Superior Drilling Products, Inc.
Q2 2019 Earnings Call Transcript

Published: 3 Aug 2019

[Operator:]

Greetings, welcome to Superior Drilling Products, Incorporated Second Quarter 2019 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded.I will now turn the conference over to your host, Deborah Pawlowski, Investor Relations. You may begin.

[Deborah Pawlowski:]

Thanks, Sherry, and hello, everybody. We certainly appreciate your time today, and your interest in Superior Drilling Products, Inc. Joining me on the call are Troy Meier, our Chairman and CEO, and Chris Cashion, our Chief Financial Officer. You should have a copy of the preliminary financial results that we released yesterday after the markets closed and you should also have a copy of the slides that will accompany our conversation today. If you don’t, you can find both of those documents on our website at www.sdpi.com.As you are likely aware, we may make some forward-looking statements during the formal discussion as well as during the Q&A session on today’s call. These statements apply to future events that are subject to risks and uncertainties as well as other factors that could cause the 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 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 will discuss some non-GAAP measures, which we believe will be useful in evaluating our performance. You should not consider the presentation of this additional information in isolation or the 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, I’m going to turn it over to Troy to begin. Troy?

[Troy Meier:]

Thanks, Deb. Thanks everyone for joining us for the 2019 second quarter call. Let’s start off with the Mideast. Let’s look at what’s going on there with the progress that we’ve made there. The Mideast team has done a great job moving forward. We now have agreements in place with three of the major service companies over there. And this was a big deal. This is a testament to our team able to get those in place, but also the tool, if you – when you understand the rental agreements that get put into place that’s usually a four or five-year term on these agreements and with the technology that’s available at the time.And so for Drill-N-Ream to go in there and now be involved in those agreements. It says a lot about the tool. And again, the team has done a wonderful job there and we’re looking forward to strengthen that team that we’ll talk a little bit about here on the next slide. We learned a lot about the impact of Ramadan. It’s essentially a month. It’d be like trying to do business here in the oil field around December. So we’ll be a lot more prepared for that next year and we’ll know how to forecast that much better.We’ve added three new members to our staff. We’ve got – we beefed up our engineering team. We’ve got – we now have an in country engineer in Kuwait and in Dubai. We’ve got technical team on the ground in Kuwait and we’ve also got a area manager that is managing this team very well. So our international team is starting to really gel and they’re doing a great job.We’ll talk a little bit more again on the next slide as we talk about the progress that they’re making and what we can do with the new 16-inch tool that we’ve got there. If we look at our domestic, what we’re doing here with our legacy customer be in Baker Hughes. As you all know, we’ve had a contract with them for 23 years. As you look at when Chris goes through the financials, you’ll see that how that revenue has been building up, when we look at the legacy services.We told you back in Q4 of last year that we were going to focus and pay a lot more attention to this legacy relationship and we’ve done that. Our team was able to get a new contract in place. And as we’ve been working hand in hand with Baker Hughes, we’ve been able to identify some very nice looking opportunities