Superior Drilling Products, Inc.

Q1 2021 Earnings Conference Call

5/12/2021

spk06: Greetings and welcome to Superior Drilling Products, Inc. First Quarter 2021 Financial Results. At this time, all participants are in 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 first quarter of fiscal 2021 and talk a little bit about the conditions in the market today. 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 should also have the slides that will accompany our conversation. You can find both of those documents on our website at sdpi.com. If you would turn to 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 today. 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 the earnings release as well as in the slide deck. So with that, if you would turn to slide three, you'll see Troy's name, and he will begin. Troy?
spk03: Thanks, Deb. Thanks, everybody, for joining us. Q1 was a solid quarter for us. We had a strong improvement over the fourth quarter of last year. This was driven in the strength of the U.S. market. You're all aware of the steady increase in rig count that we've been seeing. I believe so far in this Q we've been averaging about 19 rigs per month increase. So that's been wonderful. When we look at the tools that that are being ordered. We started seeing an increase in orders in late December for new tools, and that's followed through all the way up until today. We're still receiving new tool orders, and those tools are being put to work. They're going in the hole. They're being run, coming back to us, being repaired, and we see this. We see this in the other tool revenue that we'll talk about, but you also see it in the in the warranties that we have when these tools go in the hole. We think that when we look at the market, it's not just because of the market improvement that we're seeing this big increase in demand for our tools, but we also believe that the operators that are out there and the ones that were left from this horrible downturn that we had, they're the efficient ones they're the ones that that realize the value of this tool and it's uh they're seeing the value and and and it shows you know you see it in reduced rig time you see it in improved efficiencies the drilling efficiencies when you have a smoother wellbore makes a big difference tripping times are reduced and casing goes to bottom so it's it's a The tool does a good job for people and we're seeing that and they're recognizing that. We're also seeing a big uptick in our contracted services. You know, this is clearly a result of the rig count improving. But when you look at the relationship that we have with Baker Hughes, that really shows right there when you start to see the amount of repairs that are units that are going through our facility not just bits but associated drilling tools as well that we do for them. We're also seeing a high demand on new products through our manufacturing. We're making a lot of new drilling tools right now for Baker Hughes and that relationship is getting stronger every day. We value that relationship and we know that they really rely on us to, when the rig count turns like it has, we can respond quickly. And they need us there to help them respond to this demand. So this has been a good uptick in all areas of our business. And like I say, we're doing more for them all the time, and we're going to try to lean on them a little more and see if we can get something in place that allows this work to continue to flow to us and improve the amount of units that we've got going through our shop. When we look at our international business, we're a little frustrated with what's going on there. It's lagging behind the recovery, but it also lags behind on the downturn. But what we're frustrated with mainly is the travel restrictions that we have going on over there. When you look at Kuwait and Oman and only the nationals are getting in and out of the country, it puts a little bit of a burden on us to get our tech team in there and get face to face with our customers and show them the values that they're getting. But it hasn't slowed us down. We're still We're still making phone calls and sending out presentations and we've got a new structure around our international development. We've put new management in that team and we believe that they're focused very, very well. We look at some of the things that we've been able to get into place. We now have contract with Halliburton in Iraq for the tool. And not just Halliburton looking to run the tool in Iraq. We've got Schlumberger looking to run the tool. We've got Weatherford looking to run the tool. And we now have tools on their way to Iraq that we're looking forward to some good performance of our product there. We've got opportunities in Oman. We have some opportunities in the UAE that we started to get into the UAE really well last year and then We were tripped up by some registration papers that we've got to get finalized and get done, and we're looking to hopefully be through that whole process sometime in Q3, Q4, have all that done and get that back ticking again. We're working with the Servcos, as you all know, to build a strong relationship. They see the value of the tool. It helps them with their projects. services when they go out there to drill a well the drilling ream is a benefit to them getting their products in and out of the hole saving their BHA of a lot of wear and tear and you know preventing helping to prevent you know some stuck in the hole so we've got a good team together there we've brought on Jeff and he's doing a great job there focusing our team on again what we've Some of you call it the 80-20 rule, and we call it smart. It's just he's doing a wonderful job there. With that in mind, I'm going to go ahead and turn it over to Chris and let him talk about the financials. But, again, I just wanted to say thanks, and I also want to say thanks to our team here at Superior. We've got a great team, and we're very proud of them, and they've responded very well to this uptick in business. and been with us through the, you know, the horrible downturn that this pandemic caused, and we're looking forward to this new uptick and watching how this team performs. Chris?
