Superior Drilling Products, Inc.
Q4 2014 Earnings Call Transcript

Published: 27 Mar 2015

[Operator:]

Greetings and welcome to Superior Drilling Products’ Fourth Quarter and Full Year 2014 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]. And now I’d like to turn the conference over to your host, Ms. Deborah Pawlowski, Investor Relations. Thank you, you may begin.

[Deborah Pawlowski:]

Thank you, Rob, and good day everyone. We certainly appreciate your interest in Superior Drilling Products and for you taking the time to join us. On the call with me I have Troy Meier, our Chairman and CEO; Annette Meier, our President and COO; and Chris Cashion, Chief Financial Officer. Troy and Chris are going to review the results of the fourth quarter and full year of 2014 as well as provide an update on the Company’s progress and activities. You should have a copy of the financial results that were released before the market this morning, and if not, you can access it on our website at www.sdpi.com. There are also slides that are accompanying this teleconference and if you have not received that email the slide as well should be on the website. 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 from what is stated here today on the call. These risks and uncertainties and other factors are provided in earnings release as well as with other documents filed by the Company with Securities & Exchange Commission. These documents can be found on the website as well or at sec.gov. So with that, I’ll turn it over you Troy to begin. Troy?

[Troy Meier:]

Thanks, Deb, and thanks everybody for joining us on this call today. Let’s just get right into our fourth quarter as we’ll be talking about, we had very strong fourth quarter growth. You’ll be able to see that we go on here with the nearly doubled what we did in 2013 and we're up 31%, increase from our trailing third quarter. We see some incredible growth in Drill-N-Ream, our monthly run average, in the customer acceptance of this tool is continuing to be very, very strong. You can see that our monthly average is at 66 runs, it's up 85% from Q3 so we’re sitting at some incredible customer acceptance throughout the fourth quarter. When you look at that you are also going to notice this we’ll talk a little bit about the first quarter as well and you’re going to see the average on this tool in the first quarter we’re going to be right around 60% with the same tool. And you all be well aware that’s due to the slide in rig count. The organic refurbishment and the third party manufacturing services were up 3.4% in fourth quarter of 2013, we did start to see an impact in this business in the fourth quarter as we started to see a slide in the rig count starting in September by year end there was a 5% decrease in the rigs and we did feel that in this section of the business. As we’re talking about the fourth quarter stayed strong with customer acceptance of the drilling rigs tool, we had 17 customers as our average customers throughout the fourth quarter keep in mind that this is -- the actual operators is what we call customers and within those customers there is multiple rigs so we’ll talk a little bit about that as we talk about rig count decline but how we’ve strengthened our position within this customer base. The rigs using the DNR tool if you look at the third quarter was at 35 we increased that to 43. As we’ve diversified into these new basins, we’ve also seen the price per run decrease and that’s mainly due to the length of the lateral. We’ve talked about it before we started up in the Bakken they have the longest laterals that we’re doing right now and as we introduced this tool into other basins and the length of the laterals is shorter this is actually more of the footage based so we don’t charge as much for the tool but what we’ve also found out is that the tool doesn’t get beat up as much so we’re finding that we get more runs on the tool before it has to be repaired which is really good as far as when we start looking at the economics of the tool as we start to get less revenue per run we also are spending less money to service the tool and we’re getting quite a bit more runs out of the tool. So right now we’re very, very pleased with the economics we’re seeing in these other basins. There is pricing pressure we have by the first year our customers have come to us just like they did everybody else every other service company in the industry and essentially demanded a 20% decrease in what we’re charging them. So respectively we have honored that and you will see some of that as we move forward throughout this year. If you look at the first two months of 2015, the average customers, 16 customers in 38 rigs. So if you want to look at that in a little different way we have -- if you look at December and in Q4 as far as customers we had -- we were on 60 of 122 rigs, we look at this and we had a total -- let me go through my notes. We had a 60 rigs that we were running us out of the possibility of 122. Now we actually have our customers’ rig counts have dropped and we’re looking at 69 rigs and of those 69 rigs we're on 35, so when you look at that we’ve actually gained quite a bit of market share within our customer base going from around 42% up to 55%. So we’re not losing customers, that's the point to get across there, we’re not losing any customers, we’re just -- the customers are laying down rigs, but as they lay down rigs they’re keeping us on those rigs and actually giving us some more rigs on top of that. So they’re really starting to see the advantage of our tool. And so, if we look at the growth opportunities that we have, let’s talk a little bit about the solid position that we’ve got with the customer base that we’re very pleased with, we feel that there is a lot of growth opportunity within that base when we talk about the -- looking at 53% and we love to be at 100% and we’re not basing on that going there, but we’re basing not to be quite a bit higher than it is now. We also realized that the things Drill-N-Ream like we’ve always said is this is our gateway tool and this is the tool that’s getting us out there; this is the tool that is transforming us into a rental tool company. And as we really established a solid customer base, now we’re going to start bringing on these complementary tools, so we’ve looked at and we’ve talked about Strider in the past, I'm going to jump a little bit ahead to that. The testing on that in our lab has gone very-very well. We’re very pleased with that what we’re seeing there, it’s not quite ready yet to be introduced to the market place but we feel we're