that we look to proceed with in the second half of this year.The Strider Technology, that’s again we have the tools working with Baker Hughes up in Alaska. They’re performing very well. They’re very pleased with how those tools are performing and it’s the response on that tool with them has been very good. So again, we still have to move forward with the development of the larger tools. The team is working on that diligently. Our goal like we’ve stated is to have that commercialized by year end and the R&D team is doing a good job moving forward with that tool.If we look domestically at the Drill-N-Ream, what our channel partner has done there in this pullback in rig count in the market. We’re very – we’re impressed with what they’re doing. They’ve been able to go on and bring on new customers even as the rig count pulls back in some very high level customers and they’ve been able to hold their own. And when you look at the performance of the tool in July, July is the best month we’ve had for Drill-N-Ream, getting tools in the hole both domestically and internationally. So they’ve done a good job and I believe they’ll continue to straight forward.Go into the next slide, Slide 5. Again, like I mentioned, July was the best month in history, both domestically and internationally with the Drill-N-Ream. If you look at what’s happened internationally with that tool, we definitely see an inflection point in July with the tools being run. A lot of good news on the tool, you can – we’re hearing things now and we’re seeing things where operators are noticing in their well bores when they’re coming back off a bottom. They can tell very well, when they get to the part of the well bore that the Drill-N-Ream was used in, they no longer have to rotate. They can just come through that section with their elevators. That’s a big savings to them.We’ve got some – we got our first run [Audio Dip] 6-inch tool in the lateral performed very, very well. So Drill-N-Ream continues to do a good job both domestically and internationally. We look at the 16-inch tool, we talk about that on our last call. Those tools we hadn’t – we now have two tools over in the Mideast, those tools will be going in the hole within the next week. We’ll have the first one. So within the next two weeks, we’ll have the second one in the hole.And of course, we’ll keep you updated on how those performed. We believe that these larger tool sizes, which we’ve never done before. Matter of fact on the bottom of the slide, if you look at it, that’s actually a photo of the 16-inch tool, but we fully expect this tool to perform very well and be a great benefit to our customers.We talked about the performance of the Drill-N-Ream and what it’s doing both domestic and international. And it’s now getting the attention outside of the U.S. and also outside of the Gulf Coast countries. We’re getting request for South America. We’re getting request for – from countries Egypt, Russia, over into Malaysia. People are calling, they understand the quality of the tool. So we’re looking to really firm up our international opportunity, but also we’re very cautious, where we go and how we’re going to do it and making sure that when we go to a new country, we do it right.We talked about – little bit about the expansion of opportunities with our channel partner. We’re very excited of teaming up with them more domestic and international. We believe that some of the legacy services that we’ve offered for a long time and we’ve been performing for – this partner for a very long time. Those services can be used in the international market as well. And so we’re evaluating that now, we’re working with their team diligently and we think there is a tremendous opportunity as we go into the second half of 2019.With that being said, I’m going to go ahead and turn this over to Chris, and he can talk finances.

