Superior Drilling Products, Inc.
Q1 2017 Earnings Call Transcript

Published: 12 May 2017

[Operator:]

Greetings and welcome to the Superior Drilling Products First Quarter 2017 Financial Results Conference Call. At this time, all participants are in a listen-only mode. An interactive question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I’d now like to turn the conference over to your host Ms. Deborah Pawlowski, Investor Relations for Superior Drilling. Thank you. You may begin.

[Deborah Pawlowski:]

Thank you, Matt, and hello everyone. We certainly appreciate you’re joining us here today and your interest in Superior Drilling Products. Here with me on our conference call are Troy Meier, our Chairman and CEO; and Chris Cashion, our Chief Financial Officer. Troy and Chris are going to review the results of the quarter as well as our outlook for the year. We will also provide an update on where we are in our strategic progress. You should have a copy of the financial results that were released before the markets opened this morning as well as the slides that will accompany our conversation today. You can access both 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. 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 and other factors are provided in the earnings release as well as in other documents filed by the Company with the Securities and Exchange Commission. You can find these documents on our website or at sec.gov. I want to also point out that during the call today, 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 to comparable GAAP measures in the tables accompanying today’s earnings release as well as in the slide deck. So with that, let me turn it over to Troy to begin. Troy?

[Troy Meier:]

Yes, thanks, Deb. Thanks everybody for joining us today as we talk about the first quarter. Let’s get right into the highlights. One of the things that you’ll see as we go out to the slide deck today is the increased demand that will be just talking about and showing in all aspects of our business. I’d like to start with Slide 4 on the slide deck. The increased demand that we’ve had in both our manufacturing and of our fleet maintenance is the tool repair side of things has really, really increased. And again, we’ll go over those numbers and also the percentages, but I want to mention here that our management team and our team at Superior have handled this increase very, very well. We started a program last year looking at the optimization of our design, programming and manufacturing. There’s been some very unique programs that have come out of this that’s helped really decrease programming time and also machining time that have allowed us to really get on top of this increase in demand for our tools and services. If we look at the Drill-N-Ream, one of the things that we’re seeing there is the increased number of operators that are picking up that tool and we’ll talk about that on the next slide how that’s becoming more and more of a standardized tool throughout the industry. The coil tubing Strider, we talked about it and bringing that to market in January and that’s been and very, very successful on getting that out there, getting the runs that we need and keep in mind we’re not aggressively going out and trying to market this tool as much as we are getting the facts behind this tool, so that we can now go and put that in the hands of a very qualified channel partner. So the runs that we’ve received on that tool throughout the first quarter have been very impressive and we’ll talk a little bit more about that later on in the presentation. The rig rate as that increases, it puts a demand for all areas of our company. We build more new tools. We’re repairing more fleet tools. So as the rig rate increases of course that that gives us a good bump all around and we’re continuing to move forward on the Open Hole Strider this is something that’s become a – I know I have talked about it for a couple of years, but this tool with the R&D team that is now really starting to materialize within our company. The high-tech products that they’ve brought into that tool, we’re very excited about where that’s going. Let’s turn to Slide 5 and let’s talk a little bit more about the Drill-N-Ream and we’ll talk about the excitement we have around operators standardizing this tool. It really truly helps them decrease time and save money on drilling wells. We’re seeing more and more operators adopt this tool every single month and we’re also seeing operators using it in more stages of their wells and we’re seeing multiple tools per well being deployed now and it’s very exciting for us. It’s no longer just a tool for laterals. And again demonstrating the value of this tool is I mean if you look at the KPIs on this tool when you go to see an operator, I mean you’ve got a good list – a good solid list of ten. Do you want to increase you T rate, do you want to decrease your days on wells, do you want your MWD to see less shock and vib, do you want to help your motor out by not getting the stick slip that’s chunking that motor? What are the benefits that you want to achieve on this with this tool and it’s making it a fantastic tool to get out in front of them. Let’s turn to Slide 6. And again technology is how we define ourselves where we’ve got to get more and more technology out and we’re doing that. We’ve got like I mentioned just a bit ago. Our R&D team is really starting to get a feel for the oil and gas industry. We brought a team from outside the oil and gas industry and we brought them together because of their unique qualities in other industries. And now they’ve had got a couple 2.5, 3 years under their belt. They understand the oil and gas industry now and they’re really starting to click and understand the tough environments that we deal with the abrasion and erosion and down hole temperatures and these guys are really starting to click and it’s really exciting to see what’s going on. So as we talk about patented technology, we’re on top of those patents. We’re getting those that innovation out there getting in tied up for the future innovation that will be bringing to the forefront here over time. But we’re really excited and again we’ll talk a bit more about the Strider tool and what we’re going to be looking at doing there. But that being said I’m going to turn it over, so Chris can get into the numbers.

