Superior Drilling Products, Inc.
Q4 2019 Earnings Call Transcript

Published: 12 Mar 2020

[Operator:]

Greetings and welcome to Superior Drilling Products Inc Fourth Quarter 2019 Financial Results. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.It is now my pleasure to introduce your host, Deborah Pawlowski, Investor Relations. Thank you. You may begin.

[Deborah Pawlowski:]

Thanks, Ted, and hello everyone. We certainly appreciate your time today and your interest in Superior Drilling Products. On the call with me are Troy Meier, our Chairman and CEO, and Chris Cashion, our Chief Financial Officer. They are going to provide you with their prepared remarks after which we will open the call for questions.You should have a copy of the financial results that we released before the market opened this morning and should also have the slides that will accompany our conversation today. You can find both of those documents on our website at www.sdpi.com.As you are 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. All of 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 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, I will turn it over to Troy to begin. Troy?

[Troy Meier:]

Thanks Deb. Thanks everybody for joining us today. Pretty incredible week. Wow, anyway if you turn to Slide 4 in your deck, let's get started with what we'll be talking about today. We'll start off with the growth that we've seen in the Mid East. When you look at the 25% growth that we've had in the quarter, and we look at Q4 of last year, you all remember that we made a decision last year to focus our resources into the Mid East market. We did that by really beefing up our staff over there. We brought on some phenomenal people that are doing a wonderful job. We're supporting the management team here in the States with additional industry experts that we've brought in to support everything we're doing over in the Mid East. And as you see in Q4, it's starting to pay off and when we talk about Q1 again, that's just cowering Q4.So we're very excited about the opportunity in Mid East and what we're doing there. You look at the runs that we're getting. We just had a tool with [Indiscernible] set a record run on a gas well that's a very high profile gas well come in it at over 2 million a day. We've got operators now running three tools per well. They're seeing the benefit of the Drill-N-Ream and they're recognizing that and they're running with it. We have a good testimony to the tool in the Mid East when you see, when we go into a sale cycle into an NOC, we're talking to them and we're telling them about the benefits of this tool. And we've got a very good tech staff over there that can explain those benefits. But you still get some pushback on the side of the [serve co] that using that tool does it really benefit them.Well, it takes days off of the well and they're paid for days on wells. And so we see this pushback. So now what we're seeing is a change a shift in the marketplace is these ITM groups, these turnkey projects that Halliburton is taken on and Schlumberger's taken on and Baker's taken on. They are now requesting the Drill-N-Ream for those projects as the Drill-N-Ream enhances not just the quality as well but as you all know it takes days off the wells. And so that's really starting to show now that we're getting these groups that are in charge of these turnkey projects calling us and wanting the tool.We've expanded into multiple countries over there. We have requests on the board right now for numerous countries that have identified the need of Drill-N-Ream. I can't tell you enough how important that market is for our success going forward especially with what's happened and what will happen in our domestic market as we go throughout the year. We're very excited about the Mid East and what we're doing there and the team that we've assembled has been incredible. They're doing a wonderful job. We look at the service agreements that we have with our legacy customers. We've got our legacy customer that we've been doing business with for 25 years and we are doing more and more work for them every day as they look at the efficiencies that Superior provides them and not just new manufacturing but the repair as well as bringing on additional product lines that we had never worked on before.So we're seeing in an enhanced relationship with our legacy customer and what we got going through our facility there in vernal on new end used. So we're happy with the progress that the team is made there. We see a lot of efficiencies been brought forward with our team where we're modifying equipment last year when we looked at what we were doing in R&D. We focused our team; we pulled them off of just staying on new product development and said how do we make things more efficient. And our team has come in now and in hence the way that we grind diamond with diamond. And we're seeing a benefit there.We've gone through our whole facility in Vernal Utah and combined all of the PDC application. So where Drill-N-Ream and PDC bits used to be separate, it's now one and we're starting to see the benefits of that combination and that combining of services that we provide and we're very pleased with what we're seeing early on this year. When you look at the Drill-N-Ream domestically, our channel partner there's done a fantastic job you all know DTI and what they do with us and for us. They've done a great job maintaining their market share holding their own in this environment. We know it's going to be, we're going to see rig count fall in the US. I mean that's no question we'll see that, but we feel we're well prepared to work with them and do the things to make sure that they can still get tools efficiently and get them out to their customer and still give them a well performing tool.And it's what we see are customers that have got to have the efficiencies that Drill-N-Ream gives them. There are groups now use in the Drill-N-Ream that is setting records every day. When you look in West Texas and what's going on with Drill-N-Ream, I was on the phone with a service company just last week that they're drilling 20,000 to 23,000 foot wells and they're doing it in seven days and they're doing that with the help of Drill-N-Ream. The largest operator in the country is now got the Drill-N-Ream. So we're excited about the stuff that Drill-N-Ream has going on here domestically and international. When we look at our R&D and what we've got going on there, we've got a team that has done a phenomenal job. When we look at the Strider tool, we're still finalizing that large tool.I know I told you all that we'd have that out the end of last year. We changed our focus a little bit, but we're still - we ran the Strider in January on a test rig looking to cancel out cavitation. We did that. It was a great test. We're very excited about the Strider tool. We've sold our first coil tubing Strider tools to Baker Hughes in January. So things are moving forward in that product line. And we're pleased right now with the team and what they're doing.One more thing I want to touch on the mega bore. We spent, like I said we focused our resources to the Middle East last year, but one of the things that in doing so we knew we had to be more efficient at making large tools. The Middle East is demanding large tools 12-inch, 16-inch, 17; we now have requests for 22. So we invested in the turning center that we talked about, it's a mega bore; it's a very large turning center and right now today I can tell you that we've doubled our capacity on the larger size tools due to this tool that we've put in place. This massive turning center that we've put in place. I'm very proud of the work that the team has done.So with that I'm going to turn it over to Mr. Cashion and he can go over the financial details. Chris?