[Chris Cashion:]

Okay. Well, thank you. Thank you, Troy and welcome everyone. And let’s continue our discussion on Slide number 7 and take a look at our revenue and the trends that we see in our revenue. As you see, we – total revenue is down over the prior year period, as well as the trailing period. And you can see in the dark blue and the light blue, the dark blue being our Contract Services business and the light blue being basically the Drill-N-Ream, you can see the two trends.We’ll talk more about that tool revenue trend on the next slide. What I’d like to focus here on this slide is, is our Contract Services revenue. Troy mentioned, enhancing our relationship with our long time legacy partner. And you can see the value and the benefit as that continues to develop.You look back over the last half of 2018 and you see roughly $1.3 million to $1.4 million in revenue per quarter. And in Q1, a nice increase to $1.6 million and in Q2 an increase over Q1 up to $2.0 million, that we’re seeing the benefit of the new contract that we negotiated on April 1 of last year and in that contract, picking up more product to refurbish, and we’re seeing that. And so in this soft market that Troy alluded to, roughly a 12.5% decline in the U.S. rig count since 12/31/2018. We’re managing to increase revenue in the U.S. with that partner.And then once again, that’s due to additional product that we are now repairing for that partner. And it’s really starting to bear some good fruit. We’re really excited about just how that is. That’s growing and that relationship is getting stronger and stronger. And Troy alluded to, there’s more things we can do with that partner. When Troy was talking about second half of the year and going forward. So we’re just beginning to see the value of what we’re doing, the time we’ve been spending in strengthening that relationship.So let’s turn to the next slide, tool revenue slide. That’s the Drill-N-Ream. As you know, the Strider – the commercialization of the Strider that’s targeted for later this year. So when we look at tool revenue, that’s the Drill-N-Ream. And on this chart, the dark blue we’ve referenced before, that’s what we call the recurring revenue. That’s the royalty, the maintenance and repair fees. And you see over the last five quarters a steady business. And so that continues to hold up well. Once again, softening market and that recurring revenue stream is still holding up well. And that’s the testimony as Troy said to our U.S. distributor. They’re holding their own as the rig count has declined. They’ve been able to add some new customers and offset some of the decline from existing customers. So we’re really pleased with how that’s working out.The one issue that we still are facing and you see that in the numbers and that’s the life of the tool, the quality of the tool, the life of the tool, the tool is lasting longer than we had modeled and forecasted. And that’s a great thing as far as a testimony to the quality of the product that we build. The negative impact is the tool replacement sales. Since the tool is not wearing out like as quickly as we thought it would, then we don’t get those replacements sales. That’s what you’re really seeing in that light blue, when you look at the decline from the trailing to trailing quarter and a decline from prior year comparable period So these tools will eventually wear out, that just happened at this point. And once again, that’s a testimony to the quality of the tool that we manufacture at Superior Drilling Products. Permian Basin market share for our distributor holding up nicely at 25% to 30%.The next slide, Slide 9, take a look at operating expenses. And you can see that over the prior year period, our SG&A has increased $400,000. That’s primarily the expense and cost associated with our investments and expanding our international footprint. And you also will notice that compared to Q1 on the trailing quarter basis, SG&A is down. And so with this softy market, our reaction, our response to that is to manage our spending more tightly. And that’s just prudent when the market continues to drift as it has in the first half of this year. And we’re reacting to that by differing and cutting costs where we can. And so you see that, you see that to go from Q1 to Q2, a reduction of $300,000 in SG&A.When you look at the trailing 12 month basis and you begin to look at cost of revenue as a percent of total revenue, last year’s quarter, we didn’t have our facility in Abilene, Texas. We’ve invested in that facility and we’re still getting the volumes up to start seeing that operating in their average. Investments in our international, we have costs of goods sold, we have a repair facility in international, so that investment is in the current quarter. It wasn’t in Q2 of last year. And then just the lower volumes and that does led to lower absorption.So cost of revenue as a percent has gone up and it’s the combination of lower volumes and the investments that we’re making. The other thing I would like to point out is that we impaired obsolete inventory associated with the Strider, Specifically, it’s the previous design. It’s not the current design, it’s the previous design. We were spending time and effort getting that tool run on a very limited basis, it wasn’t producing a lot of revenue at all. We made the decision in Q2 that, to just focus on the new design, get that big tool developed as Troy mentioned. And focusing on the new design, we made a decision to go ahead and write off the inventory parts associated with the old design. And so that’s about $136,000 impairment that we picked up in Q2.Now let’s go to Slide 10 and look at the adjusted net