Superior Drilling Products, Inc.

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.

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.

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.