Q3 2022 Superior Drilling Products Inc Earnings Call

Greetings and welcome to the superior drilling products, Inc. Third quarter fiscal year 2022 conference calls.

At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.

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Now I'll turn the conference over to your host correct. My House you may begin.

Yeah. Thank you and welcome everyone excuse me to our third quarter 2022 earnings Conference call.

We appreciate you joining us today joining.

Joining me Troy Meier, our chairman and Chief Executive Officer, and Chris Cashman, Our Chief Financial Officer should have a copy of the financial results that were released before the market. This morning should also have a copy of the slides that accompany our conversation today if not both can be found at our website at S. P. P I dotcom.

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. Each.

These statements apply to future events, they are subject to risks or 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 flight and other documents filed by the company with the Securities and Exchange Commission.

These documents can also be found at our website or in S. E T Dot Gov.

What I'll also point out that during today's call will discuss non-GAAP financial measures, which we believe will be useful in evaluating our performance.

Should I consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP we.

We have provided a reconciliation of non-GAAP with comparable GAAP measures in the tables accompanying the earnings release as well as the flight deck.

So with that please turn to slide three and I'll turn it over to Troy to begin.

Thanks, Greg.

Thanks, everyone for joining us for.

Our third quarter 2022 calls.

We had another strong growth quarter with revenue of $5 2 million.

Year over year, we've seen a 45% revenue growth sequentially up 14% with an adjusted EBITDA margin just under 30%.

We have we have had and continue to have some very strong customer demand.

One of the things that I'd like to talk about a little bit as you know the the.

The hiring and training we've done throughout the first two quarters of this year.

Coming into the third quarter and the benefit that we're seeing from that now and we expect to continue to see.

This strong revenue growth throughout the remainder of the year end and throughout 2023.

We've seen a higher number of rigs using the flagship drilling ream tool we.

We've seen a 6% increase in new wells drilled.

Improved market conditions and increased drilling activity driving demand for our services.

I'm going to say that the overall rig count was up.

Right about 7%.

Which is a big plus for us.

When you look at.

The balance sheet, one of the things we want to point out is the hard rock note.

Is paid off and that was Oh, we did that early on in October , but that's nice to have behind us and it's it's something the team has done a good job in.

Getting that goal accomplished and moving forward.

When you look at the capacity that we have in our facility.

One of the things that we've done throughout the third quarter that I want everybody to be aware of as we have continued to build out as we look at.

Our raising capacity our machining capacity. This is all stuff throughout the quarter and that we've been working on very diligently.

The one thing that we have is the equipment now that we have fabricated we've doubled the ability to oh.

We've doubled our capacity in equipment not in the human capital, but in the equipment.

We've got that manufactured and put into place to support our growth.

And as.

As we hire and continue to hire and train individuals to put this equipment to work.

Allow us to bring more units through our facilities.

I think youre going to see a big benefit.

By that as we go forward.

One of the things I'd like to mention is we're extremely.

Extremely proud of our team's performance thus far in 2022.

And their.

Their ability to capture the growth without sacrificing service quality or safety. The team has done a phenomenal job.

We're seeing our.

The apartment leads take ownership.

Their understanding.

Their role in the business and they're doing a phenomenal job.

And and we're very proud of that.

And with that I'm going to pass it on to Chris to talk about the numbers and then I'll come back and finish up Chris.

Thank you Troy and welcome everyone.

Let's turn to slide four well, where he will review our strength in top line.

As Troy just mentioned, our Q3 revenue increased 45% to $5 $2 million.

And that's an increase over the prior year period, a 45% and we grew 14% sequentially.

We have continued to benefit from the benefit from the improvement in the North American oil and gas industry and our success can also be attributed to the strong demand for our manufacturer and refurbishment of drill bits and other related tools for our long term legacy customer.

North America revenue, which comprised 89% of our total revenue grew 52% year over year, largely due to the improving industry conditions and growing demand for our flagship tool the drill N ream.

Which continues to demonstrate its value to operators by improving drilling efficiencies and reducing production costs.

Rig count continued to grow in the quarter, although at a slower pace than previous periods.

Average U S rig count of 761 in Q3 was up 45 rigs sequentially and up 264 rigs from last year's third quarter.