[Chris Cashion:]

Thank you, Troy, and good morning to everyone. Let’s continue our review by looking at Slide 8, titled significant revenue growth. As we said out in a press release a week or two ago forecasting or kind of – this release indicating that we were seeing, have seen some very strong revenue growth. Those were estimates and that release whether we have been through our audit review and so they’re hard numbers now. So we’re really pleased to how our revenue has increased significantly here up over 100% on where we were prior year quarter and up a strong 40% plus on a trailing quarterly basis. And as you can see in this chart, it’s both parts of our businesses. It’s the tool revenue business is up and that’s as a result of a strong rig count, but you can see here on this chart that the rig counts up between 26% and 34% compared to prior quarter and previous quarter, but our revenues as I just indicated are higher than that. And so that’s continued market penetration through our channel partner with the Drill-N-Ream. We just continue to see good operator growth, good revenue growth from penetrating the market. And also our contract services business is up more than doubled and that does as I think most everyone knows that’s a bit refurb business and our third party manufacturing. The bit refurb business, we’ve seen an increased number of bits coming from outside our contracted area with Baker Hughes, specifically we have a contract to refurbish bits in the Rockies, California and Alaska. And in Q1, we saw up a number of bits come to us from other parts of Continental U.S. And so that was really nice to see and that really helped us more than double that net revenue as you can see sequentially from Q4 to Q1. If we slip over to the next slide and look at the business model, the go-to market strategy that we changed. It was one-year ago this month. We entered into our agreement with DTI, where they became the customer interfacing arm and we focused on manufacturing and engineering. And you can see here that that model is proving out very well for us. Looking at the chart at the bottom, tool sales/revenue, it’s up almost 100% from Q1 this time last year. And then the other line item to really focus on here is the other related revenue in that chart and that’s up over 10x. And that’s the royalty and the repair revenues that we get from this agreement. And so, you can see good strong revenue growth. As you may recall under this model, our Cap Ex is minimized. We did report about $130,000 of CapEx in Q1 and that was a couple of operating leases of a couple of CNC machines coming off those operating leases and we went ahead and just bought out – bought out those leases and so that was the $130,000. Non-new machines, but existing machines that we had in the business that we’ve been getting our operating lease on. And you’ll see in our guidance as we go a little bit forward and as you saw in the press release, minimal CapEx for the rest of the year. So this model is continuing to prove out the way we had thought it would. And then the bottom line here is as you can see here the operating leverage that that we see in this business from volume, volume growth and you saw our press release this morning where we’ve got EBITDA of $900,000 that’s a strong improvement on that incremental revenue and incremental revenues Q4 to Q1 about $1.1 million and we’re able to get $900,000 to the EBITDA line. So we’re really pleased about the operating leverage that we’re seeing here. On Slide 10, we’re also keeping our eyes on cost. We’re keeping costs constraint and a little bit of growth $100,000 from Q1 last year to Q1 this year. Virtually the same amount operating expense. And as you saw in that revenue bar chart revenues more than doubled. So you can see on a relative basis a strong improvement in operating expenses relative to revenue. SG&A we think that $1.5 million which you see is down $100,000 from Q4. That’s probably going to be a pretty good run rate for the rest of the year about $1.5 million a quarter. And then really nice cost of revenue. And we’ve got some bits of favorable mix shift between our new tool sales. We sell three different tool sizes 6-inch, 8-inch, 12-inch tools. And so depending on what remains measuring our margins move a little bit between those tool sizes. And then we do sell some used tools. CTI has been purchasing our used tools fleet since we entered into our agreement. And with those assets pretty low bases in those assets