Superior Drilling Products, Inc.

Greetings and welcome to the Superior Drilling Products Third Quarter 2023 Financial Results Conference Call. 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 and zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Craig Boholik, Investor Relations for Superior Drilling. Please go ahead.

Yeah, thank you, and welcome everyone to our third quarter 2023 earnings conference call. Certainly appreciate you joining us today. Joining me are Troy Meyer, our Chairman and Chief Executive Officer, and Chris Cashman, our Chief Financial Officer. Chris will first review our results in detail, and then Troy will provide an update on the company's outlook and opportunities, after which we'll open up for Q&A. You should have a copy of the financial results that were released before the market this morning. You should also have 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'll 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 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 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. The third quarter presented some challenges given the persistent decrease in the domestic rig count, which led to lower demand for our tools and contract service businesses. However, helping offset the slowdown in the domestic market was modest growth in our international business, where we have made investments in our technical sales support team as we look to accelerate the drilling and reaming market penetration and capture greater opportunities moving forward. The overall top-line softness impacted margins, given the underabsorption of fixed costs, together with unfavorable product mix during the period. Also contributing were additional costs that I will speak to later in the presentation. Despite these challenges, we generated significant cash from operations, driving our year-late total to $4.1 million. Also during the quarter, we finalized our new credit facility, which provides additional financial flexibility and liquidity, and we have begun to utilize the accounts receivable purchase program as part of that facility. Now, if you turn with me to slide four, you can see an overview of our top line, which I mentioned felt the impact of the lower U.S. rig count. International revenue, however, increased 6% over last year, but sequentially we were down. As we mentioned on our last call, at the end of Q2, we brought in a new team lead. for our international business, and he has made tremendous progress during the quarter, getting up to speed regarding our business, evaluating staff, and determining priorities. As a result, we made further headcount changes within the business development technical sales support group. This team lead has a highly technical approach in approaching the customer and represents a significant upgrade in our Middle East business development efforts. Our U.S.-based executive management team spent significant time on the ground in the Middle East and guiding this reorganization. We see incredible opportunities for growth and are looking forward to leveraging our new team's capabilities and skills and significantly adding to that team as we move into 2024. In North America, we saw a slight revenue decline year over year. The change reflects the impact of a lower rig count in the U.S. as the current quarter average count was 650, down 111 rigs or 15% year over year. The lower rig count impacted both drilling ring tool sales and contract services work. Despite this significant decline in the rig count, our revenue was only impacted by 3%. We were able to hold our own against these headwinds and gain a larger share of the tool and contract services market. Now, unfortunately, the U.S. rig count story hasn't gotten any better as the count has further declined to 618 rigs as of last week. We haven't seen those kinds of numbers since the end of 2021 and beginning 2022, just as we were coming out of the pandemic. We believe we have reached the bottom of the U.S. rig count decline. and expect the domestic count to begin to improve as we move into calendar 2024. On the international front, the RIG count has trended very differently versus the U.S., steadily improving throughout calendar year 2023 from 900 at the beginning of the year to 962 as of the end of October. Now let's move on to slide five and take a little closer look at our tool and contract services revenue. Third quarter contract services of $1.8 million was down slightly from the sequential period and last year's third quarter. Likewise, tool revenue for the drilling ring was down slightly, which reflected the impact of that decline in the U.S. rig count, that 15% decline that we just referenced. Once again, we want to emphasize that our revenue decline was at a much lower rate than the overall 15% decline in the market. Now let's go to side six and take a look at SG&A expenses. As you can see, year-over-year expenses were up roughly 50%. A significant portion of this was due to our international human resource reorganization that I mentioned earlier. We had people that were not aligned with our new technical approach to business development, and they are no longer with the organization. As well, With our U.S.-based management team spending a significant amount of time in the Middle East, we incurred increased travel-related costs. In addition, we continue to spend heavily in our patent infringement lawsuit. During the quarter, we incurred $260,000 in litigation legal expenses. Year-to-date, we have incurred just over $1 million, which is in line with our 2023 guidance. As well in the quarter, We modified our small diameter strider tool to be run in the Middle East. And lastly, we had incremental costs related to our previously announced initiative to evaluate strategic merger and acquisition options. Moving forward, we believe the majority of our litigation costs are behind us. And as of now, we expect a jury trial in the spring of 2024. We will continue to incur litigation related costs as we move forward, but we expect those costs to be at a lower level compared to what we have spent this year. In addition, the reorganization of the Middle East technical team is complete, and we don't expect a repeat of those travel-related transition costs, nor do we expect additional strata-related modification costs. Now, if we go to slide seven, we can see our bottom line and adjusted EBITDA results. Our business has significant operating leverage when volumes increase. But with lower volume, you can see the reverse of that is true with those unabsorbed fixed costs. And layering on the additional costs, as I just mentioned previously, and the unfavorable product mix, they all contributed to the margin pressure that we saw during the period. We did have a reduction in force in the first week of October. in order to right-size our manufacturing organization for what we continue to see as a soft near-term market in the U.S. As I mentioned, we do expect going into 2024, the market to begin to increase, but as we sit here today, it's still a soft market. In that we've completed our investments in our Middle East repair facility and drilling ring rental tool fleet, This reduction in force will not impact our ability to respond to additional drill and ream tool demand as we move into 2024. Two other items also impacted adjusted EBITDA. We received roughly $200,000 from a non-management shareholder due to short swing SEC profit rules, and these funds were recognized as other income in the quarter. Partially offsetting was a $43,000 expense due to an early redemption fee as part of the company's debt refinancing during the quarter. Now let's move on to slide 8, where we will highlight our balance sheet, which has strengthened significantly. We have previously discussed our new credit agreement that we closed in late July. And beyond the additional financial flexibility and liquidity, it extends our maturity dates and importantly, includes more favorable financing terms than our previous debt arrangements. Total debt At the end of the quarter was a modest $2.5 million, and we continued to be in a negative net debt position where cash exceeds debt. Year-to-date, as I mentioned, we generated from operations $4 million compared to $1.3 million in the year-ago period. Cash at the end of the quarter was $4 million, double the balance from year-end 2022, reflecting improved working capital management, and the timing of receiving customer remittances under the new credit facility purchase program and the resulting transferring of those remittances to the bank. At quarter end in October, we made a $1.2 million payment to our lender as part of that program. Going forward, we do not expect to see timing issues such as these with lockbox system now in place. With the lockbox, we will no longer be a customer remittance pass-through. Thus, payments will go directly to the customer, to the bank, to settle AR purchases. Capital spending of $3 million year-to-date was largely in support of our Middle East operations, which included the drilling and rental tool fleet and the new service and technology center that we opened in the second quarter. Now let's go to slide nine. We are maintaining our guidance for 2023. Our revenue range is $22 to $24 million. SG&A is expected to be between nine and nine and a half million. And this includes those litigation costs, which projected through Q4 will be approximately $1.2 million. So as I mentioned previously, through nine months, it's just over a million. So we expect another couple of hundred thousand of spending in Q4. And as I also mentioned previously, we expect a jury trial in the spring of 2024. Our adjusted EBITDA guidance is 5.5 to 6.5. And lastly, our expected capital spending guidance for 2023 is in the range of 3.5 to 4 million. So you can see that the vast majority of our CapEx has already been incurred. 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 the Middle East region. Troy? Thanks, Chris.