This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk08: good morning ladies and gentlemen and welcome to the superior drilling products first quarter 2023 financial results at this time all participants are in 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 then zero on your telephone keypad as a reminder this conference is being recorded It is now my pleasure to introduce your host, Craig Mahalik. Thank you. Please go ahead, sir.
spk01: Yeah, thank you, and welcome, everyone, to our first quarter 2023 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. Should have a copy of the financial results that were released before the market this morning. You should have also a copy of the slides that accompany our conversation today. If not, both can be found at 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 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 the Securities and Exchange Commission. These documents can also be found on our website or at 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 GAAP measures in the tables accompanying the earnings release, 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.
spk03: Chris? Thank you, Craig, and thanks, everyone, for joining us today. We kicked off the year on a strong note as our team continued to execute well to meet increasing demand. This slide highlights several of our accomplishments. which includes the highest quarterly revenue and net income since the company went public in 2014. Our top line growth for the quarter was driven by strong drilling ring tool sales from our U.S. channel partner, higher contract services work, and the improved market conditions internationally. We expect a continued improvement in the international market throughout 2023. The operating leverage that we gained from higher drilling ring tool sales resulted in measurably improved operating income and net income and very strong EBITDA performance. We put our strong cash generation to use in making capital investments to expand capacity to accommodate our increased work and in support of anticipated demand growth, both domestically and on the international front. As we mentioned in our earnings press release, the company's board of directors is finalizing a process to engage a financial advisor to assist the company in the evaluation of potential strategic transactions in order to maximize shareholder value. As part of the process, the board will consider a full range of strategic alternatives, including acquisitions, sales, mergers, divestiture of assets, or other strategic initiatives. There's no assurances regarding the outcome or timing of this evaluation, and we do not intend to make further announcements until such a time further disclosure is appropriate or necessary. Now turning to slide four provides an overview of our revenue growth. Q1 revenue was up 52% to a record $6.3 million, reflecting the recovery of the oil and gas industry in North America which resulted in increased tool revenue and strong growth in contract services. We also saw improving marketing conditions in the Middle East where we continue to gain traction. While not back to pre-pandemic levels, we have benefited from an increasing rig count when looking at our results on a year-over-year basis. As the average U.S. rig count was 761 in the first quarter, up 128 rigs from the average in the first quarter of last year. However, as expected, the domestic rig count flattened, and when comparing with the sequential fourth quarter, was actually down 14 rigs. Over the near term, it is our expectation that the North American rig count will stabilize around these levels. On the international front, revenue doubled year over year. which reflected improved market conditions and our strengthened technical sales and marketing team. Our team continues to make further inroads, opening doors and driving greater awareness of the drilling ring value proposition. Our international sales mix was approximately 13% of total revenue for the quarter, up roughly from 10% from last year. We continue to be encouraged by the many opportunities in the Mideast region, and expect that mixed change to continue to trend upwards. Now let's move on to slide five and review our tool and contract services. First quarter contract services revenue was $2 million, up 49% over last year. This was due to continued expansion of the volume and products we refurbish and manufacture for our longtime legacy customer. Tool revenue grew 54% during the quarter, given our improved market penetration in the Middle East and as our channel partner in the U.S. continues to drive new tool sales. In addition, activity on more rigs has led to increased royalty and repair revenue. Now, as you can see on slide six, we have continued to invest in people to address demand while still fighting inflationary headwinds for payroll, raw materials, and other costs. Importantly, though, we continue to demonstrate the significant inherent leverage in our operations as we leverage these costs with higher sales volume, which resulted in significantly improved operating margin performance. SG&A expenses were 37.2% of revenue, down 270 basis points year over year, and down 200 basis points sequentially. SG&A expenses in the first quarter of 2023 included $360,000 of legal expenses pertaining to our patent infringement lawsuit. Currently, we're preparing for a trial and expect a jury trial during the fall or early winter of 2023. Our strong operating leverage can be seen as we turn to slide seven. which highlights our bottom line and adjusted EBITDA results. We delivered net income of $1.5 million or 5 cents per diluted share in the quarter. Now included was $350,000 of recovery of a related party note receivable, whereas the comparable 2022 period did not have such a benefit. To put that 1.5 million into perspective, That is more than what we achieved all of last year, which was our first year of positive bottom line performance. Even backing out the recovery of the related party note, our Q1 2023 net income still outperformed all of calendar year 2022. Adjusted EBITDA nearly doubled year over year to $2 million with the EBITDA margin expanding 760 basis points to 32.1%, our highest level in recent history. Moving on to slide eight, we highlight our balance sheet, which has continued to strengthen. Cash generated from operations for the quarter was $1 million. Strong EBITDA growth in the current period was offset by an increase in working capital as the company continues to grow. Total debt for the quarter was $1.6 million, down slightly from year-end 2022, but down significantly 45% from the end of 2020. We are currently in discussions with a commercial bank regarding a credit facility with the use of proceeds to refinance our