Q3 2020 Superior Drilling Products Inc Earnings Call
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Greetings and welcome to the superior building products third quarter 2020 financial result.
At this time all participants are they 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 zero on your telephone keypad. As a reminder conference is being recorded it is now my pleasure to introduce your host Deborah pull out.
<unk> Investor Relations. Please go ahead.
Thanks, Stacy and Hello, everyone. We certainly appreciate your time today and your interest in superior drilling products on the call with me are trained Meier, our chairman and CEO and Chris Cashman, Our Chief Financial Officer.
They're going to review, our prepared remarks discussing the quarter or the third quarter and a little bit of our outlook and then open the call for question.
You should have a copy of the financial results that we released before the market. This morning, and you should also have the slides will accompany our conversation today you.
You can find both of those documents on our website at www Dot F.D.P.I. Dot com.
As you are aware, we may make some forward looking statements during the formal discussion as well as during the Q and a session on today's call. These statements apply to future events that are subject to risks and uncertainties as well as other factors that could cause the 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 Securities and Exchange Commission.
All of these documents can be found on our website for it FCC dot Gov.
I would 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 of this additional information 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 beliefs as well as in the slide deck.
So with that I'm going to turn it over to try to begin Troy.
Thanks, Deb, thanks, everybody for joining us today.
Let's go ahead and turn to slide four in your slide deck.
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There's three things good I'd like everybody to take away from today's call and and number one.
Like to talk about our international growth and how that's going and how that's expanding.
And how our tools are performing there, it's it's very very encouraging.
And two is the diversification and what we're doing here to essentially create a stronger foundation in the core business.
And then number three.
The management of our costs I think that's very important in these times and to our team is doing a very good job at that.
So let's start off with what we're doing in the traction were getting internationally.
The drilling as you all know we introduced it over in the mid East a couple of years ago and.
We're really seeing it now where the operators are.
See the benefit and the value that the tool gives.
And as we look at what's going on internationally and how we're being pooled.
In two new opportunities into new countries.
We're being pulled in there by large servicos that that run the tool.
In countries like Kuwait, and the UAE and they recognize the value when they recognize how.
How much that tool is helping their performance.
And and better in requesting these tools in places like Iraq in Ukraine.
Cutter.
Obama and.
So we're very excited about that you know we have challenges with with logistics that were that were being educated on and working through as you. All know when we will meet these tools run they've got to be downgraded they've got to be serviced and said we've got a good team working on it and they're doing a great job.
So you look at the five five different countries right now the expansion after after North America, and it's and it's going very very well. We're also seeing opportunities with a slim hole product line that is allowing operators to.
Exit existing wellbores cutting the window and Exane those wellbores.
And going through that window with the drilling ream tool as they go with smaller sized bottom hole assemblies.
This drilling ream is now, allowing large operators that are well known to get in and out of these wellbores that as they deepen existing wells or sidetrack out of.
Existing wells, it's a it's a good opportunity for us going forward.
When we looked at the diversification that we'll be talking about.
As you all know we we've been our team has been working on getting.
So.
9001 certified as well as a S 9100, certain parts of the gates and we're going through audits as we speak we actually have them in our facility today and we're looking to wrap all of that up.
By year end, and a and I really think that we can probably haven't done probably before December and what that allows us to do is go after.
Some work that really fits into the wheelhouse of our machines.
Well no we have some some large CNC machining centers here.
And.
Right now they are very busy making small parts and we'd like to get them very busy making large parts and this certification is going to help us do that so we're excited about being able to look at the defense industry and some of these other industries that that.
That require large parts to be machine.
And this ISO certification and the EPS certification will really help us.
Get that done.
When you look at how we're managing our cost.
I want you to be aware you know that that we've we've reduced our monthly cash burn to 700000, it's it's down dramatically from from where we started the year, we've gone into a phase three of our cost containment.
And.
You know, it's it's a kind.
Going to be.
Year end going into 2021, we believe that.
The cash burn will be gone. So we're looking for a cash breakeven going into 2021 and I feel very good that we're going to we're going to achieve that.
But with that being said I'm going to go ahead and turn it over to Chris.
Chris Oh.
Okay, well, thank you Troy and welcome everyone.
Lets continue our discussion by turning to slide six.
If you look at the trend in our annual revenue. This slide shows that the value of our drilling rainwear bore conditioning tool has been gaining traction internationally and that's what Troy just kind of walk you through the various initiatives that we have and and how that traction is really started is really picking up.