and so we get some nice margin bump when sell. That’s a mix shift that’s pretty much driving that flat cost for revenue for Q4 to Q1. Now if you go to Page 11 you can see where in all this comes right down to EBITDA and you can see the nice improvement that we saw this quarter. I mean we’re really pleased about how EBITDA was up $1.5 million from prior quarter, excuse me, same quarter prior year. And up $900,000 roughly, $850,000 for Q4, virtually a breakeven level at Q4 to a 27% of revenue level. That’s where all the things that we talk about it is really beginning to show fruit is that that EBITDA relative percentage. And then from a cash flow basis we continue to move toward that cash flow positive in the second half of this year. The other thing I like to point out is that when you look at our third quarter revenue and that Contract Services number on the previous slide not only were we strong with our Baker Hughes refurbished business, we also saw a nice increase in the demand for our products that we manufacture in our manufacturing plant. What we call third-party sales. Those sales were very nice and we get very nice leverage when we have those kinds of orders come through our plant. No additional people, no additional machining time and so it’s a real good operating leverage there and we see that third-party work. So we had a nice third-party level in Q1 as well that helped that operating leveraging improvement. And let’s go to the next page and look at the balance sheet, Page 12. And you see cash drop from $2.2 million to $1 million and that’s primarily just the timing of some collections. We had some deferred collections from some of our customers at March 31, but we had a very strong first week of April collections. And so it just happened to be the timing a couple weeks timing between the time that we collected our receivables versus when we were hoping to collect by the end of March. So that led as you see in our segment of cash flows, you see a large $1.6 million use of cash from operating perspective. But once again we had a real strong first week of April collections. And then last couple of bullet points I think everyone is pretty familiar with the sales that we had in the quarter of non-core assets thanks Superior Auto Body where you consummate that sale and that allowed us to pay down debt at $2.5 million dollars paid down. And so when you look at the chart at the bottom left hand side between from December 31, 2015 to March 31, 2017 we’ve managed to take $6 million of debt out of business. So we’re really proud of that, that we managed to get that debt low down. Let’s go to Page 13, look at our guidance now. Revenue guidance $12.0 million to $13.0 million. As you may recall, we guided last time last March $11 million to $13 million. So with the confidence that our Q1 results gives us where we’re confident to tighten up that guidance. So instead of $11 million to $13 million we retain it $12 million to $13 million. And so from a operating margin perspective you may recall the guidance there was 2% to 5% and with the strong operating leverage that we saw in Q1 gives us the confidence to tighten – not tighten it but increase that expectation up to 9% to 11% operating margin. So that’s going from 2% to 5% to 9% to 11%. And once again it’s a strong first quarter that gives us the confidence to kind of guide at these kind of levels now. One thing to note as I did mention, we had a lot of a non-contracted bit refurbishment work in Q1. We see the Baker Hughes is building up their capacity. And so as we go forward, we decided to kind of look at them a little more conservatively and just kind of look out and say when we might see some softness. And so we try to keep this guidance so no conservatives but we’re trying to forecast there. And that’s the reason for some of our conservatism as we’re just not quite sure of how that’s going up that’s going to work out as far as us continuing to get this out of market out of contract area of work. So depreciation $1.3 million to $1.4 million. Interest expense just under $100 million and then as I mentioned earlier, CapEx for the year and that includes $130 million that we spent in the first quarter of the year of $350,000 of CapEx. So once again we really like the go-to-market strategy that we have, developed DTI and we can see that in lower CapEx, as well as at least strong revenue numbers. So with that I’ll turn it back over to Troy to talk about little more detail about some opportunities.

