Superior Drilling Products, Inc.
Q2 2017 Earnings Call Transcript

Published: 11 Aug 2017

[Operator:]

Greetings and welcome to the Superior Drilling Products, Inc. Second Quarter 2017 Financial Results Conference Call. [Operator Instructions]. It is now my pleasure to introduce your host Ms. Deborah Pawlowski, Investor Relations. Thank you Ms. Pawlowski. You may begin.

[Deborah Pawlowski:]

Thank you, Michele, and hello everyone. We certainly appreciate you’re joining us here today and your interest in Superior Drilling Products. On the conference call with me 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 and you should also have the slides that will accompany our conversation today. You can access both on our website at www.sdpi.com. If you're 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 also want to 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 the earnings release as well as in the slide deck. So with that, let me turn it over to Troy to begin. Troy?

[Troy Meier:]

Thanks, Deb. Thanks everybody for joining us today for our second quarter 2017 highlight. As you're all aware just over a year ago we changed our business model and we changed our go to market strategy and one of the things that you'll start to see with today's presentation and future presentations is going to be how that business model is now starting to grow legs and how it’s starting to perform. So we talked about being able to demonstrate leverage gained in higher volumes and that’s what you're going to see as Chris goes through the numbers with you today you'll start to see what that means to this company as we get higher volumes and not just the tools that we're getting to market but also are our contracted service channel partners as well. We're pleased to announce that our channel partner for North America achieved their 10% goal in June and we believe they're well on their way to achieve their 12% goal that is set for them in December. So we're very pleased in their class organization, they're doing a wonderful job. You're going to see how the volumes affect our operating income and our margins as we go through the financial part of the presentation today. The DNR like we’ve told you for a couple years it's a tool that deserves to be on every rig, it's now finding homes throughout all the major basins in the U.S., market saturation is starting to happen. We're very optimistic about what the future for that tool is here in North America and we're working very closely with our channel partners on that tool to make sure we support them every way we can. So we're very excited about what's happening with that tool. The operators as they use that tool for the first time it's a tough sell to try to get these operators to want to spend money more money on a tool such as Drill-N-Ream but once they use it they realize the benefits that this tool gives them and we've got a list of 10 strong KPIs that they now look at that this tool helps them with. So we're very pleased with what we're seeing on that tool. In regard to our contracted services, you know the drilling rig increase was a plus obviously you know the more rigs, the more bit being used, you're all aware of our partner there in our contracted services they have very strong relationships in bit world with these E&P companies and we'll talk a little bit at the end of this presentation after Chris is done about the opportunities we can have with them as we grow that business as well. Then at our opportunities when we get to that slide we'll talk about the opportunities we have in the open-hole Strider. We'll talk about where we are and that advancement and testing of that tool and also where we are at with the Coiled Tubing Strider. So with that I'm going to turn it over to Chris to go over the numbers.

[Christopher Cashion:]

