Superior Drilling Products Inc. Q1 2023 Earnings Call

Yeah.

Good morning, ladies and gentlemen.

And welcome to the superior drilling products fourth quarter 2022 financial results.

At this time, all participants are in listen only mode.

A brief question and answer session will follow the formal presentation.

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As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Chris Mahalik. Thank you. Please go ahead Sir.

Yeah. Thank you and welcome everyone to our first quarter 2023 earnings conference call.

Certainly appreciate you joining us today.

Joining me are Troy Meier, our chairman and Chief Executive Officer, and Chris Cashman, Our Chief Financial Officer.

This will first review our results in detail and then Troy will provide an update on the company's strategic progress after which we'll open up for Q&A.

They have a copy of the financial results that were released before the market. This morning.

You should have also 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.

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.

These documents can also be found at our website or at SEC Gov.

I would also point out that during today's call will discuss some non-GAAP financial measures, which we believe will be useful in evaluating our performance should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP we.

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 please turn to slide three and I'll turn it over to Chris to begin Chris.

Thank you Craig and thanks, everyone for joining us today.

We kicked off the euro and a strong note as our team continued to execute well to meet increasing demand.

This slide highlights several of our accomplishments.

Which includes the highest quarterly revenue and net income since the company went public in 2014.

Our topline growth for the quarter was driven by strong drill N ream tool sales from our U S channel partner.

Higher contract services work and.

And the improved market conditions internationally.

We expect a continued improvement in the international market throughout 2023.

The operating leverage that we gained from higher drilling rig tool sales resulted in measurably improved operating income and net income and very strong EBITDA performance.

We put our strong cash generation to use and making capital investments to expand capacity to accommodate our increased work and in support of anticipated demand growth both domestically.

Lastly, and on the international front.

As we mentioned in our earnings press release, the company's board of directors is finalizing a process to engage a financial advisor to assist the company and the evaluation of potential strategic transactions in order to maximize shareholder value.

As part of the process the board will consider a full range of strategic alternatives.

<unk> acquisition sales mergers divestiture of assets or other strategic initiatives.

Theres no assurances regarding the outcome or timing of this evaluation and we do not intend to make further announcements until such a time further disclosure is appropriate or necessary.

Now turning to slide four provides an overview of our revenue growth.

Q1 revenue was up 52% to a record $6 $3 million.

Ducting, the recovery of the oil and gas industry in North America.

Which resulted in increased tool revenue and strong growth in contract services.

We also saw improving marketing conditions in the middle East.

We continue to gain traction.

While not back to pre pandemic levels, we have benefited from an increasing rig count and when looking at our results on a year over year basis as.

As the average U S rig count was 761 in the first quarter.

128 rigs from the average in the first quarter of last year.

However, as expected the domestic rig counts flattened and when comparing with the sequential fourth quarter was actually down 14 rigs.

Over the near term it is our expectation that the north American rig count will stabilize around these levels.

On the international front revenue doubled year over year.

Which reflected improved market conditions, and our strengthened technical sales and marketing team.

Our team continues to make further inroads open.

Turning doors and driving greater awareness of the drilling rig value proposition.

Our international sales mix was approximately 13% of total revenue for the quarter.

Up roughly 10 from 10% from last year.

We continue to be encouraged by the many opportunities in the mid east region, and expect that mix change to continue to trend upwards.

Now, let's move on to slide five and review our tool and contract services.

Fourth quarter contract services revenue was $2 million.

Up 49% over last year.

This was due to continued expansion of the volume in products, we start we refurbished and manufactured for our long term legacy customer.

Tool revenue grew 54% during the quarter.

Given our improved market penetration in the middle East.

And as our channel partner in the U S continues to drive new tool sales.

In addition activity on more rigs.

Led to increased royalty and repair revenue.

Now as you can say on slide six.

We have continued to invest in people to address demand, while still fighting inflationary headwinds for payroll.

All materials and other costs.

Importantly, though we continue to demonstrate the significant inherent.

