Q4 2020 Superior Drilling Products Inc Earnings Call
Greetings and welcome to superior drilling products, Inc, fourth quarter, 2020 financial results.
At this time all participants are in a listen only mode. A 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, this conference is being recorded and is now my pleasure to introduce your host Deborah Pawlowski Investor Relations for superior drilling. Thank you you may begin.
Thanks, Doug and Hello, everyone and we certainly appreciate your time today, and your interest and superior drilling products and.
And on the call with me are Troy Meier, our chairman and CEO and Chris Cashman, Our Chief Financial Officer.
Troy and Chris will go through prepared remarks, discussing our fourth quarter and full year 2020.
And talk a little bit about the conditions and the market today and then we will open the call for questions.
You shouldn't have a copy of the financial results that were 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 S. BPI dot com.
So if you would look at slide two I would point out that we may make some forward looking statements during the formal discussion as well as during the Q&A session on today's call.
These statements apply to future events and are subject to risks and uncertainties as well as other factors that could cause actual results to differ materially from what is stated here today. These risks and uncertainties are provided in the earnings release.
Slides and other documents filed by the company with Securities and Exchange Commission.
All of these documents can be found on our website or at SEC 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 and this additional information in isolation or as a substitute for results prepared in accordance with GAAP.
We have provided reconciliations of non-GAAP with comparable GAAP measures and the tables accompanying earnings release, as well as and a slide deck.
So with that I am now going to turn it over to Troy to begin Troy.
Okay.
Thanks, Dan and thanks, everybody for joining us for our fourth quarter 2020.
Paul.
Go ahead, and let's turn to slide four.
Let's talk about some of the accomplishments that we achieved throughout 2020.
And in Q4.
So as we look at the highlights for 2020 I'm going to touch on a few of these so that you have and understanding that throughout 2020, we didn't just locked down and try to survive. We got a lot of things done and not just the strength of our balance sheet.
But we achieved.
Certification and our ISO 9001 R. A S 9100.
And this.
Led to the implementation of our <unk> system, So companywide and now we have a total <unk> system that we've we've got up and running and it's working very very well. This was a big achievement through our team for our team throughout 2020.
And this will also lead.
As we talk about our diversification model as we go forward this really really helps.
Getting that put into place.
We were able to restructure our international business team.
We've had people and few years over there now and we've had an opportunity to look at and who we have and and what positions and whereas our strength and weaknesses and we were able to restructure that team and.
We've been able to get service agreements in place with large service providers and multiple countries are the team has done a really good job on still going out there, even though locked down mode and and the mid east we couldn't have our boots on the ground and in the countries we have.
Already introduced the tool into everything was done there.
Their phone and email and the team has done a tremendous job on getting the word out there and showing post run.
Recaps.
And I sit on a on a call every Tuesday as we go over the Kpis of our product line and are they being achieved and I want you. All day know that this product line is achieving the kpis and really really well.
So we're very pleased with with what we're seeing.
We've been able to expand the size and scope of this product line.
We've added some design enhancements it is going to increase our revenue rental margins as we go forward and that was and that was it.
Barry.
Strong enhancement that our engineering and R&D teams have come up with its its going to its going to pay as we go forward.
No we were able to to make some very strong and amendments to our legacy contract and.
And our legacy contract with very large service providers that they had had our hands tied in some areas there that areas.
Or is that or our expertise.
Well, that's now gave me and us opportunities to look at as we go forward and.
And to 2021 so I'm very pleased with the amendments that we were able to make to these contracts.
We're still moving forward I know that we've talked in the past about introducing.
Introducing another product line and we still move that forward throughout 2020, and and it's going to be it's going to be meaningful as we go into 2020, one that we bring on them another product offering and not and we're just not.
You know offering the drilling rig and we will support that with another product offering and throughout 2021.
Right.
And obviously as we were going through 2020, we saw the collapse, but not just the domestic market, but we also have seen the collapse of the international market.
But through that collapse.
We increased our international revenue, 43% year over year. So it's a testament to the team that we have and and their willingness to get out there and and and work hard and work smart.
Yeah.
We were able to reduce.
Our cash.
Our breakeven when when you look at the reductions the consolidations that we made throughout our organization and the goal was by the time, we get to year and we wanted to breathe be it at a cash breakeven and we've achieved that.
Yeah.
We took this opportunity in 2020 two to look.
And our management team.
You know we've got we've got a.
And <unk> system that did our HR has put in with what they're calling superior management University and and the team has refocused on core values and.
