Q3 2023 Superior Drilling Products Inc Earnings Call

Ladies and gentlemen.

Greetings and welcome to the superior drilling products third quarter 'twenty to 'twenty three financial results conference call.

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

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

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It just now my pleasure to introduce your host Greg Mahalik Investor Relations for Superior drilling. Please go ahead.

Yeah. Thank you and welcome everyone to our third quarter 2023, our 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, Chris.

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

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

I also have a copy of the slides that accompany our conversation today.

Not both can be found at our website that's D P dot com.

Turning to slide two.

Point out that we'll make some forward looking statements during the formal discussion as well as during the Q&A session.

These statements apply to future events and 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.

Slides 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 also point out 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. So with that please turn to slide three and I'll turn it over to Chris to begin great.

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

The third quarter presented some challenges given the persistent decrease in the domestic rig count, which led to lower demand for our tools and car truck service businesses.

However, helping offset the slowdown in the domestic market was modest growth in our international business.

Well, we have made investments in our technical sales support team as we look to accelerate the drilling of rain market penetration to capture greater opportunities moving forward.

The overall topline softness impacted margins given the under absorption of fixed costs.

Gather with unfavorable product mix during the period.

Also contributing were additional cost I will speak to later in the presentation.

Despite these challenges we generated significant cash from operations driving our year to date total to $4 $1 million.

Also during the quarter, we finalized our new credit facility.

Which provides additional financial flexibility and liquidity.

We have begun to utilize your accounts receivable purchase program as part of that facility.

Now if you turn with me to slide four you can see an overview of our top line, which I've mentioned felt.

Felt the impact of the lower U S rig count.

International revenue, however, increased 6% over last year.

But sequentially we were down.

As we mentioned on our last call.

At the end of Q2, we brought on a new team lead for our international business.

And he has made tremendous progress during the quarter.

Getting up to speed regarding our business evaluating staffs and determining priorities.

As a result, we made further head count changes within the business development technical sales support group.

This team blade has a highly technical approach and approaching the customer.

And represents a significant upgrade in our middle East business development efforts.

Our U S based executive management team has spent significant time on the ground in the middle East and guiding this reorganization.

We see incredible opportunities for growth.

Looking forward to leveraging our new team's capabilities and skills and significantly adding to that team as we move into 2024.

Yeah.

In North America, we saw a slight revenue decline year over year.

The change reflects the impact of a lower rig count in the U S.

As the current quarter average count was 650 down.

Down 111 rigs or 15% year over year.

The lower rig count impacted both drill N ream tool sales and contract services work.

Despite the significant decline in the rig count our revenue was only impacted about 3%.

We were able to hold our own against these headwinds.

And gain a larger share of the tool and contract services market.

Now Unfortunately, the U S rig count story hasn't gotten any better.

As the count has further declined to 618 rigs as of last week.

We haven't seen those kinds of numbers since the end of 2021 and beginning 2022.

Just as we were coming out of the pandemic.

We believe we have reached the bottom of the U S rig count decline.

Unexpected domestic count to begin to improve as we move into calendar 2024.

On the international front, the rig count has trended very differently versus the U S.

Steadily improving throughout calendar year 2023 from 900 at the beginning of the year.

962 as of the end of October.

Now, let's move on to slide five and take a little closer look at our tool and contract services revenue.

Third quarter contract services of $1 8 million was down slightly.

From a sequential period and last year's third quarter.

Likewise tool revenue for drilling rain was down slightly which reflected the impact of that decline in the U S rig count that 15% decline that we just referenced.

Once again, we want to emphasize that our revenue decline.

Was at a much lower rate than the overall, 15% decline in the market.

Now, let's go to slide six and take a look at SG&A expenses.

As you can see year over year expenses were up roughly 50%.

A significant portion of this was due to our international human resource reorganization that I mentioned earlier.

We had people that were not aligned with our new technical approach to business development.

And there are no longer with the organization.

As well with our U S based management team spending a significant amount of time in the middle East we incurred increased travel related costs.

