Q1 2021 Superior Drilling Products Inc Earnings Call
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Greetings and welcome to superior drilling products, Inc. First quarter 2021 financial results.
At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
Once you require operator assistance during the conference. Please press Star Zero on your telephone keypad. As a reminder, this conference is being recorded it is now my pleasure to introduce your host Deborah Pawlowski Investor Relations for superior drilling. Thank you you may begin.
Thanks, Doug and Hello, everyone. We certainly appreciate your time today and your interest in superior drilling products.
On the call with me are Troy Meier, our chairman and CEO and Chris cash in our Chief Financial Officer true.
Chris will go through prepared remarks remarks discussing our first quarter of fiscal 2021 and talk a little bit about the conditions in the market. Today, then we will open the call for questions. You should have a copy of the financial results that we released before the market. This morning and should also have the slides will accompany our conversation you can find both.
Those documents on our website at S. P P I dot com.
If you would turn to 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 today.
These statements apply to future events that 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, the 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 of 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 in the tables accompanying the earnings release as well as in the slides.
Dirk.
So with that if you would turn to slide three you'll see troy's name and he will begin try.
Thanks Deb.
Thanks, everybody for joining us.
Q1 was a solid quarter for us we had a strong improvement over the fourth quarter of last year.
And this was driven in the strength of the U S market.
We're all aware of the steady and credit crease in rig count that we've been seeing.
I believe so far on this this QE has been averaging about 19 rigs per month increase so that's that's that's been wonderful.
When we look at the tools that that'll be an order we started seeing an increase in orders in late December for new tools.
And that's followed through all the way up until today, where we're still receiving new tool orders in.
Those tools are being put to work.
They're being they're going into the whole there being run.
On.
Coming back to us being repaired and we see this we see this in.
The other tool revenue that we've talked about but you also see it in the.
And the warranties that we have when these tools go in the hole.
We think that when we look at the market, it's not just because the market improvement that we're.
We're seeing this big increase in demand for our tools.
But we also believe that the operators that are out there on the ones that were were left from this.
Horrible downturn that we had there the efficient ones are the ones that they realize the value of this tool and its there.
They're seeing the value in and.
And it shows you know you see it and reduce rig time.
See it and improved efficiencies the drilling efficiencies when you have a smoother wellbore makes a big difference tripping times are reduced.
And pacing goes to bottom. So it's it's a the tool does a good job for people and we're seeing that and they're recognizing that.
Yes.
We're also seeing a big uptick in our contracted services.
You know this is clearly a result of the rig count.
Improving.
But when you look at the relationship that we have with Baker Hughes.
That really shows right. There when you start to see the amount of repairs that are units that are going through our facility not just bits, but associated drilling tools as well that that we do for them.
Also seeing a high demand on new products.
Through our manufacturing, where we're making a lot of new drilling tools right now for Baker Hughes.
And that relationship is getting stronger every day, we we value that relationship and we know that they really rely on us too.
When the rig count turns like it has.
We can respond quickly and they.
They need us there to help them respond to this demand.
So.
This has been a good uptick in in all areas of our of our business.
And like I say, we're doing more for them all the time on we're going to we're going to try to lean on them a little more and see if we can get something.
Now in place that allows this work to continue to flow through to us.
And and improve the amount of units that we've got going through our shop.
When we look at our international business, where we're a little frustrated with with what what's going on there. It's it's lagging behind the recovery.
But it also lagged behind on the downturn.
But what we're frustrated with mainly as the travel restrictions that we have going on over there. When you look at you know.
Kuwait and Oman, and only the the nationals are getting in and out of the country. It it's.
Puts a little bit of a burden on us to get our.
Tech team in there and get face to face with our customers and show them the values that theyre getting them.
But but it hasn't slowed us down where we're still.
We're still making phone calls and sending out presentations and we've got a new structure around our international development.
For them.
We've put new management in that team and.
We believe that they are focused very very well.
