Q2 2022 Superior Drilling Products Inc Earnings Call
Greetings welcome to superior drilling products incorporated second quarter fiscal year, 2020 two 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. Please note. This conference is being recorded I will now turn the conference over to Craig Mihalik Investor Relations for Superior Kelly. Thank you you may begin.
Thank you and welcome everyone to our second quarter 2022 earnings calls.
We certainly appreciate you joining us today.
Joining me Troy Meier, our chairman and Chief Executive Officer, and Chris Cashman, Our Chief Financial Officer.
You should have a copy of the financial results that were released before the market. This morning.
Also have the slides that accompany our conversation today. If you do not both can be found on our website at F. C. P I dot com.
Turning to slide two I'll point out that we may make some forward looking statements during the formal discussion as well as during the Q&A session.
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.
Abided in the earnings release, the flight and other documents filed by the company with the Securities and Exchange Commission.
These documents can be found on our website or at SEC Gov.
I want to point out also that during today's call, we'll discuss 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 slide deck.
With that please turn to slide three and I'll turn it over to try to begin strike.
Thanks, Greg.
Thanks, everybody for joining us.
For our second quarter 2022.
Paul.
When we look at the second quarter I'd like to highlight.
For items that we spent a good.
Majority of our time and resources going in and one of the things sit.
I think first thing to highlight is the hiring and training of new talent.
As you all know that as the business grows we've got to.
Bring on more personnel and.
And our management team has been doing a good job picking up talent and getting them trained and.
Some of the a lot of the services that we provide here take a special talent and especially working with heat and so.
I wanted to tell our team good job for what they've been doing there and where we're building a good strong.
Our team here so.
The next thing I'd like to make sure that we mentioned today as a security or additional opportunity with our legacy customer.
Biggies that we'll be talking about.
Fair enough.
<unk> channel partner, there's another there's another bullet point I'd like to discuss or talk about today.
And then also in the second quarter, we get a lot of repair and maintenance of equipment that are as you well know over the last few years, we haven't had the opportunity to get to that.
So at least we spent some some resources.
Taking care of the plant and equipment here. So I want you to all be aware of that as well.
So as we look at what.
What we've got going on in <unk>, and what we had going on in <unk>, a very very strong demand.
For our services.
When we look at our legacy side of the business yeah on the refurbishment of tools that is very strong and it's and it's growing every day that.
That demand continues to strengthen.
Both on the.
Our flagship tool the drill N. Ream is we see D. T I keep a strong presence in the North American markets.
They bring on new customers in.
They're doing a good job there.
Also have.
The legacy bit refurbishment as you know with with Baker Hughes than they've been.
They've been <unk>.
Keeping us very busy as they get stronger and stronger and their position in that market.
We see improved market conditions, because we see rig counts go up.
Of course, there is more of a demand for our services, so and I think that even though you know when we when we look at rig count it's nowhere near where it was few years back. However, the rigs that are there are drilling a lot of footage so keep that in mind that the demand for tools at the current rig levels is.
There's tremendous so.
You know be very aware of the footage being drilled per rig is very impressive.
Yeah.
The strengthening of our balance sheet, you know Chris will talk about that we continue to keep focused on that as we pay down debt and build cash and he'll talk about that.
And then we look at the working to improve capacity and demand.
Hum.
We've brought on.
Additional shifts to a supply for.
New tools that we're manufacturing in our machine shop.
As well as <unk>.
When we look at.
The people that we need for that it's a very it's a very talented.
Operator that we're looking for that not not only do they.
Program and run the Cnc's, but they're.
They're very very talented in the design side as well.
And we've been picking up some good talent there and we continue to look.
We have the we have issues like everybody else does in the labor market today, you know finding talent in and get them on board, but our team is doing a good job and they they are.
They're doing that every single day trying to find better ways to attract some good good talent.
We spent a lot of time in the international side of the business.
You all know that we are we signed on a channel partner in the Mena region.
The Ben Ziad Petroleum group.
And we work with them you know on a on a weekly basis.
Our teams are getting to know one another and how how we're going to work together to.
Saturates the markets with the drill N ream technology and other technologies that they may need a spin.
Ben.
Very.
Refreshing opportunity to deal with such a with such a world class organization. We're very we're very pleased with the individuals we deal with and.
We think it's going to be good sure steady steps as we go forward.
Keep in mind.
No we talked about the turnkey process.
We believe we purchased a new machining center.
It was a million dollar machining center that that we've put into place. We now have it in place. We've made we're making the jigs and fixtures that are going to allow us to do this turnkey process that we've talked about where.