You can see from this chart that we reached a breakout hit have $800000 in Q1 international revenue.
Our revenue went down in Q2, driven by the impact of of Cowen.
But what we are seeing in Q3 and continue to see in Q4 is the beginning of recovery.
Internationally.
And so we're very excited about that we are now operating in five countries outside of North America.
Partnering with a global oilfield service companies and serving the world's largest production companies.
Year over year, our international revenue.
For the quarter is up $141000 or 49% up to 429000 for the quarter.
Which represents about 28% of our total revenue.
So we are rapidly becoming.
Diversified geographically.
U.S. and internationally.
For the first nine months, our international revenue increased a 121% and this was with a 20% decline in international rigs.
In the U.S. revenues down 47%.
With the overall us rig count down 52%. So so the things that we're really excited about is that in both markets U.S. International our tools continues to gain traction and share.
The decline in total revenue was about 24% sequentially or $500000.
Paired with year over year decline of three and a half million dollars or 70%.
This is demonstrating and proving conditions since the initial impact of COVID-19 on our industry and the geopolitically driven imbalance of supply and demand in the <unk> and the global markets.
Now, let's turn to slide seven and we can take a little deeper look at our tool revenue.
Well this well the slot the light blue, which.
Which is tool sales and rentals.
Includes our international revenue that we just spoke about on the previous slide.
That $429000 is contained in that light blue part of the bar.
And you can see that with that revenue it helped mitigate the decline in the overall decline in the revenue was only 11.4% sequentially.
Which is much lower rate than the overall market once again, just another indication.
The drilling ream is gaining share.
Given the decrease in this market activity, our our distributors additions to their tool fleet were minimal in the quarter.
Now the Navy Blue part of this bar contains what we call our repair revenue in our royalty revenue.
And we repair tools as they are placed into opera operation by our.
Distributor.
So we're still seeing activity with the two good activity as a matter of fact as we just said it's better than what the market's doing and.
And we can see that on this slide we can see that that year over year revenue for the recurring revenue stream that we have here doesn't make the blue bar down.
Down, 65%, which is less than the decrease in the market up 72%. So.
Nipigon decreases in the market, but the theme is the same as the recurrent theme our tools continue to outperform the market.
Now I want to continue to just dimension keep everyone.
Understanding that in April this year, we did provide our distributor a discount for regular maintenance and repair work.
And they often provide that on to their clients and we do this in consideration of the of the depressed state of the industry.
During the quarter, we saw the U.S. rig count hit its low point in August with a total rig count of 244.
And we're excited to see that since then the number of drilling rigs has been increasing reaching 296 by the end of October.
That's a 21% increase in approximately two months.
Now, let's go to slide eight and look at our operating expenses.
Through Q3 of this year, he we have implemented to cost saving initiatives.
I'm proud of headcount reduction in salary, Doug deferral of R&D projects closing of our West Texas facility.
These actions have resulted in a 58% decline in coal revenue.
As a percent of revenue.
Cost of revenue was 56% compared to 41% for the prior year period.
That increase as a percent of revenue reflects lower absorption of overhead costs from reduced volumes.
SGN a good strong client in that spending down 39%.
And that's a function of these cost reduction measures we've implemented.
And of course, we implement these as.
The reaction to what Colgate is done to our revenue last significant reductions in our revenue.
Related to the to the market conditions, driven by COVID-19.
Now in October 2020, the company implemented a third round of cost containment measures as Troy mentioned.
Through additional payroll reductions which has reduced.
Our monthly cash burn to approximately $700000. This.
This is down approximately $200000 per month from previously reported cash breakeven.
The company expects that this right and given expected improvements in monthly revenue it will enter 2021 at a cash breakeven.
Let's go to slide nine.
Net loss for the quarter $1.7 million adjusted net loss of $1.4 million.
Seven cents and five cents per share respectively.
Adjusted EBITDA, which is a measure we use for operational performance was negative $600000.
For the trailing 12 months EBITDA was $1 million right Center revenue these metrics reflect the decline in our revenue.
And that decline our revenue is resulted as a result of cobiz impact as shown in our industry.
Now at.
I think it's important to remember.
What our business looks like pretty cold here.
So the bars right hand part of this chart you see 2018 EBITDA as a percent of revenue in 2019, EPS Dr. Center revenue.
Healthy 21, 28%.
And remember that we were able to generate those kind of margins while investing in R&D.
And financing our geographic expansion.
So this is what the company will look like as we continue to turned the corner.
And get back to where we were pretty cold it.