very-very close. So, I am very encouraged with what we’ve got going on there. One of things that we have found out as we’ve gone out as our team have gone out and then getting in front of customers with Drill-N-Ream, there is a lot of customers that are stubborn and setting their ways and when you go out there with something such as Drill-N-Ream where you’re trying to get them to change the way that they’re used to doing things. The first thing they looked at is hey you tool is too expensive and those customers of ours that understand that this tool saving them a lot of money to them that’s not an issue, but it’s getting back out from that customer that tells you your tools are too expensive that we’ve got to give our sales team something else to get out there with. And so we’ve developed what we call a Streamline Reamer that’s going to be introduced here over the next two weeks and this is a value tool, this is more in line to what they’re used to using, but it’s going to get our sales team rather than driving by these rigs because they don’t want to try the Drill-N-Ream yet. We are now going to get out there with the tool that they’re used to using, saying hey here, this is what you’re used to and then we’re going to use that opportunity to up-sell to the Drill-N-Ream. And we think this should be a very positive thing throughout the second quarter. The one of the other things that we’re doing is we’re looking at this rig count as its slides and we’ve said, okay when is it going to come back and how we position ourselves for this market when it turns around and starts to come back up. But what we looked at is we don’t want to wait and just count on the drilling activity picking up. We know there are a lot of wells out there that have been drilled and uncompleted, a lot of wells. And so OrBit now is going to take us into that completion side of the market, so we’ve been in the drilling side, we’ve watched this backside slowdown, completion side is still going on with the drilling, but we’re going to be able to tap into these wells as the price recovers and these customers start bringing on these wells that have been drilled but not completed Drill-N-Ream is going to get us into that where we can start introducing technology such as OrBit -- sorry I said Drill-N-Ream but as the technology of OrBit and also looking at other tools will complement that completion side of things if you look at Strider that tool they use a lot of tools like that that are similar to what Strider does, they call it an extended rigs tool we think we can downsize Strider and compete in that market very, very well. So we’re excited about the completion side of the business we’re currently looking at and getting into. When we purchased OrBit there was some issues with the cutting structure on that product, it’s a carbide button cutting structure that is very brittle but we as we evaluated OrBit we’ve seen that it was an incredible cutting structure so what we see there is true 3D cutting and so we knew that we could take our expertise in machining and in design and design a new cutting structure for this tool using the same mechanical properties. And with that those first parts finished we are going to be testing these parts over the next few weeks in Canada and also Houston instead of having pieces that can break or tear off or actually be pulled out of the pocket. This will be a solid will that will be machined out one piece and we think it’s going to really, really enhance the opportunity of OrBit. That being said we’re also introducing a hardening process and that is going to be very-very unique to the oil and gas industry as we take in machine we still will be able to apply this hardening that will take us still to a hardness of carbide but still maintain the ductility of steel and we think that’s going to be just an incredible option on this OrBit line. So, some of the things we’ve done as we’ve been adapting to market conditions, it was very obviously at the start of the year that we were going to need to reduce headcounts and so as we did our homework and we’ve seen the products, the divisions within our company as we look at the organic we talked about drill bit refurbishment we knew that was going to slow way down so we took the cuts there. If you look at this third party service work that we’ve been doing in our machine facility and we know that’s not where we want to be throughout this year as we transform into a rental tool company so we look at that and we look at just utilizing what we have there and the talent we have there to bring on our Strider line, bring on our OrBit line and then we’ve adjusted the personnel accordingly. So, we’re very cognizant of cost, as Chris will go through here you will find that we’ve moved very rapidly and we haven’t waited around to see where it’s going to go. We had a pretty good idea on where the market is going to be. I’d say that if you look at it, is it going to go at 850 rigs, is it going to go to about 800 rigs, we might say that’s pretty good idea let me back up. We feel it’s going to end up been around 850 rigs but we can’t guarantee, we’re not sure, but we have been through these slowdowns before. So if we talk about being efficient in product and productive the team here has done a very, very good job in there watching cost, increasing efficiencies, I think you’ll all be very pleased with that as we go forward. Just putting the right people in the right place, we’ve looked at our sales team. We’ve brought on another sales position in up almost city that we feel that this gentleman is world class and he’s going to add a lot to our team that’s going out into the field right now. And we’re looking to bring on another city sales position in the Rocky Mountain. So, we’re going to be bringing on more customers. No interruptions to the research and development. We know that this is key to our success going forward. We talked about what we spent last year in the CapEx, we’ve started a wonderful R&D facilities that we’ve got a great testing site there where we’ve got the -- we certainly like the drill string underground, we have the same consistent they have out on the rigs. And we can put tools into a valve that’s all wired we can check and see how these tools react. And what we’re seeing with Strider being the first tool down there is very, very impressive. We end with bringing on a company that’s got a MWD and a downhole motor, a very good one. And we brought them into see the results of our tool and we’re very impressive. With that being said, I am going to turn it over to Chris and he can get into the financials.