spk02: Okay, well, thank you, Troy, and welcome, everyone. Let's continue our review with slide six and look at some numbers that that we're seeing now with this upturn that Troy's been talking about, really encouraged with this 57% sequential growth in the first quarter over Q4, as activity and overall market conditions have definitely improved in North America. In fact, the revenue in North America increased 74% sequentially from the drill and ring tool sales, the drill and ring royalty, and those repair fees. As Troy mentioned, our largest U.S. distributor of the drill and ring is seeing higher demand for the tool, and early in Q1, we delivered our first new tool order since last summer. Demand for the tools continued through Q1, and it resulted in roughly a half a million dollars of new tool sales in the quarter. And as Troy mentioned, we've seen that demand continue into Q2. We're very optimistic that this recovery will continue at a steady pace throughout the rest of the year. Of course, you look at year over year, the impact of the pandemic and geopolitical supply imbalances in the global markets. That's obvious when you look at our year-over-year comparison, Q1 last year to Q1 this year. We know why we're down, but the really, really encouraging thing is that turn that you see from Q4 into Q1 and the growth that we continue to expect to see. And it wasn't only the drilling ring that improved substantially in the quarter. It was the contract services improving sequentially, reflecting higher drill bit refurbishment revenue from that increasing rig count. We ended the quarter at 417 rigs in the U.S. That's a strong increase from the low point in the summer. That's an increase of 71% from that point and up strong from that year end 417, excuse me, the year end up 19% to that 417. So the rig count overall market certainly is helping us out. But But it's a little more than that. This business, this refurbishment business, as Troy mentioned, I mean, we're doing more. And that revenue increased 50% sequentially over that 19% recount increase. So we're continuing to see good share improvement in this part of the business. As a matter of fact, if you were to go back and look at the quarterly average recount in Q3 compared to the quarterly average recount in Q1, you'll see you know, roughly a 55% increase. You look at revenue from this business, it's up over 100%. So this, what we saw in Q1 was really a continuation of what we began to see in Q4 from Q3. So really pleased with how that's developing and has developed. As Troy mentioned, the international markets, they lagged somewhat both in the downturn last year and now in the recovery. Despite the decline in the international rigs, Our international revenue was relatively flat at $332,000, about what we did in Q4. However, we are gaining some traction. Troy mentioned them with some awful service companies and some agreements we're putting in place. And so we expect to see penetration in that Middle East market. There's no doubt we can continue to make further inroads, and we're very optimistic about that. Let's go ahead and turn to Slide seven, take a little bit deeper look at the tool and contract services revenue. You can see that the contract services revenue, which is that third-party machining work that we do as well as that bit referred business, it's up nicely sequentially, albeit far from pre-COVID levels. But we continue to see a trend that's moving in the right direction. Those tool sales and rental up strong, $489,000, almost $500,000. 143% sequentially. And once again, driving that is the favorable conditions in the North American market. The international revenue line is also included in this bar. The other tool-related revenue, that's the drilling ring maintenance and repair fees, up $300,000 roughly, or 48%. So strong move in our revenue. And I just want to point out that that's... The rig count certainly has helped, but we're also doing some good things from a share perspective. We took aggressive actions, as I think most of you know, to reduce costs in 2020 to get our operations aligned with the lower demand that we saw. And if you turn to slide eight, you can see the results of that. Slide eight, you see our operating expenses. And you see that they're up about 13% sequentially. largely reflecting higher cost of revenue given the increase in volume that we saw in the quarter. We have demonstrated the strong leverage by seeing a good, strong gross margin improvement of roughly 480 basis points to 51.5%. So costs are up, but they're not up at the same rate that revenue is, so we're getting good operating leverage. We continue to maintain cost discipline with keeping overhead costs low and carefully staffing with direct personnel as we see demand come back and as we expect demand to come back. Now, if we'll go to slide nine, take a look at our bottom line and then the adjusted EBITDA results. I just want to point out, it's a busy slide here, but I want to point out for the first quarter, net loss was 1.1 million. Adjusted net loss was 732,000. And we've got a reconciliation to get to the non-GAAP, these measures that we're talking about in the back of this slide deck. But you compare that $732,000 adjusted net loss to Q4's adjusted net loss of $1.2 million, you see we improved the bottom line a half a million dollars. Now, what is driving that adjustment is the forgiveness, the benefit of the forgiveness of the Triple P loan that we booked in Q4. So we had an unusual credit that flowed through the P&L. So just from an operations perspective, the bottom line got better a half a million dollars. And you look at adjusted EBITDA. And you can see that we broke even