Q2 2020 Superior Drilling Products Inc Earnings Call
[music].
Greetings and welcome to superior drilling products incorporated second quarter 2020, <unk> results conference call.
All participants are in listen only mode. A question. That's just to show called presentation <unk> operators just turn the conference. Please press star you're on your telephone keypad. Please note. This conference is being recorded I would now.
So what's your hoax, covering lusky investor relations for superior drilling products. Thank you you may begin.
Thanks, Devin and Hello, everyone. We appreciate your time today and your interest superior drilling products.
On a call with me are Troy Meier, our chairman and CEO increased cash in our Chief financial officer, they're going to provide you with her prepared remarks discussing the current situation. The company the results of corridor and a little bit on where we see things going then well open the call for questions.
Have a copy of the financial results, we released before the market. This morning, and you should also have the slides will accompany our conversation today you can find both of those documents on our website at www Dot STP Dot com.
You are aware, we may make some forward looking statements during the formal discussion as well as during the acuity session on today's call.
It looks quite a future events that are subject to risks and uncertainties as long as other factors that could cause actual results to differ materially from what I've stated here today.
Risks and uncertainties are provided in the earnings release the slides in other documents filed by the company with Securities Exchange Commission. All these documents can be found on our website Werent 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 isolation or the substitute for results prepared in accordance with gap.
We have provided reconciliations of non gap with comparable GAAP measures in the tables accompanying earnings release as well as in the flight deck.
With that I'm going to turn it over to try to begin Troy.
Thanks, Dan Thanks, everybody for joining us.
Let's go ahead and turn to slide four in the slide deck.
[noise] diversifying revenue and cost reductions.
You know I.
As we go into this.
Today, I'm going to I want to tell you just little bit I've been in this business for 39, and a half years and.
I've been through a number of.
Ups and downs in this energy and energy industry, and it's a I've never seen anything like this.
You know, it's it's Crazy times, it's a rig count just since March was down 67%.
You know that this whole coal bid.
It's really really changed the landscape and what will or what we're doing in how we manage this business.
But you know we've got a great team where survivors I look at some of the things that where we're doing to replace our foundational business.
We can no longer rely on the oil and gas sector to to be that business that the gives us that strong flooding and we are we do have some.
Good programs in place you know that's what we'll talk about them as we go through the presentation today, what we're doing.
I'm not losing focus at our opportunities in the oil and gas industry, which there's still a lot.
We look at what we're doing over in the mid eastern expansion of of.
Our tools and how our tools are performing our team is doing over there they're doing a great job.
As we look at our tools and as we were no.
Leaving just the Kuwaiti market, we're going in we've got.
Tools that are in the you weigh in performing very well, we got tools now in the Ukraine, We've got tools in Saudi and we've got.
Tools in cutter.
Oh, you know our tools get written a lot of recognition, we're getting a lot of requests were working with.
The major.
ER Serb goes.
When you look at what's going on in the international markets, you've got a lot of what we call I P M projects.
They are integrated.
They're turnkey projects there wouldn't when when these eno sees want to.
Actually set a new benchmark for how drilling should be done within their countries.
They roll over to these I.P.M. projects and then these groups like somebody Jay or Halliburton or.
Baker Hughes come in and they turn to these projects and it's it's really interesting to see.
How these companies turned to drill N ream to help them.
Turnkey their projects more efficiently.
So there's a lot of excitement with our team around that and the things that we're doing there a we're getting some agreements in place.
Well, we've got to be very cautious on on how we.
Go from country to country to country were up.
And streamlines small company that so.
Maybe we don't have logistics that exports like a lot of big companies do but we've got some people that are learning very very fast and.
So we look at going into and entertaining opportunities in other countries, where we're very cognizant of shipping requirements and costs and tariffs and duties and.
We're getting much better at that and I think that's going to show is we as we go throughout this year.
As you all know, we're relying very heavily on our international opportunities.
We don't see a rebound in the in the drilling market here in the U.S. anytime soon.
And.
You know, where we're focused on servicing our customers here. We're building those relationships that we have here in the U.S.
Stronger and stronger.
And seen if there's anything else that we can we can do for them, but the same time, we know that the real opportunity lies in the international market. When we talk about the oil and gas sector.
And we're doing a lot of good things too.
Do you know strengthen our business and start bringing in that.
ER revenue that we that we need and you know so as we look at diversification or not we're not losing sight of.
Oh of our tools and our talents that we can we can get to the energy industry.
But we just do not want to get we do not want to get burned with this.