[Chris Cashion:]

Thank you, Troy and welcome everyone, glad you can join us. I am going to start on Page 9 of your slide pack. We probably have investments in growth, so the first thing I’d like to do is take a look at our operating expenses, Q4 versus Q3 2014, and then take a look at Q4 2014 versus Q4 2013. The first point to make as we realize a small non-recurring item, less than $100,000, some intercompany charges that we reported in Q4 that the same prior periods, once again small on the clean-up item. The next point that I want to make and this is a big-big point operating expenses were help flat from Q3 to Q4, as you can see with the bar charts there. But big movement between constant revenue in Q3 2014 cost of revenue Q4 2014. As you probably recall, what we pick up in constant revenue are the field infrastructure sales, distribution infrastructure costs, associated with our rental tool business. And so, we continue to expand that throughout Q4 2014. We began that, as many of you know, right after we purchased Hard Rock, May of 2014 that was a big initiative for us in the last half of the year and we make some very good progress in establishing that infrastructure. And that infrastructure is a key investment for us. You heard Troy speak about the new tools that we’re going to be coming up with, that we’re introducing, first-half of this year and we’ll be seeing the revenue ramping in the second half of this year. And so the -- who we are? We are a new product and developments Company, and a rental tool company with a distribution system to get those tools into the marketplace. So, that’s one of the things I want to point out is that while the total operating expenses were flat a big shift in the make up for those expenses, a shift toward investment in field infrastructure and then a shift down in SG&A. And as many of you may recall, in Q3, we had some non-recurring charges, primarily into G&A area, lot of professional fees a lot of getting established and getting set up one-time charges which we did not see again in Q4 and so on. We're very pleased with the progress that we've made in establishing that field infrastructure. The second thing I’d like to point out is just looking at Q4 2014 to Q4 ’13, up dramatically, but that is as a result of a course once we closed the deal, once we began putting cost in place, G&A related costs, to bring this Company to a SEC caliber reporting company. The distribution costs in the field, the sales costs the marketing costs, all those investments were not a part of this Company a year ago and that's one things to kind of keep in mind as we look at quarter last year quarter this year, as we look at year-to-date results, 2014 calendar year 2013 calendar year, keeping in mind that this Company transformed into a different company post the acquisition of Hard Rock. The next page, Page 10, we take a look at EBITDA. As you saw on the press release for the quarter, we reported that about $150,000 GAAP loss. It's very important, as we said before as we think about this business, we think about cash flow. And so we think about taking that GAAP number and adjusting it to EBITDA, non-GAAP EBITDA. And we’ve got a table in the back of the slide deck, which shows you the details of how -- of the numbers that we adjust-in, predominately it's depreciation and amortization that’s a big number that we add back $1.1 million, and of course interest expense of $0.5 million. And then we did have a gain on the distribution of excess facility for us in Q4. And that gain we back out in getting to that adjusted EBITDA. So, $1.3 million in Q4, a little over 20% EBITDA to revenue. And as you saw earlier, the revenue increased slightly from $5.8 million in Q3 2014 to $6.1 million in Q4 with EBITDA staying flat at the $1.3 million level. So we round-up second half of the year with the EBITDA as a percent of revenue, north slightly up 20% and that’s after the significant investments that we put in place, as we just talked about, in field distribution sales, in marketing and in G&A and in the sales and marketing area. We're still generating 20% EBITDA. Adjusted net income, as you see that slightly positive and we've got another chart in the back that shows how we go from GAAP net income, and we’ll make some adjustments to get to that adjusted net income number. Next page, Page 11, look at the full year results. We did $20 million as a Company for calendar 2014. And once again, the first half of that year roughly it was a very different company. It’s Superior Drilling Products a bit refurbishments company and a third-party manufacturing sales company. And without the infrastructure for rental tool business and without the SG&A investments, that company did roughly 42% in EBITDA for 2013. 2014, we did the same amount of EBITDA with a lower EBITDA to revenue percentage, 10 points, and that’s once again what’s driving, that is what we just spoke about previously. That’s the investments we’re making for the future in this business. So for 2014, if you look at the first half of the year, it's going to be 30% -- 37% per quarter EBITDA as a percent of revenue that’s the previous business. The solely the bit refurbishment, what we call the organic business. And then the last half of the year, we just saw those numbers 20% to 22% EBITDA, giving a year of about 33.2% EBITD. You can see from a revenue perspective how the impact that the acquisition has for us, Drill N Ream $6 million of revenue at that $20 million total for the year. And then adjusted net income once again it's down from '13 to '14, but once again it's the same cause, the same reason, the investments we put in place in '14 for the growth that we’ll be seeing in '15 and beyond. The next page is to take a look at the balance sheet. And while we’re talking about the balance sheet, we want to talk about liquidity. That’s the name of the game these days in this marketplace is liquidity. We’ve got a fantastic business that’s poised to grow. But as we all know, the rig count has dropped precipitously. And none of us here, and don’t think anyone really has a crystal ball that where thing is going to land. So for us, it’s all about managing cash. So let’s take a look at the debt levels that we have. Currently, we’ve got roughly $24 million in debt at the December 31, 2014. And as you recall, that’s roughly half of that is from our Hard Rock acquisition. We paid 50% of purchase price