We expect growth in the rig count to be flat this quarter versus Q3 and as of last Friday, the count stood at 770 rigs.

Over the last year international market growth has been at a slower rate compared with our domestic market.

But we are now beginning to see some improvement.

Also as Troy mentioned, we are encouraged with the initiatives we have to expand our presence internationally.

Now lets please turn to slide five to review our tool and contract services revenue.

Both of which are significantly higher.

In an effort to simplify how do we think about our business. We have combined all tool related revenue into one bucket.

That's the Navy blue part of those progress.

This bucket and close to some of new drilling ream tools.

Tool rental revenue.

Total royalties and fleet maintenance phase.

Total revenue for the quarter was $3 $3 million, which represented almost two thirds of our business.

And as completely derived from the drill N ream.

This revenue line can have some lumpiness given the timing of new tool purchases by our channel partner with.

With these two a purchase has tended to come in batches.

Overall, our revenue growth is being driven by higher market activity, which is demanding more of our tools are more rigs.

Of note our international revenue, which is all from the drilling Ream is contained and this tool revenue bucket.

Now, let's move to contract services revenue.

That was up 51% to $1 8 million.

As we have leveraged our improved capacity to support a significant rise in demand from our legacy customer as they continue to value our high quality PDC bit.

Other tool manufacturing and refurbishment services.

This is part of our business has seen steady growth and we're working hard to expand our relationship with other major industry players, which over time is expected to bolster this revenue line.

I mean as you can see on slide six.

Total operating expenses were actually down 2% sequentially.

As our teams have done a nice job on cost control efforts, while we still made the necessary investments to help us capture increasing demand for our products and services.

On a year over year basis, the increase in expenses reflects global inflationary headwinds, which specifically have impacted our payroll expenses supplies and repair and maintenance costs.

We have also expanded our workforce to accommodate our growth with talent being added in the areas of quality safety and general manufacturing support.

Importantly, we continue to demonstrate strong leverage on the SG&A line, specifically, which went from 43, 6% of revenue in last year's third quarter.

Down to 33, 3% of revenue in this years third quarter a significant improvement.

Depreciation and amortization expense decreased approximately 11% year over year.

Primarily because of fully amortizing a portion of intangible assets.

And fully depreciating some of our manufacturing center of equipment.

Inflationary pressures are expected to endure for at least the near term.

But our teams are working to optimize our processes.

Relationships as we expand our global presence.

On the labor front, we have had some success, adding talent and moving those associates up the learning curve to be more productive and efficient.

However, this is a daily battle to fight and cultivate talent as we prepare for additional demand.

As we discussed last quarter, we're using pricing to help combat the inflationary headwinds around materials and labor.

We made some pricing changes in July and again in October and.

And we will certainly use that labor next year if warranted.

Our intellectual property law suit is progressing well.

We are now entering the phase of interrogatories production requests and depositions and expect related legal expenses to increase in Q4 2022.

The court has ordered both parties to be ready to go to trial.

April 2023.

And we expect the trial date to be set for late summer early fall 2023.

That was to pension on slide seven.

Our bottom line and adjusted EBITDA bounce back in third quarter.

Nicely, we delivered net income of $639000.

Two cents per diluted share and achieved EBITDA of $1 $5 million.

Now this is our highest level in more than four years.

Our adjusted EBITDA margin expanded 560 basis points to 29, 5%.

Now moving on to slide eight we take a look at our balance sheet cash.

Cash was down sequentially.

Working capital timing and higher levels of inventory to combat supply chain inefficiencies.

And in support of the company's growth.

Cash generated by operations for the year ended period was $1 $3 million.

We did receive significant receivable remittances in early October just after the quarter closed at some of our larger customers were managing their own cash flows around quarter end.

Capex year to date was $2 $6 million since were related to machining capacity expansion.

Higher maintenance initiatives and.

And an increase in our middle East drilling ream rental tool fleet those expenditures happening primarily in the first half of the year.

The comparable period in 2021 had just under $600000 of capital spending.

Now we did refine our capital spending expectations for fiscal 2022 to a range of between three and a half to $4 million.

As a reminder, we announced at the end of September that we were awarded a grant of up to $750000 by the state of Utah.

As part of their manufacturing modernization Grant program.