Okay. Thank you, Troy. Let's continue our review by looking at slide number six and on that slide you can see that our revenue year-over-year is -- we got some phenomenal growth. You can look at 2Q 2017 versus the same period prior year and almost a four-fold increase in our revenue. Now the rig count did improve, the rig count was up double, a 118% but you can see that our revenue significantly increased the increase in the market and you can also see that that's true across all of our product lines and so we're really pleased about how our revenues have grown over this last year. You can see good steady progression and as Troy mentioned we attribute that to the business model that we're now in and also a lot of volume increase from our bit refurb business from that channel partner getting volumes of bits out of areas that are not our contracted areas and so we sense some good increases there and then in our what we call our custom manufacturing third party manufacturing that's up significantly. So we're really pleased about how all businesses are up year over year and a nice strong steady upper-trend. So let's go to page seven and look at what we call tool revenue product line a little bit, that's the Drill-n-Ream and on page seven you see the growth there in the bottom of that chart, tool sales are steady at $1.5 million to $1.7 million per quarter and that's a channel partner that Troy mentioned has achieved our market share goal as of June 30th and well on their way to achieve their year-end goal and so as they continue to build out their fleet and purchase tools we continue to get good strong revenue from that and then the other related revenue on this chart really excites us on how that growth rate is materializing, that's that the royalty and the maintenance revenue streams that we get from this channel partner as they built that fleet of tools and penetrate the marketplace and you can see that's going for practically nothing in 2Q 2016 to almost $900,000 in the current quarter, so some dramatic increase there and that's once again that's attributed to the new business model that we entered into roughly a year ago and you're going to see when we get to our margins that these kind of volumes drive strong operating leverage for our company. So let's go page eight, and start looking at looking at expenses. SG&A, first thing to note there is -- just look at 2Q 2016 $4 million of operating expenses. We just got through set of $1.1 million revenue line and then look at Q2 third quarter down $400,000 with revenue has almost quadrupled. We are now in positive black operating margin territory. So as Troy continues to drive the top line, negotiating these channel partners and working with these channel partners we're keeping an eye on the operating expenses and making sure those don't get out of line and we keep those contained. So once again just want to emphasize we now have operating profit of black operating profits of $400,000 in the current quarter and a bottom line net income of $300,000. So in Q2 this year we have had a positive net income black bottom line first time for the company since we IPO-ed we're really excited about where we are and where we're going. Now let's look at page nine, talking about the operating leverage that we're getting off this higher volume. We feel this chart lays it out beautifully, $1.5 million of adjusted EBITDA in the current quarter, that is a 64% increase over a very good Q1 at 27% EBITDA in Q1 we managed to beat that and exceed that at 37% EBITDA in Q2, $1.5 million of EBITDA that is a 100% EBITDA change to revenue change up $600,000 quarter to quarter Q1 to Q2 and revenue EBITDA up $600,000. We generate a $0.5 million in operating cash in Q2. As you may remember in Q1 we were negative $800,000 so year-to-date we're negative $300,000 but strong improvement because of that operating leverage and we also achieved net cash flow positive of $200,000 in the quarter. We had previously signalled that we thought we'd breakeven on a net cash flow perspective in Q2 we beat that, $200,000 positive net cash flow in Q2, 2017. Now let's take a look at the balance sheet page 10, really pleased with the way that cash bumped back up from -- about $1 million to $1.1 million was our ending cash balance in March. As I said we were positive cash flow a couple $100,000 we turned the quarter, we're starting to build cash now. We expect to continue to do that through the second half of this year. As you see our debt levels are coming down $2.9 million or 17% decrease since the end of last year, 12/31/16, debt service very, very manageable $450,000 per quarter principal and interest, that breaks down roughly half of its principal, half of its interest, very, very manageable and then our Hard Rock principal payments as I think most everyone know that we began paying off the principal with Hard Rock the January of 2018, $0.5 million January total of $2 million over the the first half of next year and we're well on our way to being able to meet those debt payments. So we're really pleased with how the balance sheet is shaping up. Now let's go to page 11 where we look at calendar year 2000 versus trailing 12 months 2017. This is pretty much the same story, revenues up, operating expenses down, EBITDA significantly improved, it’s the same story. We have got strong operating leverage and we're starting to show that and once again as Troy mentioned that’s the result of the business model that we're now entering. We did enter a year ago as most of you -- everyone remembers I think that's low CapEx, that’s zero tool distribution expenses sfor us and zero sales expenses. So that's what's attributing to this strong operating leverage performance that we're now seeing, 2.4% operating margin including amortization expense is what you see. Now let's go to page 12 and look at our guidance. Because of the strong performance we had in Q2 we've increased our revenue range for this year. We previously said $12 million to $13 million, we've increased that to $14 million to $16 million. Once again this strong Q2 has given us the confidence to increase that range and you can see when we talk operating margin excluding amortization that range is 16% to 18%, previously we had communicated 9% to 11%. So because of the strong performance in Q2 we're confident that we can increase both our revenue and operating margin expectations for the rest of the year. Once again just want to highlight the fact that we're positive cash flow and we continue to stay that way in second half of this year and we're very, very confident that we will be able to service our debt and we're going to begin looking at getting a working capital and lot of credit in place. We did see some working capital needs to develop in the first half of the year with receivables building and so we're going to begin looking at getting that working capital line in place to as we go forward. So with that I'm going to turn this back over to Troy to talk about additional opportunities that we see.