existing debt and to provide increased liquidity. In addition, we expect an improvement in our cost of capital. First quarter CapEx was $1.6 million and was related to the completion of our new domestic machining centers, an increase in the Middle East drill and ring tool fleet, our new service and technology center in the Middle East, and the expansion of PDC bit refurbishment capacity in Vernal. We ended the quarter with $2 million in cash down slightly from year end 2022. Now on to slide nine, which provides our guidance. We continue to expect 2023 revenue will be in the range of $24 to $27 million, which implies top line growth of 34% at the midpoint. SG&A expenses are projected to be $9 to $10 million. This is a step up from where we ended 2022, largely reflecting the litigation costs of approximately $1 million related to our ongoing patent infringement lawsuit that I mentioned earlier. The SG&A expectations also take into account the investments we are continuing to make in our international team to drive future Middle East growth. With these added international costs and our expectation that the new drill and ream tool sales will not be repeated at the same level we saw in Q1, we are maintaining our adjusted EBITDA guidance of $6.5 to $7.5 million. which implies an EBITDA margin of 27.5 percent at the midpoint. That level is nearly 300 basis points higher than our 2022 results. Lastly, we have revised our expected capital spending for fiscal 2022 to range between $3.5 and $4 million from the previous expected range of $3 to $3.5. The added spending is in support of our Middle East expansion So with that, I'm going to turn the presentation to Troy to wrap up with a review of our outlook and opportunities, both in North America and internationally. Troy? Thanks, Chris, and thanks, everybody, for joining us.
spk06: Excuse me. So as we look at our outlook and opportunities, first of all, as we look at North America, like Chris had mentioned, we've spent the money on new machining centers We've also taken our drill and ring facility. We've moved that off campus into its own building, which has allowed us to now entertain a larger customer. As we look at our legacy operations, we can double what we've been doing and our team is working diligently to get that done. I want to talk about our team just for a minute. One of the things that we've been able to do is hire really well. The people that are being attracted to our company are world-class, both domestically and internationally. We've been able to bring on top individuals that they have a lot of get up and go and they're excited to see the growth of this company and to take this company to the next level. And we're seeing that throughout the company. It's very refreshing and rewarding to work with these individuals. When you look at the North America, again, when we look at our machining capacity. Chris had mentioned the spend that we have there. Those machines are now, we've got them fitted, we've got them tooled, and we're looking at those opportunities to start filling that capacity. There's a lot of opportunity out there for this type of machine, and it's a lot of opportunity in the oil and gas business, and that's That's where we really focus, even though we still talk about diversification. There's a big need for what we do in the oil and gas market. Even though we talk about a flat rig count, there's a tremendous opportunity within that flat rig count in North America for us to gain more business, and we're going to do that. When you look at our international opportunity, again, the team there is really doing a good job. We've just been working in a few countries, and we're expanding that now as our team members get aboard and they understand what our product does and how it benefits the customers and the runs that we're getting. We're able to show offset data that really, really shows these NOCs the benefit of of our wellbore conditioning tool. But with that, we're also finding the need to duplicate what we do here in North America over there when we talk about, you know, the bit repair service. We've got a tremendous opportunity over there, and we get asked a lot, when are we going to start doing that? in the MENA region. And so the team's looking at that. We've got the equipment that we're putting into place to service the drilling rings. That facility will be up and going here by the end of this quarter. And the next look from there is going to be to also look at enhancing our offering in the to do the bit refurbishment, which is greatly needed in that part of the world. So the international market has got some tremendous opportunity for growth, not just Drilling Ring, but also our legacy business that we have to offer that part of the world. And like I say, we've essentially been duplicating the facility we have in Vernal. We've designed and created some new brazing stations that are working out very, very well. We've got teams now trained that will be going in and out of the MENA region, training our team members over there, and our first team is heading over there within the next two weeks. But there's some tremendous opportunity in our customers now are starting to see a big value that they're receiving from running the drill and ream. And there's a lot of excitement on getting that into more of the wellbore. When you look at North America, drill and ream fits really good into the curb. When we drill a horizontal well, we've got customers that run it in the curb. We've got customers that run it in the lateral wellbore. But what we see over in the MENA region is a need for much larger tools in the vertical section of the wellbore as well as the curve and the lateral. You know, lateral is just now starting to become a way of drilling over there, if you will. They're starting now to duplicate what we do here in the U.S. as we build a curve and then go out horizontal, directionally, in a lateral. And so we're really excited about that happening now in the Mideast, what the tool was designed and built for. We're now being able to just come right in there and say, yes, this is what drill and ring does, is to help you out in the lateral on top of benefiting them greatly that they're seeing right now in the vertical section of the wellbore. Wellbore quality is the new buzzword. When you talk to operators, they want to know, they're all talking now about wellbore quality. What's the quality of the wellbore I'm drilling? And drilling that fits right in place. That's what it does. It helps to create a quality wellbore. So we're excited for the opportunities on both the domestic and the international markets, and we're excited to capture those opportunities as the year goes on. With that being said, I'm going to turn it over to some Q&A.