[Troy Meier:]

Thanks Chris. So opportunities, looking forward throughout this year we’re very, very focused on the channel partners the partnership program that we have. We like the way it feels. And we have another tool that we need to plug in to the right channel partner in the coiled tubing Strider and we’re talking to some very high-end potential partners that we’re – what they were very pleased with those negotiations so far. We’re also know that we’ve got to get that Open Hole Strider out and again get that into the hands of the proper channel partner. So you’ll hear is talk more and more about channel partnerships as we go forward throughout this year because again that’s what we like. What this does for our company, we like to build the focus on the engineering, design manufacturing and fleet maintenance that we do very well. So our opportunities are going live within us putting good, solid technology innovation into the hands of good, solid channel partners. So that being said I’d like to open it up to certain questions and answers.

[Operator:]

Thank you. At this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Jason Wangler from Wunderlich Securities. Please go ahead.

[Jason Wangler:]

Good morning guys.

[Troy Meier:]

Good morning.

[Chris Cashion:]

Good morning Jason.

[Jason Wangler:]

Wanted to just ask you Chris you mentioned on the guidance and tightening the range, but have some of the pretty good first quarter you did talk a little bit about some additional work that came in outside of kind of the core business. But are you kind of telling us that things should be kind of flattish as we look forward? Or I mean are there still some growth initiatives that you’re seeing kind of just being little more conservative as your look at the market?

[Chris Cashion:]

Yes we’re just being conservative Jason. We still see good opportunities to grow but in this marketplace you know that it’s kind of a [indiscernible] market sometimes. And so we’re just trying to be conservative.

[Deborah Pawlowski:]

You could also mention Chris that we haven’t in any of the new tools we haven’t really built those into our expectations.

[Chris Cashion:]

Yes coiled tubing Strider we got that out there, it’s commercial. We are talking to some channel partners around getting that out into the marketplace. Troy mentioned some very positive discussions with that. We’ve not put any of that into our forecast for the rest of the year. And those are some very real opportunities. So it’s just a matter of being conservative.

[Jason Wangler:]

Okay. That’s certainly a favor. And maybe just kind of around that as your the market certainly seemed like it did very well in the first quarter for most folks and obviously really well for you all. Now we’re middle of May, and oil has kind of come back a bit. It doesn’t seem like we’ve seen anything change big in the rig count or anything? But have you seen your customers or even potential end users, so to speak out there changing the tax at all or any activity levels change. Has it still been pretty consistent to what we’ve seen so far this year?

[Chris Cashion:]

We did this very consistent as far as what we are seeing out the bid. As far as the drilling ream I think Troy will hit on them. It’s more demand for multiple drilling rigs and single wellbore.

[Troy Meier:]

Yes.

[Chris Cashion:]

So I mean what we’re seeing from the operators is it’s very strong.

[Troy Meier:]

Okay. And maybe last one from me just at the end of kind of dovetailing what you just said there Chris.

[Jason Wangler:]

Obviously the Premier is such an active area for the entire industry and you guys have been in a lot of different basins. Are you seeing expecting specifically in certain areas more than others or is it just simply just getting in with customers and then they’re starting to use that just maybe how you’re seeing the acceptance move whether it’s geographically or from a customer base.

[Troy Meier:]

It’s actually from a customer base. We’re seeing our channel partner where they’re putting their resources is where the tools are being run the heaviest. But it’s just now being introduced into other markets. We see acceptance very well there, as well. So it’s just them gearing it up to sell and being able to sell and market then tool.

[Jason Wangler:]

Okay great. I’ll turn it back. Thank you.

[Troy Meier:]

Thanks.

[Operator:]

Our next question is from John Stoltzfus from Oppenheimer. Please go ahead.

[John Stoltzfus:]

Thank you. Well congratulations at spectacular results versus last year. I’m just curious you gave us some projections last year of some estimates we’re well ahead of that to the rig count. What would you say your penetration level is because you had initially estimated something like 10% at roughly this time in 2017.