Leveraging our operations as we leverage these costs with higher sales volume, which resulted in significantly improved operating margin performance.

SG&A expenses were 32 points were 37, 2% of revenue.

Down 270 basis points year over year.

And down 200 basis points sequentially.

SG&A expenses in the first quarter of 2023 included $360000 of legal expenses pertaining to our patent infringement lawsuit.

Currently we are preparing preparing for trial and expect a jury trial during the fall or early winter of 2023.

Our strong operating leverage can be seen as we turn to slide seven.

Which highlights our bottom line and adjusted EBITDA results.

We delivered net income of $1.5 million or five cents per diluted share and the corner.

Now included was $350000 a recovery of a related party note receivable.

Whereas the comparable 2022 period did not have such a benefit.

To put that 1.5 million into perspective.

That is more than what we achieved all of last year.

Which was our first year of positive bottom line performance.

Even backing out the recovery of the related party note.

Our Q1 2023 net income still outperformed all of calendar year 2022.

Adjusted EBITDA nearly doubled year over year to $2 million with the EBITDA margin expanding 760 basis points to 32, 1%.

Our highest level in recent history.

Moving on to slide eight we highlight our balance sheet, which has continued to strengthen.

Cash generated from operations for the quarter was $1 million strong EBITDA growth in the current period was offset by an increase in working capital as the company continues to grow.

Total debt for the quarter was $1 6 million.

Slightly from year end 2022.

But down significantly 45% from the end of 2020.

We are currently in discussions with a commercial bank garden your credit facility.

With the use of proceeds to refinance our existing debt.

And to provide increased liquidity.

In addition, we expect an improvement in our cost of capital.

First quarter Capex was $1 6 million.

And was related to the completion of our new domestic machining centers.

An increase in the middle East drill N Ream tool fleet.

Our new service and Technology center in the Middle East.

And the expansion of PDC bit refurbishment capacity and burnell.

We ended the quarter was $2 million in cash down slightly from year end 2022.

Now on to slide nine which provides our guidance.

We continue to expect 2023 revenue will be in the range of $24 million to $27 million, which implies top line growth of 34% at the midpoint.

SG&A expenses are projected to be $9 million to $10 million.

This is a step up from where we ended 2022, largely reflecting the litigation costs of approximately a million dollars related to our ongoing patent infringement lawsuit that I mentioned earlier.

The SG&A expectations also take into account the investments we are continuing to make in our international team to drive future Middle East growth.

With these added international calls.

And our expectation that the new drill N ream tool sales will not be repeated at the same level we saw in Q1.

We're maintaining our adjusted EBITDA guidance of six five to $7 5 million.

Which implies an EBITDA margin of 27.5% at the midpoint.

That level is nearly 300 basis points higher than our 2022 results.

Lastly.

We have revised our expected capital spending for fiscal 2022 to range between three and a half and $4 million from the previous expected range of three to three and a half.

The added spending is in support of our middle East expansion.

So with that I'm going to turn the presentation Detroit to wrap up with a review of our outlook and opportunities both in North America and internationally sure.

Thanks, Chris and thanks, everybody for joining us.

Okay.

Excuse me.

So as we look at our outlook and opportunities first of all as we look at North America.

Like Chris had mentioned we've spent the money on new machining centers. We've also taken.

Our drilling rain.

Facility.

We've moved that off campus into its own building, which has allowed us to now entertain a larger.

Customer as we look at our legacy.

Operations are we.

We can we can.

Double what we've been doing.

Our team is working diligently to get that done.

I want to talk about our team just for a minute.

One of the things that we've been able to do is is a higher really well.

The people there.

<unk> been attracted to our company a world class.

Uh huh.

Both domestically and internationally, we've we've been able to bring on a top individuals that are they have a lot to get up and go and they are excited to see the growth of this company and to take this company to the next level.

And we're seeing that throughout throughout the company its very its very refreshing and rewarding to work with with these individuals.

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When you look at the North America again.

