million at the end of September 20, 2020, to a positive working capital of $1.3 million at the end of calendar year 2020. We are very pleased with how our balance sheet has strengthened measurably. And you can see that with the building in cash and a significant decrease in our debt levels and a significant improvement in our working capital position. So with that, I'm going to turn the presentation back to Troy.
spk03: Thanks, Chris. So as we look at our outlook and opportunities. Let's turn to slide 11. We're very encouraged with the discipline growth activity we see in the global market right now in the oil and gas industry. We're confident that this improvement in activity will allow us to get further penetration of our drill and ring product line into this growing market. It also serves our manufacturing services well, our repair services well, our third party very well. And I want everybody to know we're continuing to strengthen our relationships with our third party, our legacy customers, our channel partner customers. We're really pleased with our domestic channel partners. You've heard us talk about them. They've done a phenomenal job. You know, our relationship with Baker Hughes continues to strengthen as we do more and more products for them all the time. So we're encouraged about what we see, and we're excited for 2021. You know, you look at the – I want everybody to understand that the certifications that we've got, when we talk about ISO and we talk about AS and we talk about all the things that we're putting in for diversification, I want everybody to understand that that we are an oil and gas technology and service company. That's what we do. Our diversification model is going to make it just so when we get into these dips, these horrible dips that are common in this marketplace, they don't have the negative effect on our company like they've had in the past. So make no doubt, we are an oil and gas service provider and technology provider. inventors. So that's where we are. We're still, we're getting MSAs throughout the international market. We're signing more MSAs all the time as we, every country we go into, it's a process. It's not, you know, you've got a tool deployment in the Mideast and it's good for the Mideast. Every country that we IntroduceRTool2 is another MSA, even with the same service providers that we currently are with. It's a new contract. It's a new agreement, country for country, and we're getting good at that. Matter of fact, we have a gentleman now, and that's his focus. We're going to get these MSAs in place. That's going to really help with getting tools in the hole. We've got a lot of requests for drill and ream on a global basis. But these companies cannot deploy this tool until we get these contracts in place, and that's what we're doing now. So, you know, going forward in 2021, we're very excited about what this year is going to do to strengthen us as a company, and we hope that you're all as enthused about this as we are because – We feel that we're in a better shape now than we ever have been as a company, and we're ready to move forward. So with that being said, I'm going to turn it over to the Q&A, back to the operator.
spk05: Thank you. Ladies and gentlemen, at this time we will be conducting a question and answer session. If you'd like to ask a question, you may 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 key. Our first question comes from the line of Dick Ryan with Colliers. Please proceed with your question.
spk06: Thank you. So Troy, just looking at the order trends late in the year and so far through February, What really kind of drove those, and can you talk maybe what the, let's say, the near-term pipeline looks like? Is it still pretty active, or how would you describe the other near-term opportunities?
spk03: Yeah, so the near-term opportunities are very active. One of the things that drives these orders is the fact that the age of the fleet that our channel partner has. Even though that fleet was built for a lot larger rig count than what we're currently at, that fleet is getting old. And so as they have to start turning over that fleet, it allows us to replenish that fleet. And we also have new connections. When we talk connections, we're talking the threaded pin and box end of these tools. And there's new threads come out. You have higher tensile strength threads and you have different types of threads. These tools that our customers have in their fleet are not those threads. And a lot of the operators don't like to run crossovers. So we end up making them new tools. So that's what's driving the majority of our new tool manufacturing. And keep in mind that the tools that you see us talking about here are not the tools for our Mideast fleet. We've also, you know, we talked earlier about how we increase the size and scope of our product offering, well, our DNR offering. And when you look at the DNR, when we broke out with that tool, you know, in 2011, 2012, it was a six-inch series tool. You know, we rent it in the lateral in North Dakota and that's not the case anymore. You know, we've, we've got, uh, tools that we run, uh, in the Ukraine that are, that are four and three quarter inch tools for, you know, going back into re-entries and cutting windows and, and, and helping operators to drill down. We've got, um, our sizes in the mid east are, we got 16 inch tools that are becoming very, very popular. We've got 12-inch tools. So when you look at the offering of the DNR product line, it's not just 6-inch anymore. It's 4, and it's 5, and it's 6, and it's 8, it's 12, it's 16. As we've expanded those sizes, it's really given us a lot more opportunity. So that's what's driving most of what you're seeing.
spk06: Okay. As you say, grow through 2021, will that be domestic, international, or both?
spk03: It's going to be both. We look at a tremendous opportunity, you know, with our channel partners here domestically, but we also understand that the need for drill and ream on a global basis is massive, and we've never, you know, Ever since 2015, we haven't had a sales and marketing structure in this company. We've been a tech company that's handed this stuff off. We've had to learn the process as we deliver these tools on an international basis. Believe me, every step of the way is something new for us. But we're learning it, and we think that the big growth model for our company is going to be international, but there's still a tremendous amount of opportunity here in the domestic market.
spk06: Okay. With that hard rock note coming up in July, do you think you can pay that off with cash generated through the first half of the year, or are there options or flexibility to maybe push that out as well?
spk03: We're shooting to pay it off with cash generated, but we have options. We have some flexibility on it. So, I mean, it's out there. We see it. It's something we've got to take care of, and we're focused on it, but we have some options.
spk06: Okay. When could we see some of the revenue streams outside of oil and gas contributing?