We look at some of the things that where we've been able to get into place. We now have contract with Halliburton in Iraq for the tool and not just halliburton looking to run the tool on Iraq, We've got Schlumberger looking to run the tool we've got Weatherford looking to run the tool.
We now have tools on their way to Iraq that debt.
Where we're looking forward to some some good performance of our products there.
We've got opportunities in Oman.
We have some opportunities in the UAE that we started to we started to get into the UAE really well last year and then we were tripped up by some.
Some registration.
Papers that we've gotta get finalized and get done and we're looking to hopefully be through that whole process.
Sometime in Q3, Q for all that down and get that back chicken again.
We're working with the serve COSE as you all know to build a strong relationship they they see the value of the tool.
It helps them with their with their.
Services when they go out there to drill a well the drilling ream is a benefit to them getting their products in and out of the whole saving their BHA up a lot of wear and tear and you know preventing helping to prevent you know some stuck and stuck in the hole. So.
We've got a good team together that we brought on Jeff and he's doing a great job there focusing our team on.
Again, what we saw.
Some of your call at day, 80, 20 rule and we call it smart which is.
He is doing a wonderful job there.
With that in mind I'm going to go ahead and turn it over to Chris and let him talk about the financials.
But again I just I just wanted to say, thanks, and I also Wanna.
I wanted to say thanks to our our team here at superior we've got a great team and we're very proud of them and they've responded very well to this uptick in business.
And they've been with us for the you know the horrible downturn at this pandemic caused an.
We're looking forward to this.
This new uptick in.
And watch them on how they how this team performs.
Chris.
Okay, well, thank you Troy on up and welcome everyone. That's.
Let's continue on review with but slide six and look for some numbers that.
That are that we're seeing now with this upturn that debt choice has been talking about.
I'm really encouraged with this 57% sequential growth in the first quarter over Q4 as activity and overall market conditions have definitely improved and in North America and in fact, the revenue in North America increased 74% sequentially.
From the drill N ream tool sales the drill N ream royalty in those repair fees.
Our Troy mentioned, our largest U S distributor for the drilling range is seeing higher demand.
For the tool and an early in Q1, we delivered our first new tool orders since last summer.
Demand for the tools continued through Q1 and it resulted in roughly a half a million dollars a new tool sales in the quarter.
And as Troy mentioned, we've seen that demand continue into Q2.
We're very optimistic that this recovery will continue at a steady pace.
Throughout the the rest of the year.
Of course, you look at year over year, the impact of the pandemic and geopolitical supply imbalances in the global markets.
That's obvious when you look at our year over year comparison Q1 last year to Q1 this year.
We know we know why we're down but that really really encouraging thing is that turn that you see from Q4 into Q1 and in the growth that we continue to expect to see.
And it wasn't only the drilling ream does improve substantially in the quarter. It was it was the contract services improving sequentially, reflecting a higher drill bit refurbishment revenue from.
From that increasing rig count.
We ended the quarter at 417 rigs in the U S.
Strong increase from the low point for the summer that's an increase of 71% from that point.
In an up strong from that year in for 17 excuse me the year ended up 19% to that for 17. So the rig count overall market certainly is helping us out, but but it's a little more than that this business. This refurbishment business as Troy mentioned I mean, we're doing more.
And that revenue increased 50% sequentially.
Over that 19% rig count increase so we're we're continuing to see good share improvement in this in this part of the business.
As a matter of fact, if you if you were to go back and look at the quarterly average rig count in Q3.
Prior to the quarterly average rig count in Q1, you'll see roughly a 55% increase you look at revenue from this business, it's up over 100%.
So this is what we saw in Q1 was really a continuation of what we began to see in Q4 for Q3, So really pleased with how that's without that's developing in house developed.
As Troy mentioned in international markets.
They lag somewhat both in the downturn last year and now on the recovery.
Despite the decline in international rigs, our international revenue was relatively flat at $332000 debt.
