Q1 2020 Earnings Call
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Greetings and welcome to the superior drilling products incorporated first quarter 2020 financial results.
This time, all participants are they listen only mode.
Question answer session will all the formal presentation.
If anyone should require operator or technical assistance during the conference. Please press star as you're 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 Ms. Polaski maybe.
Thanks, Victor and Hello, everyone. We appreciate your time today and your interest is pure drilling products Inc.
On a call with me are Troy Meier, our chairman and CEO, Chris cash in our Chief Financial Officer.
They're going to provide you with your prepared remarks discussing the current situation of the company.
Results of the corridor and a little bit on where we see things going.
And then we'll open the call for questions.
You should have a copy of the financial results that we released before the market open. This morning, and you should have for flights. It will accompany our conversation today you can find both of those documents our website at www Dot SPP Dot com.
As 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.
Statements apply to future events that are subject to risks and uncertainties as well as other factors that could cause the actual results could differ materially from what it stayed here today.
These risks and uncertainties are provided in the earnings release, the slides and 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 want to also point out that during today's call. We will discuss some non-GAAP financial measures, which we believe will be useful in evaluating our performance.
You should not consider the presentation. This additional information in isolation or as a substitute for results prepared in accordance with gap.
We have provided reconciliations of non gap with comparable GAAP measures in the tables accompanying the earnings release as well as it looks like that.
With that I'm not turn it over Detroit to begin Troy.
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Yeah.
Thanks, everybody for joining us.
Go ahead, and turn to slide number four in the slide deck.
Let's talk a little bit about what we did and.
Q1, when you look at the numbers that Chris will be going over you'll see that.
The stuff that we started doing midway last year, we started talking about building stronger relationships with our domestic partners.
Well the same time.
Yeah, we're working our mid east what we've been doing over their building that really staying focused.
Really within one country over there and where we're now starting to migrate out of that country is is the tools success. The drilling tools is being tested in other areas and and we'll talk about that more dismissed as we go on through this presentation.
Well, what do you see in in the first quarter until revenue grew 5% and that was a combination of the efforts that we had both.
In our international market or mid east market.
As well as the domestic marker and market and what we've been doing what.
With our.
Our domestic channel partner.
And ER and it shows.
One that they have some great relationships with their customers I mean, when you look at it and realize that.
The revenues growing even with the market shrinking 25% when you look at a rig counts and again, Chris will deal with this a little stronger but.
Look at the rig count to your goal in January and it was a continue decrease all the way through Q1 this year.
Its really a good.
Testimony to the the tool and the performance of the tool in the operators that are using the tool in understand.
The efficiencies tool tree age.
As well as the strong customer relationships that are channel partner has.
With some very high end customers so were.
We're pleased with what's going on there and what's happening there.
And ER.
And they've done a great job.
When you look at our contract services again, we started really going after that halfway through the year last year, we started to focus on deeper.
Stronger relationships with our legacy partners.
And ER and that's started really paying off as we started to get in.
Other work you know with anything with a P.D.C. cutter enough that we could one manufacturer, which our manufacturing we did a lot of drilling tools.
In this case for for Baker Hughes, but also you know.
Are you seeing the diamond cutter PTC cut or in other.
Tools as well is it's just a bit.
And so there's an opportunity there.
Obviously, the current market conditions are going to really stifle that opportunity, but it's still there and we're still going to pursue it.
And so but you know the contract services was up 10%.
And to a lot of that was.
Recurring new new tools other than just bets and it was also manufacturing new tools.
So we're very pleased with what we what we were doing there.
Let's go to the next slide slide number five.
Well, we look at that some of the things that we've been doing is this is as we got it.
Here with you know this.
What some people call a double black Swan.
Maybe negotiated pricing for repaired services when you look at our DNR customer are like.
I don't partner here in states.
Oh worked with them.
Right. The onset of this week, we looked at the you know supporting their efforts there are customers were asking for a discount.
And we went in there and we we worked with them and we discounted our repair services.
Sam 10%.
Well, we're also able to.
HM get a rush she involved in there as we.
We try to right size our organization.
We need our customers to work with us as well and.
Not just.