You know in the right now today, we just we machine new product, but we don't we don't finish the product we ship it off to Houston, where it's where it sprays and hard faced a this new tool.
Key process that this machine will be addressing is going to keep those products that we machine.
And then keep them here. So that we can also finish this product and then ship it out we think it's going to be.
A great opportunity for this company and I say that machines in place and where we're running the programs right now and we will start turning our first products off of there this month actually so.
We're excited for that.
But that being said I'm going to go ahead and turn it over to Chris to talk about the financials Chris.
So I could Troy and welcome everyone.
It's continue I'll review by turning to slide four where we will review our strength in top line.
Q2 revenue rose, 34% to four and a half million dollars over the prior year period and grew 10% sequentially.
Well, we are certainly benefiting from the continued improvement in the oil and gas industry.
We also are quite our success to our manufacturing processes and business development effort.
That have resulted in obtaining additional business with existing customers.
North America revenue was about 89% of our total revenue.
Which has been increasing thanks to improving industry conditions, the growing demand for other related tool and contract services.
And more rigs utilizing our flagship tool the drilling rate.
Which continues to demonstrate its value to operators.
Improving drilling efficiencies, which.
Serve to reduce reduce oil and gas drilling and production costs.
The U S rig count continues to increase leading to a number of customers recognizing the value of our technologies and expertise.
The average U S rig count of 715 in Q2 2022.
Was up 82 rigs sequentially or 13%.
And up 264 rigs since last year's second quarter, a 59% increase.
We expect this steady trend in North America to continue and as of last Friday.
Rig count was 764.
Over the last year the international market growth has has been at a slower rate compared to our domestic growth.
Due to ongoing pandemic related restrictions, which have impacted travel and labor recruitment in that part of the world.
We are we are really excited about our new marketing and distribution agreement with bin Ziad as Troy mentioned.
We believe this will accelerate our international growth.
As we previously announced this agreement provides the bin Ziad Petroleum will initially purchased the company's existing middle East drill N Ream tool fleet.
And they will purchase no drill N ream tools as they penetrate the middle East and North African markets.
The company will repair and maintain <unk> purchase to a fleet.
And we will share and the revenues have been ziad receives from the rental of the tools to the end users.
In total through the purchase of tools and the revenue share model the company expects to realize roughly $13 million in revenue over the 12 month period, beginning July 2022.
Through its relationship with Bing Ziad.
The initial tranche of purchased inventory of approximately $4 million will be recognized in revenue in the third quarter of this year.
Market penetration expectations are still being agreed and will be adjusted on an annual basis.
Yeah.
Now please turn to slide five to review our tool and contract services revenue, which are both appreciably higher.
Total tool revenue, which is the sum of other related to our revenue and tool sales and rental revenue.
Increased 27% to $2 $9 million from the prior year period.
And was largely driven by higher drilling ream royalty and repair revenue.
Given the increase in the end users of the tool.
Contract services were up 47% to $1 6 million.
As we have leveraged our improved capacity to support our customers increasing demand.
They continue to recognize the value of our high quality.
PDC bits in other tool manufacturing capabilities as well as our PDC bit refurbishment services.
On slide six you will see that our costs and expenses have increased.
We are working hard to keep up with the demand for products in the face of global inflationary headwinds.
Specifically have impacted us in payroll expenses raw materials used in our manufacturing operations supplies and repair and maintenance costs.
<unk> also expanded our workforce to accommodate our current growth with talent being added to quality safety and general manufacturing support areas.
We continue to demonstrate strong leverage on the SG&A line, which declined 160 basis points as a percent of revenue from the prior year.
Depreciation and amortization expense decreased approximately $180000 or 31% year over year.
Primarily as a result of fully amortizing a portion of our intangible assets and fully depreciating some of our manufacturing center equipment.
We remain focused on our cost control efforts.
We are making the necessary investments to help capture the tremendous demand for our products and services.
Inflationary pressures are expected to endure for at least the near term.
But our teams are working to optimize processes and build relationships to expand our global presence.
And while we have had some success in adding talent labor constraints are still an issue as we move forward and prepare for additional demand.
To help combat the inflationary headwinds around headwinds around materials and labor.
We implemented customer price increases effective July 2022.
And I expect to make further pricing adjustments this fall and into next year.
Now, let's go to slide seven.
And we see that our bottom line and adjusted EBITDA.
Pressured by these increased costs as we just noted on the previous slide net.
Net loss for the quarter was near breakeven slightly negative.