What we did in Q4.
Wherever we are gaining some traction join mentioned them with them some auto service companies and some agreements for putting in place.
And so we expect to see our penetration in that middle East market.
There's no doubt we can continue to make further inroads in roads and and we're very optimistic about that.
Let's go ahead and turn to slide seven type of a little bit deeper look at the tool and contract services revenue.
You can see that the contract services revenue.
Which is that third party machining work that we do as well is that bit refurb business, it's up nicely sequentially.
Albeit you know far from pre COVID-19 levels.
But we continue to see a trend is moving in the right direction.
Now those tool sales and rental up strong 489000, almost $500000 143% sequentially.
Once again driving that is the.
Favorable conditions in the North American market.
The International revenue line is also included in this bar.
The other tool related revenue, that's the drilling rig maintenance and repair fees.
Up 300000, roughly or 48%. So so strong strong moving in our revenue and I just want to point out that that's that's a rig count certainly has helped but were also done doing some good things from a share perspective.
On the company took we took aggressive actions I just as I think most of you know to reduce costs in 2022 to get our operations aligned with the lower demand that we saw and if you turn to slide eight you can you can see the results of this.
Slide eight youll see our operating expenses.
Say that they're up about 13% sequentially.
Largely reflecting higher cost of revenue given the increase in volume that we saw on the quarter.
We have demonstrated the strong leverage that seeing a good strong gross margin improvement of roughly 480 basis points to 51 five per cent.
So cost are up but they're not up at the same rate net revenue here. So we're getting good operating leverage.
We continue to maintain cost discipline.
With keeping overhead costs low and carefully staffing with direct personnel.
As we see demand come back in as we expect demand to come back.
Next we'll go to slide nine.
Take a look at our bottom line and then the adjusted EBITDA results I just want to point out.
Busy slide here, but I want to point out for the first quarter net.
Net loss was $1 1 million adjusted.
Adjusted net loss for 732000, and we've got a reconciliation to get to the non-GAAP.
These measures that we're talking about in the back of the slide deck.
But you compare that 732000 adjusted net loss two Q4s adjusted net loss of $1 2 million you say, we improved the bottom line on a half a million dollars on now what is driving that the adjustment is for forgiveness. The benefits forgiveness of the triple play long debt, we booked in Q4, So we had unusual credit.
That flow through the P&L.
So just from an operations perspective.
On the bottom line got better half a million dollars.
Look at adjusted EBITDA.
Can say that we broke even at the adjusted EBITDA level in Q1, but you also see a substantial improvement of roughly a half a million dollars for.
Q4.
And so you look at Q3, and Q4 of last year negative EBITDA of $1 $1 million and in Q1 of this year were at breakeven. So once again the impact of the <unk>.
Turn that we have made.
We saw in and are seeing Q1.
Now, let's go to slide 10, and take a look at the balance sheet and it has strengthened measurably.
On building cash.
We.
Told you the last time that we were getting down to a two.
Two the breakeven cash level at $700000 of revenue in and we did that entering into the quarter and you can see that we $300000 increase in our cash balance and net and that was an increase off of September 30th of 600000. So the cash is moving in the right direction.
Mm $139000 from operations in the quarter.
Long term debt, which includes the current portion staying steady at $3 million.
We've got a.
Payment too for the hard rock note in July of this year 750000, and at our last payment on that note would be October 2022, that'll be the last $750000 payment.
As I believe you know we completed a sale leaseback transaction for our vernal, Utah property in the fourth quarter and that debt deal includes the repurchase option should we should be down the road when we want to do that so as a long term lease for $2 million financial obligation is not considered debt.
And its significantly improved our liquidity as you see.
Now, let's go to slide 11, and just look at the highlights of these opportunities and outlook as we see.
Once again, we are really really happy to see the improvement in the U S markets and we expect that to continue steadily throughout the year.