[Troy Meier:]

Yes John we’re kind of looking at that. That 10% measurement date is June 30. So that’s mere six weeks away. And we see the DTI on track to achieve that that market penetration right.

[John Stoltzfus:]

Okay. I’m just curious you have your average cost of debt is that little over 7% do I have that right?

[Chris Cashion:]

That’s quite right, yes.

[John Stoltzfus:]

Is there a chance you getting some nice results so they continue have you begin to think about possible refinance of some of that?

[Chris Cashion:]

Not only that but also working capital on. We are definitely thinking about that. We feel like that we probably need another quarter of kind of results like this to be able to get in front of some finance institutions and do some of those things. So coming off a last second half of last year that was a nice step up and a nice kind of a baseline and we’ve taken another step this quarter so we feel like we need to probably have a year’s worth of trailing numbers that are good, strong growth to our EBITDA. So but yes we’re definitely thinking about that.

[John Stoltzfus:]

Do you have any estimate as to what level working capital you want to have in place?

[Chris Cashion:]

We really haven’t put a lot of thought into. To be quite honest we really haven’t got in front of folks yet. We’re going to be gearing up to that over the next months or two in anticipating that that will be about the right timing.

[John Stoltzfus:]

Okay. And I’m just curious with your implementation of DPM program, it sounds like you’ve raised your internal capacity.

[Chris Cashion:]

We have.

[John Stoltzfus:]

So last time about a year ago may be not quite a year ago we talked about handling the demand. And you said you had outside sources if you needed them. I’m just curious how does pick up give me some color.

[Chris Cashion:]

It’s really interesting because we identified some outside sources and worked with them to be able to machine some of these parts that we machined, such as the Drill-N-Ream. And at the same time we were going down that path and got them qualified we finalized some of the DPM process in house and so we were really able to meet this demand and not have to utilize the outside source that we thought we might need to. So this has helped us out a bunch. So we’re still keeping everything in-house. We still have plenty of capacity. Our team is doing a great job.

[John Stoltzfus:]

So how far can you – is there any way to estimate cost of goods going forward assuming you have to make excess capacity that’s currently factored into the current cost of goods, but going forward you’re likely to keep that number somewhat flattish as revenue builds. Do you know when you’ll likely have a sense of what point you have to add additional capacity to capital spending?

[Chris Cashion:]

We really don’t get it won’t be this year we’re confident about that that’s why we guided CapEx to be such a low number. I would guess – and hey John this is just kind of a guess probably mid-2018, may be late 2018, something like that.

[John Stoltzfus:]

Okay. You have quite a runway then? Nicely done. Thank you.

[Chris Cashion:]

Thank you.

[Troy Meier:]

Thank you.

[Operator:]

Our next question is from Jack Fraser from Seamark Capital. Please go ahead.

[Jack Fraser:]

Good afternoon everybody.

[Chris Cashion:]

Hi Jack.

[Troy Meier:]

Hi Jack.

[Jack Fraser:]

I wanted to start with when I listened to you describe your business in both pockets and then the outside business obviously running quite strong. And I look at your guidance range it feels like you’re trying to bring up the bottom end of the range and it makes me wonder if given the acceleration of we’re saying that we still haven’t really incorporated coiled tubing Strider in place. And we’re still seeing early stage adoption of Drill N Ream. Am I wrong to think that the range might well also be followed as between $12 million and $14 million for the year?

[Troy Meier:]

That’s – I don’t have answer that exactly that Jack which...

[Deborah Pawlowski:]

Well. I think you could reemphasize that. He’s correct. We didn’t –we don’t have their coiled tubing Strider in there, is the open-hole Strider. And we have stated that we are being conservative.

[Jack Fraser:]

Maybe a related question on this and also that ties back to this is – we just in response to one question, we just talked about the 10% rate of penetration Drill N Ream tool, sometime middle of this year. I’m wondering Troy, based on what you’re hearing from DTI and the rest of your team. What is your current sense of where that penetration rate is going to eventually migrate to over time? And am I right and thinking that as we long as we live in this neighborhood of $45 to $55 oil that we’re sort of and an ongoing sweet spot for continued industry adoption of the tool set.