And in a big load of units that need to be repaired and and they want him back reduction. So our customers are working with us to keep work flowing through the shop in a timely manner and in a manner that allows us to do not either be slammed with it kind of work or have nothing at all.
We're also able to amend an agreement.
With our legacy customer.
DHR.
And not agreement you know the big.
The I guess the the high points that agreement was the number of units.
Good day would give us make sure that we've gotten in exchange for that.
We gave them exclusivity.
We would then we would not be doing the work we performed for them for anybody else.
And you know we still have the a wonderful.
Agreement with Baker Hughes, they understand that the times are extremely tough and we've got to do what we've got to do that.
To make sure that so we keep our business moving forward.
And so we agreed upon taking that exclusivity clause out.
And that gives us the opportunity as we.
Look into our international markets and domestic markets.
What else can we do for other companies what products what services do we provide can we provide and were very good.
That's a they have a really good opportunities. We go into I mean, you look at in international markets speeches.
You know right now we've introduced sort international market as a drilling ream tool and we.
We have services and other tools that we could provide to that market I think there will be very exciting as Lee as we go forward.
Through this.
Period of time.
Just to say the lease.
We look at our cash burn so we're working on that we've got it down to 1.1 million. We think we can still do more work there and get that down.
We've been able to deferred to the principal payments on the hard rock note.
Again, the holders that node, it's been very gracious and worked with us in the past and I've worked with us again and so.
And so that's gonna be you know wonderful going forward.
To not have such a burden so we're still working on extending our mortgage we believe we'll get that done but we we think we've got to get out of this turns environment.
Before we.
We can get thanks to look at it seriously but.
We're working on it.
We believe we'll get it done.
The mid East again, as we look at that the the and the other international opportunities.
What we have going on there.
I think that you'll also find.
Very interesting very exciting is as let me start dealing with what we called the I.T.N. groups with these large service companies.
I don't believe there's a service company out there at least if you looked at the top floor.
Or just for that that don't understand the.
Bloody up the drilling rig tool they get it they understand it.
And it's kind of interesting that when we start dealing with the I.P.M. groups and they know that turn key these wells for these and overseas.
They've got it'd be a fish and they've got to be quick and it's got to be done right. That's how they make money.
And they call and they want the drilling rig tool to help them do that so we think there's a tremendous opportunity there as we start to look at.
Large service companies to.
The drilling ream tool into their turn T. operations, So and it's just not in the mid east that were getting requests where this from these ITM groups. It's it's it's around the globe, which it's.
South America age, it's you're up pitch.
It's in South Asia. So we've got some great opportunity there that we're seeing very cautious on how we.
Go forward with these companies and making sure that we understand the days to.
Hey, good.
Shipping requirements duties and that trend.
I think we've got to a team put together that's doing a tremendous job on that.
So with that being said I'm going to turn the time over to Chris.
Okay, well, thank you Troy and welcome everyone.
Let's continue our discussion, but looking at slide seven.
And as Troy mentioned, we had a strong revenue growth core 6.4%.
And particularly.
Impressive we feel with a decline in the market of 25% in the U.S.
Well, so both of our products and services the tool repair as well as a contract services boat show good growth.
In total total revenues that sets up roughly $170000 or 5% and as Troy mentioned, that's a that's attributed to that so the strong expansion that we have in the middle east with our drilling right.
And then in addition, the contract services with a Baker Hughes.
It was up as well quarter over quarter.
And that's as Troy mentioned, we're doing more more products for them repair and products bits and kind of product called the blades.
So we're real pleased given what's what's happened in the marketplace with being able to report $5.4 million a quarterly revenue that happens to be though.
The second highest quarterly revenue that we reported since 2014.
And so I'm, we're really I'm really pleased with.
Hi, how things started and protected with the international and how that is taking off and just to remind everyone of that trend line on international that's 800000 or revenue and the current quarter.
Versus 200000 in Q1 of last year, that's it for Forex inquiries.
And then climbed steadily across the year.
300000 in quarter three of last year and up to 600000 in quarter, four and and I might add that we we did start seeing weakness in the month of March.
But in the first couple of copper.
Much into this year. Thanks.
Looking really really well.