When we looked at our machining capacity, Chris had mentioned.

The spend that we have there.

Those machines are now you know we've got an FID, we've got them tooled.

And we're.

We're looking at those opportunities too to start filling that capacity.

There's a lot of opportunity out there for this type of machine and that's a lot of opportunity in the oil and gas business and that's that's where we really focus even though we still talk about diversification.

There's a there's a big need for what we do.

In the oil and gas market, even though we talk about a flat rig count.

Tremendous opportunity within the flat rig count in North America for us to gain more business and where we're going to do that.

When you look at our international opportunity.

Again the team there is really doing a good job there are we.

We've just been working in a few countries and we're expanding that now is.

Our team members get aboard and they understand what our products do.

Does and how it benefits the customers and the runs that we're getting we're able to show offset data that really really shows. These N O sees the benefit.

Of our Wellbore conditioning tool.

Well with that we're also finding.

The need to duplicate what we do here in North America over there when we talk about.

Bit repair service, we've got a tremendous opportunity over there and we get we get asked a lot and when when are we going to start doing that.

In the Mena region and so the teams looking at that we've got the equipment that we're putting into place to service the drilling range.

That facility will be up and going here.

By the end of this quarter and.

There's a the next look from there is going to be to also look at enhancing our offering and the mid east too.

To do the bit refurbishment, which is which is greatly needed in that part of the world.

So the international market.

He is got some tremendous opportunity for growth not just drilling marine but also our legacy business that we have to offer that part of the world.

And like I say, we've we've essentially been duplicating.

The facility, we have in farnell, we designed and created some new.

Raising stations that are that are working out very very well.

Got teams now train that will be going in and out of the Mena region training are.

Team members over there and our first team is heading over there within the next two weeks, so, but theres some tremendous opportunity and our customers now are starting to see a big value that they're receiving from running the drill N ream and theres a lot of excitement on on getting that into <unk>.

More of the Wellbore as you.

When you look at when you look at North America drilling Ream fits really good into the curve when we drill a horizontal well we've got customers that run it in the curve, we've got customers that run it in the in the lateral.

But what we see over in the Mena region is a need for much larger tools in the vertical section of the wellbore as well as the curve and the lateral lateral is just now starting to become a.

A way of drilling over there if you will.

Now to two.

Duplicate what we do here in the U S. As we go.

Build build the curve and then go out horizontal directionally.

In a lateral.

And.

And so we're really excited about that happening now in the mid east with the tool was designed and built for.

We're now being able to just come right in there and say yes. That's this is what drill N. Ream does is to help you out in the lateral on top of.

Benefiting them greatly that they're seeing right now in the vertical section of the Wellbore.

Well bore quality is getting at is the new buzzword you know when you when you talk to operators they want to know that they're they're all talking now about wellbore quality, what's the quality of the Wellbore I'm drilling.

And drill N ream.

That fits right right in place that's what it does is it helps to create a quality wellbore. So we're excited for the opportunities on both the domestic and the international markets and where we're excited to.

Capture those opportunities as the year goes on.

With that being said I'm.

I'm going to turn it over to.

Some Q&A.

Thank you Sir.

Ladies and gentlemen, we will now begin the question and answer session.

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Just last question is from <expletive> Ryan from Oak Ridge Financial. Please go ahead.

Thank you and congratulations guys on a very strong performance.

Say Troy you know just one on the macro side, if you listen to what the drillers are fine.

With gas prices being what they are youre seeing rigs being laid down in the gas fields and kind of moving over.

And to the oil oil rich basins like the Permian. So there is a shift and it sounds like gas is going to stay pretty challenging for <unk>.

You know the next several quarters at least is that changing your outlook.

Drill N ream opportunities and may be a tag along can you talk a little more on how DTI is kind of expanding the opportunities in North America.

Yeah, what we say is DTI is when you look at the top operators in let's say the <unk>.

Permian.

GTI is got tools on the top five operators and they're penetrating those operators deeper every day so.

Again the.

The buzz out there of Wellbore quality.