[Chris Cashion:]

Thank you, Troy. And welcome everyone. Let's continue our review by looking at Slide 6. On this slide, I like to point out Q4 this year versus Q4 of last year. Troy mentioned in his commentary that we were up strong quarter-to-quarter and here are the numbers up roughly 25% quarter-to-quarter. As you know, the Q4 is typically a softer quarter for the oil and gas industry when you look at across the year. And so we're real pleased with how strong our Q4 came in. You can see the numbers there. It's driven by the tool revenue that's the Drill-N-Ream and then that's where we have the International Revenue and the US revenue in. And I might add, we're up on both international and US quarter-to-quarter. And we'll see that a little bit more on the next slide.So great, we've got some wonderful things going on internationally but the US business is hanging in there and as Troy said, that's a testament to what our distributor DTI is doing in the US market. They are holding their own. And we'll see that a little bit more on the next slide as well. So when you look at our numbers on an annual basis, you see a nice steady increase calendar 2017 to calendar 2019. And so we just, you look at that and Troy mentioned few minutes ago, we've expanded our relationship with our legacy partner Baker Hughes doing some more of their product in our repair operations. That's the navy blue part of this bar and you can really see that on the calendar year basis very strong roughly $5 million a year with Baker Hughes on the bit refurb side.And with the addition of that additional product that we put in place with the new contract in April 2018, you can see how it really started to show up in 2019. So real pleased with how that's looking. If we go to slide 7, we can break down that tool revenue just a bit and look at rental and sales versus the other related tool revenue, which is basically that's the royalty and the maintenance revenue in the US. So as we look at the sales and the rental part of that bar graph, International is in there, international in Q4 came in at $600,000 versus Q3 of just under $300,000.So we saw a doubling, little more than doubling of international revenue in Q4 versus Q3. And if you look back at Q1 and Q2 of 2019, we were around $200,000. So if you kind of get a view of what that trend line looks like. A $200,000 in Q2; $300,000 in Q3 and $600,000 in Q4. So there's the numbers that Troy's talking about when we sit here and we look at the traction that we're getting internationally, we're really pleased with that curve and the way that curve is taking shape. And we're confident that that's going to continue, will continuously good growth as we go forward with the international piece of the business.And as I mentioned that the second bullet point, higher tool sales in the quarter. That's the US piece of the business and so that US and international was strong force in Q4. The navy blue part of the bar that's that other related tool revenue or recurring revenue that's royalty in the repair and maintenance. And you see that is flat across the last five quarters between $1.6 million and $1.8 million and that's once again that's our distributor in the US holding their own. I mean you see that it's flat but that's good when we think about what's happened in the market.These numbers where we're looking at for Q4, I mean the markets down in the US roughly 25% whether you measure that on an average quarter to average quarter basis or you measure that on end of year to end of year basis, whichever way you do it, it's down in the US from 2018 versus 2019 about 25%. And so a significant drop in activity from 2018 to 2019 and yet our distributor, it continues to hold their own in activity, market activities. So that basically says that they pick it up share. And so they're doing a very good job for us and that's what these numbers are saying right on this chart.Now let's go to Slide 8 and look at our operating expenses and the first thing to kind of point out is on a - once again on a quarter-to-quarter basis Q4-to-Q4, we're flat. It moves around a little bit during the quarters but pretty flattish. I want to point out that the SG&A is around that $2 million kind of a number and that's a good run right to be thinking about. SG&A $2 million a quarter; $8 million a year. That's a good run rate. That's a decent run rate based on how we're operating today. And so I kind of want to make that point that as everyone knows we got some real dynamic things going on in this industry. And we're looking at a lot of different things and what are we going to do next and those kinds of things.So once again the qualifier is based on how we do things today, it's about an $8 million run rate on SG&A. You look at the depreciation and the amortization line, you see that coming down a bit from $1,900, 000 to $700,000, that's an amortization expenses coming down. May 2019, there was - we had some intangible assets that we had - we fully amortized and so that basically led to a $100, 000 a month in less amortization expense. So that - that you see that in the second half of calendar 2019. There have been some another bucket of intangible assets that will fully amortize in May of 2021. And so we expect that that