Adjusted EBITDA of $831000 was 18% of sales.
Now moving to slide eight we sit on our balance sheet remains strong with reduced debt and stable cash levels.
For the first half of this year, our cash balances exceeded our debt.
Cash generated from operations for the year to date period was $1 4 million.
Compared with 335000 in the year ago period.
Largely reflecting the improvement in net income.
We have you lost some of our cash to support an increasing capital plan, which to date.
It's $1 $2 million spent in the first six months of 2022.
This reflects the downpayment.
Roughly $300000 to secure a new CNC machine.
In Q1 of this year.
An increase in maintenance and cat capacity improvement projects and an increase in our middle East drill N Ream tool fleet.
Capex for the comparable period of 2021 was $55000.
We expect our increased level of capital spending to continue into the rest of this year and totaled approximately two to $2 $5 million over the last two quarters.
Troy will review our capital priorities.
Just a few moments as he goes over our outlook.
Total debt of $2 4 million.
It was 2% lower from the end of calendar year 2021.
We have sufficient cash and expect to pay off our hard rock note.
A final payment on a hard rock note that of $750000.
And we'll make that payment in October and that will retire this portion of our debt.
In addition, with the cash from stage, one drilling inventory sales have been ziad, we've considered retiring other high interest rate debt.
Now, let's continue with slide nine.
Take a look at our.
Guidance going forward for the rest of this year.
We're guiding 2022 revenue up between 22% and $25 million.
As a point of reference I might add in 2021, we did $13 million in revenue for the year.
Yeah.
We believe SG&A expenses will be between 7 million and $7 3 million.
We believe adjusted EBITDA will be between six and $8 million.
And our capital expenditures for the year will be between three and $4 million.
As as we would like to note in Q3 as we mentioned.
We will be selling roughly $4 million of our existing inventory.
In the middle East have inside petroleum.
And we expect that to happen this quarter Q3.
And.
With that sell off.
Tools, our revenue in Q3 will be between eight and $9 million.
And adjusted EBITDA in Q3 to be between three and a half in four.
So now with that I'm going to turn the presentation back over to Troy as it goes through our outlook and opportunities.
Thanks, Chris.
So as we look at our opportunities.
That we see throughout the remainder of this year.
Yeah.
Like I said earlier, there is a tremendous need for our legacy.
Skill set what we've been doing and we've.
Where we're building out that part of our our business when you look at the facility here.
Increasing our brace.
Capacity, we're building new base stations.
We're moving moving some.
Equipment from one building into another in Italy, as we find more efficiencies and teaming up with the base stations from the drill N ream and and then into the drill bit side of things.
So we're going to see some capex spending there we're going to we're looking at bringing on a another large five axis machining center to support the activities that we have there.
You're all aware that we've got several large we call them five axes, but there are seven in and actually nine axis machining centers.
We're going to be duplicating, the two large ones due to the the backlog and with that we have on those machines and it will also give us a good backup machine in case something.
Does to happen on these two main machines, so there'll be some capex spending there as well.
With that when we bring these machines and we also got to do some.
Work to our foundation to support these large machines and that allow us to keep the accuracy that we keep we.
Do modifications, we cut out the existing floor and then didn't lay in a really good support structure for these machines.
We're also going to be we've got to get.
Refurbishment of service centers done and running in the Mena.
In Dubai.
So our team is very focused on that.
We're identifying the equipment that we've got to to get purchased and get over there and get installed as well as.
Getting a workforce over there trained to refurbish the tools inspect and refurbish.
Along the same lines as what we do here in <unk>.
And you know of course that will start off being for the drill N ream.
Tools.
But there's a lot of drill bits of get run over there as well so I'm sure that'll that'll come in right behind the drilling rooms, the need to also service those type of tools.
We will also we expected drilling ream demand to increase.
Which is wonderful were making sure we have the equipment and the personnel in place to service that demand.
Keep in mind, the turnkey process that we've talked about.
We expect that to be up and running and.
By the time, we get to Q4, it should be a meaningful addition.
To the services, we provide here.
And the contract services like we've said, we've got a massive demand for that service.
So lots of opportunities we've got to we've got to continue to.
Expand our manufacturing capabilities.
But with that again I think the biggest.
The biggest part of all of this expansion is going to be the hiring and training of of qualified personnel and we will continue to.
To get creative on how we.
Attract.
The high end workforce and retain this workforce.
So with that being said I'd like to turn it over to.
Q&A.
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Our first question is from John Sturges with Oppenheimer and company. Please proceed.