Now, let's go to slide 10.
And look at the cash balance we ended the quarter $1.4 million.
That was up from 1.2 million at the end of 2019, but it was down from two and a half at the end of the second quarter of 2020.
Total debt at the end of the second quarter was $6.7 million down $200000, we continue to pay down our debt.
Down $1.3 million for the year.
And just as a reminder.
And that number is the remaining two principal payments totaling $1.5 million on our hard rock note.
Once again as a reminder, that first payment is due.
July 2021 second one October 2022.
We are applying for forgiveness on a $900000 long from SB eight.
Payroll protection program.
Regarding our mortgage.
Which matures in February 2021.
We've been in active discussions regarding extending this with our current lender.
We received email compromises that they will extend it.
And as another option, we are actively pursuing a potential sale and leaseback of our burn on campus.
Additionally, the company recognized $41000 in other income related to a machine tool lease that was under an SP a loan that we had and that was forgiven as part of the cares Act.
Now, let's go to slide 11.
And just to summarize our outlook and opportunities.
Once again.
Regarding liquidity.
With the latest round of fixed cost reductions, we expect to be net cash flow breakeven entering into 2021.
We expect our international revenue to continue to grow driven by the demand we see globally for the drilling rain.
And as Troy mentioned, we're working with all the major awful service company should have acknowledged the value of the drilling rigs.
We have opportunities and our bit remanufacturing business.
Internationally in 2000.
As Troy mentioned, we're still working on ISO 9001.
And we are close to having that accomplished as Troy said auditors are looking over what we've done as we speak. So we expect to have those certifications done by the end of 2020 and that will open up more business to provide precision machining services to the defense industry and for other critical does.
Aerial applications.
So with that operator, I would like to open up the call for questions.
Thank you we will now be conducting a question and answer session.
If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tolerable indicate your line is it a question Q you May press Star two if you would like to remove your question from a Q.
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Our first question comes from chalk bear with ascend wealth advisors. Please go ahead.
Hey, good afternoon gentlemen.
Good afternoon gentlemen.
Yeah, you got a couple of questions here.
Got a couple of questions here for you.
Do you have any potential expansion of your product line in the hard rock markets for example, precious metals base metal.
Activity I know in their exploratory work they kinda diamond core, but very often they do reverse circulation drilling. So I'm just wondering if perhaps you could have any application of here.
Your tools or the drill bit, particularly in refurbishment in those markets if that would Ah if that's a possibility or if have you looked into that.
And then you know John we <unk>.
We've we've done so.
Custom design and manufacturing work for some.
Some of the mining industry. If you look at Kennecott and you look at some of the stuff over in Nevada.
So we haven't pursued that market a with the with the drilling marine product line.
There's there's some opportunity there you know with a economic drill bit if you will but we've looked at.
But no we have we have not we have not look to deploy the drilling ream into that market.
I'm just thinking with what.
[noise], particularly pressure smell even base metal prices on the rise here more activity probably in that market and you know being domestic might or might be helpful. So that's interesting. Okay. Hope you might consider looking into that if if there. If there's application then the follow up question on that.
Totally unrelated but said your active in five international countries right now.
Does that mean that you have five tools chambless at work right now or or kind of how does that work.
And then if you can mention anything about Canada, and Mexico activities in North America in general.
Okay. So if you look at our International Act.
Activity.
We've got a fleet a our inventory.
In Dubai and also Kuwait.
And so that fleet is being is service scene.
The U.S. Lee.
Kuwait, obviously it will go over in touch into Oman. It goes into the car and now we also have a small inventory the slim hole opportunities that are in the Ukraine.
And so when you talk about what does that look like they're individual tools that are sent out to do a job and then they come back where there into a shop, where we have a.
Service agreement with with with a company that will taken.
Clean these tools they didn't do it the old grade and and to decide the level of service. This this goes through a.
It's all a web based system that the team here created so when when we don't have great. These tools with this service provider, we're sitting right down with them looking at the tool in and identifying what part of that tool needs to be serviced.
So it's a very efficient way.
I will say however, the inefficiencies are that we don't have a full blown level three service center in the mid East, which were looking to do the first part of 2021, we'd like to get that done no later than Q2, because right now we have to see cans that are loaded with tools coming.
Back to volatile where it will surface these tools and put them back into a c., you can and and send them over.
So, but you know you talk a little bit about the opportunities what we're finding is.
It is where it is were like in the Slim hole application is we're sitting down with the engineers of these projects, then and helping them get there.