And our managers are stepping up it was it was really and opportunity for throughout 2020 to see our strength and our weaknesses and.
And.
And I'm here to tell you we've got a very strong management team. They know our products. They they have learned our business very well and I and I I believe strongly that we've got the team in place that is that is going to.
<unk> really build a solid company throughout 'twenty, one and beyond.
So I'm excited about those things that we talked about and I'll talk a little bit more about the future opportunities after Chris gets done on the financial side of things and.
And to tell you about some of the neat stuff, we've got going looking forward, but curious.
Chris I'm going to turn it over to you.
Okay. Thank you Troy and welcome everyone.
Continuing our discussion, but I'm looking at slide six.
This provides an overview of our revenue and and while the impact of the pandemic and the geopolitical supply imbalances and the global oil markets are obvious when you look at our quarter trends, we were very encouraged with how our revenue stabilized in the fourth quarter.
In fact revenue in North America increased 8%.
Sequentially on higher contract services.
From an increasing rig count and we ended the year with the U S rig count of $3 51.
That's a good strong increase of 44% over August.
August 2020 low of $2 44.
The increase in market activity.
Resulted in our largest U S distributor of the drill and room to begin buying more tools. We received late in Q4.
225000 dollar order that we delivered and the first quarter.
Through February.
We have received an additional two orders totaling 270000 and for new tools.
And we are encouraged that this trend will continue through throughout 2021.
As Troy mentioned that the international markets.
They declined and.
And what we saw was as they lag somewhat and the downturn and now lagging somewhat and the recovery.
However, despite a 40% decline and international rigs and 2000 and 'twenty is as Troy just mentioned our international revenue grew 43% to $1 9 million and.
And calendar year 2020.
Good day revenue outside of North America.
Represents about 18% of our total revenue.
The success of our international strategy and the continued penetration of the drill N ream in the Middle East was certainly a bright spot during a very challenging 2020.
We attribute this success to the growing recognition and benefits abusing our drilling ream wellbore conditioning tool and our go to market strategy of partnering with global oilfield service companies.
And working with the worlds largest production companies.
We are operating and five countries outside North America, and we are now partnering with six oilfield service companies.
Now, let's turn to slide seven and.
And take a little deeper look at what we call tool and contract services revenue.
Now on this slide our international revenue is included in the tool sales and rental.
Part of the bulk of the bar graph.
Contract services revenue as we mentioned.
<unk> up.
$280000 or nearly 80% sequentially.
And once again, just as a reminder, that is our bit refurbishment business.
And third party.
Hi, and machining sales business.
Up 80% sequentially and.
And while that's far from pre Covid levels. We believe it is now trending and the right direction.
Total revenue was down sequentially.
As those as those new tool orders that I referenced did not happen until late in the quarter.
And we did receive those orders and we just ship those tools and early 2021.
And as we mentioned and international wasn't date soft.
At the end of calendar year 2020.
However, other related tool revenues, which includes drilling rig maintenance and repair fees as well as royalties held steady from quarter to quarter and fact royalty revenue.
And that's what held up in Q4, and we and that's a result of the increasing activity.
And all the drill N ream in the field here and the U S.
Now, let's go to slide eight.
On this slide you'll see the result.
And of the three phase cost reduction program that Troy alluded to we executed that throughout 2023 different phases.
Continuing to right size the organization.
And we took aggressive actions to reduce our costs.
And response to significantly lower demand from the marketplace.
The last phase of the three phase program, we did in October 2020.
And that got us down to the monthly revenue cash breakeven level of approximately 700000.
And total fourth quarter operating expenses were $3 million down 37% from last year's fourth quarter.
And were down three 5% sequentially.
Reflecting that that third phase of cost reductions.
For the year operating expenses declined 28% to $14 3 million.
And with our controllable cost reduction for the year totaling $5 million.
With the company's monthly cash burn rate of approximately 700000, we entered 2021 as Troy just mentioned.
At a cash breakeven operating level.
Now, let's go to slide nine.
Which shows our bottom line and adjusted EBITDA results.
Net loss was $655000 and the quarter or <unk> <unk> per share.
This was a marked improvement from a net loss of $1 7 million and the trailing third quarter.
Largely reflecting the forgiveness of the company's triple P loan of $892000 that we reflected as other income in Q4.
Adjusted EBITDA, which we use to measure operational performance was a negative $949000 and the quarter.
Which did reflect an improvement sequentially on similar revenue given that third phase of cost reductions that we spoke about earlier.
