Q4 2019 Earnings Call
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Greetings and welcome to the superior drilling products Inc. fourth quarter 2019 financial results.
At this time, all participants are in listen only mode.
Good question answer session off all 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 Deborah Pawlowski Investor Relations. Thank you you may begin.
Thanks, Doug and Hello, everyone. We certainly appreciate your time today, and your interest and superior drilling products.
On the call with me are Troy Meier, our chairman CEO, and Chris Cashier, our Chief Financial Officer.
They are going to provide you with their prepared remarks, after which we will open the call for questions.
You should have a copy of the financial results were released before the markets opened. This morning should also have the slides that accompany our conversation today.
Can find both of those documents on our website at Www Dot STP <unk> Dot com.
If you are aware, we may make forward looking statements during the formal discussion as well as during the Q any session on today's call.
These statements are quite a future events that are subject to risks and uncertainties as long as other factors that could cause actual results could differ materially from what it stayed here today.
These risks and uncertainties are provided in the earnings release, the flight and the other documents filed by the company with Securities and Exchange Commission.
All of these documents can be found on our website, where it FCC dot Gov.
I'd also point out that during today's call, we will discuss some non-GAAP 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 gap.
We have provided the reconciliations of non gap with comparable GAAP measures and the tables accompanying earnings release as well as in the slide deck.
So with that I will turn it over to Detroit to begin Troy.
Thanks, Dan Thanks, everybody for joining us today.
Pretty incredible week.
Wow.
Anyway, if you turn to slide four and your deck, let's get started with.
Well, we'll be talking about today, we'll start off with the growth that we've seen in the mid east.
Oh, when you look at the 25% growth that we've had.
In the quarter.
Look at Q4.
Last year.
Well remember that we made a.
A decision.
Last year to focus our resources.
Into the mid East market, you know we did that bye.
Oh really beefing up our our staff over there we've we've brought on some.
Nominal people that are that are doing a wonderful job.
We're supporting the management team.
Here in the states with additional.
Industry experts that we brought in to support everything we're doing over in the mid east.
As you see in Q4, it starting to pay offs and.
And when we talk about Q1.
Again that's.
That's just towering Q4 so.
We're very excited about the opportunity to mid east and what we're doing there.
You look at the ones that were getting.
Oh.
We just got a tool with so knock.
Set a record run on a.
Gas well, that's a very high profile gas will come in it.
Then over 2 million a day.
We've got so.
Operators now running three tools per well.
They're seeing the benefit.
The drill N ream and there.
ER recognizing that they're running with it.
We have a good testimony to the tool.
In the mid East when you see hold me go into a cell cycle into it and we'll see.
You know, we're talking to them and we're telling them about the benefits of this tool and we've got a very good text staff over there.
The can explain those benefits.
But you still get some push back on the.
On the side of the served codes that.
Using that tool does it really benefit them.
It takes days off the wells.
And there are paid.
For days on wells.
Until we see this push back.
Well now what were seen as a change a shift in the market places. These ITM groups. These turnkey projects.
That halliburton's taken on its lumberjacks taken on and bakers taken on.
They are now requesting the drilling rig for those projects is the as drilling dream enhances.
Not just the quality of the well, but as you all know it takes days off the wells.
And then so that's really starting to.
Just show now that we're getting.
These groups that are in charge of these turnkey projects.
Calling us and walking the tool.
We've expanded into.
Multiple countries over there we have requests on the board right now for.
Numerous countries that are have identified the need of drilling dream.
I can't tell you enough.
How important that market is for our success going forward, especially with what's happened.
And what will happen in our.
Mastic market as we go throughout the year.
We're very excited about the mid east and what we're doing there and the team that we've assembled has been incredible they're doing a wonderful job.
We look at the service agreements that we have so with our legacy customers you know we've got our.
Our legacy customer that we've been doing business with for 25 years, and where we're doing more and more work for them every day as they look at the efficiencies that superior provides them in not just new manufacturing.