income. We like to look at adjusted net income, we factor out a couple of things. And you’ll see in adjusted income and adjusted EBITDA, we’ve got at the back of this presentation, the reconciliation slides. So you can see exactly what it is that we pullout of GAAP net to get adjusted. The big item is amortization of intangible assets. That’s the big item on those adjustments.And then non-cash bonuses, we call it atypical bonus, but basically non-cash bonuses. And you’ll see those on those slides. And so that when we look at the adjusted net income number this quarter, $332,000, roughly 7.5% of revenue and in a quarter, where the volumes have dipped, where we did not see that inflection point in international. As Troy mentioned, we’re seeing it right now in Q3. We’re still able on an adjusted basis to have net of 7.4%.From an EBITDA perspective, we’re hanging right in there in that mid-20s, 24% roughly in Q2 2019, 24% roughly in Q1 2019. So even with a softening marketplace in the U.S., not significant international revenue, yet, the inflection point, we realize in Q3. We’re seeing good, strong mid-20s EBITDA. So investing in our footprint, R&D around commercialization of the Strider, soft marketplace, we’re still in the mid-20s on EBITDA. And we’re really pleased about how we can still generate that kind of that operating cash flow in this kind of a marketplace.Now let’s go to Slide 11 and take a look at the balance sheet. We decrease cash about $1 million from March quarter to June quarter. Our focus is CapEx, and you can see that CapEx for the quarter is $565,000, primarily investing in that Middle East fleet that we talked about. And then there’s a couple of machining centers that we are purchasing. That will help us in efficiencies. One machining center is just replacing a machine that needs to be replaced. And so we’ve got some deposits that we’ve made on those two machines.So with CapEx, at roughly $0.5 million in continuing to focus on getting the debt reduced. You can see we brought debt down another $1 million in the first half of the year. So we’re pleased with the way we keep bringing that debt down. And then we’ve got the ABL put in place and that’s a $3.5 million revolver. We have currently between $1.5 million and $2 million of available on our borrowing base. So basically, we borrowed $1 million and we’ve got another $1.5 million to $2 million available in our borrowing base. So that gives us flexibility going forward as we look at the rest of the year.Now let’s go to the next slide. Slide 12, we announced today that after a review and interpretation of accounting standards that typically are applied to the banking industry. We have amended our 2018 Form 10-K. Basically, we are writing down our Tronco loan. We’re running it down effective in 2017. So the comparative numbers in that 2018 will reflect the 2017 write down. The trigger for that 2017 write down was a modification we made to the loan by extending the payment terms. We did that in 2017 and that triggering points walked us into this impairment accounting.And once again, it’s looked at those kinds of events from my banker’s perspective. And so that’s what we’ve done. We’ve gone back and we’ve reviewed that standard and we decided that based on that standard that we should fully impair, we haven’t written the note off. We’ve fully impaired the note. And so the decision is based purely on accounting, does not impact our continuing efforts to collect the note.So going forward, as we receive payments on the note, we’ll be recognizing these payments as a recovery of a fully reserved note. And so once again, no change as far as what we’re doing as far as collecting, we still hold 8.3 million shares of our common stock as collateral. So from a business perspective, nothing has changed. What we’re doing is recognizing a more conservative accounting treatment for the note.Now let’s go to Slide 13, and we’ve updated our guidance and giving the continued softness in the oil and gas rig count in the U.S., we feel that wise to lower that guidance. And so we’ve lowered our guidance range to $19 million to $20 million. We’ve got the upside, the way that Troy talked about, we’ve got that looking up. But where is the market going? I mean, as I mentioned earlier, we’re down 12.5%. The U.S. rig count as of last Friday was 946 rigs versus 1083 rigs at the end of the year. And so it continues to notch lower. And so we think that it is wise, just to go ahead and acknowledge that.Our gross margins, it’s the same 58% to 61%. We think, we can do some things to conserve, save on some spending, SG&A $7.5 million to $8 million, just better cost management there. So we can do – we can save some money on that line. And then D&A, one of the things that we saw during the quarter specifically after the month of May is, we fully amortized one of our intangible assets and that has resulted in roughly a $100,000 of amortized expense per month lower.So you may recall that, we’ve been running roughly $200,000 per month of amortization expense. That’ll be half going forward. And that’s one of the reasons that D&A is lowered. We got one month of that benefit picked up in Q2. So we’ll be picking up a full three months of that benefit going forward. Interest Expense pretty much relatively unchanged at $800,000. And then CapEx $3 million to $3.5 million, and that’s just the building out our tool fleet and continue to spend those CapEx dollars. From a liquidity standpoint, we feel like we’re in good shape going forward. And then once again, I just want to highlight that available borrowing base to us $1.5 million to $2 million.So with that, I will turn this presentation back over to Troy.