Thank you very much.
Nice quarter gentlemen.
I am curious about if you can provide an update on strider.
Where is it in any other tools that you have.
Some of them are you going to distribution.
And then the second question, which fits in with that.
Fourth quarter typically in the U S is slower for you I would imagine mcgee's business with <unk>.
<unk> offset a bit of that.
But with the pace of drilling fourth quarter may not be that week. So I'm just curious as to what you're seeing at this point in time versus the fourth quarter.
Okay. So regarding your first question on the Strider.
You know I don't I don't.
I don't talk much about that tool just because we kind of we put that on the back burner in 2020.
<unk> Q1 of 2020, and we're really excited about the strider sold our first four tools and then you know what happened.
But but since that time, we've had a very high end customer that.
Took those tools that we sold in Q1 of 2020 and actually ran them in Q1 of this year and they performed very very well.
We have since brought that debt.
Product in.
Everybody that we had.
What is involved in that product line.
We had when we did our reduction in force we lost those those individuals and so it was.
It was a pleasant surprise for us.
And we've.
We've now got a manager in that Department, who has who has taken that on and we refurbished those tools that came in.
They performed well and they've been we've put them back out and they've they've they've performed well again. So we know that there is a need for that product line and we are addressing it.
We haven't put anything in our budget for that although we are doing it.
On a small basis, we've now gone to.
We're moving that product line instead of having our elastomer.
Power section is what we started that design with many years ago, the realigning and.
The elastomer in that product line has gotten very expensive and so we're moving that to a metal on metal.
It's very exciting for us the metal on metal, we believe will last at least 10 times longer than the last summer that were used and we're just now modifying those power sections. We've got four of those that we're going to be.
Getting out here over the next month, so we're excited.
To get those out and get them in the field and see some wonderful performance on those and we'll probably be talking a lot more about that in our.
In our Q.
Q3 in November , but really where that's going to be Q4, where we we start to see these tools getting out and getting multiple runs on them and then we start to look at addressing a really good buildup in that side of the business and starting in Q1 Q2 of next year.
Regarding Q4 and the <unk>.
You know the typical slowdown.
What you see there.
We're not expecting that at all.
You know in the past what was what would really affect the Q4 is the fact that the drilling efficiencies we're big.
Becoming so great from year to year.
That.
The company's E&ps would say, we're going to drill 100 wells this year and they were looking at wells that may take them.
25 days to.
From spud to TD.
And then.
They plan that out throughout the year and then they find out that they'd have that drilled up because of the efficiencies.
Up by September October and those gains kept happening year after year after year and what we're seeing now is.
The wells are being drilled very very efficiently, but were not seeing those days come off of wells that we've been seeing in years past, so even though theyre getting better at it and more efficient.
I think we're reaching the point, where we can only put pipe in the hole so quick.
And so the efficiencies of drilling wells.
Our being.
They're being recognized in other places than just.
Days off of wells. So I don't think we will see budgets drilled up.
October I think we'll continue to see some good activity.
Throughout Q4 and with the need to.
When you look at the rig count.
Do you see it.
It's trying to get to get push towards that 800, Mark but I think one of the issues that you have with that is you know.
What we see here past 750 now it seems like we go up a few rigs and then we come down a few rigs.
And I know when you are talking to the service.
The serve toes when these e&ps want to put up more rigs.
Those hands are coming from the service companies and so it's a tradeoff now of if you want the tools could taken the hands right, but you got to have the hands to stand up the rigs. So it makes it really interesting demand dynamics, where we're at right now with the rigs and the serve kos.
So I think we're going to see.
I think we're going to see a strong Q4 in the drilling activity.
We plan on participate in that with in that with some of the other things that we've been talking about with the new product line adoptions that we're bringing on and the new services that we're adding.
I hope that answered. Your question you did it was a great a lot of color.
I really appreciate that just one little follow up and that is the DUC inventory that was usable.
It seems to have.
They've worked it down so.
All new production pretty much is coming from fresh greenfield drilling or something close to that.
Which would imply.
Just to keep up with current production you'd have to have either longer laterals or more wells.
And I'm, just trying to get a sense of.
What you see along those lines.
It seems to me like a two mile lateral is commonplace now.
Used to be when we first started.
Getting out there.
We were doing.
Foot laterals, and then 2000 foot laterals and now we do laterals that followed property boundaries in a square you.
But it seems to me that the.
The talk that we hear a lot about this.
These two mile laterals.
And I'm not quite sure how much how much further they can go to be to be productive I know there's a when.