This grant is being flat towards the cost of new high speed tight tolerance, saying so machines.

And to date, we have met the requirements to receive $675000 of that grant and have recorded on the balance sheet and other current assets that receivable.

A corresponding liabilities were recorded as deferred income.

After the quarter closed in October the $675000 receivable was received.

It is now in the bank.

Total debt was $3 million at quarter end.

We did finance, 70% or $670000 of the purchase of one of our machines.

Subsequent to the quarter end as Charlie just mentioned, we made our final $750000 principal payment on our hard rock note now many of you may remember that the balance of this note was $12.5 million.

At the appeal of our company in May 2014.

As Troy said, we are really pleased that this obligation is now behind us.

We are looking at our capital allocation priorities, assuming the consummation of the sale of the first stage of our middle East drilling Ream fleet.

Ziad.

As we noted we have increased our capital plan to support our growth expectations and also looking at.

Paying off some higher interest cost debt.

Now slide nine provides our expectations for 2022.

With one quarter to go we have refined our expectations in revenue.

Adjusted EBITDA for the year.

Revenue is expected to come in between 22 and $24 million.

Which implies a topline growth at the midpoint of 72%.

We're expecting our SG&A expenses to be between seven and $7 3 million and the net result is that we expect adjusted EBITDA to be in the range of 657, and a half million dollars.

Which at the midpoint equates to an adjusted EBITDA margin of around 30% for the full year.

Keep in mind these expectations do take into account the <unk>.

The $3 8 million dollar stage, one middle East drilling ream.

Two of fleet sales to <unk> petroleum in this quarter.

If the sale does not occur during the fourth quarter than our expectations for 2022 revenue would be between 18 and $20 million adjusted EBITDA between four and five both still significantly higher than last year.

Now with that I'll turn the presentation back to Troy to wrap up with a review of our future growth opportunities.

Right.

Thanks, Chris.

So looking forward, we're very optimistic about the rest of the year.

Our outlook for 'twenty 'twenty three is it was very pleasant as well.

And when we look at North America. The contract services you know we've we've like I told you earlier, we've expanded with the equipment that's needed to.

To bring on other major industry companies.

We've got a talent there that is that is really really needed throughout the industry.

When you look at the international opportunities are there.

The Mena facility that we talk about the refurbishment facility. That's in Dubai, We have moved our our technical and sales team in their work.

We're currently fabricating.

The equipment needed to do the refurbishment services there like we do here in North America.

And we're looking to get that facility up and running in Q1 of 'twenty three.

And that's going to open up.

All kinds of opportunities over there for us.

We've been enhancing ourselves and marketing team. We've you know we've been over in the past and we've we've gone over there mainly with technical people and we're now focused on bringing on some high end P. D C professionals and as we do that we see.

Major improvements to our revenue line.

We continue to work with the.

The bands I hadn't team as we look at strengthening our opportunities in the mid east and penetrate that market.

So looking at the enhancing the manufacturing and support capacity like I mentioned, we've we've doubled our brazing capacity, we've built that equipment. Most everything we use in our facility is fabricated by us. So when you look at the that'd be great.

Stations the media Blasters this equipment that we use if we do buy something it takes modification, but it's all made in house in and we've got most of that equipment built and ready to go.

We continue to bring on new team members and train those we're hiring very well, we're retaining very well so are we.

We're hiring at the speed that we can train you know, we we too have a.

Problems with with you know finding the right people, but our HR departments and our.

Our leads in each department they've done a fantastic job of identifying the type of personnel that they want to bring in that we can train and.

To perform the services, we need done so we're very happy with that.

When you look at the Capex, we're spending we talked about it a minute ago, we've got.

Two new five axis machining centers coming in.

One is already in place and we've got it just about ready to start turning a production parts that was purchased for a turnkey opportunity that we have on a product line for a major oilfield service company.

And the second a 750 that we've got coming it's in it's being.

Boxed up and shipped right now out of Chicago coming our way and we'll have it up and running in January probably I would say by the end of January it should be up and running and that's to support the need of of the large part that the 750 that we've talked about in the past that's our very large five axis machining center.

And we now have a duplicate to that machine that's going to.

One give us a little more comfort knowing that if one of the machines go down we have a backup to that large machine.