spk10: Thank you, Phil.
spk08: Ladies and gentlemen, we will now begin the question and answer session. If you would like to ask a question, please press star then 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and then 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. Again, if you would like to ask a question, please press star and then 1 now. The last question we have is from Dick Ryan from Oak Ridge Financial. Please go ahead.
spk07: Thank you, and congratulations, guys, on a very strong performance. Say, Troy, you know, just on the macro side, if you listen to what the drillers are saying, you know, with gas prices being what they are, you're seeing rigs being laid down in the gas fields and kind of moving over into the oil rich basins like the Permian. So there is a shift and it sounds like gas is going to stay pretty challenging for the next several quarters at least. Is that changing your outlook of drill and ream opportunities and maybe a tag along? Can you talk a little more on how DTI is kind of expanding the opportunities in North America?
spk06: Yeah, what we see is DTI is, you know, when you look at the top operators in, let's say, you know, the Permian, DTI has got tools on the top five operators, and they're penetrating those operators deeper every day. So, again, the buzz out there of wellbore quality is starting to – It's been probably four weeks ago now down in Houston. And it was a seminar that the operators put on and asked the PDC suppliers to attend. And I was asked to come down and participate in the seminar. And almost every topic went to wellbore quality. So, you know, in the past, they would drill a well. And the completion team would come on. So you drill it really fast, and whatever condition it was in, you know, the completion team had to deal with. And what we're seeing now is an awareness of, wait a minute, what kind of condition is this well that you're leaving me to complete? And so I think that's been very beneficial for DTI is customers now within DTI their customers are saying, you know, maybe a Pioneer or an Oxy was using it on, you know, 40, 50% of their rigs. I think they're getting a lot higher numbers now. So we will see the gas basins slowing down, but I think what we're going to see is the oil basins needing more rigs and also needing to do a better job at the wells they're drilling and I think they'll rely on drill and ream to help them with that so I think the drill and ream activity is going to stay busy at least the indications of the new tool cells and how busy I mean we're setting records in our new facility, new drilling facility. It's amazing what the team is doing there and the record number of tools that's leaving that facility every week being repaired and put back out in the field. So I think we're still going to continue to see, you know, strong activity and strong use of the drilling room.
spk07: Good. Appreciate that. With the capacity now in place for the contract services side of things, can you kind of handicap when, you know, when does the marketing start to reach out to a potential another customer or how far along are we in that path?
spk06: We already have, and we've already been doing a few products for other customers. We think that, you know, we've got... a contract in place with one. And I think that it's going to, we're now at the point where we can start soliciting work from them. And so we should start to see that happening this quarter.
spk07: Okay, I appreciate that. Thank you, Troy and Chris, and good luck and congratulations again on a strong performance.
spk02: Thank you. Thanks, Derek.
spk10: The next question we have is from Ignacio Bernaldez from EF Hudson.
spk08: Please go ahead.
spk05: Hey, good morning and congratulations on the great quarter. Great to see the business doing really well. When you think about the international opportunity, what are some kind of headwinds you might be seeing or you are seeing in that expansion?
spk06: Mostly logistics. You know, it's even though you know, the countries that we deal with in the MENA region are all very close to one another. It's not like shipping a tool from Colorado to Texas. It's, you know, every country's got its own documentation that needs to be filled in, filled out. You've got restrictions on if you send a tool in there, how long can it stay there? And so We're trying to understand the logistics portion of the business over there, and we're getting much, much better at understanding that. But that's probably been our biggest headwind. And, you know, the operators, they now – what they've been doing that's been really neat is they've been looking at – runs without the drilling reams and runs with the drilling reams and the comparison and what the drilling ream is doing is phenomenal. And so it's nice that they're taking the time and looking at it and saying, okay, you've got something to sell here. You tell us it's going to help us. We're going to prove it to ourselves. And now that they're doing that, The reports that we're getting from the operators are phenomenal. We're very impressed with all of the benefits that the drilling gives them. Excuse me. And not just a quality wellbore, but you see a lot less damage to the bottom hole assembly, what we call the BHA. Bits last longer. Motors are lasting longer. We seem to take a lot of the shock and vibration that's inherent with the drill string rotating and flopping around that drill and dream and the fact that it is conditioning that wellbore, it's in constant contact with the wellbore. It seems to act as a shock absorber and really benefit and it lessens all of that vibration and shock that would be going right down to the BHA. So that's another great benefit that the tool is giving the operators.