[Troy Meier:]

Jack, what we’re seeing is as more and more operators use this tool. And see the benefits of the tool I believe like I did years ago. This tool should be on every rig in the marketplace. It works extremely well. And I could tell people, if it doesn’t do anything for you, we won’t charge you for the nine feet of drill pipe that we just added to your drill stream. It works so well and it’s just it falls into a tool bracket called reamer tools, which is so much more than just a reamer tool. That reamer tools have this, that’s category where they’ve been around a while and people look at them and sort of break that and to get people understand this. This is got a lot of innovation behind it. This is so much more than a reamer tool. They’re now seeing that. We’re seeing 12 in a quarter runs. We’re seeing that 8.5 runs. We’re seeing 16 runs. And its – you do, you never have a customer saying that didn’t do anything for me. They say okay, all right. And the adoption this tool is strong. And so I don’t know where ends up, but I truly believe that there is not a well being drilled out. There they cannot benefit from a Drill N Ream tool.

[Jack Fraser:]

So Troy, listening to you, it sounds like I mean you wouldn’t dissuade me from thinking that down the road looking how past this year obviously in the next year that migrating towards a 20% adoption rate is not an unreasonable part.

[Troy Meier:]

No. It isn’t. And that’s what we – in our model I think we go from –

[Chris Cashion:]

Yes, yes. At the end of next year, the contraction of the DTI is 17.5% adoption rate gettable.

[Jack Fraser:]

Sure,

[Chris Cashion:]

So, yes, your numbers in the ballpark.

[Jack Fraser:]

Okay, super. And it’s still too early to tell and I appreciate Chris that you’re trying to be conservative with people, but when we think through you’re well negotiations on the coiled tubing Strider. When we think through how we should at least just framework that in our heads, is that something that we should realize probably does hit the top line in terms of revenues some time in 2017 and then accelerates into 2018?

[Chris Cashion:]

Jack, I would say that’s – as you are thinking about that make it early 2018, hits the top line. We are in discussions. We’ve got a ways to go. People that we’re talking with are not small players in this industry, the large players and going from a – yes, we’re instead that’s get the technical people talking to a commercial agreements where that can take some time. So that’s why we kind of hesitant to really start [indiscernible] lot of revenue in this year.

[Jack Fraser:]

Yes, understood, okay. I appreciate that conservatism. And just lastly Chris you mentioned that and I completely understand why you’re envisioning a good timing for engagement with financial institutions, on financing alternative to be in the near future, but not right now. But as you have begin your preliminary work and sort of dealing out the opportunity there. Do you have an instinct yet as to the kind of interest, expense, savings you could be getting access to?

[Chris Cashion:]

At this point in time, which is one of the reason we’re delaying the discussions. I would think that we got somewhat 7% is our kind of our weighted cost of debt capital. I don’t think we would see much savings of that number. I think if we would try to go to market now, once we’ve got a stronger financial position under us, 7% is not bad, so it’s not like we’re double-digit interest cost capital of debt.

[Jack Fraser:]

Sure.

[Chris Cashion:]

So yes, I make a couple of points. Once we do get our final balance sheet kind of where it needs to be and we would to be able to kind of get a little bit below that 7%.

[Jack Fraser:]

So but if just thinking of forward, if it were the case then an EBITDA $900,000 to $1 million was happening again and a couple more quarters that would strengthen your hand quite a bit in those discussions I’m guessing.

[Chris Cashion:]

Absolutely.

[Jack Fraser:]

Yes, of course. Guys, congratulations. I really appreciate that the answers to questions.

[Troy Meier:]

You bet, Jack.

[Chris Cashion:]

Thanks, Jack.

[Deborah Pawlowski:]

Thanks, Jack.

[Operator:]

Our next question is from Joseph Reagor from Roth Capital Partners. Please go ahead.

[Joseph Reagor:]

Good morning, guys, and thanks for taking the questions.

[Troy Meier:]

Hi, Joe.

[Chris Cashion:]

Hi, Joe.

