Superior Drilling Products, Inc.

Greetings and welcome to the Superior Drilling Products fourth quarter fiscal year 2022 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, this conference is being recorded. It is now my pleasure to introduce your host, Craig Mahaly. Thank you, Craig. You may begin.

Yeah, thank you and welcome everyone to our fourth quarter full year 2022 earnings conference call. We certainly appreciate you joining us today. Joining me are Troy Meyer, our chairman and chief executive officer, and Chris Cashin, our chief financial officer. Chris will first review our results in detail and then Troy will provide an update on the company's strategic progress, after which we'll open up for Q&A. You should have a copy of the financial results that were released before the markets this morning. You should also have a copy of the slides that accompany our conversation today. If not, both can be found on our website at sdpi.com. Turning to slide two, I'll point out that we may make some forward-looking statements during the formal discussion as well as during the Q&A session. These statements apply to future events and are subject to risks and uncertainties as well as other factors that could cause actual results that 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 the Securities and Exchange Commission. These documents can also be found on our website or sec.gov. I want to also point out that during today's call, we'll 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 gap measures in the tables accompanying the earnings relief as well as in the slide deck. So with that, please turn to slide three and I'll turn it over to Chris to begin. Chris.

Thank you, Craig, and thanks everyone for joining us today. We had a strong fourth quarter that capped off a record year as our team continued to execute very well to meet increasing demand for our tools and contract services businesses. This slide highlights a number of our accomplishments. which included impressive top line growth for both the quarter and the full year as we continue to see improved market conditions and some very strong customer demand, which we expect to continue throughout 2023. The leverage that we gained from higher sales volume led to a significantly improved operating and EBITDA margins, which translated into a very strong bottom line result. For the full year 2022, we achieved our highest level of net income since being a public company. With our strong cash generation, we continue to strengthen our balance sheet by reducing debt 33%, while making significant capital investments to expand capacity to accommodate increased work and in support of future demand. Now let's turn to slide four, which provides an overview of our revenue growth. Q4 revenue grew to $5.3 million, up 33% year-over-year, reflecting the recovery of the oil and gas market in North America, which resulted in strong demand for our drilling ring and contract services businesses. We also saw improving market conditions in the Middle East, where we are beginning to gain revenue traction. For the full year, 2022, total revenue increased 43% to $19.1 million. We have benefited from an increasing rig count, although we did see rig count growth moderate in the second half of calendar year 2022. The average U.S. rig count was 775 in the fourth quarter, up 14 rigs from the sequential third quarter, and up 216 rigs from the average in the fourth quarter of last year. Over the near term, it is our expectation that the North American rig count will stabilize around these levels. On the international front, we have seen strong revenue growth of 79% in the quarter, which reflected improving market conditions and a strengthened technical sales and marketing team in the Middle East. This team is opening doors and driving greater awareness of our drilling ring value proposition. Our international sales mix increased to approximately 14% of total revenue during the quarter. As you may recall, this mix had been hovering around 10% for the last year or so. We are very encouraged with the many opportunities in the Middle East region and expect that mix shift to continue to trend upwards. Now let's move on to slide five and review a breakdown of our tool and contract services business. Fourth quarter contract services revenue was $1.9 million, almost double the prior year period. and was up 65% to $6.7 million for the full year. We continue to successfully meet our long-term legacy customers' growth in demand for manufacture and refurbishment of drill bits and other related tools. Tool revenue also saw measurable growth for the quarter and year, given our improved market penetration in the Middle East, and as our North American channel partner continues to drive new tool sales. We're also benefiting from increased activity on more rigs, which leads to higher repair and royalty revenue. As you can see on slide six, we have continued to invest in people to address customer demand while still fighting inflationary headwinds for payroll, raw materials, and other costs. Importantly, though, we have effectively leveraged those expenses with higher sales volumes, which drove significantly improved operating income of $700,000 in Q4 and $2 million for the year. Of note, while the increase in SG&A reflects our workforce expansion, it also includes continued litigation costs associated with the company's patent infringement lawsuit. Just as a reminder, we are suing a third party over violations of the patents on our drill and ream tool. During the fourth quarter, the lawsuit progressed rapidly with interrogatories, production requests, and depositions, thus the reason for higher legal expenses in the quarter. As of now, the jury trial is set to begin in the fall of this year. Now on to slide seven, we have our bottom line and adjusted EBITDA results. Looking at the annual charts on the right, it really demonstrates the progress we are making to grow our business in order to enhance our earnings potential. Our adjusted EBITDA margin for the year expanded 500 basis points to 24.7%. There are a couple of items to point out within the quarterly results. 2021 fourth quarter included a $700,000 other income item related to the recovery of a related party receivable. whereas the 2022 fourth quarter did not have a similar benefit. Also, you will see a slight dip in the adjusted EBITDA from third quarter. This was the result of that additional litigation expense that I just mentioned previously. Now, moving on to slide eight, we highlight our balance sheet, which has continued to significantly strengthen Cash generated from operations for the year was $3.5 million, a significant improvement over $500,000 in the prior year. This change reflected higher net income and improved working capital, partially offset by an increase in inventory to combat some supply chain inefficiencies and an increase in that inventory to support our growth. Total debt at year-end was $1.7 million, down 33% from the end of 2021, largely due to the final $750,000 principal payment that we made on our hard rock note in October of 2022. Full-year CapEx was $3.3 million, consisting of two new machining centers, an increase in Middle East drill and ream tool fleet, and higher maintenance activities. We ended the year with $2.2 million of cash, a solid cash position considering our CapEx investments and debt pay down throughout the year. Now let's move to Slide 9, which provides our guidance. We expect 2023 revenue to be in the range of $24 to $27 million, which implies top line growth at 34% using the midpoint of that range. SG&A expenses are projected to be between $9 and $10 million. This is a step up from where we ended in 2022, largely reflecting litigation costs of approximately $1 million related to that ongoing patent infringing lawsuit. The SG&A expectations also take into account the investments we're making in our international technical sales and marketing team, which will drive future international growth. Despite those added costs, we expect adjusted EBITDA in the $6.5 to $7.5 million range, which implies an EBITDA margin of 27.5% at the midpoint. That level is nearly 300 basis points higher than our 2022 results. Lastly, we are targeting capital expenditures of between $3 and $3.5 million. This is generally in line with the past year's investment though the focus will largely be on international new tool additions to our fleet in the Middle East. So with that, I'm going to turn the presentation over to Troy to wrap it up with a review of our outlook and opportunities both in North America and the Middle East region. Troy?