So let's go to slide I can take a little deeper look at the tool revenue.
As you say for the core.
The about 50 50 between tool cells and rental and other related to revenue.
And that's that's I'll just remind everyone. The other related to revenue was comprised of the royalty and maintenance fees.
And included in the tool sales in rental revenue was the international revenue.
And once again, we talked about how how that's has expanded and grown a really well.
We're just.
We've been very pleased with the success that we've had and even with the softness.
How that international expansion has been.
Been going.
As you know the Navy blue.
Part of that bar, that's the other related to revenue or what we call the recurring revenue.
That's those royalty fees and <unk> parent maintenance season.
What's important to note here is is that the and choice hit on this somewhat in his in his remarks, but at the beginning of calendar year 2019, there were 1083 rigs operating in the United States.
And that rig count steadily dropped across 2019 and ended at the end of.
The current quarter.
March 31 at 728 so.
So.
Just like 33% drop in the rig count from the beginning of calendar 2019 to the end of the first quarter.
And you can see the recurring revenue just look at how that is steady and as a matter of fact up slightly in Q1 2020 to Q1 2019. So that's that's that's what we're talking about when we talk about in the face of a declining and falling rig count we continued to maintaining.
Actually increased somewhat the activity that the drilling ream is seen in the marketplace. So well no tool sales have been down the fleet that is deployed it's been quite active and for the five five quarters as this chart.
Yes.
So let's go to slide nine.
Look at our operating expenses.
Cost of revenue as a percentage of sales was 43%, it's about 260 basis points over last years first quarter.
In the current quarter.
Costs up.
Up because of power international volume and we began those cost cutting cutting moves that Troy alluded to what we call phase one and in phase one we put a press release out on that decrease salaries reduced head count those kinds of things and we had some severance costs that were associated with those actions.
$200000 and severance cost.
In Q1 or 2020 associated with phase one of Rightsizing the organization.
As you see here SGN I declined Q O Q1, 2020 versus Q1 2019, best result of of less stock compensation expense and accrued bonus expense.
Not taking a look at depreciation and amortization you can see that that's down from around a million dollars to about 760000.
That's a 25% decrease and that decline is due to lower amortization expense as a result, a fully amortizing a portion of our intangible assets.
Those portion of assets that became fully amortized that's happened in may of 2019.
Its important to note.
As Troy mentioned that we have taken out.
Phase one of cost reductions.
Taking we've taken a couple hundred thousand dollars out of our breakeven as Troy mentioned, we're down to about 1.1 million in revenue as our breakeven level and we were running a 1.3 or so before we took those actions.
Oh, let's go to slide 10.
And and we're really pleased to be able to have to show here net income of $198000 in this current quarter I.
One cents per market share in order to adjusted basis 466002 cents per share.
So a good good bottom line on the revenues were strong and it fell to the bottom line and and the other dogs.
We will use adjusted EBITDA.
That's a.
Good measure of our operational performance and that came in at $1.2 million.
It's about the same as the first quarter 2019, and bear in mind, we had some of those severance cost of that hit us in this quarter that we didnt have in the first quarter 2019.
And that a EBITDA as a percentage revenue, 23%. So we continue to hang in that that a low to mid.
Twentys for for EBITDA, and you can see their own, Illinois, trailing 12 month basis, a $4 million about the dog 21% of revenue.
Now, let's go to slide 11.
Well you can see that we ended the quarter at $3.3 million in cash up from $1.2 million at the end of 2019 a.
We had mentioned at the end of the year 2000 maintain that there was a delay in receiving some receivables.
Receivables that did not come in in Q4, where they came in in Q1. So we got the benefit Oh collecting that money.
We also had cash generated from operations of $2.2 million.
That's a solid increase from 900000 in the first quarter 2019.
Total debt down again, we continue to bring our debt debt levels down another $400000 roughly 4%.
And then we didn't make the another principal payment on a hard rock note, we made that payment.
Yes, so right after reporting of these numbers are another 750000 of debt.
Was paid.
So that leaves a $1.5 million on that hard rock.
And then as Troy mentioned.
The holder that no has worked with us once again.
Agreed to extend that maturity out to Oktoberfest 2022.