You get to the total well, which is the end of the lateral.
I don't know if you get as much energy from your Frac as you do with the Hill and so we may not have the efficiencies and not get the return.
Well it gets too long.
I am not an expert in that field, but just from talking with people that's what I hear.
Our next question is from Ben <unk> with pattern. Please proceed.
Thanks, guys nice quarter, just on Penn Sayiid, if we can.
Peel that back a little bit more.
I mean, it looks like margins or.
Explode to the upside Q3.
<unk>.
Transition occurs but just can you talk a little bit more about the longer term implications to just the capital intensity.
And the margin profile of the business.
As the middle East looks a lot more like like North America and then the follow on you mentioned that there could be a nice opportunity to have a drill bit refurbishment business in the middle East as you open up the center in Dubai, maybe just.
To find the fairway or how big of an opportunity.
Could that be for the company over the next couple of years.
Okay.
Alright so.
When you look at the opportunity that we believe we have with with Ben Ziad Group.
Yes.
They're.
There are new into the upstream right.
They sell oil.
And.
They're now entering into the upstream market.
And so they're there as they go into this market, they're looking for a lot of support from us and we're looking for a lot of support from them. They have the contacts in these.
These.
Oil and gas companies.
That.
We didn't have we didn't have those contacts.
<unk>.
And these companies that we could just go and call on like maybe we could do here in the U S and so that's always been a struggle for us.
Being foreigners over there and trying to break into a market.
And.
And they are very much into that market as you're well aware.
So when they look at.
The services that they expect from us.
Not not only are they looking at the drill N ream tool to be one of those first tools that theyre getting them into the service side or the upstream side of the market. They also have needs for.
Products in their side of the things you know and the production in the downstream side of things that that they would like us to look at it as well you know there is.
I'm not quite sure what all.
Those products are but they're very very interested in our machining talents that we have here and I know they have they have mentioned that multiple times.
As we look past just just the drill N ream in the.
And the drilling tools that we may be able to provide them.
They have a directional drilling team a very small directional drilling team that theyre going to expand on and so as you will know when a directional drilling team goes out they need.
Any bits they need motors, they need rotary <unk> systems, and they need all that stuff's serviced and so as we set up our service center.
In Dubai.
We will be looking at all of those things.
We know what we're going there for us to service the drill N ream.
But we also know there is a lot of additional opportunities.
And our first our first trip over into that region and this will touch on your on your second question or.
Our first trip over there.
I want to say it was probably.
Yes, it might have in 2018 2000, no I think it was I think it was it was around 16 and it was over there when we went over there it was to look at.
The drill bit refurbishment market.
For AD knock off.
Abu Dhabi.
And at the time.
We looked at that we couldnt really justify going over there and setting up a facility.
Just for the volume that we'd be getting.
From.
The UAE.
But now as.
As we look at the volume that we could be getting from the.
The Mena region.
It looks a lot more appealing.
So as we set up this facility that we're looking to have open.
By year end as our goal.
And.
And I'm, hoping we can we can have it up and going by the first week in December but.
We still have a lot of issues, we're dealing with with the supply chain and logistics, you know, putting putting equipment in <unk> and trying to get it over there and.
Theres no.
Nobody can give you a timeframe on when that can will arrive at its destination is just kind of.
Just kind of got to go along and hope that it gets there in some meaning.
Meaningful manner.
So we're trying to fabricate the stuff, we can over there and try not to get stuff on the <unk>, but.
When we opened up that service center.
We're designing things in a way that we know there's going to be additional products. So when we look at <unk>. When we look at cleaning stations. When we look at inspection stations. This whole facility is being laid out based upon.
Other tools and equipment coming in there.
That answer your question Ben.
Yeah. That's helpful is it just.
Try to dig in on the margins a little bit more.
Just conceptually the.
The margins as you expand.
The opportunity with these folks in the middle East should it be better than the margins in North America are similar or maybe it's not as good just any any color on kind of the profit profile is.
Growth comes from as part of the business.
I think when you look at the margins you can consider and look at them to be about the same.
When we look at the rental.
Products over there.
There is a little higher we get a little more per foot, but it costs us a little more to do business over there. So I think it's going to be a wash.
Expect good margins.
The products that we do over there, but I think theyre going to be a lot theyre going to be really close to what we get here.
Okay.
Got it thanks and again congrats.
Thank you.
Our next question is from John Bair with ascend wealth advisors. Please proceed.
Thank you good morning, Troy and Chris.
Good morning, John how are you.
Given the <unk>.