But the repair as well as bringing on additional product lines.
That we had never worked on before so.
We're seeing an enhanced relationship with our legacy customer.
And what we've got going through our facility there and in burn on new and used so we're happy with the progress that the team has made there.
We see a lot of efficiencies.
Ben Brock forward.
With our team, we're we're modifying equipment.
You know last year, when we looked at.
What we're doing in R&D.
We focused our team.
We pulled them off the just staying on new product development and said, how do we make things more efficient.
And our team has come in now and and hence the way that we drying diamond with Diamond and we're seeing a benefit there.
We've gone through our whole facility and vernal, Utah and.
Combined all the P.D.C.
Applications. So we're we're drilling ream and PDC bits used to be separate it's now one.
And we're starting to see the benefits of that.
Combination and that that combining of services that we provide we're very pleased with what we're seeing early on this year.
When you look at the drilling Ream domestically you know our our channel partner there has done a fantastic job you all know de <unk>.
And what would what they do with us and for us.
They've done a great job maintaining their market share.
Holding their own in this environment.
We know it's going to be a we're gonna see you know.
We're going to see rig count fall in the U.S. I mean, not that's that's no question, we'll see that.
But where we're where we feel we're well prepared to work with them and do the things to make sure that they can still get tools efficiently and get them out to their customer and still get him a well performing tool.
And that's what we see its customers that.
That's got to have the efficiencies that drilling ream give them.
There's there's groups now use and the drill N ream.
That are setting records every day.
You know when you look in West, Texas, and what's going on with drilling rigs I was I was on the phone well the service company.
Last week that.
They're drilling 20 to 23000 foot wells and they're doing it in seven days.
And they're doing that with the help of drilling.
The largest operator.
In the country is now adopt a drill N ream. So we're excited about the stuff the drill N ream pads going on here domestically and.
International.
When we look at our R&D and what we've got going on there you know, we we've got a team that.
Oh, he's done a phenomenal job when we we looked good.
The strider tool, we're still we're still finalizing that large tool I know I told you are all that we'd have that out the end of last year, we changed start.
Our focus a little bit, but where we're still leave we ran the strider in January.
I want to test rig looking.
The council out capitation, we did that it was it was a great tests were very excited about the strider tool we've sold our first.
Coil tubing strider tools or two.
Baker Hughes and.
In January so things are moving forward in that product line.
When we were pleased right now with the team and what they're doing.
One more thing I'm going to touch on.
No. The Mega bore you know we spent like I said, we we.
We focused our resources to the middle East last year, but one of the things that.
In doing so we knew we had to be more efficient, making large tools the middle east is demanding large tools.
Well then series 16 inch series 17, we now have request for 22.
So we invested in the turning centered that we've talked about it it's a mega bore it's a very large.
Turning center.
And right now today I can tell you that we've doubled our capacity.
On the larger size tools due to this tool that we put in place this massive.
Turning centered that we've put in place I'm very proud of of the work that the team has done.
So.
With that I'm going to turn it over to Mr. passions and and so he can go over the the financial details.
Chris.
Yeah, Thank you Troy and welcome everyone.
Oh, that's continue our review by looking at slide six.
On the slide I like to point out.
Q4, this year versus Q4 last year.
Troy mentioned in his in his commentary that were up strong quarter to quarter and her the numbers up roughly 25%.
Quarter to quarter.
As a as you know the Q4 is typically a softer quarter for the oil and gas industry. When you look at the across the year and so we're real pleased with how strong our Q4 came in.
You can see the numbers there its its driven by by the tool revenue that's the drilling rain and.
That's where we have the international revenue and the U.S. revenue and and and I might add were up on both international and U.S. quarter to quarter, and we'll see that little bit more in the next slot.
So a great we got some wonderful things going on internationally, but but the a U.S. businesses hanging in there and that's that's choice said, that's a that's a testament to what our distributor did you guys doing in the U.S. market. They are they're they're holding their own quote unquote, and we'll see that little bit more next slide as well so.