In addition, we continue to spend heavily in our patent infringement lawsuit.

During the quarter, we incurred $260000 in litigation legal expenses.

Year to date, we have incurred just over $1 million, which is in line with our 2023 guidance.

As well in the quarter.

Modified our our small diameter strider tool to be run in the middle East.

And lastly, we had an incremental costs related to our previously announced initiatives to evaluate evaluate strategic merger and acquisition options.

Moving forward, we believe the majority of our litigation costs are behind us.

As of now we expect the jury trial in the spring of 2024.

We will continue to incur litigation related costs as we move forward, but we expect those costs to be at a lower level compared to what we have spent this year.

In addition, the reorganization of the Middle East Technical team is complete and we don't expect a repeat of those travel related transition costs.

Nor do we expect additional strike related modification costs.

Now if we go to slide seven we can see our bottom line and adjusted EBITDA results.

Our business has significant operating leverage when volumes increase.

But with lower volume you can see the reverse of that is true.

With those unabsorbed fixed costs.

And layering on the additional costs as I, just mentioned previously and the unfavorable product mix. They all contributed to the margin pressure that we saw during the period.

We did have a reduction enforced in the first week of October.

In order to right size, our manufacturing organization.

But what we continue to see as a soft near term market in the U S.

As I mentioned, we do expect going into 2020 for the market to begin to increase but as we sit here today is still a soft market.

And the way, it's completed our investments in our middle East repair facility and.

Drilling ream rental tool fleet.

This reduction in force will not impact our ability to respond to additional drilling ream tool demand as we move into 2024.

Two other items also impacted adjusted EBITDA.

We received roughly $200000 from our Nonmanagement shareholder.

Due to short swing as we see profit rules.

And these funds were recognized as other income in the quarter.

Partially offsetting was a $43000 expense due to an early redemption fee as part of the company's debt refinancing during the quarter.

Now, let's move on to slide eight we will highlight our balance sheet, which has strengthened significantly.

We have previously discussed our new credit agreement that we closed in late July.

And beyond the additional financial flexibility and liquidity that extends our maturity dates and importantly, and close more favorable financing terms than our previous debt arrangements.

Total debt at the end of the quarter was a modest two and a half million dollars and we continue to be in a negative net debt position where cash exceeds that.

Year to date as I mentioned, we generated from operations $4 million.

Compared to $1 3 million in the year ago period.

Cash at the end of the quarter was $4 million double the balance from year end 2022.

Collecting improved working capital management.

And the timing of receiving customer remittances under the new credit facility.

Purchase program.

And the result, and transferring of those remittances to the bike at quarter end in October we.

Made a $1.2 million payment to our lenders as part of that program.

And going forward, we do not expect to see timing issues, such as saves with lockbox system now in place.

But the lock box, we will no longer be a customer remittance pass through.

Payments will go directly to the customer to the bank to settle a our purchases.

Capital spending of $3 million year to date was largely in support of our middle East operations.

This included the drilling ream rental tool fleet, and the new service and Technology Center.

We opened in the second quarter.

Now, let's go to slide nine.

We are maintaining our guidance for 2023.

Our revenue range is $22 million to $24 million.

SG&A is expected to be between nine and $9 5 million.

And this includes those litigation costs.

Which projected through Q4 will be approximately $1 $2 million. So as I mentioned previously through nine months, it's just over $1 billion. So we expect another couple of hundred thousand of spending.

In Q4.

And as I also mentioned previously we expect the jury trial in the spring of 2024.

Our adjusted EBITDA guidance is not is five five to six and a half.

And lastly, our expected capital spending guidance for 2023 is in the range of $3. Five 4 million. So you can say that the vast majority of our capex has already been incurred.

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 the Middle East region.

Sure.

Thanks, Chris.

Thanks again, everyone for joining us.

And before I get started on my comments on the Q.

I wanted to make sure that everybody on this call.

It was aware and as mentioned earlier this year the company's board of directors has engaged a financial advisor to assist the company with the evaluation of the.