Is starting to I was at a seminar.

It's been probably four weeks ago now down in Houston and it was a.

A similar that the operators put on and asked the <unk> suppliers to attend and I was asked to come down and participate in the seminar and.

Almost every topic went to wellbore quality.

So you know in the past they would drill a well.

And in the completion team would come on so you drill it really fast and whatever condition. It was in the.

<unk> seen that the completion team had to deal with and what we're seeing now is an awareness of wait a minute.

What kind of condition is this well that you're leaving me to complete.

And so I think that's been very beneficial for DTI is as customers now.

In there.

Their customers are saying.

Maybe maybe a pioneer or an oxy.

<unk> was used in it on.

40%, 50% of their rigs I think they're getting a lot higher numbers now so we will see that the.

The gas basins slow them down.

But I think what we're going to see is that the oil basins.

Needing more rigs.

And also of needing to do a better and better job at the wells, they're drilling and I think though that rely on drill N ream to help them with that so I think I think the drilling ream activity is going to stay busy.

At least the indications of the of the new tool cells and how busy I mean, we're setting records in our new facility.

New drilling ream facility, it's amazing what what what the team is doing there and the record number of tools, that's leaving that facility every week.

Being repaired and put back out in the field. So I think we're still going to continue to see strong activity and strong use of the drilling rig.

Good I appreciate that.

With the capacity now in place further contract services side of things.

Can you kind of handicap when you know when there's a marketing started to reach out to a potential another customer or how far along are we in that path.

We already have and we've already been doing a few products for other customers.

We think that we've got.

A contract in place with with one and I think that it's going to.

We're now at the point, where we can start <unk>.

Listening work from them.

So we should start to see that happening this quarter.

Yeah.

Okay I appreciate that.

Troy and Chris and good luck and congratulations again on the strong performance.

Thank you Thanks Stewart.

The next question, we have is from Ignacio <unk> from Hudson. Please go ahead.

Hey, good morning, and congratulations on a great quarter, great to see the business doing really well when you think about the international opportunity.

What are some kind of headwinds you might be seeing or you are seeing in that expansion.

Mostly logistics you know it's.

Even though.

The countries that we deal with in the Mena region at all all very close to one another.

It's not like ship a tool from Colorado to Texas.

It's every.

Every country has got its own.

Documentation that needs to be filled in filled out.

You've got restrictions on if you send a tool in their how long can it stay there.

And so we're trying to understand the logistics portion of the business over there and where we're getting much much better at understanding that.

But that's probably been our biggest headwind.

And you know the operators they know what they've been doing thats been really neat is as they've been.

Looking at.

Runs without the drilling Marines and runs with the drilling dreams.

With the drill N ream in the comparison.

What the drilling ream is doing is phenomenal.

And so it's nice that.

They're taken the time and looking at it and saying, Okay. You've got something to sell here you would tell us that that's going to help us.

We're going to prove it to ourselves and know that theyre doing that.

The reports that we're getting from the operators are phenomenal, where we're very impressed with with <unk>.

All of the benefits that the drilling and gives them.

Excuse me and not just a quality wellbore, but.

You see you see a lot less damage to the the bottom hole Assembly, what we call the BHA.

Bps last longer motors are lasting longer.

Seem to take a lot of the shock and vibration.

Thats inherent with the drill string rotating and flopping around.

That drilling dream and the fact that it is.

Congestion that wellbore.

In constant contact.

With with the Wellbore It seems to act as a shock absorber and and really benefit.

And.

It lessens all of that vibration and shock that would be that would be going right down to the BHA.

So that's that's another great benefit that the tool is giving the operators.

That's really helpful and thank you for the additional color on the benefit of the drilling ream from the operator perspective.

Yes.

Thank you.

Thank you ladies and gentlemen, just a reminder, if he would like to ask a question. Please press star and then one now.

The next question is from John Rogers from Oppenheimer and company. Please go ahead.

Thank you for taking my call very nice execution.

I really appreciate the results too.