<unk> demand on on your services as well as the tools and so forth I'm wondering.
How that plays into your pricing environment, whether you were able to.
Raised prices.
You know.
To accommodate that.
We are you know as Chris mentioned.
Mentioned.
We had a price increase.
10% in July on.
On the drilling Ream service part of our business and we expect a price increase.
The bit refurbishment side of our business in September is what we're shooting for.
So yes, we.
Everybody understands that they're there they're going through the same.
Same situations. We are you know what the price is still the prices saw at a price of <unk> everything that we use has gone up and.
They're sharing that.
What we're charging it's going on to the end users. So the price of drilling a well is definitely going up and I think you're probably very aware that.
You know the E&ps have talked about how the.
The price of drilling a well they expect to continue to rise.
Right.
Are you seeing any leveling off in in general.
Uh huh.
Component prices are.
Metals or so forth.
Metals, we are.
Peaked around November December timeframe.
And so we're starting to see a little bit of easing on.
Metals pricing.
I don't know, how thats going to play into.
This third and fourth quarter, it's not a bunch, but when you look at when you look at the raw metals per ton, it's coming down I.
I want to say peak 2000 metric ton.
Some time back in November October November timeframe, and I think we're back down.
To about 800.
So it's come down.
It's come down quite a bit from the foundry, but we're not seeing that that big of a price decrease from the supplier.
Okay.
And then.
The last couple of years, you had mentioned that you were having trouble getting folks into the middle East how is the situation there or has that eased up to two <unk>.
<unk> added somewhat to.
Where are you are able to get your folks over there more easily.
Well in Dubai, we can get we can get people in and out of there.
Uh huh.
Dave.
They've got less restrictions and say Kuwait.
Kuwait was where we were really strong pre COVID-19 is where we're making R. R.
Our best headway was in Kuwait and.
And then that locked down pretty hard.
And I think it's and it's just not for our services.
Keep in mind that a lot of these wells are being drilled with the support of.
Ex Pats right and.
And so.
When it was when they went into lockdown mode.
Some of the ex Pats were over there had to stay and there are a lot longer than what they are planning.
And so there is there is some.
Concerns.
With people going over there and maybe getting involved in another lockdown, where you maybe have to stay longer than what you wanted. So I think that's why we're not seeing a big increase in rig count over there.
It's just the fact that.
It's just not real desirable right now with <unk>.
No.
The new world of Pandemics and.
But we are seeing like what you've seen in the news here lately, you know where they're easing up on you know.
On what happens with Covid and we're starting to see a lot of easing here and.
And I hope that it seems like the UAE follows really close to what happens here in the U S. And then when you get into countries like Kuwait.
They may they may follow a little bit later.
But.
With the exception of.
Getting materials in and out of there and see cans in and out of there.
Don't think we'll have an issue of getting personnel in and out of Dubai, I think that we're going to be okay with that.
For training purposes, and remember we have a whole drilling rig fleet over there as it gets used.
We got to get it repaired, we're not going to ship it back here to the states like we've done in the past.
Does it you just you can't rely on that at all.
So there's tools that need to be repaired and they're building up and so we've got it we've got to get it done and I think we'll we'll get it we'll get a facility put in place over there and get people moving in and out of there as we hire and train people over there to do this.
This service work.
Okay, Great one last question.
That's just in the past what opportunities you're seeing perhaps in South America. There seems to be you know theres a robust.
Industry over there, Brazil and of course, I don't know that.
Yeah, No change they are looking at that maybe a channel partner or whatever that can help you break into that market.
We have we've talked to.
Several companies that would like to to rest of the drilling ream down there.
One of the issues, we have with that is we don't have a service center down there.
And the drilling dream.
And it's one of the reasons is a successful product as we we really keep tight reins on on the procedures and processes that are followed.
This tool is.
After after its Ron.
Goes through it.
A really rigorous inspection process and then re fair process and we just don't hand that off to anybody.
So we have been in talks with with companies that would like to support it.
Our bandwidth just hasn't allowed us to get too aggressive with it.
You know when when companies run a tool down there, which we've done.
Worked very well.
Then when they're faced with ship them the tool back to the states and having us repair it and in it.
It kills that opportunity so.
We are running we're going to be sending some tools down to Guyana.
On a on a.
Yeah.
Test well down there for a large company.
Company, I think will be shipping those tools out.
This month actually.
So we've got four tools going down on an experimental well. This this large customer wanted to to run that as part of this exploratory process.
And.
And would we can update you on our next earnings call on that.
