Q2 2021 Superior Drilling Products Inc Earnings Call
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It is now my pleasure to introduce your host Deborah Pawlowski Investor Relations for superior drilling.
Thank you Victor and Hello, everyone. We certainly appreciate your time today and your interest in superior drilling products.
I have with me on the call Troy Meier, our chairman and CEO and Chris Cashman, Our Chief Financial Officer.
Troy and Chris will go through their prepared remarks discussing our second quarter of 2021 results and talk a little bit about the market conditions and what we're seeing here today.
Then we will open the call for questions you.
You should have a copy of the financial results that we released before the market. This morning and should also have the slides that will accompany our conversation today you can find both of those documents on our web site at S. D. P I dot com.
If you would turn to slide two I will point out that we may make some forward looking statements during the formal discussions 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 the Securities and Exchange Commission. All of these documents can be found on our website or SEC Gov.
I should 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.
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 slide deck.
So with that if you would turn to slide three.
You'll see choice name and I will let him begin.
Troy Thanks Deb.
Thank you and thanks, everyone for joining us.
We go into our second quarter 2021.
Conference call, we're gonna be talking about a lot of exciting opportunities and also talking about some strong very strong business.
Growth that we see here at superior.
When you look at what's what's driving the demand for what we do it's it's the North America market when we it's it's.
You look at North America, and you look at it it's up 74% and what that does for our business is that it drives every business unit we have.
Superior whether it's.
The third party machining and the the P D C refurbishment and when we talk about.
P D C refurbishment.
It's everything that we take a certain skill set that we have here.
Our team is very good at doing and it can be.
You know when we when we raised the P D CS into rumor blades when he brings them into the DNR when we break them into the drill bits that PTC refurbishment activity has been.
Very busy it's there's there's some exciting stuff going on there and.
Were real.
Because we manage this.
Growth spurt.
Exciting to see how.
People are relying more and more on us all the time to produce a high quality.
Product a breakthrough product that we that we've been providing for so long here at superior.
If you look at our third party drilling tool manufacturing business. That's the machine shop, that's the high end machines that we've talked about we've got.
You know, we brag on our staff here.
On on our team here that that does the P. D C refurbishment.
Also like to brag on the team that we have developed and in our machine.
Machining side of things that's a it's a very unique team.
These these these.
People over there are <unk>.
Programing machines are running machines or understanding.
The tooling touch types of tooling that we need they they they take.
CAD files from from our larger customers in and help them out with those files too to convert those to match. The the drawings that they've asked us to produce and then again in that in that part of our business companies are relying on us more and more to provide them with the services and we'll talk.
We will talk more about that in the in future opportunities here.
After after we go through the financial side of things.
And when you look at the increased drilling activity in North America.
It's it's great for driving the DNR demand the DNR as they say is a wonderful tool that that operators are finding help them create good well bore.
And good.
Good wellbore qualities and it also helps them with the longevity of their tools there'd be a chase.
There's a lot of reasons why people should be running a drill N ream and more and more people are figuring that out as time goes on.
When we're talking about drilling ream I'd also like to talk about some of the things that drill N. Ream is allowing some of these operators to do when we just had.
A few weeks ago, and operator drill a very unique profile well.
Where they were able to go down because of the acreage positions. They were they could only go out on a 5000 foot lateral.
But what they were able to do with with by running drilling Dream was they were able to go down.
They're 8500 feet somewhere about there.
Make their curve go straight out 5000 feet.
Then to the left go out another 2500 feet and again to the left come back.
Another 5000 feet so.
Totally changing the evaluation of that that acreage that at one point in time would have been a 5000 foot lateral is all you could do on their this team went in and made a U shaped well and did it to perfection and so I think that's gonna be a new a new.
Advanced drilling process that we're going to see in some of these basins. It it's really it's really incredible what they did.
Well look at international opportunities and growth here are our international revenue increased 37%.
As you all know we've talked about the issues that the mid east is where our international.
Activity is happening currently.
And you all know that the Covid was hit over there and Lockdowns.
Are still in place when you look at our people moving in and out of countries like Oman or to wait.
It's still very restricted.
So our team was able to still bring up that that increase that revenue bring on new customers.
We've got some exciting stuff going on with some some high profile customers that that the team has done very well in and breaking into those those markets and again, we'll talk about that on an.
On future opportunities so.
When you look at it.
And all the stuff that has happened in Q2.
To the business and you'll see that in the financials here that Chris talks about.
We're just getting started we've got to grow this business back.