[Troy Meier:]

Thanks, Chris. So let’s just go into Q&A.

[Operator:]

Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question is from Jason Wrangler with Imperial Capital. Please proceed with your question.

[Jason Wrangler:]

Hey, good morning guys. Troy, just wanted to maybe dig in on the Drill-N-Ream with the three oil field service companies in the Middle East. Can you just talk about what the agreement is with them and how you guys fit into that and kind of how you see, I guess the supply agreement or the contract, ultimately working out for Drill-N-Ream in the Middle East? Or would you look at I guess multiple contracts across different countries?

[Troy Meier:]

Yes. We worked in this one particular country. The first country we were in – we worked with these three as you know, we’ve got Odfjell, we’ve got Weatherford and we’ve got SinoGulf which is now [indiscernible]. And each one of those agreements are different. And we had to come with an agreement that if you’re going to go out there and be our channel partner to this tool and when you go out there and get an invoice for this tool, because remember all of the inventory that we have in the Mideast is owned by Superior. It’s our inventory.So these channel partners are now going out and repping this inventory to get it into the hole. And so what we had to do is, we sat down and we negotiated with each one of them individually and said, what’s our portion of the invoice that we get signed from the operator and what’s the repair ticket going to be? So it was a negotiation point on every single one. If a tool rental contract with them, it doesn’t say that they have to use the tool. What it does say is, when you take this tool out and get it in the hole. Here’s how we’re going to split up the invoice. And I think Chuck and his teams have done a phenomenal job, making sure it’s a win-win for both sides and to the excitement we’re seeing now that we have those in place, I think proves that they’ve done a great job.

[Jason Wrangler:]

Okay, that’s helpful. Thank you. And then, with Strider, up in Alaska would just be curious if there’s any more color there, how long it’s been working and kind of a plan, moving forward with Strider.

[Troy Meier:]

Elder and his team have got that tool run. I believe we’ve had it running up there since we put it in the hole around November, December. And if you remember right, this is the tool that the specialty project for them, because they go into an existing wellbore, they cut a window and then they go out horizontal for ways and this technology and that tool is our latest and greatest technology. It’s got our updated closer, closer can, power section, everything that we’ve got in our big tool. The difference is it doesn’t have to run as hard, because they’re pumping a 100 and 110 gallons a minute instead of the 700 that we see in the open hole.But it’s the smaller design of what we’re currently testing for the large hole application, but it’s working very well. We were down in Houston a couple of weeks ago and there was multiple comments on how well that tool is performing. So it’s doing a great job, but we’ve got to do Jason is we’ve just got to take this tool and the parts that have worn out in our previous tests have larger tool. Josh and the team have got those parts identified. As you know, we brought in Dr. Storm and his team to help analyze and do mathematical modeling on this tool.They identified where points on our tool. We’ve gone back now we actually have set up an in-house testing facility rather than running back to Katusa, which is about $100,000 of whack. We’re able to test it now in-house make sure that the changes that we’re making or making monumental improvements to this tool before we go back to Katusa. But I believe we’ll be back at Katusa sometime in September is what our goal is with a tool that we think will perform to the $100 mark. That’s our goal.

[Jason Wrangler:]

Okay. I appreciate the color. Thank you.

[Troy Meier:]

You bet.

[Operator:]

Our next question is from Dick Ryan with Dougherty & Company. Please proceed.

[Dick Ryan:]

Thank you. Couple of additional Troy on the Middle East. So the three agreements you have, are they just working with the one country and you’re now, are they going to expand into other Middle East countries?

[Troy Meier:]

I don’t believe those particular agreements will expand into other countries. We’ve just targeted Kuwait right here with these three. What we’re looking at as we go into Saudi. And so we’re looking at opportunities with additional channel partners. We’ve talked about our legacy relationships. We think there’s a good opportunity there, both in what we do with the bit reefer that’s – they don’t do that over there currently. And I know Aramco would really like to start that process. So we’re hoping that we’re involved in that with them. And Dick, this really became something as we – the biggest challenge for us over there has been the repair of these tools, shipping tools in and out of, from Kuwait to Dubai, and understanding the logistics has been a bit of a challenge.And so when we go into Saudi, we would like to do that under a – maybe a contract, if you will, with the player that’s been there for a long time and as well recognize. And that’s our goal there. And so if we can do that, it would sure help a bunch on identifying a repair facility, because there’s a lot of do’s and don’ts when we go into start dealing with the foreign entity such as Kuwait.

[Dick Ryan:]

Yes. Next question, what’s the fleet size of DNR over there and what is that have to grow to and can this turn from a rental to a sales model?