Alright, great. Thanks, very much you bet.
Our next question is from Matt Reiner with Adirondack.
Please proceed.
Hi, guys.
Alright, alright.
My first question is on the capacity.
Alright, obviously, youre, making some big investments in this quarter.
And.
How much.
Yes.
I guess what.
What can you share with us about like what your current capacity is and what these extra investments will add to it.
Okay.
Well our current capacity what it is we've got machines.
You know that.
That's not that's not what's holding our capacity back expand the human capital.
Capital side of things.
And I say that.
But we're going to be investing in machines as well.
Because of the opportunity to for turnkey processes and also to facilitate more.
Capacity with units coming through so.
That probably sounds real wishy washy, but what I mean is if you look at our 750. If you look at the if you look at the machines that make the.
Drilling rooms, we have to.
Machines that produce those tools and they are very unique machines.
And.
The large tools, we only have one machine that produces those tools. So once you start getting over a 10 inch size range. They all get made on this one machine.
It's called the <unk> 750 and.
We're going to duplicate that our goal is to get that duplicated in place.
Before year end, we'd like to have that done.
And.
What that does is it.
It supports the 750 that we currently have if it goes down for any reason, whether its operator error or maintenance.
We're not we're not stuck with.
Hurting increase in our backlog our delivery time.
But also that machine can be running simultaneously with.
With an operator running both machines. So that's why I said, it's we're building another machine but.
The same operator can run both machines.
So that's a big benefit.
The human side of capital that we're looking at well let me go back to also your turnkey process that machine there that we've put in place right. Now we have one manager Thats working all the bugs out and designing and manufacturing the jigs and fixtures that we need for this turnkey.
Process and once that gets going now we're going to run three shifts.
We're looking at going 24, seven and so the people that will be supporting that machine.
It's going to be the growth in our human capital.
Look at the current machines that we have.
We run.
I would imagine would not imagine that we do run when we get into second and third shift.
We're running about 40% capacity on those machines.
And that's because we don't have.
The operators standing in front of all of those machines.
We have more operators on day shift that have been doing that and it's been it's been handling the workload that we've had to this point.
But the demand has become so strong.
But we now got to look at running the all of those machines and putting people in front of them.
Looking more on a 24 seven on those as well.
So the current capacity will increase a bunch on the existing equipment that we have by putting more people in front of them on more shifts.
And then we also will be increasing our capacity by <unk>.
The additional 750 that we're looking at as well as the.
The big phase that turning to centers that we just put in place.
So we're going to be increasing our capacity quite a bit.
Yeah, Okay. So I guess and maybe this is a question for Chris, but so looking at from a.
Free cash flow perspective, or whatnot as we as we look out.
At least for the second half of 'twenty two.
Clearly.
With the large order in the third quarter.
Your adjusted EBITDA.
If we can even go off the midpoint of that.
A fairly healthy adjusted EBITDA, you're also looking at.
Roughly $6 million in Capex in the back half so.
Some of that just kind of get eaten up by the Capex and then.
Curious as to how much gets eaten up by working capital floor.
However, you want to answer that either if you could tell me how much free cash flow you expect to generate from in the third quarter and the back half or if you don't want to approach it from a working capital we'll break it down that way.
Okay.
Yes.
Just think in terms of doubling.
Our existing cash balance so nobody is saying that is we're about $3 million right now June 30th.
As you just noted we've got the large order in Q3, and we will be collecting collecting on that and and just as a point of reference.
That's existing those are existing tools existing.
Fleet of tools that we have on our balance sheets, so thats monetizing an asset.
So that.
That so we'll go right to the cash line.
But we do have some capex that we're putting in place. So that's why I say just think in terms of.
Doubling the.
The cash balance from three to six by the end of the year.
Okay.
Okay.
And you were saying that you use.
Besides the hard rock note you may look at taking out some high interest rate debt.
I assume some of that action.
Cash can go through that and how high is the interest rate on that that extra debt.
Yeah, it's prime plus and with some fees Thats about 10, and a half right now.
Okay.
So that's why that's why we're probably take that out it's not much money, it's about $1 million. So that's okay.
But we will pay that off.
Yep Yep.
Okay.
Alright.
That's my questions for now thanks, guys.
Thank you.
As a reminder, this star one on your telephone keypad, if he would like to ask a question. Our next question is from Brett Davidson private Investor. Please proceed.
Alright, great well good morning for you guys. Good afternoon here on the East coast.
I'm relatively new.
So the company and.