Over the last two principal payments of 750000 age.
First one that principle payments extended into July.
2021, and that second payment.
Couple of with 2020 <unk>.
I now exchanged for that we did.
But the interest right 75 basis points to 8%.
And interest payments will continue as previously scheduled.
In addition, we are in conversations with our life regarding extending the maturity on our 2.2 point 8 billion dollar mortgage on our vernal property.
Oh, we were very optimistic that we'll be able to get that extended [noise].
And I will continue to work there by the to get that done.
Currently because that's within 12 months, we've got that.
That mortgage is sitting in our current liabilities on our balance sheet.
Now, let's go to slide 12.
And discuss up.
We're well, but given the cobot 19 pandemic and its significant impact on demand for oil.
As I mentioned earlier, the U.S. rig counts is declined in the quarter in has been declining since the beginning 2019.
Even with those declines a week we work.
Oh actually on track through February this year to exceed our expectations for 2020.
And once again as Troy mentioned that that's a testimony to.
But the tools performance the advantages the tool the operators are saying both.
Internationally and domestically.
And then the world changed.
In fact, the significance in suddenness of the change can be seen in the dramatic decline in the rig since they had a barge so rigs to come down another 44% to a 408 is rig count as of.
This past Friday.
So as you might expect the contraction in this industry would impact our second quarter.
We we know that our tool provides a measurable value for oil and gas operators.
Proving their drilling efficiencies.
But when the market is in contraction as it is now everything slows down.
Interesting lived through April we had a really decent oh.
No.
In the month of April.
We expect to see things to the slow and we expect that third quarter. This year will be our toughest quarter in the U.S.
The middle East it slowed down a they were they had the same sort of stay at home restrictions that we've had here in the U.S.
However, in the last week or so we're seeing some some more.
Engagement with our customers, but it's still slow so were thinking that the middle east activity.
Improve in the second half a year. So so unlike the U.S., we believe will will be continued to decline.
And in Q3 being kind of the bottom.
Oh, we're thinking about in the Middle East Q2 will be the will be the bottom and we're expecting the second half a year.
C.
Some improvement in the in the activity of the operators and as I said, we're already seeing.
Things.
I'll bet with them with the operators in the Middle East So second half of the year, we're expecting international to two to do well.
However, with the contraction in the industry, we were working on a phase two cost reduction efforts.
And.
We believe that we can take outs. Another another couple of hundred thousand dollars out of our breakeven or mostly per month cash requirements.
And so we're continuing to work on that and we'll continue to manage those numbers.
We believe that what's in that scenario, but we've got to liquidity.
To get through 2020 and into 2021 and that is with continued funding of expanding our middle East.
Two fleet.
So with with that funding effort and with the cost containment things that we're doing phase one in phase two that's on the drawing board Oh, we're quite confident we're gonna get they've got the liquidity to get through I get through 2020 and into 2021.
We're really excited as Troy mentioned about conversations that we're having with major awful service companies internationally.
And and we believed that the international projects, they're going to help offset this this U.S. market contraction.
So with that I'm going to turn it over to a turn it back the operator for questions.
Thank you, we'll now be conducting a question answer session if you'd like to ask a question. Please press star one on your telephone keypad.
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Our first question comes from Mike Threerd Who's a private Investor. Please proceed with your question.
I'm just wondering how prices are holding up in the middle East and can you charge a little more as you work spread in new countries.
Well, Mike when we look at the pricing over there. It's it's it's better than it is here in the U.S.
And we have seen some requests.
For some support a with some pricing reduction we have we we've not done anything as of yet.
But it has its it's only been.
Its been very minimal.
Company, who said that I should say the the country that has asked for that.
But but no we haven't been in the under any pricing pressure.
Our international.
Market at all.
But I'm not I'm, not ready, yet, but we won't see that.
Are you getting a lot of repeat this discussion customers using your product over and over.
Yes, yes, I mean, one yet when you look at the way that structured so far what Weve debt then doing in the mid east. It's all based around a national oil companies right. So when we look at our customer over there. It's it's actually the national oil company and they there.
Finding.
A lot of support with the drilling rigs for the issues that they're having.