spk03: You know, Dick, I wouldn't count on it contributing much throughout 2021. We're looking, we're being very selective. At the end of 2020, as we started going down this diversification road, the third-party machining is, outside of oil and gas, is incredibly competitive. So we're entertaining those bids that fit, one, fit our equipment and the tooling that we have. But we're also looking for that repeatable work. So every time somebody sends us, you know, they need this widget made. It's not a prototype, and it's not we buy tooling and go through all the programming and post-processing and design stage of that just to make a one-off. We're looking for we're entertaining these companies that can give us work that fits the size of machines we have but is also complicated, you know, that really reduces that bitter pool. And so we've been bringing companies in. We've put a team in place here within Superior that is doing a really good job on understanding what truly are those costs when we scrap a part. You know, we've got – Chris has done a phenomenal job with the accounting team in getting the knowledge base in there that we need. We just made a phenomenal hire there as well in the controller side of things. So we're building the team. We've got the processes in place. And now we're being really stingy on what we're willing to take in. Because like I was starting to allude to, in Q4 of 20, as we went out and started doing third party work for other people, man, the margins in that arena is incredibly tight. But we have been into talks where we're identifying the areas where we can make margins that look closer to what we're used to in the oil and gas.
spk06: Okay. Good. I appreciate it then. Congratulations on the recent order trend.
spk03: Thank you.
spk05: Our next question comes from the line of John Bear with Ascend Wealth Advisors. Please proceed with your question.
spk04: Thank you. Good morning, Troy and Chris. How are you doing?
spk03: Good. How are you doing, John?
spk04: Good. Hang on. Okay. Sorry, I was on the speaker. Okay. I'm just curious, if you have much exposure, your existing customer base that has oil and gas companies that have exposure to federal acreage, and whether or not those are companies that might be impacted if this federal leasing and operations moratorium that the current administration has put in place and if it were to be extended. And also, along those same lines, do you have much exposure to companies operating in the offshore Gulf of Mexico in federal waters? I know historically that's not been a big area.
spk03: So when we look at the customer base, in the US, in the domestic market here, we're one step removed because of the channel partner that we have there that delivers our product to the customer. However, when we look at that customer base, the majority of the work is Texas, Oklahoma, I think most of Texas, and I could be wrong, but I think most of Texas is feed ground compared to like if you look at Utah. Utah has a lot of federal and state ground. SITLA is what they call the state ground. I do believe the rush that we were seeing late into Q4 and what we're seeing right now in Q1 are some companies that are getting leases drilled. that are on federal acreage so they don't lose that lease. I do hear that that's some of the activity that we're seeing. But knowing the amount of work that's coming from Texas and Oklahoma, I can't believe that that's very much of that work. New Mexico, when you look at the drilling that goes on down there that's associated with that Permian, That there in New Mexico, I would imagine you probably got some federal grounds that are being drilled there, but I don't see that as ending the federal, drilling on federal grounds is a major impact to us. I'm hoping I'm not wrong there, I don't think I am, because if I look at like Utah, There wasn't much drilling going on here anyway, and we actually have some rigs standing up, which is great to see. I think we've got four or five rigs now standing up. But I do know that some of that is on federal ground. The stuff we've seen on tribal here in Utah, they were excluded from this deterrent of drilling on federal ground. I'm not quite sure how the You know, the tribe got around that issue, but they got a release from that non-drilling on federal ground. So that's probably why we're seeing some of the activity pick up here in the state.
spk04: Right. Well, and I would think that if – I mean, I hope they come to their senses about this, but if it doesn't, I would imagine that could – perhaps pick up activity in other areas like, you know, up in the Appalachians, perhaps, where there's not a lot of the federal acreage up there.
spk03: Correct. You know, and we're going to, we need oil and gas and we're either going to get it on an international market or we're going to get a lot of it here domestic, but we're going to get it. So, you know, that's how we look at it. That's why, you know, the strengthening of our international platform is very important. To answer your question in regards to the Gulf, again, where we send tools to our channel partner and they send them out, I do know we've run drill and ream on offshore in the Gulf, and I do believe it had some good performance, but I can definitely find out how many runs that we have had in the Gulf and the performance of those tools and and be able to get back to you on that.
spk04: Okay.
spk03: I was going to say circle around, but I won't say that.
spk04: Yeah, yeah. Okay. Right. Okay. Also, wondering, as you see demand for products starting to pick up, do you feel pretty confident you can keep your overhead expenses pretty much in check, or are you going to be, you know, perhaps impacted by ramping up on that? In other words, you're trying to figure out if orders come in that hopefully that'll just flow to your, hopefully flow to your bottom line?
spk03: You know, volume is key. We have, you know, fixed costs here, and we've been able to hire back some very, very good talent that we had to let go midway through last year. We've been able to hire those people back. Volume is everything to us. When we start getting volume, the amount of people that we have in place now can absorb more volume, and when we do, our margins really start to look nice. I think, I think we can, we can grow this company without adding a ton of costs. We're going to have some international expense. We have to get a repair facility in the international market. So, you know, we budgeted for that. You know, we had a, we had a goal to get that done by the end of 2Q. It may be pushed back a little bit because there's still some travel restrictions going on that we're, that we're trying to deal with as we look to train individuals over there. But we're going to have a repair center and a fabrication option in the Mideast in the not-too-distant future.
spk04: Well, very good. Keep after it.
spk03: We will.
spk04: Good luck forward. Thank you. Hopefully it'll stick. All right. You take care.
spk05: If there are no further questions in the queue, I'd like to hand the call back to Matt and come in for closing remarks.
spk03: I'd like to tell everybody thanks for joining us. And, you know, we've got a lot going on here. I think it's going to be very positive in 2021 and beyond. And, you know, and I really feel optimistic about the team we've got and the opportunities in front of us. So stay tuned and we'll – We'll keep pounding away, and we'll get this right. We'll get down the road. We'll get it right. With that, I want to tell everybody have a good day. Thank you.
spk05: Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.
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