[Troy Meier:]

Thanks, Chris. So as everybody can see what we need here is volume. We really thrive volume units going through our facility. You look at the Drill-N-Ream the opportunity we have there, we still have a lot of basin saturation to do here in the second half and throughout '18 and '19 and we're going to be working very, very strongly with that channel partner to support them with you know our engineering services that that show offset performance from well to well and show the advantages of using a drilling rig tool. You know that same tool as we look at the international opportunity there you know we're very firm talks with some very quality channel partners as and they would love the opportunity to take that tool out on an international basis. We think that's going to have a huge opportunity going forward. We're very, very excited about that. If you look at contracted services you know you all know that -- the contracts that we have with BHI. We're in the middle of talks right now with them and getting higher volumes into this facility, not just on bid repairs but also into our machine used services where we can take a product, take it from a raw piece of steel and turn out a finished product that goes in to the back of their pickup trucks and they take it out to the field. So we're in those talks and we're excited about the direction those talks are going. If we look at our Strider technology, you know you've heard us talk about this for a while. The Coiled Tubing Strider has had some fantastic field results. We're looking for those channel partners on that particular tool and we're in talks with good quality channel partners. I know our Strider team is negotiations with some particular customers in the Rockies that would love to have that tool and have seen some phenomenal performance with that tool. But what we've done is when we look at this company now and who we are today we have to identify tools that will allow us to achieve the margins that you're all going to come to expect from us. So we have a tool that performs very well and the initial sell the tool that looks really good, the repair on the tool looks is the cost to that, to us on that tool is a little high. So we're working to get those costs down and we've got the team on it and they're doing a great job and when we get those costs down we're going to start hitting the market with that tool with a plan that allows us to make the margins we need to make on both sell and the repair of that tool. The Open-Hole Strider, we're very excited about that you know that tool has kicked our butt in getting that tool out into the marketplace and as you all we introduced that into the Bakken, it ran great. We went to introduce it at [indiscernible]. The Silica Muds [ph] tore our design up we have fixed that issue. Not only hae we fixed it we have identified a incredible high tech material that we're now using on our closer system that takes away that the erosion, the abrasion problems that we've been seeing and we're working with that particular engineering firm to see if we can somehow help lock that up in the oil and gas industry, but its an incredible material. So we're very excited about that. So moving forward you know we look at and say what are our opportunities? Well it's nice to see a good drawdown since March in the oil markets, right, in the oil reserve, in the oil storage. We like this, we like the opportunity of being able to get some time to prove this new model out and going forward we are going to keep building on this. We've—for the first on our company's history we're putting together a treatment plan a five year strategic plan that is a bit strong and we're excited to get that out there and watch this team perform. So that being said I'm going to turn it over to some Q&A.

[Operator:]

[Operator Instructions]. Our first question comes from the line of Joseph Reagor with Roth Capital. Please proceed with your question.

[Joseph Reagor:]

Good morning, guys and congrats on a very strong second quarter.

[Troy Meier:]

Thanks, Joe.

[Joseph Reagor:]

So two questions, I guess the first one on working capital, it looks like back of the envelope math here, working capital is consumed about $2.5 million cash in the first half. What should we expect in the working capital area in the second half not the line of credit but do you think working capital is going to continue to consume cash or if it might be you know an opportunity to actually generate some cash?

[Christopher Cashion:]

There is definitely an opportunity there Joe. We're negotiating with vendors, getting some better terms, we're talking to our customers, getting payments received quicker and we did have a lot of invoicing at the end of Q2, the last half of June so there is a little bit of timing of some receipts and invoicing there but there's definitely some improvement that we can make with our vendors and our customers to improve that working capital picture. So we definitely believe we're going to be able to improve that in the second half and as you just said that's without doing any kind of working capital financing. I mean that's just basic working capital management and just getting better at it and so yes there's opportunities there.

[Joseph Reagor:]

Okay, that's good to hear. It should help the cash on the balance sheet improve a little bfit. Moving over to Coiled Strider, what was its contribution to revenue in the quarter and how should we think about that moving forward?