This energy and it environment anymore, I'd like I say, its and 39 half years I.
We've got to get something stronger in place. So that we don't get tripped up so bad every so many years or some of the things that we're doing along those lines is.
There's.
There's certifications that we've got a habit, we start to one if we want to taken and start delivering products ourselves to the end users.
There's a an I.S. so certification that that we've got to get in place.
That certification will be in place by year end.
And that allows us to go directly to the end users.
With our products as you're all aware weve, there's some products that we don't introduced to the the market and we haven't for 24 years.
But are very in tune with what the latest and greatest.
Tools design theory cutter types.
In these products I'm talking about drill bits of course, we know how to make those.
Better than anybody in the world.
And we know how to service those better than anybody in the world and and so.
It's it's time that we get out there and start doing that and so what are the things were looking out as we go into international scene is is what is the opportunity there for something like a bit right fabrication.
How can we enhance our.
Ah cells with drilling ream by also throwing to a.
A very high end drill bit.
To go out with that product so.
There's a lot of there's lot of energy here, there's a lot of excitement here on the things we can do we've got an incredible.
Workforce here, that's very very talented if you look at the ISO certification. It also allows us to start looking at.
Deal de contracts Department defense contracts.
For many years we've had.
Companies, the likes of Boeing and Mcdonnell Douglas and come here and ask us to.
You do things.
For their industry, but like you all know aerospace industry isn't really doing well right now.
The department offense, what's going on there is very exciting and we think that we can.
Get the certifications that we need there.
That's the A.S.
9100 certification, we're working on that and we really believe that.
We can take and start bringing in.
Additional.
Baseline revenues that will that will strengthen the foundation of this company.
So we're not so relied on on the oil and gas industry and the ups and downs that we go through so we got a team that's working on these certifications and and they're they're moving forward very rapidly and doing a very good job.
So we're excited about what we're we're going to be able to bring in as far as diversifications. When we talk right now over in our fabrication facility, where we've got parts going through there that.
That are.
You know for some sort of weaponry and ER.
And it's it's really neat what what these guys can do and how they can how creative they are and so.
The talents that they bring.
To that to that industry is gonna be really fun to see.
Keep in mind that so like I said earlier, we're not losing focus of you know the companies like Baker Hughes that we have still have a great relationship with and we're going to strengthen that even more de T.I.. We've got a great relationship there they're doing a wonderful job with.
You know even penetrate into markets, even better and this downtime.
There's some things we can do better with them.
And so we're on it we're going to get it done.
But.
You know this this.
I read that we're in right now that I hear people, calling it a black swan or a double black Swan.
I'm not even sure if I know what that means but.
There's a.
There's a.
It's a tough time.
But were survivors and we will get through this.
And so we'll be a better company when we do.
So you know you look at you know Chris will talk about the cash burn and what it is per month that we've got you know what 900000 or we were doing things to.
To bring that down.
No we're looking at additional.
Stages to.
Bring our cost structure down as you all know we've already gone through two when they possibly needed to do a third one.
But.
Like I say diversification is is key to our survival and and we we are well continue to move forward with or opportunities in the mid eastern I'm.
I'm proud of what the team's doing over there and so we've got a great team and we just we just need to to make sure that so we continue to produce high quality drilling tools.
That I'm going to turn it over to Chris Chris.
Okay. Thank you draw and welcome everyone.
That's continued our discussion, but turning to slide six.
If you look at the the trend in quarterly revenue from Q2 2019 to Q1 2020.
This shows that our growth strategy, even in a weakening oil and gas market was working.
Q1 of this year was our second best revenue quarter.
Since our IPO in 2014.
We have successfully grown our international presence.
And expanded market share and contract services.
Market share.
Contract services is referenced in that and that dark blue part of those bars that that's that's the part of the business. That's all U.S., that's driven 100% on the U.S. rig count.
So you can see where were down slightly in that Q2 last year Q1 time frame.
With the rig count down 28%.
During that timeframe.
We'll move into Q2 of this year and we'll talk about the rig count going down again as we all know.
But we don't well inside the fact that even.
2019 in first quarter 2020.
We were.
Holding our own and a U.S. market environment that was down almost 30%.
So sometimes it gets kind of lost and looking at the that's a decline in Q2 of this year roughly another 64% on top of that.
So as that's important to remember that for us as we as we think about our growth opportunities.
Coming out of the Kobin 19 environment as markets began to two to improve we believe we can get back on that on that growth plan that we had we demonstrated through Q1 this year.