Two questions one is sea.

Drilling.

Activity.

At least from the Baker Hughes data appears to be flat to down from December .

What's your change in your go to market.

Market strategy, because it looks like you've had a surge.

In penetration.

And second question is how long from now do you expect to to.

To go for before you'll have to add additional capacity.

So when we looked at the of the market being flat in the change and why we're seeing.

The increased revenue in a flat market.

Again, I think it's the awareness that the operators are there.

Receiving.

In regards to the Wellbore in the Wellbore quality.

It's a big deal when you when you look at all the tortuosity in.

The dog legs in.

When you can smooth that out and you can you.

You can put in casing, rather it's your surface your intermediate or your lateral.

And you know that you've got.

Better cement job because you don't have your casing lean.

Leaning up against a part of your Wellbore that the drill N Ream has now taken out.

So you get a better cement job I just think there is.

Much.

Higher awareness of of Wellbore.

No. It's not just about how quick can we drill a hole anymore, which it's amazing how how fast they're drilling these wells.

But.

The awareness of saying.

What kind of Wellbore did you leave us.

To complete I think is is really.

Okay, let's do this.

Quick and efficient, but let's make sure we do it right.

And I think that's been a big plus for the drilling ream tool.

So if I may ask so this sounds more like a market driven response.

It really is I think it really is and you know of course DTI has done a fantastic job.

They've also built a team and they've now got.

Experts in the with the drill N ream that theyre getting out and they're getting deeper into their customers to explain these benefits that are that are now obvious and so.

So I think I think that's helping out a bunch too.

And what was your second question I'm, sorry, well with its current pace, how long will the current capacity last.

Oh, we've got we now have a lot of capacity I mean, we were we were starting to get really tight in our facility.

But moving the drill N ream operations off campus and into its own facility.

<unk> added a ton of capacity where.

We could we could easily double what we're doing now so I think it's I think it's going to I think it's going to be a while before we've got to expand more capacity.

I'm looking I mean, it's we've got a couple of years.

Okay. It just looks at the current pace it looked like it might be a shorter timeframe.

Thank you for adding all that color I appreciate it.

Thank you.

Thank you.

Next question we have is.

Paul.

From.

As a private investor. Please go ahead.

Good morning, gentlemen, and congratulations on your first quarter report.

Sure.

I have three.

Two questions for you trying to get a.

And idea of where you're at.

Can you describe to me what percentage of your business is primarily making new drill bits versus refurbishments and repairs.

New drill bits.

If we just talk drill bits and not not throw drill N ream in there.

Youre near talk and refurbishment is.

Yeah, that's a third of it.

Okay.

<unk> is the third then right.

Correct.

And the drilling ream is the risk.

Yes.

Okay.

And what's your current growth is taking place in there.

<unk> wise.

Can you.

Describe to me your current position in the business.

You consider now that the mid tier manufacturing level or are you a major.

Producer where are you at on this scale.

If we look at the scale of what we're doing where we're still very small.

Very small.

In our industry, we've got a.

We've got a long way to go to be what I would consider mid tier.

So.

We're still very small.

Thank you Anne.

With regard to the patent infringement lawsuit.

Are you the plaintiff or the defendant in that suite.

We are the plaintiff.

That's all I got for you guys I'm sure appreciate you answering my questions.

Thank you. Thank you.

Thank you Sir.

Ladies and gentlemen at this stage there are no further questions.

I'll hand back to management for closing remarks.

Yeah, but again, we want to thank everybody for joining us and we.

We look forward to.

Continuing growth throughout this year.

The team that's in place now.

Lease.

<unk> spent the resources to bring on some quality people and to get these people trained and our team is really starting to feel.

Comfortable with what's what's their roles in the company so.

Look forward to our next earnings call and share.

Sharing some some new highlights with you then.

But thanks again, everybody for joining us and have a wonderful day.

Thank you, Sir ladies and gentlemen that then concludes today's country. Thank you for joining US you may now disconnect your lines.

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