Now, let's go to slide 10, and take a look at the our cash balances and <unk> and our debt levels.
You can see on this slide that as of the end of 2020 are cash of $2 million up.
From $1 4 million at the end of the third quarter 2020.
And up from $1 2 million at the end of 2019.
Very pleased about where our cash balances are going into 2021.
Now during the fourth quarter, we completed a sale leaseback transaction of our vernal, Utah property re.
Realizing net proceeds of $4 $2 million of which $2 6 million was used to pay the total outstanding balance of the mortgage on our property.
We also recognized in 2020 $933000 of loan forgiveness.
Which includes the triple play around that I, just mentioned and an additional 41000 related to and SBA equipment line that was forgiven and the third quarter as part of the cares Act.
Long term debt, including the current portion as of the end of 2020 was down to $2 9 million, our lowest level since becoming a public company and 2014.
We have principal payments of 750000 due to hard rock and.
In July of this year and the final payment.
In October 2022, so we've got $1 5 million on the balance sheet as of 12 31 'twenty.
Half of it will get we'll get paid middle of this year and the last installment on that would be and the fourth quarter of next year.
And now a little more detail on the sale leaseback transaction that that transaction and includes three repurchase options and one at the end of the fifth year. One at the end of the 10th year and wanted to and of the 15th year.
And so we accounted for that.
As setting up a $4 $2 million financial obligation, which is related to the future minimum lease payments.
So as a long term lease.
The financial obligation is not considered that.
And with a 15 year term approximately 4 million of that four point too.
Long term.
This transaction significantly improved our liquidity.
From a negative working capital of $2 6 million at the end of September 22022, a positive working capital of $1 3 million at the end of Cowen.
Calendar year 2020, we are very pleased with how our balance sheet has strengthened and measurably and you can see that with the building and cash.
And a significant decrease and our debt levels and a significant improvement and our working capital position.
So with that I'm going to turn the presentation back to Troy.
Thanks, Chris.
So as we look at our.
Outlook and opportunities, let's let's turn to slide 11.
And.
We're very encouraged with the disciplined growth activity, we see and the global market right now and.
And the oil and gas industry.
We're confident that this improvement and activity will allow us to get further penetration.
Our drilling ream product line and into this.
Growing market and it all.
So serves our our manufacturing services well our repair services well you know our third party very well and I want everybody to know, we're continuing to strengthen our relationships with our our third party our legacy.
Customers are channel partner customers.
And we're really pleased with our domestic channel partners, you've heard us talk about them they've done a phenomenal job.
You know our relationship with Baker Hughes continues to strengthen as we do more and more products for them.
All the time, so we're encouraged about what we see and we're excited for 2021.
And you look at the one everybody and understand that the certifications that we got when we talk about ISO and we talk about and we talk about all the things that we're putting in for diversification I want everybody to understand that that we are and and oil and gas technology and service company. That's what we do.
Do.
Our diversification model is going to make it just so when we get into these dips. These these these horrible dips that are that are common in this marketplace. They don't have the negative effect on our company like they've had in the past so keep make no doubt, we are and oil and gas service provider.
And <unk> and technology inventors, so that's where we are.
We're still we're getting msas throughout.
The international market, where sun and more Msas all the time as we every country. We go into it's a process.
Not you know you've got a tool deployment in the mid east and it's and it's good for the mid East every country that we that we.
Introduce our tool to us is another MSA, even with even with the same service providers that we currently are with it. It's a it's a new contract. It's a it's a new it's a new low grade agreement country for country and we're getting good at that matter of fact, we believe we have a gentleman now and Thats just focus where we're going to get these msas and.
Place.
And it really helped with with getting tools and the whole we've got a lot of requests for drilling ream on a global basis.
But these companies cannot deploy this tool and until we get these contracts in place and and that's what we're doing now.
So.
Going forward in 2020, one we're very excited about what this year is going to do to strengthen us as a company and.
And we hope that you all are as enthused about this as we are because.
Where we feel that we're in a better shape now than we ever have been as a company and we're ready to we're ready to move forward.
So with that being said I'm I'm going to turn it over to the Q&A back to the operator.
Thank you, ladies and gentlemen at this time and we'll be conducting a question and answer session. If you'd like to ask a question you May press star one on your telephone keypad and a confirmation tone will indicate your line is there any question Q.
You May press Star two if you would like to remove your question from the queue.
And for participants using speaker equipment, and it may be necessary to pick up your handset before pressing the star key.
Our first question comes from the line of Dick Ryan with Colliers. Please proceed with your question.