A year over year international revenue for the core.
Q2 quarter up 66%.
Now represent 17% of our total revenue.
Well now as we move into Q2 2020 wet weather, we compare revenue in this quarter to last year second quarter or this year's first quarter.
It was clearly impacted by cobot 19.
Rigs around the world, we're dropping in the U.S. the rig count dropped another 64%.
During the quarter.
The end of the end of Q1 this year.
728 rigs dropping to 265.
About the ended the quarter, so another 64% decline and not only in the U.S.
Rich declining internationally.
As operators were were not working the cost stay at home requirements.
Global demand for oil dropped significantly BOP production.
Which cannot be turned off as quick we created a surplus of supply and and all of you on this call I understand I understand all that.
Well, we want to emphasize this despite all that going on in the marketplace. The usage of the drilling ream relative to the market continued to expand as our U.S. distributor gained market share and is we penetrated the international market.
The value of the drilling rain.
It is critical to a market in these types of conditions.
So bottom line we.
We want to emphasize the growth track that we were own.
From Q1 of this year.
The same that's the same value proposition. This company provides is deal here today, and we're going to X band those opportunities as Troy just mentioned.
And intend to get back on that growth curve.
I might add the international revenue for the first half of 2020 was up 175%.
Over the first half of last year.
So with that that's going to slot.
Yep.
And take a little deeper look at the tool revenue.
On this lot International revenue is included in the light Blue part of those bar brass.
Oh tool sales.
Well rental.
That $335000 of international drilling rain rental helped to offset a lack of tool sales in the U.S.
Given the size of our distributors fleet, they did not need to add additional drilling ream tools to that rental tool fleet due to the significant drop in rig activity in Q2 this year.
We do of course continued to repair their tools as they continue to put those in service.
The maintenance and repair fees.
Or part of the dark blue part of these bars.
And that's labeled the other related tool revenues I want to emphasize that that that when we think in terms of maintenance and return and repair fees on the drilling rain domestically.
That revenue stream together with our royalty fees makes up what we call other related tool revenue.
And sometimes you might hear us refer to that as recurring revenue.
I should note that at this point that we we have provided the discount to our U.S. distributor.
We passed that just kind of long to them.
In April of this year and their pass that along with their customers.
Of course doing these those kinds of things because of the depressed state at this industry is in.
So just a backup and put into perspective that total rig count decline from the.
Beginning of Q2 2019.
To the end of Q2.
2020 that five quarter period of time, the rig count declined in the U.S. from 1006.
The 265.
That's roughly a 74% decline over those five quarters.
As I mentioned earlier.
Quarter over quarter.
Average rig counts are down 60%.
And once again that recurring revenue stream that that we talked about.
Was down only 38% and you can see that when you look at those five quarters. You look at Q2 2019 $1.6 million Oh, there related to a revenue.
Lash recurring revenue.
Down to a million 600000 drop Q2 last year Q2 this year.
38% down in revenue.
Average rig count down 60%.
So we we talk in terms of averages when we're trying to talk about revenue.
And then point to point rig count declines we believe that's that's relevant way to look at just what's the what's happened in this marketplace.
So with that let's let's go to slide eight and look at our operating expenses.
We completed phase one of our cost reduction plans.
That was affected been second quarter.
These savings are reflected in these reduction in operating expenses that you see here on this chart.
Cost of revenue decreased 45% due to lower variable costs on lower volume.
The closure of our Abilene facility.
Reduction in headcount reduction in salaries.
And reductions in other fixed costs.
That's what we call our phase one of cost reductions in those got implemented in early Q2.
As a percentage of revenue cost of sales was 54% compared to 44% for the prior year period.
The increase as a percent revenue reflects lower absorption of overhead cost or reduce volume.
So while we took cost out of the fixed cost base.
Couldn't take enough fixed cost out it did lead to a.
Drop.
And the cost of goods so percent.
The decline of 26% NSG Tonight.
As reflecting headcount that came out of the SGN I'd departments as.
As well as salary reductions and the deferral of new product development projects.
As you may recall R&D as a part of our SGN nylon.
Now taking a look at depreciation and amortization you can see that it is down from almost a million dollars to 680027% decrease.
This decline is due to lower amortization expense as a result.
Fully amortizing a portion of our entire intangible assets in may of 2019.
It is important to note that we have taken a significant amount of cost out.
And in addition, we completed phase two of our cost production plan.
In early July but this year, so those benefits will start rolling through in Q3.