[Joseph Reagor:]

If couple for Chris to start out, I guess the first thing being on the guidance, the operating margin after Q4 report you guys guided operating margin including amortization of 3% to 5% and now the new one is operating margin excluding amortization 9% to 11%. By knock off the $2.4 million of amortization and I use the midpoint of your guidance, cost $12.5 million, it looks like on an operating margin basis instead of it being 3% to 5% it was – it would be more or like negative to even or am I missing something on the map there and if that is the case what was the delta?

[Chris Cashion:]

Yes, yes. The operating margin…

[Deborah Pawlowski:]

We’ve…

[Chris Cashion:]

Go ahead Deb.

[Deborah Pawlowski:]

I was going to say we missed something in that we didn’t say excluding amortization, when we report it before.

[Joseph Reagor:]

Okay. So the old operating margin 3% to 5% was also excluding amortization, so let’s gotten better.

[Deborah Pawlowski:]

Correct.

[Joseph Reagor:]

We should look at operating margin on an excluding amortization basis.

[Deborah Pawlowski:]

Correct.

[Joseph Reagor:]

Okay. And then on the G&A line, the $1.5 million I think the expectation, which could put down a little bit. Is that of product of having that to bring in a few more people as the market is ramped up?

[Chris Cashion:]

We’ve got some, we’ve got a little bit of volume, not a lot, but yes. And so yes, that’s more of function, that that’s more we’re kind of thinking that. We’re probably not going to make a lot of decreases or cuts in that going forward, that probably where we are right now as, so we’ve made a management investment at folks in Q1.

[Joseph Reagor:]

Okay. Then thinking about rig count and your guidance, do you guys have a rig count estimate as part of your basis for your guidance that you’re using and if so can you tell us what that number is for North America let say?

[Chris Cashion:]

We do forecast the rig counts. We typically have been – no hopes for that. So Deb is coming to…

[Deborah Pawlowski:]

Hey, if you given the range…

[Chris Cashion:]

…respond to that, we see for the year calendar year 2017 an average of 840.

[Joseph Reagor:]

Okay.

[Chris Cashion:]

That’s just the U.S. rig count, little less precise on Canada. Canada is kind of a tricky when it really crashes during the spring time and plans out the summer and it climbs at the fall, but the big driver is the U.S. rig count. And so our numbers in Q1 average of 738 rigs in U.S. rigs in Q1 2017. And then I think Baker Hughes about 877 was the end of last week count. So as we look at the averages, we don’t really forecast much of an increase at all from kind of where we are on an absolute basis. Kind of almost 5 months into the year at about 870, 877 and then kind of flat land out a little bit in kind of wind up in the year annual average 840.

[Joseph Reagor:]

Okay.

[Chris Cashion:]

So in our modelling – we don’t think the rigs are going to continue to go up like has been gone out.

[Joseph Reagor:]

Right, yes, but pointing is there some conservative that’s built in there. Given you’re assuming a number lower than the average so far. But that’s good. And then one final thing, if we – somebody already tried to touch on it, but what is your level of confidence on the DTI is going to make the 10% minimum for June and in the unlikely event that they don’t? Can you walk us through what would happen after the fact?

[Chris Cashion:]

Well. We believe their well one the way to hit it. We believe that they’ll hit it. And when we meet with them the end of June and look at that metrics, there’s some options there, that we have it, if they don’t hit it. But we believe they’re very close. And so I mean if you don’t hit it, there’s a exclusivity pause there that you do no longer have exclusivity. We can open that up to other people. But right now, we think they’re going to hit it. Our relationship with them is good and we love working with them and we’re doing all we can to help them hit it.

[Joseph Reagor:]

Okay. If they didn’t hit it, they have the right to access the deal or is it only an option on your end if you don’t – if they don’t make that number?

[Chris Cashion:]

If we were to takeaway exclusivity, they could exit the deal.

[Joseph Reagor:]

Okay. All right, that’s helpful. I’ll turn it over.