Potential strategic.

Partner alternatives.

This process is ongoing.

And we are committed as ever to maximizing our shareholder value.

As far as the process the company has received.

And is actively evaluating unsolicited interest.

And the company from Prospected strategic transaction counterparts.

Keep in mind, there is no no assurances regarding the outcome or timing of this evaluation and we do not intend to make further announcements until such a time.

Further that disclosure is appropriate or necessary.

So.

Let's go to slide number 10.

And let's look at North America, our comments towards North America.

You know as Chris has mentioned, it's the year over year, where the rig count was down 15%.

But we were able to.

Support this this downturn by bringing on some additional hot work, we've got some some additional products going through our shop other than in bids.

Is that are there.

We're seeing that.

And uptake in.

And so that's been that's been a plus the fact that we've been working with the a second very large serve go.

To start doing their work.

As far as the PDC.

Refurb.

So that's coming along good.

We think that that's really going to pick up and it'll be a big plus as we go into <unk>.

In Q1 of next year.

We're building that relationship where we've proven our services that we have done for them and we expect to see that volume increase throughout Q4, and then really gets strong as we go into Q1.

We rationalized our domestic operations.

So there'll be some savings there.

<unk> noted.

Let's look at the international when we look at the Mina the rig count.

But we sit what we're seeing over there is totally opposite of what we're seeing here on the domestic front.

It doesn't matter what.

Country, we're going to whether it's a kuwait.

The UAE with Abu Dhabi.

The kingdom of Saudi Arabia.

Oman, there, they're all picking up rigs and they're doing it in a rapid fashion.

We've proven our tool out very well in these countries, we haven't been able to do work in.

In KSA and nor have we been able to do work in Abu Dhabi due to the fact that.

We didn't have our ISO requirements.

These are all complete now.

So we're excited for the opportunity that that's bringing us in as we look into next year and through the remainder of this year.

We're excited to be able to you know first of all start.

Doing work in with Aetna and Abu Dhabi, we've made those visits sleeve.

We we've got some.

Good history.

With some tools that we run there through a through a large share of co.

That had very good performance.

But again, we needed to get those ISO qualifications that we now have in place.

So as our as our tech team as we've been building that we've mentioned.

We've mentioned on previous calls, where we don't consider ourselves a sales and marketing company.

We're heavily weighted towards tech.

And operations in fabrication.

And we have been building a team now that that's.

Building, a very strong database as we look at that.

The tool runs that we've had in Oman and Kuwait.

And even the tool runs that we've had in Saudi Arabia and.

Abu Dhabi prior to being.

<unk> finalized for not hasn't our ISO.

Requirements.

The drilling ream product line performs very very well in the Mena region, just like it does here in the in the U S. But I I think the big opportunity. There is the fact that.

When you look at the Mena region, the drill N ream.

Was introduced into the.

Vertical section of the Wellbore.

So we introduced that tool in larger sizes, and so if you can envision a well.

Typical well here in the U S. We drill a vertical we drill a curve.

And then we drill a lateral.

Or horizontal if you will.

And the drilling Ream was designed and built for those long for the laterals that.

It's have now turned into extremely long laterals.

Here in the U S. But when you look at the Mena region the issues that they that they have in the upper section of the Wellbore.

Where we've introduced the drilling ream to really help out.

Now, saying that we've also drilled.

The two longest laterals in Oman.

With the drill N ream.

So you know the.

I'm sorry, the two longest laterals horizontals again.

In Oman. So there is there are starting to make these curves and starting to.

Lay down and goes sideways and that that's where the real benefit of drilling ream comes in.

So the fact that.

We started out in the upper section of the Wellbore and have proven this tool out in the Mena region with the larger sizes that the 16 inch sizes, the 12 inch sizes.

And working our way down to the age and the fixes that are so popular here in North America is going to be really need to see how this matures over time in the Mena region.

We've mentioned earlier, Chris mentioned about our technology team and we're very pleased with what's going on there.