But we will continue to focus on gaining market share.

You get some strategic pricing in place.

And we will build strong middle east relationships as we look at the end of this year and going into next year. You know, we're we're very excited about what we've got ahead of us.

And.

We look forward to reporting back to you all in March so with that let's turn it over to some Q&A.

Okay.

And at this time, we will be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing to start.

Yes.

And one more me please while we poll for questions.

And our first question comes from the line of.

If you bring all games would be Uh huh.

Please proceed with your question.

Hey, good morning, and thank you for your time today and congratulations on the quarter I'm, calling on behalf of bank to get here at yes Hutton.

And we're wondering you know looking at the impact of the DNR fleet sale I'm, just how should we be thinking about the impact on the income statement in 2023 and beyond.

We.

Signed an agreement with Bing Ziad in in June of this year.

And we disclose that.

In addition to this first stage tool sale, which is just under $4 million.

That we expect over a 12 month period of time $13 million in revenue.

And so they we had initially thought that that initial stage cell what happened in Q3.

But as we as we disclosed in our press release threshold or four weeks ago, that's that has slipped into Q4.

So what once we began.

The process of selling tools to them.

Over the next 12 months period, so think in terms of 2023.

Roughly $9 million.

Total of 13 minus the four that we would get this quarter roughly $9 million coming are coming in at the top line.

That's really helpful. Thank you for the responses.

Thank you.

And again as a reminder, if anyone has any questions you May press star one on your telephone keypad to join the question and execute.

Our next question comes from the line of John Sturges with Oppenheimer and company.

We'll see what you are quiet.

Yes, thank you nice quarter gentlemen.

I'm just curious about your hiring progress progress.

It was an initial goal of near 50 by the year end and I'm just I'm curious about how close you are to reaching that goal and if the available talent.

That requires there.

We have reached our goal John the talent.

That we've looked at one of the things that that we've done is.

As we've said rather than trying to find someone that has brazing experience or machining experience.

We've we've found that it's more productive for us to bring them up if you will through the company.

When we bring in an outside person that that we don't know we have we've never worked with before.

Sometimes that that's good sometimes we're pleasantly surprised and sometimes were unpleasantly surprised and so we've we've decided that we're going to take in and started at the ground level in our company and the employees. The team members that when we post a job.

Benin that want to put in for that.

And that's what we do we train that person so we've been.

Been fortunate with hires.

We've hired very well.

And we're doing some things in our in our manufacturing as far as the machining we have some talent there that is very good about teaching.

And training people on these high tech machines and so.

What we're able to do is we were bringing in a shop manager to manage the whole.

New product build facility.

And the people that we have in there now were really going to rely on them too.

Train and train them, well and that's what they do so.

I think we're in good shape, there and we have met our hiring goals.

Terrific.

I'm curious also about the.

They've been dead business.

You mentioned the actual product sales.

Assume that debt.

May have included some tool rental I'm curious about follow on tool rental and sales do you have an estimate for any of that.

Yeah, John we are so that's that first $4 million tranche in Q4.

It's all existing tool sales.

I had another company that's been another couple of million dollars that will follow in existing tool sales in early calendar year 2023.

So you've got roughly out of that 13 million that I mentioned earlier, you'll have about half of it six six and a half of it 6.5 of it would be existing tool sales and then the rest of it will be.

Selling been Ziad, new tools, and then sharing in and.

Our rental agreement in which we share revenue basically with Ben Zion.

Roughly half of that 13 and existing equipment sales and the other half and recurring ongoing sales.

Okay, and how should that play out would that be for the two.

2023 calendar year.

Or should we think that goes to say like the third quarter I'm just curious.

Yeah. Thanks, Thanks, and think in terms of calendar year 2023.

Okay.

Thank you.

You bet. Thank you.

And we have reached the end of the question and answer session I'll now turn the call back over to management for any closing remarks.

Once again, thanks, everyone for participating in this call and.

And being part of what we're doing.

Like I say, we're we're we're very optimistic about the remainder of the year and.

What 'twenty to 'twenty, three is shaping up and looking like.

And we look forward to reporting back to you in March.

And we'll see you then we sure appreciate it thanks. Thank you.

This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.

Yeah.

Okay.

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