Thank you.
Let's say try and just looking at the order trends late in the year and so.
So far through February.
What really kind of drove those and can you talk maybe what the let's say the near term pipeline looks like because this.
Is it still.
Pretty active or how would you describe the other near term opportunities.
Yeah. So the near term opportunities are very active.
One of the things that drives these orders is the fact that day.
The age of the fleet that our channel partner has.
Even though that fleet was built for a lot larger rig count and what we're currently at that fleet is getting old and and and so as they have to start turning over that fleet and it allows us to replenish that fleet and we also have we have new connections and when we talk connections were talking the thread.
Penn and box and of these tools and.
And as new.
Threads come out you have higher tensile strength threads and you have different types of threads.
These tools that our customers have and their fleet.
Are not those threads and.
And a lot of the operators don't like to run crossovers. So we ended up making them new tools.
So that that that's what's driving that.
The majority of our of our new tool manufacturing.
And keep in mind that the tools that you see is talking about here are not the tools for our mid East fleet. We've also.
We talked earlier about how we how we increase the size and scope of our product offering.
Well, our our DNR offering and.
And when you look at the DNR when we when we when we broke out with that tool and.
And 2011 2012, it was a it was a six inch series tool.
And it and the lateral and North Dakota.
And that's not the case anymore.
We've got tools that we run in the Ukraine that are that are four and three quarter and stools for gone back into re entries and cut and windows and and helping operators to drill down we've got.
Our sizes in the mid East stars, we got 16 inch tools that are becoming very very popular and we got 12 inch tools. So so when you look at the offering of the DNR product line not just six inch anymore.
It's four and it's five and a six and eight.
Eight it's 12, it's 16.
It's a as we've expanded those sizes, it's really given us a lot more opportunity.
So.
That's what's driving most of what you are seeing.
Okay.
And as you as you say grow through 2021 will that be domestic and international or both.
It's going to be both.
And we look at a tremendous opportunity with our with our channel partners here domestically, but we also understand that the need for drill N ream on a global basis is massive and we've never we've never.
Ever since 2015, we haven't had a sales and marketing structure in this company we've been a tech company. That's handed this stuff off so we've had we've had to learn you know the.
Process as we deliver these tools on and international basis, and believe me. It's every step of the way. It is a it's something new for us, but we're learning it and we think that the big growth model for our company is going to be international.
But there's still a tremendous amount of opportunity here and the domestic market.
Okay with that of the hard rock note coming up in July and do you think you can pay that off with cash generated through the first half of the year or there are options and flexibility to maybe push that out as well.
We're shooting to pay it off with cash generated but we have options we have some flexibility on it.
So I mean, it's out there we see it is it's something we got to take care of and we're focused on it but.
We have some options.
Okay.
When could we see some of the revenue streams outside of oil and gas.
And you then.
You know Dick I wouldn't count on it contributing much throughout 2021, we're looking we're being very selective at at the end of 2020 as we started going down this diversification road and the third party machining is outside of oil and gas is incredibly.
<unk>.
So where we're entertaining those bids and say that fit one fit our equipment and the tooling that we have but we're also looking for that repeatable work. So every time somebody sends us.
They they need this widget made its not a prototype and it is not we buy tooling and go through all the the programming and post processing and and design stage of that just to make a one off we're looking for we're entertaining these companies that can give us.
Okay.
Work it fits the size of machines, we have but it is also complicated.
Really reduces that bidder pool, and so we've been we've been bringing companies and we've put a team in place here within superior that is doing a really good job on understanding what what truly are those cost when we when we when we scrap apart.
And you know we've got Chris.
Chris has done a phenomenal job and and with the accounting team and getting the knowledge base in there that we need we just made a phenomenal higher there as well and and the controller side of things.
So we're building the team we've got the processes in place and now we're being really stingy on on what we're willing to take and because like I was starting to to allude to in and.
Q4 of 'twenty as we went out and started.
Doing third party work for other people man margins and in that arena is incredibly tight.
But but we have been in the talks where we where we're identifying the areas where we can make margins that looks closer to what we're used to and the oil and gas.
Okay.
Good I appreciate it and congratulations on the recent order trends.
Thank you.
Our next question comes from the line of John Bair with ascend wealth Advisors. Please proceed with your question.
Thank you good morning.
Troy and Chris How're you doing.
Doing good how are you doing Jon.
But.
Hang on I'm, sorry, I was on the speaker okay.
And I'm just curious.
If you have much exposure.