upfront in cash without deal proceeds and the other 50%. The seller gave us a three year selling note. So half of that debt is for the purchase of Hard Rock the other half is in mortgages on the facility here in Vernal, Utah, and on the machining tools and machining centers, that we’ve talked about before that’s in our R&D facility. CapEx for 2014 was $3.5 million and it was back end loaded in Q4, $2.6 million up, that was in Q4 and $1.5 million of that was the sixth of the our machining centers that we purchased in Q4, that was a stated goal stated objective, as we talked about in the road show. We’ve got that done. As part of the machining the research and engineering facility that we’ve built in the last half of the year and that is another of our key investments, key developments in the last half of the year. Now two big areas, the rental tool field distribution and the investments we’ve made there and in the investments we’ve made in the research and development. Those investments in research and development, is what allows us to now develop the products that Troy spoke about. The rapid innovation, that’s who we’re that’s what we do. And we put those investments in place in the last half of 2014 to be able to do that. So $1.5 million of the $2.6 million in Q4 was for that machining center. The remaining amount was for tools, Drill N Ream tools. Those rental tools that we put in place that fleet that we now have in place. As you’ve seen for 2015 CapEx is going to be a third of what it was in 2014. We do not need any more road plan, we do not need any more machining centers, we need tools and we need tools for the second half of the year. The first half of the year is down. It is a reflection of the downturn in rig count, that’s the organic business. And so the first half of the year, we’ll need a couple of $100,000 in CapEx. As we say here, 80% to 85% of the total 800,000 for the year is going to be in the second half of the year. And that money, that capital, is going into the Strider and into the OrBit. So, the new product is what’s going to be taking the capital last half of the year. So, from a liquidity perspective, CapEx is minimal for the first half of the year. We’re in very good shape, from a CapEx perspective. We have about to close. We’ve been approved by our lender to refinance our corporate headquarters and manufacturing facilities here in Vernal, that’s a $5 million loan that was due August of this year. We’ve been approved. We’ll be closing that deal in the next couple of weeks. So, we’ve got that restructured and refinanced. And that’s half of what you will see as short-term debt due in 2015. And then we’ve got other options that we’re looking at with our indebtedness, restructuring, renegotiating some things. So, the result of all this, we will still continue to be when we go over into our outlook on the next page. Let’s go ahead and slip to next page, Page 13, and we look at the market outlook. As we said a few minutes ago that with the volatility in the market, the uncertainties of the market, we can make some assumptions on what we think, rig count may go down too but we don’t know. And our visibility is very limited. It’s very difficult to really look out in this market place beyond a month or two. And so, what we are doing, we’re closely monitoring the changes in this market. Troy had mentioned a few minutes ago, we’ve done some right-sizing in the first couple of months of this year. We’ll continue to look at that. We’ll continue to right-size, as necessary. Everything we do is about cash flow. It’s about making sure that we stay positive cash flow. And that’s how we are going to survive in this market place and that’s what we’re doing. We’re watching the costs. We are making whatever reductions that need to be made and we’re talking to our lenders and renegotiating indebtedness. And so the results of that would be that we will have the liquidity to get to this downturn. When we look at this year, given the fuzziness of our visibility, we’re not going to give a whole lot of hard guidance numbers. We’re going to talk in terms of -- like the second bullet point. Our organic business or our debt refurbishment and third-party manufacturing services business, is expected to be down in 2015 between 50% and 60%. And that’s kind of where we think the rig count is going to go. We think the rig count is going to go into the 800 to 900 range. It’s about 1,050 per Baker Hughes a week ago today. Our crystal ball said. It’s going to go down some more. I mean the rate that’s been dropping over the last -- well, since January 1. Then show a whole lot of -- rate keeps about the same slope of the curve. So, who knows where it’s going to stop. The way for our planning purposes, we’re looking at the third-party manufacturing basis with debt refurbishment basis being down and that’s what we’re expecting. Where our goal, our goal is to replace that fall off in that organic business with the new products that Troy talked about, that’s what we’re going to do. And the first half of this year is getting those price introduced, second half of the year, that’s where we’ll accelerate the revenue of those new province. So, when you think about our year, first half is going to be slow. It’s going to look a whole lot like the downturn that we’re seeing in the organic business. Drill N Ream will continue to grow in this market with Drill N Ream it’ll be a slower growth and we’re going to do the things that Troy talked about. We’ve got a -- we are coming out with our streamline reamer and help us open some doors. We’ve got some strategies to get on those rigs and ones that are left working. And we’ll continue to grow Drill N Ream but it won’t be at the same kind of growth rate that we saw before this market turned down. So, our revenue expectations, heavily weighted to the second half of the year. And that’s going to be driven by achieving the goal we have in new product development and shifting that mix from organic business to the new product business. And achieving those goals, we should reach that 20% EBITDA margin for the year. So, we have a goal. We have a plan to EBITDA to be 20% for the year. And that’s what we’ve been running and that’s our goal, our expectation. So our goal for 2015 is to achieve revenue similar to 2014 and the EBITDA to be also similar to 2014. With that, I am going to turn it back over to Troy to talk about the market outlook.