[Troy Meier:]

If the quarter is very small, really net out for the second half of the year, we're still working with channel partners, we haven't modeled any of those numbers into our forecast.

[Christopher Cashion:]

Yes, what we're doing with that Coiled Tubing Strider that we are renting it to a few small service companies mostly here in the Rockies just continuing to get runs on that tool and continuing to prove its functionality and it's performing very well and so it's minimal revenue at this point. We don't expect this is going to generate a lot of revenue in the second half of the year as we continue. As Troy mentioned we're in a phase now where we're looking at the design of the tool and looking at the economics around the tool, pricing points in the market and we know it performs very well. We've got over 50 runs on that tool and it's doing very well. Now it's a matter of just getting our cost down, our manufacturing cost, our repair costs and that's going to take -- takes a little redesign of the tool but it's not anything with regard to functionality and performance it does the job and so don't count a lot on the revenue from Coiled Tubing Strider in the second half this year. It will start rolling out in the first half of next year.

[Joseph Reagor:]

Okay. Just for clarification which one of your revenue reporting categories do you guys bundle that into?

[Christopher Cashion:]

That will in the tool revenue category.

[Joseph Reagor:]

Okay. All right I will turn it over. Thank you.

[Troy Meier:]

Thank you.

[Christopher Cashion:]

Thank you, Joe.

[Operator:]

[Operator Instructions]. Our next question comes from the line of Jason Wangler with Imperial Capital.

[Troy Meier:]

Hey, Jason.

[Jason Wangler:]

I'm just curious, you talked about it in your prepared remarks about obviously rig count moving up in the first half of this year. As you saw that [Indiscernible] your client base, did you see incremental adds on those rigs for Drill-N-Ream, just maybe give us your thoughts around how you saw, when those rates are going to work for your clients and when those kind of similarly impact the Drill-N-Ream additions as well.

[Troy Meier:]

What we have seen the acceptance to the marketplace was slower than what we anticipated, you know, as we went through the downturn that we've been coming out of nobody wanted to try anything new so now that we've got most of the major operators they're running that tool and most the most the basins run around the U.S. Other people are willing to try it now and to use it and realize the performance that these top performing operators have been seen with this tool. So I don't know how to say if you know this -- how each basin is been saturated, all I know is that what we're seeing they are hitting their market share goals and we're shipping tools to various basins around the U.S. and orders keep coming in.

[Jason Wangler:]

Okay. Chris, maybe for you on the working capital discussion. With your your channel partner is a considerable amount of that accounts receivable [indiscernible] with them or is it more passed on to the end user, just curious how would you think about that.

[Christopher Cashion:]

Yes, its with both the channel partner and the tool revenue side and with our contract services channel partner, BHI, those are the two big customers and yes it’s with the channel it’s not directly interfacing with end users, it’s through the channel.

[Jason Wangler:]

Okay, and are there certain contractual days outstanding or anything with them or is it just more you just kind of making sure just stay on them I guess just to get paid?

[Troy Meier:]

Yes, we -- well with most everybody -- we have got a little work with BHI to get to contract it a little bit better, but generally it’s 30 days and that’s kind of the standard contract terms and generally people stretch well beyond 30, they will push it to 45 to 60 to 65 in this industry and a lot of this is just a matter of staying on top of it and and just be more diligent and reining them and we have had to do that with some and in my experience they respond, it's kind of like, if you know squeaky wheels then they keep on stretching it out but if you kind of get on them they start tightening up. So we can do a much better job in how we manage that, we're going to.

[Jason Wangler:]

And I know [Indiscernible]. I understand. Thanks guys. I will turn it back.

[Troy Meier:]

Thanks, Jason.

[Christopher Cashion:]

Thank you, Jason.

[Operator:]

Thank you. There are no further questions at this time. I would like to turn the call back over to Mr. Meier for closing remarks.

[Troy Meier:]

Well again thanks everyone for joining us. You can see we're looking forward to sitting down and having a conversation with you again and at the end of third quarter and we're very excited about our opportunities with this company and where it's going. So again thank you very much and we appreciate you taking the time and being on this call today.

[Operator:]

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.