at the adjusted EBITDA level in Q1. But you also see a substantial improvement of roughly a half a million dollars from Q4. And so you look at Q3 and Q4 of last year, negative EBITDA of $1.1 million. And then Q1 this year, we're at break even. So once again, the impact of the turn that we have made that we saw in our same Q1. Now let's go to slide 10, take a look at the balance sheet, and it is strengthened measurably. Building cash. We told you the last time that we were getting down to a break-even cash level at $700,000 of revenue, and we did that entering into the quarter, and you can see that $300,000 increase in our cash balance, and that was an increase off of September 30th, of $600,000. So the cash is moving in the right direction. $139,000 from operations in the quarter. Long-term debt, which includes the current portion, is staying steady at $3 million. We've got a payment for the Hard Rock note in July of this year, $750,000. And then our last payment on that note will be October 2022. That'll be the last $750,000 payment. As I believe you know, we completed that sell-leaseback transaction for our Vernal, Utah property in the fourth quarter, and that deal includes a repurchase option should we down the road want to do that. So as a long-term lease, the $4.2 million financial obligation is not considered debt, and it significantly improved our liquidity, as you see. Now let's go to slide 11 and just look at the highlights of these opportunities and outlook as we see Once again, we're really, really happy to see the improvement in the U.S. markets, and we expect that to continue steadily throughout the year. As we talked, international markets lagging U.S., but most analysts that we read suggest that we can expect that recovery internationally to pick up in the latter half of this year. And very, very importantly is the is the increase in vaccinations and the impact that has on lifting some of these travel restrictions. And as Troy mentioned, that will help us tremendously, allows our guys to get in front of the customer. And that has hurt us. And so as travel restrictions get lifted and we get our guys back into Kuwait, into Oman, it's really going to help. And as, once again, as we had guided, we did achieve that positive net cash from operations position that we were looking at. Cash throughout the year, it's going to, it'll be challenging. We've got timing issues related to international receivables, just a number of things that we'll continue to work on, continue to balance, but we see this improvement continuing. And then we're also We're working on expanding our drilling tools manufacturing business to white labor products for others. That will expand our revenue potential. We see progress on that front. Overall, it is great to see how things are improving. At Superior Drilling Products, we are so excited about the opportunity for growth that we see throughout this year. With that, Doug, we can open it up for calls.
spk06: 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. The 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 John Baer with Ascend Wealth Advisors. Please proceed with your question.
spk04: Thanks. Good morning, Troy and Chris. Good morning. A couple of questions. What's that? Go ahead, John. Yeah, you answered in the presentation and your slide deck answered a couple of questions that I had, but... If the activity that you're seeing in revenues continue to increase, would you consider prepaying the remaining $750,000 due in October 2022 to set out your interest payment and your debt obligations?
spk02: You know, that's something that we're keeping an eye on, John, to be quite honest. It's a great question, and we are taking a look at that. We do, as I mentioned, we Cash flow, we're improving, but we need to keep – there's a lot of things that need to keep heading in the right direction. So later in the year, we'll see how things have evolved, and most certainly we could take a hard look at that and maybe pick up that last payment and pay it a little bit early. That would definitely give us some relief on that interest.
spk04: Yeah, and I think that would be perceived – favorably amongst investors, I would think. The other question, another question I had was, could you expand a little bit more on your ISO certification creates new product sales potential? What other areas would, I mean, you kind of briefly touched on that in the end of your comments there, Chris, but could you all kind of expand on that a little bit?
spk03: So, John, when you look at when we're penetrating the Mideast, that's the first thing that the NOCs, they ask us, you know, for certification. The ISO certification, we've got another one we're dealing with right now, which is more the, I believe it's ISO, it has 2100, but it deals more with the HS&E side of things. We're going down that road right now. But yeah, it lets us go directly to that NOC and talk rather than going through a channel. But it also does a lot for us here. You know, when you look at our AS 9001, the aerospace, we talk about diversification, right? You've heard us talk about diversification. And these certifications allow us to to go in there and start bidding on stuff for the DOD. We've got a team that we've put together that's identifying that work that fits the machines that we have. As you know, our machines are large for oil-filled stuff. And so a lot of the third-party machine work that you'll look at is a lot of small products with very low margins. And we've put a team together to identify that work that that fits the margins that we're more accustomed to, but we've got to have those certifications to go in there and entertain these bids.