[Troy Meier:]

The fleet size that we currently have over there is 72. And we’ve got now is with the addition of the 216-inch tools. It can turn into a sales model. We get request for the sale constantly. The service companies that we currently have contracts with, they would love the opportunity to buy the tool. But we – just we want to understand that, we want to understand the value of the Drill-N-Ream. And the amount of runs that we’re going to get with the repair costs going to get before we sell any tools. It’s a whole new market for us and we’ve learned a lot about our tool over there.

[Dick Ryan:]

Okay. A question domestically, you mentioned in the release, company expects that the addition of new channels to market in the U.S. Is that your current distributor moving to other basins or is this other channel partners that you would bring into the fold?

[Troy Meier:]

Yes, quickly another channel partners that we bring into the fold. We’re very respectful of our current channel partner and we respect our relationship with them. And so we – as we have looked at additional channel partners, we want someone just going to compliment them and not somebody that’s just going to try to go in and go after the customers that are already familiar with the Drill-N-Ream.

[Dick Ryan:]

Have you been able to move to other basins other than Permian?

[Troy Meier:]

Yes. We’re in every basin except for, I don’t believe we have runs in the Monterey Shale based in California. I don’t – we don’t see any reefers coming in from there. But yes, DTI is in every basin in the U.S.

[Dick Ryan:]

Okay. One last one for me. With Baker, it sounds like you’re getting deeper with them. Is that continued to be a North America opportunity or can that grow beyond North America?

[Troy Meier:]

Well, it’s definitely a North American opportunity, but we believe there’s a great opportunity for international. When I was just talking about what we were looking to do in Saudi, we would – we think that we really have a lot to offer them with the operations that they currently have in Saudi. We think that we can come in there and support them with their efforts. And we think giving them an opportunity to be part of the representation of the Drill-N-Ream in Saudi would be a wonderful thing for them as well.

[Dick Ryan:]

Okay, great. Thank you.

[Chris Cashion:]

You bet.

[Operator:]

Our next question is from Reid Walker with Hard 4 Holdings. Please proceed.

[Reid Walker:]

Hey, Troy and Chris, I’m a little bit confused with my math here and I don’t have a model in front of me. But I don’t understand, how we can say July is a record month in DTI or with Drill-N-Ream runs and you’ve got good sounding stuff on international. It sounds like you’re falling on or firing on all centers with Baker Hughes. And we’ve finally been conservative on Strider, because it’s been a show me story. And so everything sounds good, except I don’t understand lower – revenue top – the revenue guidance.

[Chris Cashion:]

Yes. That’s – we’re taking – we believe very conservative view toward what this market might be doing. Yes, we’re confident all those things you just mentioned that, that we’re going to execute on that, but where is the rig count going in the U.S. That continues to surprise us, I mean, basically quite honest that I didn’t think it’d go down to 946, that’s a decrease in eight rigs from the week before. So that’s what’s driving us. I mean, to be honest, I mean, we’re just saying, hey, rig counts is not stop dropping. And so that’s – we’re kind…

[Reid Walker:]

Well, some of that – go ahead.

[Deborah Pawlowski:]

Couple of things to keep in mind as well, Reed. We only did $9.5 million in the first half of the year and the fourth quarter is usually a weak quarter for us.

[Reid Walker:]

Yes. And some of it is, I just didn’t know, haven’t – like I said, I’m on vacation. I don’t have the model in front of me, I just don’t know how much we’ve missed revenue in the first six months, such that we’re just now throw in the towel, and throw in the towel is much too strong a word, but not sticking to the revenue guidance. And that was one of my questions. And I’d also add these E&P companies are under more pressure than ever to be less growth and more cash flow. So I guess, I appreciate that conservatism. I just – you’d always like to hear we’re sandbagging, but it doesn’t sound like. There’s enough uncertainty that, I’d rather see us not miss guidance from here.

[Chris Cashion:]

Absolutely. No, we don’t think we’re sandbagging.