As we talked international markets are lagging the U S, but but most analysts that we that we've read suggests that we can expect that recovery internationally to pick up in the latter half of this year.
Very very importantly is the is the increase in vaccinations and the impact that has on on lifting some of these travel restrictions and as Troy mentioned that will that will help us tremendously allows our guys to get in front of the customer and that's that has hurt us and so as travel restrictions.
Fictions get lifted and we get our gas back into Kuwait and Oman.
It's really going to help.
And as once again as we had guided we did achieve that that positive net cash from operations position that we were looking at.
Cash throughout the year, it's going to it'll be challenging.
Got a timing issues related to international receivables.
Just a number of things that we're continuing to work on continuing to balance, but we see this improvement continuing.
And then we're also working on expanding our drilling tools manufacturing business to white label products for others.
That will expand on our revenue potential and so we see we see progress on that front. So overall I mean, it is great to see how things are improving and we are in superior drilling products. We are so excited about about the opportunity for growth that we see throughout this year.
So with that Doug we can open it up for calls.
Thank you ladies and gentlemen at this time, we will begin ducking your question and answer session.
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Our first question comes from the line of John Bair with ascend wealth Advisors. Please proceed with your question.
Thanks, Good morning, Troy and Chris.
Good morning.
Couple of questions.
What's that.
Okay. Oh go ahead John.
Yeah, Yeah in the presentation.
In your slide deck answered a couple of questions.
But.
Right.
If the activity that youre seeing in revenues continued to increase.
Would you consider prepaying the remaining 750000 due in October 2022 to.
Set out your interest payment on your debt obligations.
You know that that's something that we're keeping an eye on John to be quite honest.
That's a great question and we are taking a look at that we do as I mentioned.
Cash flow, where we're improving but but we need to keep it there is a lot of things that need to keep hitting on the right direction. So later in the year.
We'll see how things have evolved in and most certainly we can take a hard look at that and maybe pick up that last payment and pay a little bit early that that would definitely give us some reset relief on that interest.
It's interesting.
Yeah, and I think that would be perceived favorably amongst investors I would think.
The other question. Another question I had was could you expand a little bit more on your ISO certification.
<unk> new product sales potential.
What other areas would I mean kind of brief.
Briefly touched on that in the end of your comments there Chris but.
Could you all are on expand on that a little bit.
So John when you when you look at when we're trying on when we're penetrating the the mid east.
That's the first thing that the N O sees they ask us for certification.
The ISO certification we've got we've got another one where we're dealing with right now which is which is more of the I believe it's.
Yeah. So.
It has 2100.
But it does give us more was the Hs <unk> side of things.
Where we're going down that road right now, but yeah. It lets us go directly to that NOC and talk rather than going through a channel.
But it also does a lot for US here you know when you look at our E S.
Uh huh.
9001 are the aerospace, it's we talk about diversification right you've heard us talk about diversification.
And these certifications allow us to to go in there and start bidding on on stuff for the D. O D. We've got a team that we've put together that it's identifying.
That work that fits the machines that we have.
As you know our machines are large for oilfield stuff until a lot of the third party machine work that you'll look at there's a lot of small products with very low margins and we've put a team together to identify that works at the that fits the margins that we're more accustomed to but we've got to have those those.
<unk>.
<unk> to go in there and entertain these bids.
So.
Are you seeing are you gaining any traction on that I mean is there any meaningful business. That's that's.
Let's say new business that is.
Happening because of that now or are you still kind of in the.
Stage of.
Still investigating opportunities in that area, we're still on the stage, we did a lot of it in Q4, we went down that road and was looking at a lot of third party work and we did a lot of third party work.
I was disappointed in the margins we got from it.
And so the team that we've now assembled they're directed to find the work that fits our machines are really it really limits the bidder pool when when we look at the the bigger work that we can fit into our equipment.
But as you well know this.
This marketplace has a way of every time, the oil and gas market place every time on that we start to diversify and look down on other avenues.