And and get some get some good trained staff back in place, but lots of opportunity, but with that being said I'm going to turn it over to Chris.
Yes.
Okay. Thank you Troy and welcome everyone.
Lets continue our review by turning to slide six where we provide an overview of that revenue increase Detroit was talking about.
You see that.
We have we have.
Doubled in Q2 more than doubled our revenue in Q4.2020.
So we've seen increases in all of our product lines as Troy mentioned.
Increases in drilling and tool sales, our drilling rig royalton repair fees as well as higher contract services revenue, so all lines of business improving.
We're really pleased about that.
We are benefiting from an increasing rig count as we ended the quarter with an average U S rig count of 451 rigs.
That was an increase of 15% from the first quarter of 2021.
And up 78% from last year's low 0.3rd quarter average.
Additionally, we are seeing the.
Higher demand for the drilling rig given it supports the efforts of operators to improve those rig efficiencies and you heard Troy described that U shaped well.
That was drilled pretty amazing when you think about what what they do in the drill N ream.
Absolutely one of the technologies that enable that.
We are optimistic that this recovery that we've seen so far this year will continue at a steady pace and support growth in the second half of the year.
The international markets have lagged the recovery in the U S.
However, as Troy mentioned, we are seeing positive developments as we continue to gain traction with our strategy and the penetration of the drill N ream in the middle East.
The international rig Count quarterly average has now increased the last two quarters.
And that average was 734 for Q2.
Overall, our international revenue was up 37% year over year, and 38% sequentially. So not only the product lines in North America, but internationally. Some good strong increase in revenue.
We believe we're going to continue to make further inroads as we partner with global oilfield service companies and <unk>.
Fit from increased market activity is as well as our new product development efforts later this year and into 2022.
Now, let's turn to slide seven.
Let's take a look a little deeper at tool in contract services revenue on slide seven.
The improvement in the contract services.
It reflects that higher PTC refurbishment work.
From an increasing rig count.
And the expansion of products, we manufacture for our long term legacy customer.
Tool sales and rental revenue up roughly $300000 or 35% sequentially.
Again, reflecting the strengthening conditions in North America.
International revenue.
It is also included in this revenue line item.
We are renting our tools in the middle East.
Sales for the North American market have been steady as the fleet, both expands and as upgraded with replacement tools.
Other related tool revenue, which includes drilling rig maintenance and repair fees as well as royalties was up 321000 or 39% sequentially.
This increase demonstrates the market demand.
Or the drill N Ream and North America.
Company took aggressive actions to reduce cost in 2020.
And a lot of operations with lower demand.
You can see the results of our three three phase cost reduction program on slides eight and nine.
The last phase was completed in October of last year and as you can see on slide eight we are maintaining our cost discipline.
By keeping overhead costs, low and balancing that with higher demand.
Have been re staffing with direct labor personnel to support current and expected demand.
I should note that cost of revenue in Q1.2021 included an unusual number of international shipments of tools back to the U S for repair.
We have now leased the facility in the middle East and expect to be repairing the drill N ream in the region later this year.
In total second quarter operating expenses were down 3% sequentially.
Largely reflecting the timing of expenses related to year end close and the reduction in amortization expense.
As a result of our cost control efforts and given the higher demand in the market.
We generated operating income of $116000 in the quarter.
Now this compares to an operating loss.
Of almost a million dollars in Q1.2021.
So an operating loss of $1 million in Q1, 2021 operating income of a little over $100000 in Q2.
Really pleased with how.
The business has turned in this quarter and we can see it further on slide nine.
When we look at our net bottom line and our adjusted EBITDA, both of which improved significantly.
This clearly demonstrates the strong leverage we have on higher volume in this business.
The quarter net loss was nearly breakeven.
As you can see on the chart nearly breakeven in Q2.
And just look back in Q3, 2020 was a negative $1.7 million. It was negative $1.1 billion.
Just last quarter Q1.
Almost breakeven in Q2, adjusted EBITDA, which we use to measure operational performance was substantially higher at nearly a million <unk>.
Eight 2% of revenue.
Please see the supplemental slide four at the at the back of this presentation deck that describes.
Non-GAAP measurement and it's a reconciliation table from GAAP to non-GAAP.
Now, let's go to slide 10.
Where we highlight our balance sheet, which has strengthened with the building of cash and lower debt levels.
The company generated $400000.
And cash from operations.
The year to date period, and our cash balance at the end of the quarter was $2.7 million.
From $2 million at the end of 2020.
And roughly double what it was at the end of September 30 of last year.
Long term debt, including the current portion.