Total assemblies in and out of the well bore a that they've cut a window out of the existing well and gone deeper or are gone sideways.
We're also able to help them and start to identify opportunities for us by looking at it what tools, they're using downhole and can we design and build them a better tool and we believe we can sell as drilling ream opens the door for us to these large serve coes are on.
And unique projects.
We're also identifying.
Some some opportunity with in the wheelhouse, if you will the equipment, we have the expertise we have.
Identify additional product lines that we feel that we can get out there and get to them.
Sure.
So on these projects that you're working on are they multi well projects then.
I'm trying to understand are they so one by one you know one well at a time type thing or is it up.
Like if you're drilling off of a pad in the U.S. should do and you know very often multi well so.
Trying to understand.
Correlated.
Type.
What they're doing over there versus U.S.
So what we what we're seeing is these are what we called turnkey projects. It's it's where a circle has been asked you know they put to bid into two directly be responsible for drilling wells either in this case Iraq.
Or Kuwait.
And so they're in charge of you know doing this thing very efficiently that that's how they make that's how they're gonna make their money on it is you know this well typically takes 60 days to drill and that's how they bid that job and they can come in there and do it for 45, it's a it's a big win for them.
And so they ask if that's that's where the the excitement around our tool is really really being generated there is the fact that.
It's this tool is they if they use it may be in Kuwait, or you AG and they understand how it's helping them.
It is one thing, but when they go to a turnkey project they really wants to tool and so it's a testimony to the efficiencies the tools creating.
But yeah, it's done.
It's.
Like I say with the exception of the logistics, we still struggle there because we are such a small company trying to figure out how to get stuff in and out of the countries like Iraq are in and the Ukraine.
But other than that we when we get when we get tools in place.
Tools are performing well you know a very important note is.
Every every Tuesday, we get together with our international team when we go over the past weeks performance reports, we go in and we do a post run report for our customers and we show them the savings that we're we're creating for them.
And without any exception when you look at our oppose shrunk performance reports, our K T eyes are all checked off.
What that customer wanted our tool to do for them is checked and it's typically three to four different K P. Eight out of 10, we offer them they'll pick three or four for us to help them with and those are always checked and.
And so it's Oh I'm excited about what we're seeing is the serve codes are now pulling us into other locations in and to be able to benefit from the drilling technology in those locations and it's it's it's really exciting for us too.
To start teaming up with these companies that also have the ability to help us with logistics to get tools to them.
Well I would think your your your big service companies.
Would be the.
The main help in that in that regard am I not right on that.
You are right on that you know, we get we get the tools to Houston and then they can take it from there and then.
And so it's very very beneficial for us to.
To team up with them and they also give US you know places you know there's opportunities to store tools in that to have qualified people Dole grade these tools and and it just opens up every time, we start talking in dealing with these companies, we see more and more opportunity all the time and.
And it's and that's exciting road to go down.
All right that's good what about whats the outlook right now and you know with say, Canada, Mexico, and and say maybe up in the northeast up and with the gas market gas prices have firmed up a little bit. So are you seeing any increased activity say in the Marcellus Utica trends.
You know, we're not we're not forecasting a.
Big increase in activity in North America next year, we have some.
You know, but the our channel partner drilling tools international they've done a fantastic job they've got a great team. The you know is held their own and actually have been able to increase their market share during this downtime and they're the ones that service, Canada and the U.S.
And so we figured there we look at that and they're doing a good job and so we've been able to turn our attention to these other markets.
And other opportunities.
But we haven't we haven't put a bunch in our in our forecast for 2021 for North American next year right.
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And I'll get out of will go away for anybody else that might want to.
Ask a question that is with some of the recent mergers or.
Announced here, particularly on the Permian so forth companies are heavily involved there.
Is there are there any of those companies that are being say acquired that have not been using your tools that might now be perspective, you know.
Clients given the acquiring company has been using your tools.
Yeah, I mean, when that happens I mean, there's there's times, we hear about a company that's going to that's going to merge and essentially be managing.
A new company that had been or a company that's been running or tools and so sometimes there's that worried it will this newco. This this new management team, except the drilling marine and we're finding out that that they do but you still got to go back in there and sell a new team on what the product does.
Yes.
So yeah, there's opportunities there is M&A it's happened.
There's there's good opportunities there.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad. Our next question comes from John Sturges with Oppenheimer and company. Please go ahead.
Good morning, gentlemen, I'm actually pretty decent quarter or considering you had the smell pill.