So we've dropped our monthly operating cash requirements from 1.1 million in Q2, two around 900000.
Currently.
And we are now evaluating further cost reductions and.
In a phase three.
Now, let's go to slide no.
Net loss was 1.2 million for the quarter, 5% Pershare.
Adjusted net loss about 861000 or three cents per share.
Adjusted EBITDA, which we used to measure operational performance was negative 222000.
For the trailing 12 months EBITDA was 2.7 million or 16% of revenue.
These metrics reflect the fall and our revenue in Q2 related to the impacts.
Oh, Good night team has had on our business.
And our industry.
Now, let's turn to slide 10.
The cash balance at the end of the quarter was $2.5 million.
That was up from 1.2 million at the into 2019.
But down from 3.3 million at the end of the first quarter 2020.
Over the first half the year very positive working capital was driven by strong U.S. accounts flex accounts receivable collections.
Total debt at the end of the second quarter was 6.9 million.
Around 700000 in the corner and down 1.2 million since the end of 2019.
The remaining principal balance on the hard rock note at the end of June 1.5 million.
As you might recall, we've revised that agreement.
[noise] spread out those remaining two principal payments one deferred until July 2021.
And the second principal payment of 750000 deferred to October 2022.
We are required to make accrued interest payments at 8% on the outstanding principal on a quarterly basis. During this time.
During Q2, we received 900000 from the S be ice Paycheck protection program.
Which is reflected on our balance sheet at the ended the quarter.
900000, or that 6.9 that you see it 630.
At times too.
The Patriot protection problem.
And we are planning to apply for forgiveness.
Bad debt in Q3.
Regarding the two and half million dollars, which would be doing our mortgage in February 2021.
We're in conversations with our bank to extend that term.
In February 2021 to February 2022.
I have to point out that we're also looking at the federal reserves main street lending problem.
No I'm not going to get overly optimistic here.
But we believe we aren't ideal candidates for this program.
The program is intended for companies that were doing well.
Prior to the pandemic.
Companies not in dire Straits.
Clearly our growth in earnings potential.
We demonstrated prior to the pandemic, we just got through looking at those those facts a few minutes ago, we we believe that that that.
Will allow us to potentially qualify for this program.
No I also need dimension that under this problem there will be normal underwriting requirements.
It's different than the trip P. program under the S.P.J.
This this program will go through an underwriting a typical commercial banking underwriting process.
We believe we can go through that process and our objective is to refinance all of our debt.
At much lower rates.
Well keep you posted on this as we progress.
Lastly, let's take a look to slide 11.
And discuss our outlook in opportunities.
As I mentioned, we have completed phase two and our cost reduction plan.
Got that completed in early July.
Were now evaluating the necessary actions for phase three.
Well, we expect conditions to improve we need to ensure that we get through these challenging times.
These and preliminary conditions, we we see those internationally.
Happening currently.
But as Troy mentioned in the U.S., we don't we don't see a lot of improvement through the rest of year quite honestly in the U.S. market.
So.
In order to.
Survive in these challenging times, we've got to make some additional adjustments and we're looking at those now.
As I mentioned international but demand will continue to improve from here driven by those opportunities that Troy mentioned.
The drilling ramius being recognized in its being requested in many different countries now.
As Troy mentioned, we're working with all the major auto service company too and they've acknowledged the value up a drilling rig.
We also expect that expansion of our drill bit re manufacturing.
Business and the development of our own bids for the international market can provide additional revenue opportunities.
Troy mentioned, we intend to reduce or dependence on the oil and gas industry.
Oh, this will not be easy.
Normal whether it be an overnight shift.
But we can augment our revenue streams with with existing skills that we have right now in precision machining.
We are working toward.
Leveraging these existing resources, we have to find new revenue streams into.
Additional markets.
Such as the defense industry.
We're currently in the process as Troy mentioned have obtained the ISO 9001, and I S 9100 certifications.
Our vernal, Utah operations. So we can address request to provide precision machining services to customers in other industries.
Those customers, who have critical industrial applications.
We expect by the end of this year.
We should have those certifications in place.
And we can then move towards expanding our reach.
So with that operator.
Let's turn it over for calls questions.
At this time, we would be conducting a question and answer session. If he would like to ask question. Please press star one on your telephone keypad a confirmation so indicate your lives and the question Q.
You mean for start to feel that your move your questions on the Q for participants using speaker equipment, you maybe next year to pick up your handset person stark each one monkeys as we call for questions.