When you look at our numbers on an annual basis, you said, a nice steady increase calendar 17 to calendar night team.
And so you know we just are you look look at that and chart joint much few minutes ago, we've expanded our relationship with our legacy legacy partner Baker Hughes doing some more of their product in our repair operations that that's the Navy blue part of this bar and you can really see that on a calendar year basis very strong roughly five.
Million dollars a year.
With Baker Hughes on the bit refurb side, and and with the addition of that additional product that we put in place, but the new contract. In April 2018, you can you can see how it really starts to show up in 2019, So a real real pleased with how that's how how that's looking.
If we go to slide seven we can break down that tool revenue, just a bit and look at a retro and sales versus the other related to a revenue, which is which is basically that's the royalty in the maintenance revenue in the U.S.
So as we look at the the sales and the rental part of that bar graph, a international isn't there a international in Q4 came in at $600000.
Versus Q3 of just under 300000.
So we saw a doubling little more than doubling of international revenue in Q4 versus Q3.
And then if you look back at Q1 in Q2 2019, we were at around 200000.
So kind of get to get a view of what that of what that trend line looks like.
Couple of hundred thousand in Q2.
300000 in Q3, and 600000 Q4, so there's the numbers that that a Troy is talking about when we when we sit here we look at the traction that we're getting internationally are really pleased with that what that curve and the way that curve is taking shape and we were confident that that's going to continue.
We'll we'll continue to see good growth as we go forward with the international piece of the business.
And as I mentioned that the second bullet point, our tool sales in the quarter. That's that's the U.S.U.S. piece of the business and so.
You asked and international was strong for us in Q4.
The Navy Blue part of the bar, a that's that a other related to revenue or recurring revenue. That's the that's the royalty in the in the repair and maintenance and you see that is that is flat.
Since the last five quarters.
Between 1.6 and $1.8 million and that's once again, that's that's our distributor in the U.S.
Holding their own I mean, do you see that it's it's flat, but that's that's good but we think about what's happened in the market.
These numbers, where we're looking at for Q4, I mean, the markets down in the U.S. roughly 25% what do you measure that on an average quarter to average quarter basis are you measure that on a end of year to end of your basis whichever way you do it it's down in the U.S. from eight 2018.
For 2019 about 25%.
And so that's a significant drop in activity from 2018, 2019, and yet our distributor it continues to hold their own and activity market activity. So that's basically says that they're picking up share and so that's what they're doing a very good job force and that's what these numbers these numbers.
We're saying right on this chart.
Let's go to slide eight and look at our operating expenses and the first thing to kind of point out is his own acute once again on a quarter to quarter basis Q4 to Q4 were flat it moves around a little bit during the quarter, but pretty pretty flattish I want to point out that SG anyway is around that.
2 million kind of a number and that's a that's a good run rate to be thinking about SGN, a couple of million dollars a quarter $8 million a year. That's it that's a good run rate that's a decent run rate based based on how we're operating today and so I kind of want to make that point that I just as everyone knows we got some.
Real dynamic things going on this industry.
And we're looking out a lot of different things and know what are well what are we going to do next and those kinds of things. So so once again to qualifier is based on how we do things today.
About $8 million run rate on SGN night.
You look at the depreciation and amortization Lon.
You see that coming down a bit from a million dollars 900000 to 700000, that's that's a amortization expenses coming down May 2019, a there was we had some intangible assets that we have we fully amortized and so that basically let.
Two.
Hundred thousand a month and less amortization expense so that a that you see that in the second half of calendar 2019.
There will be at some another bucket of intangible assets that will fully amortized in may of 2021, and so we expect that that will continue to come down as we go forward.
What will be increasing is depreciation expense as we continued to build tools, primarily for the middle east market with the demand that we're seeing a we were increasing that tool fleet and so I will continue to do that in that so depreciable asset and so you will see going forward.
Some increase in depreciation expense.
Well, let's go to slide slide nine and I just want to I just want to focus on the adjusted EBITDA.