It was up slightly due to a slightly higher balance on our working capital revolver.
In July subsequent to the quarter end, we paid the next to last payment.
$750000 principal payment of $750000 on the hard rock note.
That leaves us with just one more final $750000 payment, which is not due until October 2022.
As a reminder, our long term lease on our vernal, Utah property.
While our long term liability is not classified as debt. It is noted as a financial obligation on our balance sheet.
So with that I'm going to turn to present day presentation back to try to wrap up with a review of our outlook and opportunities.
Sure.
Thanks, Chris.
So as we look at going forward.
When we look at continued growth in the North American market.
We believe that the rig count will have a.
We will see a couple of rig improvement.
Weekly.
We believe that the rig count will will.
We will be will be up kind of year end and we're seeing that with the orders that are being placed on our machining facility right now.
It's obvious that the.
The market's looking for a continued growth.
And we know that.
We're supporting that growth with the products that were being there'll be an order today that will be going in the hole in.
345 weeks from today.
So we're going to continue to.
Gear up to meet the demand we have a tremendous demand right now on our facility when we look at the opportunities that are out there.
The large serve COSE have asked us to to pick it up even more and support them, even more and we're more than happy to do so we're doing a very managed growth.
And making sure that we get the people in here that we need to.
To keep up the the high quality.
The work that we're putting out so it's it's it's really exciting to see the team built and.
You know as we've done multiple shifts to increase our volume and we're finding out more more volume we do the more <unk>.
Companies are wanting to give us so.
It's really neat to see this development.
We still as we look at the international it's a good steady manageable growth our management team there is doing a wonderful job.
Identified some fantastic customers that are that are coming on and understanding the value of the drilling ream tool and these customers our large customers that is.
R R.
Excited about the the performance they are getting from the drilling ream and it's saving them time and money and.
There's a lot of inquiries going on and again, it's a.
We're managing that growth very well.
As we also manage the growth here in the domestic market.
We're getting ready to test our large bore series.
In Saudi Arabia, where.
We will be finishing those tools up and they will be going in the whole first part of Q4.
So we're looking for some feedback on that.
We know that the large sports series were good and in countries like Oman and Kuwait. So we expect.
To see some some good feedback there but.
Every country is different and.
But I'm anticipating good performance on those tools.
We're working on some global agreements with some some large serve goes that allow us to to work with our company is much more effectively move.
Moving tools in and out of countries and understanding the price structure that we'll be charging for.
Our services and also leaning on them to help us with logistics we are.
You all know we're extremely small company and we don't have a logistics team. We have some people who've got a stepping in and out of that role, but where we're happy to say that we get support from these larger served codes that are very very well do very well at logistics and we'd look to them for some <unk>.
<unk> and direction is as we as we send our tools to support their efforts in some of these places that we haven't been.
We're also looking at it really stepping up our opportunities within customers, our legacy customers and customers that we've been working with for a while as we look at adopting product lines. We know that we can turn key entire product lines. There's no reason for US just to me.
Sheen the body here and then send it somewhere else.
Do you have.
Functions performed that we do very well here. So we think we're getting an audience for this turnkey or what we're calling product line adoption as we set up sells to to take these products that.
Our customers so desperately need them.
To enhance their topline revenue.
And we think we can we can turn those products outside of our normal manufacturing.
Base, if you will and have these products come in to an identified sell that for.
From a raw piece is still to a finished product that's done in that cell and it's very efficient very timely and we think our customer base and our respond to that very well.
So.
We look forward to continued growth throughout the year very strong strong growth, but very well managed.
We still have our eye on the on the Covid as everybody does.
We're hoping it doesn't slow down any international <unk>.
Development that we've got going on there and domestic but were very.
We've got a very positive outlook I think it's going to continue to be a good strong strong year for us.
And with that being said I'm going to turn it back over to for Q&A.
Ladies and gentlemen, we will now have our question and answer session.
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Yeah.
Okay.
Okay.
Our first question comes from John Bair with ascend wealth Advisors. Please proceed with your question.
Thanks, Good afternoon and congrats.
Troy and Chris for Hep.
It's a pretty sharp rebound in this quarter I know some of it isn't.
Doing that you've positioned yourself well it seems and are starting to bear positive.
<unk> glad to.
Thank you.
Yep.
Got it got a couple of questions, so I'm pretty simple but.
Curious on.
First off best status of.
Meeting the listing continued listing requirements. That's one question.
And the second one is on.
Given that the rig count's been picking up from what I've seen and been reading a lot of it is coming from independent.
<unk> owned operators and I'm wondering if.