So it's just it's getting the engine drilling engineers all to understand the tool and as we get every month. It goes by we're building up that portfolio of success that we're able to share with the other engineers and it's it's really starting to roll that a good steady pace now.
Okay last question, how about any new areas outside of the middle East use I can't I won't happen soon.
Oh, we do you know we're working again like I told you with the IP M. groups. The turnkey projects a we're working on some stuff in South America, and we're working on some stuff in.
Eastern Europe.
ER or getting requests out of South Asia.
So yes, I do believe that will in second quarter here will be stretching outside of.
The mid east, but it will be small we're we're we're taking very small but from steps as we do this.
Okay. Thank you very much.
Thank you.
Thank you.
Next question comes from Dick Ryan with Dougherty. Please proceed with your question.
Thank you Pedro just started to reset the middle East you're just dealing with the one Oh and always see at this point.
No we're actually dealing with more we've had we've had run said.
So when you look at CNO seized we've run tools with I want to say we've got.
1234.
I believe we've got four now when you look at the mid East a day run the drill N ream and and they've been very successful rounds.
But things move slower.
Over there and.
They're very aware these countries that have run the tool. These national oil companies have been part of running the drilling ream are very aware.
Of what the tool does forum and it's it's now just getting that in two.
No into their wellborn into their drilling program. It we have 100 pack I think maybe I mentioned before.
Before on our last call.
But oh I'm, an incredible gas wells.
That was drilled and usually when it was actually drilled with.
Drone read on in the B.A. J and so they're very very pleased with the performance and.
And so it's just it's it's now you know.
Getting to them in saying this is how we're going to incorporate this into your drilling programs.
And ER and teaching them that they just.
Don't just use this win when you have a problem.
Use this to to help you so that you don't have problems.
And ER.
And that's what we're doing now as we've got a phenomenal team.
Chuck into group have done a really good job you know we've got a good technical team in the mid East that's actually now expanding outside the mid eastern working in other areas as well.
You know, we've got technical engineers that speak multiple languages.
Our team that we built over there is good one.
And we're very proud of the work they're doing.
Okay.
Hey, with the a exclusively Baker gone outlets to I would assume no.
For middle East opportunities as well how do you how do you bring those self service.
To that market is it also through these service providers that you've been dealing with <unk> what the deanna.
No no. They you know we've had a lot of requests since we've been opened the mid east to start support in that area.
No our the technology that we have behind repaired the ptcs.
But also when you look at our team.
We have.
I would say some of the the best.
Drilling told designers in the world, but don't work with US the work for us.
And part of our team and so we we've got opportunities there that we haven't looked at in the past.
We'll now look at it could be you know a lot of products that need to be repaired and service or it could be new products new opportunities for.
You know our own product line going into some of these wellbores.
Okay.
Well in the market returns what would be exclusive come back into play with Baker or is it now you're just unleashed to draw for these services.
You know I don't know it would have to be done off the.
You know volume commitments right its.
We would weigh down out at the time.
Well in the U.S. market comes back.
What does that mean as far as a volume commitment from a baker.
And of course, we'd we'd laid that out and say is is that more appealing then what we're currently doing.
We value our relationship with Baker with we've been and we've been dealing with them you know my whole career.
But you know been under contract with them for 24, plus years, and and we really respect them and appreciate everything they've done.
And.
If there's a chance to strengthen that relationship with them, we sure would do it.
[noise] since Oh, Wow forgive me mention growing up.
Market penetration in the U.S. is that true de tea.
Or is are there other things that you're doing either director with another another party.
No. It's all been DTR, they they've done a phenomenal job you notice that the market's been pulling back and they've been marching forward you know they got they've got a great management team they've got great leadership, there they they've done a fantastic job.
Okay, great. Thank you.
You bet.
Thank you.
There are no further questions at this time I would like to turn the floor back over to management for closing remarks.
Well I want to appreciate everybody for joining us today and so.
Look forward to see you want an extra earnings call event.
Well keep marching forward in.
In doing those things that we've got to do to build a strong company and get through this.
Once again, thank you very much.
Ladies and gentlemen, this does conclude today's webcast you may now disconnect. Your lines at this time. Thank you for your participation and have a great thing.