spk05: That's really helpful. And thank you for the additional color on the benefit of the drilling ream from the operator perspective. Thank you so much. Thank you.
spk10: Thank you.
spk08: Ladies and gentlemen, just a reminder, if you would like to ask a question, please press star and then 1 now. The next question we have is from John Sergis from Oppenheimer and Company. Please go ahead.
spk04: Thank you for taking my call. Very nice execution. I really appreciate the results. Two questions. One is the drilling activity, at least from the Baker Hughes data, appears to be flat to down from December. Was there a change in your go-to-market strategy? Because it looks like you've had a surge in penetration. And the second question is, how long from now do you expect to go for before you have to add additional capacity?
spk06: So when we look at the the market being flat and the change and why we're seeing, you know, the increased revenue in a flat market. Again, I think it's the awareness that the operators are, are receiving in regards to the well-born, the well-born quality. You know, it's a big deal when you, when you look at all the torturosity and, you know, the dog legs and, and, When you can smooth that out and you can put in casing, whether it's your surface, your intermediate, or your lateral, and you know that you've got better cement job because you don't have your casing leaning up against part of your wellbore that the drilling ream has now taken out, so you get a better cement job. I just think there is a much higher awareness of wellbore. You know, it's not just about how quick can we drill a hole anymore, which it's amazing how fast they're drilling these wells, but the awareness of saying, what kind of wellbore did you leave us to complete, I think is really, you know, okay, let's do this quick and efficient, but let's make sure we do it right. And I think that's been a big plus for the drill and ring tool.
spk04: So this sounds more like a market-driven response.
spk06: It really is. I think it really is. And, you know, of course, DTI has done a fantastic job. You know, they've also built a team and they've now got experts with the drilling ring that, you know, they're getting out and they're getting deeper into their customers to explain these benefits that are now obvious. And so I think that's helping out a bunch too. And what was your second question? I'm sorry.
spk04: Well, with the current pace, how long will the current capacity last?
spk06: We've got, we now have a lot of capacity. I mean, We were starting to get really tight in our facility. But moving the drilling room operations off campus and into its own facility has added a ton of capacity. We could easily double what we're doing now. So I think it's going to be a while before we've got to expand more capacity. I'm looking, I mean, it's, it's, we've got a couple of years.
spk04: Okay. I just looked at the current pace. It looked like it might be a shorter timeframe. Thank you for, for adding all that color.
spk02: Appreciate it. Thank you.
spk10: Thank you.
spk08: The next question we have is from Paul from as a private investor, please go ahead.
spk09: Good morning, gentlemen, and congratulations on your first quarter report. I have three questions for you, trying to get an idea of where you're at. Can you describe to me what percentage of your business is primarily making new drill bits versus refurbishments and repairs?
spk06: New drill bits, if we just talk drill bits and not throw drill and ream in there, you're talking refurbishment is, yeah, that's a third of it.
spk09: Okay. That refurbishment is a third then, right?
spk02: That's correct.
spk09: And the drill and ream is the rest?
spk02: Yep.
spk09: Okay. And with your current growth that's taking place industry-wise, can you describe to me your current position in the business? Are you considered now at the mid-tier manufacturing level? Are you a major producer? Where are you at on the scale?
spk06: If we look at the scale of what we're doing, we're still very small, very small. in our industry. We've got a long way to go to be what I'd consider mid-tier. So we're still very small.
spk09: Thank you. And with regard to the patent infringement lawsuit, are you the plaintiff or the defendant in that suit?
spk06: We are the plaintiff.
spk09: That's all I got for you guys. I sure appreciate you answering my questions.
spk02: Thank you. Thank you.
spk08: Thank you, sir. Ladies and gentlemen, at this stage, there are no further questions. I will now hand back to management for closing remarks.
spk06: Please. Again, we want to thank everybody for joining us. And, you know, we look forward to continuing growth throughout this year. You know, the team that's in place now, we've spent the resources to bring on some quality people and to get these people trained, and our team is really starting to feel comfortable with their roles in the company. So look forward to our next earnings call and sharing some new highlights with you then. But thanks again, everybody, for joining us, and have a wonderful day.
spk10: Thank you, sir. Ladies and gentlemen, that then concludes today's conference. Thank you for joining us. You may now disconnect your lines.
Disclaimer