You are seeing a pickup of adoption of your tools by those players as opposed to.
The big integrated companies and major independents.
Sure. So second question first if you will.
We are seeing.
The independents picking up our tools they they realize the value that.
These these are strong E&P companies are seeing with drill N ream and and there are it makes it a better sell when you can use a large E&P company as.
As a reference point.
Especially if that large company is drilling wells very effect.
Actively.
But on your on your first question Chris Go ahead ma'am.
Are you seeing new customers and in that in that world.
We are yes, we are.
Is it a meaningful percentage of your total volume then or.
Well you know if you look at the if you look at the Big E&ps you know they have they own the majority of of what we've got going on you know they have the majority of the rigs right.
So, but yeah, we do we do see these companies coming on that.
One rig two rigs and we're seeing it and it is meaningful.
But you know every every time, we get someone new that's running the drill N ream and especially as efficiently as as these as they are drilling these wells.
One new one new rig coming on could that mean multiple runs a month. So it's a it is meaningful.
Okay.
Yes, John regarding the NYSE continued listing.
Initiative, we submitted a plan.
The plan was accepted part of the plan is to provide quarterly updates to the NYSE as to how we're tracking towards that plan.
The last update we provided was the Q1 update back in May.
It was accepted by the NYSE.
We are tracking positive to that plan and we will be providing our Q2 update.
This coming Monday, the 16th of August.
So so far so good.
Okay great.
And then one a couple of other quick questions one on <unk>.
Additional drilling time is it.
Wired.
For the companies when they're doing these U shaped.
Design.
I mean, if it's.
The first one or whatever I'm sure that.
Being a little more cautious initially, perhaps but is there a significant.
The difference in time versus a straight lateral.
You know I.
I honestly I don't know the answer to that question. It's.
The excitement was.
Let's see if we can do this and then to hear back.
Weeks later to find out yes, they did it and encasing what what.
The.
What our market call. It bounced off the bottom is a good thing that that your casing goes right to bottom with no no issues and that's the really important part with especially with all the the 90 degrees beds you have in there.
But I do think that the team that they had their top notch and I I would I'd be willing to bet that the footage drilled.
<unk> runs right in line with the footage rates and pay rates being drilled.
On just about every well.
Let these guys touch they're very efficient they are very good.
And.
Theyre drilling the curve as you know it used to be that a curve was was a big deal and it took us some time.
You know these these these teams are drilling these curves now and five six hours, where where where it wasn't very long ago those curves would take.
Days.
So.
They're very efficient and and I think the fact that you know it wasn't instead of being a 5000 foot well it ends up being a 12500 foot well.
That extra time to drill.
Two and a half times far further was was probably.
A really good a really good win for that company, especially being able to book.
More production.
Out of that out of that space and that acre spacing.
Great.
One last quick one how are you positioned with the critical materials as your demand for new tools are coming.
Yes, coming along we are we find it.
You know still prices since March have gone up.
Five times. So that's that's a I'm glad that we looked ahead and we had our steel.
As we looked at what we thought this year would be like we've been there and we're at a point now where we're we're ordering this still that will carry us through to the end of the year.
So far.
We've been able to build the fleet, we need and build the fleet that that our customers need and been able to.
I think as far as still purchasing goes which is which is one of our main things that we purchase we even support.
Some big serve COSE and help them purchase steel.
So we've got a really good in on on how we purchase.
Steel and the the group that we have involved there has done a tremendous job.
We get we get a little nervous sometimes on the cutters you know that.
Diamond that we put in there because they've been they've.
They've been hit as hard as everybody has heard me and give us this stuff now and so there's a.
There are some cheaper.
Alternatives out in the marketplace that we don't we don't feel the quality is as quite as good as what we demand for our tools and for our customers tools.
So we put pressure on the high end.
Manufacturers that we feel are.
Our stepping up but there's there's been you know a time or two that we were a little nervous but they came through in guidance cutters, and we seem to be using our vendors very well and spreading that out so that that we don't get in a bind.
Great. Thank you for taking those questions I'll get out of the way for somebody else and good luck going forward.
Hey, Thanks, John Yep.
Take care.
Thank you.
As a reminder to our audience to ask a question. Please press star one on your telephone keypad.
Okay.
Our next question comes from <expletive> Ryan with Colliers. Please proceed with your question.
Let me try a couple more on the North American front.
Yeah.
Our configuration that you talked about is that an operator.
That had been using the DNR and the payoffs and.
Going forward is that a reference point you can.
Uh huh.