[Reid Walker:]

Okay, thank you.

[Chris Cashion:]

Thank you, Reed.

[Operator:]

Our next question is from John Sturges with Oppenheimer & Company. Please proceed.

[John Sturges:]

Thank you. What I’ve heard is that there’s takeaway capacity issues in the Permian. And that’s tended to slow the drilling activity in that area. Could you – is there any color you can add that?

[Troy Meier:]

Yes. I mean, the same thing, I also believe that some of that capacity issue is projected to be soft, to some extent, with some additional pipeline capacity. But I think that’s a very fair look at what’s happened so far. And I think that has depressed drilling in the Permian and until they really solve that problem, it’s going to continue to be soft, I believe.

[John Sturges:]

And the other thing I was just curious, can you comment on the actual tool life versus what you had expected in terms of – was it lasting a third as long, before it needs refurbishing? Is it more than that? I was just curious.

[Chris Cashion:]

Yes. We thought it would be 12 runs, that’s kind of how we modeled it. And yes, there’s a good third more life. I mean we’re seeing 15, 16, 17, in some cases, 18 runs in the lack of a tool. So, yes, actually when you do the math on that, that if it’s 18, then that’s actually 50% increase from 12, 18. So yes, I mean, it’s at least a good third. And to be honest, John, we’re still trying to figure out exactly what is that life, it continues to kind of challenge our thinking. But yes, that we started with 12 and we’re consistently seeing 15, 16.

[Troy Meier:]

And I think it’s important to know that when we modeled out 12 that was based off of the tools performance in the Bakken, that was really the only basin that we had good data from. We hadn’t really gone outside the Rockies at all when we built this model.

[John Sturges:]

Okay. It’s a nice problem they have for the corporate reputation. So, it results in a slightly lower revenue, but longer term they should be a pretty strong positive.

[Chris Cashion:]

I mean, you hit the nail on the head, John. I mean, the tools aren’t going to last forever. And so when I do start being, cut out as we call it, disposed of, then it’s going to be nice replacement sales revenues in the future.

[John Sturges:]

I’m just curious, is there more expense or a higher cost to refurbish then – so therefore a greater opportunity for return on something that’s obviously lasted longer than you expected. I was just curious what the metrics are?

[Chris Cashion:]

Yes. As the tool gets older then yes, we do see a higher repair cost on the tool. So that does soften the margins a bit on an older fleet. We’ve got the fixed pricing is the way it’s – we’ve got with our distributor. So, yes, the tool gets older, it’s a little harder for us. It’s not a significant amount, but yes, we are seeing some of that. Actually that’s a good leading indicator, I would suggest. Once we start seeing that, then that should begin to tell us about, how much life is left. It’s kind of like a car, you get up to some mileage that – you’re probably getting close to the useful life.

[John Sturges:]

And then of course, is there room for renegotiation on some of this? Do we negotiate the pricing?

[Chris Cashion:]

That’s a real – we have talked – put that on the table and continue to talk about that. It’s really tough in a softening market like this to get price increases, even with the best rationale, which we have, what we’re talking about. But I don’t want to put an expectation out there that we can get pricing improvements. So it’s certainly a topic that we’ve visited a lot with our distributor.

[John Sturges:]

Okay. I’ll get off the line, but thank you very much.

[Troy Meier:]

Thank you.

[Chris Cashion:]

Thank you.

[Operator:]

We have reached the end of our question-and-answer session. I would like to turn the conference back over to Troy for closing remarks.

[Troy Meier:]

Well, we appreciate everybody for joining us. There were some good points brought up, in regards to the bringing our forecast down a little bit. Believe me, it’s not because we’re not going to be out there pushing it, we’re looking to be very strong in the second half, but we’re also very cautious. So look forward to our Q3 call update and everybody on what our advances are in the Mideast as well as our domestic market. And with that thank you very much.

[Operator:]

This concludes today’s teleconference. You may disconnect your lines at this time and thank you for your participation.