will continue to come down as we go forward.Now what will be increasing is depreciation expense as we continue to build tools primarily for the Middle East market. With the demand that we're seeing, we're increasing that tool fleet and so we'll continue to do that and that's a depreciable asset. And so you will see going forward some increase in depreciation expense. So let's go to Slide 9 and I just want to focus on the adjusted EBITDA bar, the quarterly bar graph. Once again, soft fourth quarters; once again our fourth quarter this year strong on the revenue line and you can see it; it translated into a strong adjusted EBITDA as well. We more than doubled our adjusted EBITDA between Q4 of 2018 to Q4 of 2019.So that strong revenue increase that we saw previously translated in some good EBITDA increased as well. And so we're real pleased with how that's working out and that is with some of the things, some of the efficiency things we were doing that Troy spoke about. Reorganizing some things in Q4 and so we had some costs that came through the quarter that we were able to absorb those. And still turn in $621,000 of adjusted EBITDA in Q4. You see for the year 2019 we were at $4 million, 21% of revenue. We anticipate as we continue to grow primarily through the international business that we should be able to get into the mid- 20s on that EBITDA percent revenue. Once again, I need to emphasize that as we are structured and as we are functioning today, as we go forward in this marketplace, we'll be challenged with some quite obviously some need to reduce some costs as Troy mentioned, rigs are coming down.I mean they will, where and how far they come down, I don't think anybody really knows. But they're coming down and we'll do what we've been doing for years. And what we did back in 2015 and 2016. We'll make the adjustments that we need to make in order to continue to perform well in this market with these headwinds we are facing. On Slide 10, the balance sheets, want to make the point that we had some timing differences and some collections of some receivables about $1 million basically deferred into Q1 from Q4 that $1 million if it had been on the balance sheet at the end of 2019, it would have been a $2 million cash balance and that's right where the cash is today.We're collecting on those receivables that ordinarily would have come in Q4. They're coming in Q1 and we're making those collections. And so as we sit here today, I mean the cash is $2 million and $2.5 million range and so we feel very good about where our cash balance is. As you look, the timing difference, we've taken care of that and we are collecting those receivables that as I said ordinarily would have been collected in 2019. You can see the debt continues to come down. If you look at our debt charts, we have cut that over 50% since the end of 2016. We're now at $8 million the end of 2019. I want add that we paid our first installment this year on our note; on our Hard Rock note $750,000 in principal.So that light blue part of that debt bar that's the Hard Rock note and it currently stands at $2,250,000. We made that first payment on January 5, 2020. And we've got three more payments at $750,000 each and we will have fully retired that note and so we're really excited about how the balance sheet is going to look once we get that taken care of. We are selling some assets. We sold an airplane, netted out $170,000 in cash in February and so between the cash we have on hand and the cash we expect to generate going forward in operations, we're pleased with where we from the liquidity perspective.So as everyone knows, I mean this industry's in a great deal of uncertainty and that's obviously is an understatement. But the battle between Russia and Saudi Arabia is just having fits on what the supply is going to look like, production, they're both ramping up production and that together with the coronavirus the demand side is weak as well. So it's a tough time, a really tough time to be in the oil and gas business. And so we see significant opportunities even in this marketplace. But because of the uncertainty and really upheaval where we're hesitant to provide any financial guidance into 2020. And we're going to kind of stay on that position until we get a little more clarity in the market and exactly what we're seeing from our customers and from the end users as to their plans in this market.So at least for right now we're suspending the guidance for 2020. And as we evaluate what's going on. I mean this is so much of this has just hit us since this past weekend. As amazing as that sounds, it was just this past weekend when the wheels fell off on, pricing perspective.So with that I'm going to turn this back to the operator and open this up for questions Q&A.

[Operator:]

[Operator Instructions]There appears to be no questions in the queue at this time.

[Troy Meier:]

Okay. With that being said, we appreciate everybody who's joined us today. We'll continue to do what we do and we'll be talking to you again here shortly with our Q1 earnings and look forward to that call. So thanks again everybody for joining us and have a wonderful week.

[Operator:]

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time. And have a wonderful day.