Barred the quarterly bar graph once again soft fourth quarters.
Once again, our fourth quarter. This your strong and news on the revenue line and you can see it translated into a strong adjusted EBITDA as well we more than doubled our adjusted EBITDA between Q4, I think Q4 of 19, so that not strong revenue increase that we saw previously translated in some good.
EBITDA increased as well and so we're real pleased with how how that that's working out and that's it that is where some of the some of the things some of the efficiency things, we're doing that choice spoke about.
Reorganizing some things in Q4, and so we had some some cost the came through the through the quarter that we were able to absorb those and still turn in.
$621000 of adjusted EBITDA in Q4, you.
You say for the year 2019, right at $4 million, 21% of revenue.
We anticipate as we continue to grow primarily through the the a the U.S. The excuse me the international business that we should be able to get into the mid twentys on that EBITDA per set to revenue.
Once again I need to emphasize that's a as we are structured and as we are functioning today.
As we go forward in this marketplace ill will be challenged with some quite quite obviously some need to reduce some cost as Troy mentioned.
Rigs are coming down I mean, they they will where and how far they come down all thinking by really knows but a they're coming down and wheel.
We'll do what we what we've been doing for years and what we did back in 2015 to 16 will will make the adjustments that we need to make in order to continued to perform well and this market with these with these headwinds replacing.
On slide 10, the balance sheets.
One of make the point that we had some some timing differences in some collections of receivables about a million dollars basically deferred into Q1 from Q4.
That million dollars if it had been on the balance sheet at the end of 2019, it would've been a a couple of million dollar cash balance a and that's that's right right where the cashes today, we're collecting on those receivables that that ordinarily would have come in Q4, they're coming in Q1, and we're making those collections and so as we sit here today I mean the cash.
She is in the two two and half million dollars range, and so where we feel very good about where our cash balance says look that timing difference.
You know we've taken care of that's and we are collecting those receivables that as I said ordinarily would have been collected in 2009 thing.
You can see the debt continues to come down if you look at that debt charts. We we have cut that over 50% since the end of 2016 went out $8 million into 2019.
When I add that we we paid our first installment this year on our own our note on our hard rock Nokseven hundred 50000 principle, so that light blue part of that debt bar, that's the hard rock note and it currently stands at 2.250 million.
We made that first payment on January five 2020.
We've got three more payments of 750000 age and we will have fully retired that no and so we're really excited about how have the balance sheet is going to look a once we get that taking care of.
Ah we are.
Selling some assets, we sold an airplane netted out $117000 in cash in February and so between the cash we have on hand, and the cash we expect to generate going forward and pop operations.
Our.
We're pleased with where we often look from liquidity perspective.
So as everyone knows I mean this industries in a great deal of uncertainty and that's obviously is an understatement.
You know the battle between Russia, and Saudi Arabia, It's just haven't fits on on what the supplies going to look like production, yeah, they're both ramping up production and that together with the Corona virus. The demand side is is a is weak as well. So it's a tough time a re.
Really tough time to being in the oil and gas business and so.
We we see significant opportunities even in this marketplace.
But because of the uncertainty and that really the upheaval, a where we're we're hesitant to provide any any financial guidance into 2020.
And we're going to kind of stay on that position until we get a little more clarity in the market.
And exactly what a what we're saying from our customers.
From the end users as to the extra their plans in this market. So at least for right now were suspending the guidance for 2020.
And and as we evaluate what's going on I mean this is.
So much of this is just hit us since this past weekend, that's amazing is that sounds.
It was just this past weekend when when I'm in the wheels fell off for probably.
Spectrum, so so with that I'm going to turn this back to the operator and a and open this up four for questions Tonight.
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Okay with with that being said.
We appreciate everybody has joined us today.
Well continue to do what.
What we doing well.
Well be talking to you again here shortly with our Q1 earnings and.
Look forward to that call.
So thanks again, everybody for joining doesn't have a wonderful.
Wonderful week.
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