As I said the database, they're building and the the runs that we're being able to now put in there, but Polish run reports and show offsets of before.

After our product is really really need to see and we're excited to start getting that out there in front of the customers.

We have.

The new service like our legacy service here, that's going to be happening.

We're looking to kick that off when we talk about that it's of course a bit repair service.

We're currently working with some large serve kos.

On contracts as we look to kick this off in January.

All of the equipment needed for that.

Is and see cans heading over there looking to land in the Jebel Ali Port.

On the 29th of November.

So does that equipment has been built and we've got a couple of items left to go that will be in another C can leaves the farnell.

Hopefully next week.

And we've got some media blast units that will that will be going in there and.

Another O D grinder.

But.

So the equipment Capex has been spent.

We have.

Our highly trained team.

That is that is really good.

At this service that.

That will be overlooking and working and living.

In the Mena region as we kicked this off in January.

So we're really excited to see that.

That now start to mature as well.

Again, the ISO certifications that the team got into place.

The Big task and we now have the 45001.

9001 in the 14000 in one so all of these things are in place are.

Along with a.

A new large drill N ream inventory. So we're looking to to start seeing the benefits of all of this as we roll into.

And finish out Q4 and roll into Q1.

But with that being said I'm going to turn it over to some Q&A.

Thank you.

Ladies and gentlemen, we will now.

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Ladies and gentlemen, we will wait for a moment, while we poll for questions.

[noise] I'll first question is from the line of <expletive> Ryan with Oak Ridge Financial. Please go ahead.

Okay.

Thanks for taking the questions.

Troy the reorganization was that.

At first it sounded like it was just over in the Middle East, But then you said there was some domestic rationalization.

Can you explain a little bit more if there was some.

Now I'll touch in the in the North America or was it primarily in international.

No. So we have cut back in the North America due to the slow down in the third party machining services most of it was in the machine shop.

We felt that we could pull back there and it won't hurt us going in.

To Q1 of next year.

Got.

The big.

The thing that we protect is when we look at the break.

Razors that we have the fabricators that we have a we've kept them we've kept them mainly to not just support the uptake that we hope that we'll see come January.

You know typically come January about 10.

All of a sudden the market starts to wake up when everybody needs everything right now.

So we understand that well and we're positioned well to respond to that so we haven't we haven't reduced the head count in the fabrication. It was just a little bit of head count and machining as the third party work you know as we were doing our.

Drilling products for the large sharp COSE had slowed down with the rig count decrease.

When you when you look at the mid East what.

What we did there is we you know we tried to go in and.

Say, okay. We can do this shells in marketing we can figure this out and what we learned when we started off the year. We had we had some really big plans to really penetrate quickly, but then what we what we realize is we started.

Going down the road and we don't have a structure too to really support sales and marketing and as we had guys. It would.

The team that we get on a.

Playing and go over to Oman or go spend some time in Kuwait.

We realize you know come about June timeframe that that that's not going to work. We've got to have we've got to have a sales and marketing structure in place and a good one.

And we've never done that before.

We've just never been we've never we've never been in a sales and marketing and so we backed up we said wait a minute.

Our goal is to position ourselves for what we what we told you all we were going to be doing when we looked at M&A candidates in M&A potential. So we said, let's position ourselves for that opportunity and to do that we we brought in petroleum geologists.

Two is who is.

Who has written several white papers on the drilling ream product.

Is that a we were very impressed with and he has joined our team in and he's he's taken are.

Our application engineering group and starting to build that database of the two.

That we've run and where we've run them. So we we said, let's let's cut the part of the team that we considered salesman.

Because we found that the.

As I go out and we're seeing the customers say, they really werent getting that benefit of what the drilling ream.

Is to our customers across.

And so we said, let's let's get our tech built up let's get our database built up.

And this team that will support a large shelves and marketing operation.

Very highly professional level once we find that a lot.

Let's be ready for that and we're still getting sales you know we're still getting.