Our first question comes a lot of John Bair with ascend wealth advisors. Please proceed with your question.
Thank you.
That goes on speaker. Thank you.
Ah T I, a tough right [noise].
Yeah right [laughter].
Couple of questions here.
The 900000, a month cash burn does that incorporate your anticipated expenses.
For.
Sure.
Getting your certifications that you're you're hoping to have in place by the end of the year.
Oh, yes, it does.
Okay.
And then.
As a follow up.
How long do you anticipate.
It might be.
Well take for the diversification effort.
To result in any kind of meaningful either contract business basically a generation of of revenues and can you do anything in the meantime, while you're trying to.
Or get those certifications.
We are doing stuff in the meantime, John we're like I said, where we now have parts going through our facility that are not oilfield related at all.
If you look at one we'll start seeing a meaningful impact I would say about six months down the road.
We've got to we're dealing with some and we've been talking with them.
Phenomenal companies that are very big in the deal de area.
That's a.
There's incentives for people.
People big companies to send to work to what they call a rural zone, it's called a hub.
And so it gives us a competitive advantage when we start looking at competing against.
You know high end.
Machining facilities say in Houston or in Salt Lake.
The fact that were rural.
As it is a good thing.
And so but I really.
Even though we're talking to a lot of companies and they're excited about us getting lined up so we can start doing their work.
It's still going to take US little time, you know, there's a like I said that the whole ISO certification that we've we've got to go through its a big big deal.
And so we'll be bringing on work and what we do work for pro typing in some of these industries.
There's some some work that we can get bye.
Huh.
Going on underneath another companies umbrella that Ah you know they give us work that they bid on and we do the work in and that goes into their ISO certification.
But for us to truly say when we're gonna see an impact it's gonna be six months.
And I like what some of the industries outside of defense I know, where that's coming from.
But.
Areas like the E V market, perhaps a auto related or a medical medical instrumentation.
Are those those applicable areas that you could.
Provide services too.
They are we've got a really good ally.
My old boss, it's a christiansen many years ago. He he went off and started a he's got a phenomenal business down in Salt Lake and he deals with the medical industry with the type of high end machine, we have and and you know we've been in negotiations and talks with them about you know how can we support their efforts and.
Yeah, there's some industries out there that we don't have the contacts in.
But we're working on them, but we know people that are doing work in there that that we've got good relationships with.
Okay, and one last question and I'll get out.
Where were okay, you're talking about going into a phase three of of cost reductions.
Got to be getting into the into the muscle right now maybe even the bone. So just wondering where other what other areas you might.
The able then to to cut further, whereas well still trying to develop these other projects as well as expand your your efforts internationally.
Well when you look it's a you know the we actually where we're cutting into the muscle in round. One you know we were just starting to stand up from a ugly downturn in the market that we had in 15 and 16. So it's not like we had.
If you if you can look back and say, okay. In 14, and we built up and we end up with like 120 employees or something like that in.
And that that last crashed we had we end up you know cutting way back and we never really built.
Heavy I mean, everybody that we had was you know was wearing multiple hats and so yeah. I mean round one we were cutting into the muscle in round two it was the phone.
Around three you know you're going to be looking at you know executive salaries and stuff like that that.
That we've got to do to you know to keep this if we need to pull that trigger we're not saying that we have to pull that yet.
But we need to see some you know a meaningful increase in our in our revenue or else. We will have to go to that.
Got round three but we're not looking to let.
Individuals' go that's that's that's not gonna be productive for us at all.
Yeah.
Okay, well good luck T. all I.
Have been down that path and in the eighties as you as you know from our previous discussions privately.
So.
The luck T O and be looking forward to hearing.
Your progress.
I will take care thanks, John.
John.
Once again, if you would like that's question. Please press star one on the telephone keypad. Once again, if you look that's question. Please press star one on your telephone keypad humble keeping poll for questions.
Just aren't no further questions left at this time I would like to turn the call back over the management for any closing remarks.
Well I just want to say thanks, everyone for joining us and ER. We appreciate you following us and.
And supporting Us.
Again. This is this is an ugly idly time, but.
We're not out and ER got a lot of flight left in us and we've got some good things going in.
And so.
And I'm excited to get this.
Time behind us.
So.
And I appreciate you all in to thank you and have a wonderful weekend.
By <unk> <unk>.
This concludes todays teleconference. You may now disconnect. Your lines at this time tickets your participation I don't have a wonderful day.
[noise] [noise].
[noise].
[noise] [noise].
[music].
[music].