And your existing customer base that has.
Oil and gas companies that have exposure to federal acreage.
And whether or not those are companies that might be impacted if this.
Federal leasing and operations moratorium that the current administration has put.
Put in place and if it.
You know where to be extended.
And also along the same lines.
Do you have much exposure to companies.
Operating and the offshore Gulf of Mexico, and federal waters.
Historically, that's not been a big area, but.
So when we when we look at the customer base you know that.
And the into U S and the domestic market here, where we're one step removed because of the channel partner that we have there that that delivers our product to the customer however.
We look at that customer base.
And the majority of the work is Texas, Oklahoma.
I think most of Texas, and I and I could be wrong, but I think most of the Texas fee ground compared to like if you look at Utah.
Utah has a lot of federal and state ground Situla is what they call the state ground.
I do believe the rush that we were seeing in late late into Q4, and and what we're seeing right now in Q1.
Are those are companies that are getting leases drilled that are on federal acreage.
And so they don't lose that lease I do hear that that some of the activity that we're seeing.
But knowing the amount of work that's coming from.
Texas and and in Oklahoma.
And I.
And I can't believe that that's very much of that work and new Mexico. You know when you look at the drilling that goes on down there that's associated with that Permian.
That there and new Mexico, and I would imagine you've probably got some some federal grounds that are that are being drilled there but.
You know I don't see that is ending the federal drilling.
Drilling on federal ground is a major impact to us.
And I'm not wrong, there I don't think I am because if I look at like Utah.
Isn't much drilling going on here anyway.
And we actually have some rigs and standing up which is great to see I think we've got four and five rigs now standing up.
But I do know that some of that is on federal ground.
And that's the stuff we have seen on tribal here.
And here in Utah, they were excluded from this.
And it turns out and drilling on federal ground I'm, not quite sure how and how the the.
You know <unk> got around that issue, but they got a release from that.
And that non drilling on federal ground. So.
And that's probably why we're seeing some of the activity pick up here and the state.
Right, well I and I would think that if.
And I mean, I hope I hope they come to their senses about this but if it doesn't and I would imagine that could.
Perhaps pick up activity and other areas like you know up and they and any appalachians and perhaps.
Where there's not a lot of the federal acreage up there so.
Alright, Okay, you know.
And we're going to win.
The oil and gas and where we're either going to get it on an international market or we're going to we're going to get a lot of it here domestic but we're going to get it.
So.
And that's how we look at it that's why you know that the strengthening of our international platform is very important.
Well that's right.
And answering your question in regards to the Gulf.
Again, where we send tools to our channel partner and they send them out I do know we've run drill N ream on.
On offshore and the golf and and I do believe it had some good performance.
But.
You know that I can definitely find out how many runs that we have had and the Gulf and and the performance of those tools and and be able to get back to you on that.
Okay.
I was going to say circle around but I won't say that yeah, yeah, Okay alright, okay.
Also I'm wondering if you see.
Demand for product is starting to pick up are you do you feel pretty confident you can keep your overhead expenses pretty much and check are you going to be perhaps impacted by ramping up on that.
In other words, trying and you know orders come in and.
Hopefully the.
And <unk>.
That'll just flow to your hopefully flow to your bottom line.
You know volume is key we have fixed costs here and.
And we've been able to hire back.
Some very very good talent that we had to let go midway through last year we've.
We've been able to hire those people back.
And <unk>.
Volume is everything to us when we start getting volume the amount and the amount of people that we have in place now.
Can absorb more volume and and when we do our margins really start to look nice.
So I think I think we can we can grow this company without adding a ton of cost we're going to have some international expense, we have to get a repair facility and the international market. So you know we budgeted for that.
We had a goal to get that done by the end of <unk>.
<unk> and may be pushed back a little bit because theres still some travel restrictions going on that we're that we're trying to deal with as we look to train individuals' over there but.
We're going to have a repair center and a fabrication option in the mid east.
And the not too distant future.
Okay.
Well very good keep keep after it.
We will look forward.
And hopefully you'll stick alright.
Take care.
There are no further questions and thank you I'd like to hand, the call back to management for closing remarks.
And I can tell everybody thanks for joining us and.
We've got a lot going on here I think that can be very positive and in 2020, one and beyond and.
And I really feel optimism about the team, we've got and the opportunities in front of us So stay tuned and.
We'll we'll keep pounding away and we'll get this right we will get down the road, we'll get it right.
With that one and tell everybody have a good day. Thank you.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.
Yes.
Okay.