It picks up and it gets you.
Get really busy in it and it stifles that diversification model and we're going to do our best for this time to to keep focused on diversification and enhancing our product offering.
Okay.
Last quick question, you mentioned that the Youre seeing increased service fees.
And so forth.
Is that a is that.
Chewing to two.
To increase based on on additional volumes or or how is that working out.
Well, we're gonna there theres some theres some.
The agreements that we made during the downturn that we're going to we're going to put you know.
On the the deduction that we had last year, we're going on we're going to take that back and we're going to start charging more for our services and.
And I think it's it's it's it's it's well warranted.
And I think that that operators in general I mean, when you look at what's going on right now nobody nobody is prepared for it and when you when you look at it.
What 400 and.
50 50 rigs.
On the.
The.
Demand on service companies.
Just on those 440 rigs is tremendous.
So the rigs are drilling a lot more footage a lot faster.
So I think you know ever.
Everybody's got to start looking at how they look at rig count and what that means because I believe the rig count that we look at today is about three times the rig count just a few years ago. So you know if you look at 440 rigs 450 rigs times that by three you know just a few years ago and that's it.
About the level of work that we're seeing right now.
Okay very good book keep on keep on trucking, there and I'll get back in the queue. Thanks.
As a reminder, ladies and gentlemen, it is star one to ask a question.
Our next question comes from the line of <expletive> Ryan with Colliers. Please proceed with your question.
Thank you.
You mentioned share gains and increasing penetration in the U S. Can you put some numbers behind that.
<unk> market share.
What kind of on whereas at band then you know where do you think it can go.
<unk> market share in the in Texas is very strong there. There you know southern company that that does has done really well down there.
They've been really good about penetrating and getting this new this tool out there. If you look at if you look at market share.
You know I don't know.
Given that out before as far as what <unk> market share is and I'm, not really comfortable giving that out right now.
But what I can say that.
You know its very strong when you look at Texas for the majority of the rigs are and and they continue to grow it you know in Canada. They they they grow it throughout North America.
So they're doing a good job in getting out there and pushing the tool into the marketplace.
And.
We're happy with what they've done and.
They do a good job.
Yeah, the other thing Greg for.
A share perspective as Baker Hughes.
We believe they are picking up share in the bid market and that leads to more demand on us to repair their bits.
The other thing is is they they seem to be giving us more of their <unk>.
Internal work.
And so we're seeing some for some share improvements from Baker Hughes as well.
Just refresh me on the contract services side.
It refurbishment.
Is it solely Baker Hughes or I thought there was you had an opportunity to move beyond that and if so what's the outlook for that.
It is at this point in time slowly Baker Hughes, we are our contract that we amended last year does allow us to go after other customers. If you will we have not done that yet.
We've evaluated it but to be honest with you. We were we were looking to strengthen our relationship even stronger with Baker Hughes.
And right now on this point in time that offsets for any additional work we feel we may get from somebody else.
Okay.
And on the Middle East quickly you said, that's kind of lagging well how many different countries are generating this revenue stream from.
We've got five right now that we look at you know if you look at our Kuwait.
I'm on.
The UAE debt will be back into here hopefully by the end of the third quarter.
We've also the Ukraine I know that's not the mid east, but we've also had opportunities there that we've generated revenue.
Cutter.
Well, you've got Saudi that we're now taking tools into <unk>.
So and then of course, the Iraq, which is going to be the new one.
That our team is working on now.
Deploying tools over there for three of the service companies.
Okay, great. Thank you.
You bet.
There are no more questions in the queue I'd like to hand, it back to management for closing remarks.
Well, thanks again, everybody for joining us in and bearing with US. We're looking forward to talking again here in our second quarter end.
We will keep pushing this will keep pushing this florida and and keep.
Keep moving this business for it and in a very positive way, thanks, again and have a wonderful day.
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.
Yeah.
Yeah.
Yeah.
Okay.
Yeah.