Allude to or is that proprietary for them.
That's sort of.
Yeah, so it doesn't really get.
Transfer to other potential customers of yours.
No I think that you know the the group that has done this is a special team and there are really good at what they do and that the the news will will come out and then they may have already talked about it some but I believe that everybody will start looking at their acreage position a little bit dip.
Current.
And understanding that you know you can go down and make these.
Complex well geometries.
And and be fine.
And to do something like that a few years ago was unheard of you wouldn't even thought of doing something like that but today.
There's these teams out there are incredible, they're very smart and they've got some some.
They've got some good leadership and they're willing to to let their team.
Do what they think they can do and.
I do believe this technology will be shared and I think you know.
Where this has happened is as a place that there's a lot of activities going on in <unk>.
So it will create the demand for people to re look at their acreage positions and go in there and drill these complex shaped wells that.
That proved to be winters forum, so yeah that'll spread it'll the oil patch is very small.
You know directional drillers drill for this company today in that company Tomorrow.
And they take their they take their best practices with them.
So it's gonna be exciting to see.
How this develops.
Okay.
You're talking about on greater market penetration is that coming through DTI or other sources.
So that's DTI <unk> he's done a great job you know they've got a they've got a tremendous team down there that.
As has done is done a good job with the drilling ream they've got a good management team in place they're there they're a good organization.
And.
Their customers appreciate the value that they bring to them and.
You know they they they've done a good job they really have.
Okay.
I'm looking at the comment in the release on Europe.
Not necessarily guidance, but your comments going forward.
That you expect grow through 2021, and then be back on track next year to resume the growth pre COVID-19 kind of the end of 19.
Are you talking on an absolute basis I mean back then you were looking at 18 $19.20 million are you talking more on the growth rate, which I think their revenue.
Projections back then were double digit 15, plus or minus percent per year with EBITDA margins kind of in that mid <unk>.
Upper 20% range.
Yeah, I mean, it's when you look at what we did first quarter of last year, we were on a really good pace, even though rig count had been declining.
<unk> declined all through 2019.
When we got to 2020 it was.
We had geared up we get staff the profit staff here, we trained well we knew that there was some wonderful opportunities that we could go capture now to take on more work and we know that there's there's a there's a large group of companies out there that need what we have.
But we've got to be able to support it you know we've got to be able to one of the things that we have is we've got some customers right now that are after after let's say the strider tool the coiled tubing strider in and we're getting to the strider tool and we're going to get that back out there, but right now our.
Our focus is on.
The growth that we have in our company right now today to support.
The legacy customers, we have and the opportunity we have in the mid east and now as we bring on more and more people is what we're doing right now.
We will start bringing in the strider back out what we're going to have that tool out and this time, it's not going to be put back on the shelf.
If if and when things slow down it'll have a very very good audience.
So when we talk about growth and getting back on track. We felt that we had a very good program set in front of US we knew where we were going in we knew how to get there and we know the market would respond very well if we can prove this if we can prove our growth in our in our path out and we.
We feel that that's going to we feel that we're back on that path, but we're going to spend this year.
Building up a tool inventory for the mid east and supporting our opportunities there and also supporting our opportunities with with our legacy customers and what they're asking us to do is we look at product line adoption.
And also making sure that we don't slip with.
Supporting the growth that DTI has and what they need to do as we look at fleet maintenance on their tools fleet maintenance on the Baker Hughes tools.
We're managing all of that.
As we grow and we think that when we get through this year, we're going to be back to okay. What else what else is out there that we've gotta go tackle and we know Theres a lot out there for us to go tackle and so where we're going to where we are we're going to be very.
<unk> and look at those tools that.
Going to bring us.
Keep margins, good and bring us a high demand for our services.
Okay, great. Thank you.
You're welcome thank you.
Thank you.
There are no further questions at this time I'd like to turn the floor back over to Troy Meier for any closing remarks.
And thanks again, everybody for joining us and as you can you can see we've got a.
We've got a lot of opportunity going forward, we're going to continue the pace, we have challenges like everybody does.
Look you know you mentioned, you know still supply and.
And we I believe were doing a good job on that and I believe that we're going to be able to keep continued good strong growth throughout the remainder of this year and.
And I'm excited for new products coming on as we as we roll into.
2022, it's a it's very exciting times here and we've got a great staff in and a great team that that's looking forward to so the challenge is that this is.
Increased market has given us.
With that being said I just want to thank everybody for joining us.
Ladies and gentlemen. This concludes today's webcast you may now disconnect your lines.
Thank you for your participation and have a great day.