Pretty ignorant as far as the operation excuse me and so on so you'll have to excuse me. If some of these are a little simplistic.
Side here.
Cost of goods sold.
Believe you indicated that the equipment that was delivered in the middle East was had already been manufactured.
Existing equipment.
How is that going to impact cost of goods sold in this quarter.
Ah favorably.
Our carrying value on that equipment was had been depreciated quite a bit.
So that.
Those carrying costs will become Cogs.
When we sell this when we monetize this asset.
And so it will be an improvement to.
To the margin.
The margin gross margin.
Okay. Okay. So would you have a ballpark idea of maybe 25% depreciated there.
Yeah, something like that.
Alright.
Good enough.
Yes, not too interested in the precision.
Alright, the machine tools you guys have you have on order.
How are the delivery times looking at those are you guys getting the stuff.
Timely fashion or as they have been impacted by our supply chain.
You know we've been very fortunate.
Our our procurement group are still purchasing as we have.
A very good team there that's been out in front of this we're continually buying.
At good prices.
And looking ahead.
We're constantly looking for opportunities to buy.
You know mill runs was not a full mill run, but what's left of the mill run.
We look at we look at Mills high end mills globally, whether it's out of South Korea, or Ohio for Brazil.
Or or Spain, Germany.
We.
We tap into all of them and.
And so our team has done a fantastic job there so the still hasn't still hasnt been an issue.
We've had a couple of scarce.
But.
It hasn't it hasn't nothing is trip us up.
The supplies when you look at the PDC cutters, that's the next big component and probably most expensive the diamond cutters, we put in products.
I'm very fortunate there that we've kept you know.
Suppliers of that product online.
But that.
We've had a couple of scares.
More so in <unk>.
In 2000 22021.
Then we have this year.
The.
The.
The toughest thing for us when we try to.
Predict.
Our manufacturing time.
Is there is probably.
Well the hardest area for us is definitely the mid east.
How do we get things over there and we can always we can always put it on a on a jet.
At a very high expense.
See cans are pretty much out of the question right now because of the backup.
But we haven't we haven't we haven't been hurt with.
With the supply chain, but it has caused.
A lot of scares, let me put it that way, but we haven't we haven't been hurt with it yet.
So the supply chain.
Hang up is all light bodies with pulse since then.
That's right. It just takes a lot of a lot more effort on our part when you go to place an order.
The supplier doesn't have it because of these reasons and so we've got to we've got to start really kicking bushes and trying to find what else. We can we can get in a timely manner.
And of course, you already got to increase your inventory, which which isn't which isn't something we like to do but we do.
And switching back to the to the production side.
So so the existing equipment was sold.
It's already booked.
Are you currently producing product for the middle East customer for.
Chip this quarter or at some point next quarter.
Additional production already in place.
No we have.
There are some tools here.
That we have.
We plan on selling in another stage of this agreement that are that that we need to finish.
Just the.
Putting the cutter zone, and then getting them over there that was we were looking at that in stage three.
But most of those tools are have been have been done sitting over there.
As they get there.
Feed under them and start calling on customers I am quite certain we will have a demand for new new drill N ream tools.
But right now as we prepared for this.
We built up an inventory we've got them in place in various countries and there was.
There was a method to our madness.
And it's and it is very beneficial for us now.
So then.
The remaining portion of this country, how do you see it playing out I mean is it going to start production in fourth quarter for the EDA tools or.
It might extend out further before you guys need to step up to start producing new equipment.
Well think of think of the three ways that we get that contract we get our revenue from that contract we still get a percentage of every time the tools run.
We get our percentage of that revenue when we repair those tools over in the mid east we get paid for that.
And then on top of that when we get into next year, and then you might see a little bit this year, new tool purchases, but we're not we're not we're not banking on it but when you start getting into Q1 Q2 of next year and they've got their customer base growing.
That's when we that's when we see that there's going to be a need for.
New products.
Got it so you guys got a little cushion before you have to worry about.
Florida.
New revenue from.
Our new production.
Correct in that and again you heard me mentioned earlier the additional.
750 Machining center, that's also what that's for.
Got it alright, thanks, so much I appreciate the time.
Okay. Thank you alright, thank you.
We have reached the end of our question and answer session I would like to turn the conference back over to management for closing comments.
Hi, again, thanks, everybody for joining him joining us.
We appreciate the support that.
That we get from you.
We're looking forward to visiting again in.
In November regarding Q3, and we've got a lot of opportunity ahead of us and we're going to do our best to capitalize on it. So thanks again, we appreciate you. Thank you.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
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