spk04: So are you gaining any traction on that? I mean, is there any meaningful business that's, let's say, new business that is happening because of that now, or are you still kind of in the... stage of still investigating opportunities in that area?
spk03: We're still in the stage. We did a lot of it in Q4. We went down that road and was looking at a lot of third-party work, and we did a lot of third-party work. Was disappointed in the margins we got from it. And so the team that we've now assembled, they're directed to find the work that fits our machines. It really limits the bitter pool when we look at the bigger work that we can fit into our equipment. But as you well know, this marketplace has a way of every time the oil and gas marketplace, every time that we start to diversify and look down other avenues, it picks up and we get really busy and it stifles that diversification model. And we're going to do our best this time to keep focused on diversification and enhancing our product offering.
spk04: Okay. Last quick question. You mentioned that you're seeing increased service fees and so forth. Is that continuing to increase based on additional volumes, or how's that working out?
spk03: Well, we're going to, you know, there's some there's some agreements that we made during the downturn that we're going to, we're going to put, you know, the deduction that we had last year, we're going to, we're going to take that back, and we're going to, to start charging more for our services. And I think it's, it's, it's well warranted. And, and I think that that operators in general, I mean, when you look at what's going on right now, nobody Nobody's prepared for it. And when you look at it, you know, we're at, what, 450 rigs. And the demand on service companies just on those 440 rigs is tremendous. So these rigs are drilling a lot more footage a lot faster. So I think, you know, everybody's got to start looking at how they look at rig count and what that means. Because I believe the rig count that we look at today is about three times the rig count just a few years ago. So, you know, if you look at 440 rigs, 450 rigs, times that by three, you know, just a few years ago, and that's about the level of work that we're seeing right now.
spk04: Okay, very good. We'll keep on trucking there, and I'll get it back in the queue. Thanks.
spk06: As a reminder, ladies and gentlemen, it is star one to ask a question. Our next question comes from the line of Dick Ryan with Colliers. Please proceed with your question.
spk05: Thank you. So, Troy, you mentioned share gains and increasing penetration in the U.S. Can you put some numbers behind that? What's DTI's market share? You know, kind of where has it been and, you know, where do you think it can go?
spk03: DTI's market share in Texas is very strong. They're a southern company that has done really well down there. They've been really good about penetrating and getting this tool out there. If you look at market share, I don't know if we've given that out before as far as what DTI's market share is, and I'm not really comfortable giving that out right now. But I can say that, you know, it's very strong when you look at Texas where the majority of the rigs are. And they continue to grow it, you know, in Canada. They grow it throughout North America. So they're doing a good job in getting out there and pushing the tool into the marketplace. And, you know, we're happy with what they've done and they do a good job.
spk02: Yeah, the other thing, from a share perspective, is Baker Hughes. We believe they're picking up share in the bit market, and that leads to more demand on us to repair their bits. The other thing is they seem to be giving us more of their internal work, and so we're seeing some some share improvements from Baker Hughes as well.
spk05: Just refresh me on the contract services side, the bit refurbishment. Is it solely Baker Hughes? Or I thought you had an opportunity to move beyond that. And if so, what's the outlook for that?
spk03: It is at this point in time solely Baker Hughes. Our contract that we amended last year does allow us to go after Other customers, if you will, we have not done that yet. We've evaluated it, but to be honest with you, we're, we're looking to strengthen our relationship even stronger with Baker use. And right now, in this point in time. That offsets any additional work we feel we may get from somebody else.
spk05: Okay. And on the Middle East, quickly, you said that's kind of lagging. How many different countries are you generating this revenue stream from?
spk03: We've got five right now that we look at. If you look at Kuwait, Oman, the UAE that we'll be back into here hopefully by the end of the third quarter. We've also... The Ukraine, I know that's not in the Mideast, but we've also had opportunities there that we've generated revenue. Qatar. We've got Saudi that we're now taking tools into. And then, of course, the Iraq, which is going to be the new one that our team's working on now, deploying tools over there for three of the service companies.
spk04: Okay, great. Thank you.
spk06: Too bad. There are no more questions in the queue. I'd like to hand it back to management for closing remarks.
spk03: Well, thanks again, everybody, for joining us and bearing with us. We're looking forward to, you know, talking again here in our second quarter, and we'll keep pushing this forward and and keep moving this business forward in a very positive way. Thanks again, and have a wonderful day.
spk06: 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.
Disclaimer

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