The I'm just curious about the slim hole a product line that sounds like a new product line.
Is it used in conjunction with perhaps strider or some other tool that you offer.
No, but it's a if you remember right you know we started a what the slim hole Strider line before.
Everything went south this year, we were we were doing some really neat stuff up in Alaska with the slim hole strider or with with a very large sort of go and so on and so I think there's opportunity.
John when we when we look at that.
This slim hole application, because what we were doing up in Alaska with Strider.
It is really similar to what we're doing in the Ukraine. Other two different tools strider is extended reach tool. It's used to get further out in the lateral or the drilling ream of course, as you know Oh, a borehole conditioning tool.
But when we look at what we're doing with the drilling dream.
In the Ukraine, and the Slim hole and when we say slim hole, where typically talk and stuff that you know the the four and five inch tool size and so the two tools sizes that we've got over there are the four and a half in the five and a half so they're new they're new tool sizes for us.
And to.
Right identifying other.
Other parts of this operation that we're very familiar with and we've been and we've we've made them parts and we've made them tools.
In the past and we really think theres some good opportunity there.
Okay. This is a broader question has to do with basically condition of the industry are not seeing the U.S. production oil production drop about 30%.
From where it was earlier in the year, but saying now we have rig count down 70%, so and that's like pick up.
Beginning to show itself.
And we all know the Frac wells tend to drop and what in production profile a lot more quickly.
You had on the same I.
On the other hand, we're saying U.S. consumption Raj. So is this a forced.
What can I say a need.
To meet the projected or consumption demand is that is that what's what portion of the rig count.
Or are people just finding it more advantageous to have have they found other efficiencies and Oh no I'm just trying to get my arms around what's driving up the rig count.
You know.
When we first started looking at the rig count this year when we were trying to forecast what what this looks like a you know in the second quarter. We in this industry, we never see an increase in rig count in Q4, it's it's always the opposite the efficiency that that.
They've created today, you know the budget to drill X amount of wells in starting in January and the efficiencies those programs usually end sometime in October November and those rigs are laid down until January again. So this is this is something that that's that's new to us and and I mean, we.
We looked at it in Q3 and thought you know these companies are are going to have to start start drilling some of these leases and start replacing some of this production that.
These shale wells or are famous for the decline curves on them. So you know you've got these wells that come in like gang Busters, but you know 12 18 months out that production falls off a cliff.
So we think that that some of this is is it has to be placed that production that is that is definitely going to going to fall off that cliff but.
But we also know that a lot of the older wells were shut in so the wells that had small smaller amounts of production.
Those were the first ones to get shut in in Q2 and going into Q3, and the economics aren't there to bring those back on so that all those wells they've got closed in that had you know what we're developing small amounts of production everyday that got closed up.
They're not going to bring that back on at these prices and they're gonna have to they're gonna have to you know chase the the rapid decline of their production that comes out of these shale wells. So.
We believe that foot, what we're starting to see and why these rig count has got to come up.
And and and so we're we'd like to see that going up obviously and we're excited about it.
Doesn't that begs the question this is going to be up fourth quarter.
Per rig counts are going against the grain.
Do you anticipate yeah.
I mean, you look at the rig count admit it's been you know moving up every week a couple more rigs I don't know you know I don't know if if you know something recently is going to stall that out for it. This whole co bid forecast lasting longer you know makes makes people more leery about.
Bringing these rigs on but but I would I would think that there's there's got to be contracts that are in place for production demands and that the people have to supply so.
Again, I think that that sharp decline of the show wells, they're going to have to drill to fulfill their contractual needs.
Okay. Thank you that was my question I just wanted to see.
You get a sense of that stuff from you or you know you're more you're closer to the ground and all this thank you.
Thank you I would like to turn the floor over to Troy for closing remarks.
So anyway. Thanks again for joining US you know we've got a lot of opportunities in this down market. It's it's obviously a tough market is you know I mean, it's it's brutal.
But the team here is doing a great job, there's some tremendous opportunities.
You know, we're going to protect our balance sheet, we're going to continue to.
Work on service agreements that we that we're putting into place a with these large turf goes in to.
You know we're excited about the uptick in in some of our legacy business that that we've had for a long time you know, we're saying we're seeing that starts to pick up in Q4. So.
Were excited and were were looking forward to.
To get to 2020 behind US then and you don't.
Getting down to some good business in 2021.
And with that being said.
Thanks, everybody for joining us and we'll look forward to talking to you in March.
This concludes today's conference. Thank you for your participation.
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