[Operator:]

[Operator Instructions] Our next question comes from John Bair from Ascend Wealth Advisors. Please go ahead.

[John Bair:]

Thanks for taking my call. You’d stated earlier that you saw a number – a bunch of bit refurbishment business coming from, not sure if you characterized it is nontraditional markets, but mostly in West Coast and Alaska. Is that one in the same reference to increase third-party order, but…?

[Chris Cashion:]

No, I think what we referenced there is the fact that we have a contracted area John, that goes – that is talks about our contracted area is the Rocky Mountains, Alaska and California. The work that we’re seeing outside of that contracted area is the overflow from our non contracted area. And it’s not in the third party, no.

[John Bair:]

Okay, so I had kind of reversed that, okay. It – and is that – do you see that as something that’s currently in its core those trends, that activity is continuing.

[Chris Cashion:]

It has so far, but we expect it to soften some as Baker Hughes efficiencies gain there. They’re like us. You don’t know where this rig counts going and so you’re little hasn’t, since the higher and meet that demand that it takes. But they are becoming more efficient and able to do more of that work outside of our contracted area. So the overflow could slow down.

[John Bair:]

Okay, and with regards to your geographical footprint, the different basins and so forth within the U.S. Could you – I don’t know that you’ve ever stated, but is there kind of a ballpark idea of where your concentration is that, no words say, West Texas Permian versus Utica versus Rocky Mountains.

[Troy Meier:]

Yes. In this industry we always go where the rigs are. So we traditionally we came from the Rockies and jumped into Texas and we’re moving throughout Texas quite rapidly, and it’s other basins start to awake. We find a more receptive to new technology and want to talk to us. So yes, it’s expanding. But you can pretty much look at where the rig count is and identify the areas that are – where the tools being utilize the most.

[John Bair:]

Good. Kind of where I was going with that is leading into – whether the tools being used more in some of the more geologically complex basin areas. So – starting to be picked up there, but there was one operator in a recent conference call, the E&P company that had stated they set a record for fastest drilling time for one of their wells in the Appalachian area. So they’re looking to improve on that or other operators are whether that might be a draw figure for your tools.

[Troy Meier:]

It could have been that our tool was already part of that. We hear that quite often.

[John Bair:]

I hope it was.

[Troy Meier:]

So, yes, the way to look at it is, if they’re drilling a hole they’ve got a bit on the end of the drill string. And chances are it’s probably a PDC bit. I would say probably a 95% chance, 94% chance, it’s a PDC. Once you get past surface. So if it’s – if the hole has been drilled in PDC and it Drill N Ream can help them out. And so that’s typically a good way to look at it. There’s not one formation that accepts the tool better in the other. It’s going to help you out if you’re drilling a hole.

[John Bair:]

Okay. And then last question kind of a two pronged one here. Is your DTI agreement exclusive to sales in North America or does that cover a global reach?

[Troy Meier:]

North America.

[John Bair:]

Okay. And then the follow-up to that then is what are you seeing as far as international interest in the product or actually even sales in some of the areas particularly in South America, where you have some interesting exploration efforts going on similar to the shale exploration up here in the U.S.

[Troy Meier:]

We have a lot of inquiries and we know that we don’t have the infrastructure to personally, our company to take the sales efforts abroad. So we were tapping in and working with channel partners and we’re interviewing channel partners, we’re in discussion with channel partners as we look at introduction of our tools on an international basis.

[John Bair:]

Most of those operators are pretty large multinational pipe. So that no other that might make it a little easier or not, but – ok, very good. Thank you for taking my questions.

[Chris Cashion:]

Thank you.

[Operator:]

Thank you. This concludes the question-and-answer session. And I’d like to turn floor back over to management for any closing comments.

[Troy Meier:]

I’d like to thank everyone for joining us today. And [indiscernible] Boston area next week, we’re going to be presenting at the IDEAS Conference next Thursday, 18. So if you’re around welcome to come over and listen to our presentation. And we’re looking forward to next earning call in August. And appreciate you all joining us and look forward talking to you again.

[Operator:]

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