We're spending time in Kuwait, and we're spending time with with AD knock and we're spending time and in Oman, and we're still getting tools in the hole.

We're starting to see an uptick in Q4 with what's wrong. So it's not like we're not getting out there, but instead a different level.

It's going in and spending time at the higher ups in.

These companies in explaining the benefits that they see.

When they do have that.

Truly condition to well bore.

<unk>.

And it's and we're the word's getting out you know we spent we were.

We're over there at our first showing.

It's a large a mean of conference calls out effect.

And Adam Peck as their regional big.

Oil and gas event and we attended that in October we had a booth in there and our Booth was was it was highly successful we had a lot of people coming in.

Wanted to know about the tool and how it was going to be helpful for them and we had the technical support staff that can talk to these people and it was really neat to see so.

You know I.

I think that answered your questions both on the domestic and the international front and if not.

Let me know.

It certainly did just a follow up to sort of get that sales momentum kicked in or is that something you bought.

I need to do internally or will that take more of a partnership path.

We're looking at I mean, where we're doing it through a technical side internally right now, but we look at it is we're really planting the seeds.

We're planting the seeds and in these groups at a high level.

And its and its strong seeds when we when we go in there with our offset reports are drilling offset reports, they're very impressive.

We've never had that group that could do that presentation too.

Two a very technical side of these <unk>. So it is still getting out there and making people aware of the drill N ream in the benefits. They are but we're also looking forward to a very professional organization. They can come in and say you know we were very.

The sales and marketing side of things and we really appreciate what you've all done.

Let's let's let's get going.

Okay.

When you look at North America, your tool revenue held pretty well versus the rig count as both you and Chris mentioned and in your slides you talked about the distributor continuing to improve market share can you give us specifics on what you're seeing with the DNR and the market share.

North America.

Sure what we see you know is there is a competitive landscape out there.

And the operators you know no matter how.

How good their.

Bottom line is looking they're always they're always working you on price and they'll use a.

Competitive tool to try to get you to bring down price.

And you know that was.

That that threat is always there, but one of the things that are that are.

Strategic partner has done here in North America is.

They've held that price and what they've seen is the operator will run.

Brand X.

And give it to give it a run or two but then they come back to drilling ream. They always come back to drilling ream the performance is.

Is noticeably different.

And so that's that models out there now we know that somebody's going to try to get you know.

To bring down the pricing that the drilling ream demands.

And we may lose a few rigs for a month or two but then they come back.

And ER and that's that.

That's been what we've seen throughout this year.

So and in our channel partner has actually been able to grow market share.

Through this this down cycle, we talked about it being 15% down in Q3, but I mean year over year as of today, it's down 20% and they've done that they've done a great job increasing their market share.

And on the contract services side kind of flat sequentially was it was there meaningful contribution from the second customer in Q3.

No not in Q3, it was really US you know they everybody all these large serve COSE.

I'd themselves on their on their bits of course in and two to have a third party to do what we do is really unique.

And so when we when we started this with them in Q3. It was kind of just testing the waters with as you know Ken we do what we say is as are we.

Have a quality service.

R R.

All our products going to perform well once we sell products that perform well once we work on them.

And the answers to that it's been it's been great. You know, they're very impressed with our turnaround time, they're very impressed with the performance that there that they see what their products. Once we have serviced it. So we're looking to grow that relationship stronger in Q4, we will see an uptick in units coming into our facility we have.

And we look to really.

To really push that hard.

As we as we start off the new year.

Hmm.

Thank you.

Ladies and Chairman a reminder, if you wish to ask a question. Please press star and one.

Yeah.

Once again, if you wish to ask a question. Please press star one.

Okay.

As there are no further questions I would now have the conference over to the management for any closing comments.

Again, thanks, everybody for joining us.

We look forward to our Q4 call and we look forward to talking with you all again here and ER.

And have a wonderful rest of your week.

Yeah.

Thank you.

The conference of Superior drilling products has now concluded. Thank you for your participation you may now disconnect your lines.

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