[Troy Meier:]

So if we look at the market and our next priorities for growth, we’re talking about -- we feel the market is going to be dropping 50 plus percent. The first and foremost thing that we’ve got to do is we’ve got to be very careful with our spending and we understand that very well. But on top of that, we’re going to leverage the strong benefits that the Drill N Ream has provided us and the strong customer base that we have. So, as we look at that, we’re going to start introducing these new tools, this is technology, the Strider the streamline reamer. The OrBit, even though it’s going to essentially the same customer, that’s a totally different part of that company. Like we were talking we have the drilling and the completion. So, as we look for our growth in ’15, like Chris said, it’s going to be these new tools that come on. Companies are familiar but the faces within the companies on the completion side are going to be totally new. But we feel that we have a product tier that’s going to really, really grow fast. The research and development, that team is coming together very, very well. And we’ve told everybody from the start of this that we brought in people from outside the oil and gas industry that knew little or nothing about this industry but they knew a lot about what we were needing. The engineering the high quality parts and the understanding of stresses and strains in fluid flows, that group is starting to jell very, very nicely. So, we’re excited about what’s going to go on there. But that been said, operator, I think we can open this up for questioning.

[Operator:]

At this time, we’ll be conducting a question-and-answer session (Operator Instructions). And our first question comes from the line of Joseph Reagor with ROTH Capital Partners. Please proceed with your question.

[Joseph Reagor:]

I guess the first question is, you guys guided to the repair business being down 50% to 60%. Is that just for the first-half of the year, or do you think that’s something that’s going to continue throughout the whole year?

[Troy Meier:]

I think the whole year. Joe, first of all is we’re not seeing any improvement in 2015. We’re not seeing much on the oil price side. We don’t see much on -- wherever the rig count bottoms up, we kind of think it's probably burst on stake of the whole year.

[Joseph Reagor:]

On the Drill N Ream tool itself, the 195 run was a bit, I think above everyone’s expectations. So the pricing was down. Do you think you can maintain that level of run, even with the drop in rig counts, or is there potential for slight pull-back in Q1 and Q2 on the run count?

[Troy Meier:]

Yes, that’s a slight pull back. What we’re seeing right now is a about an average of 60 a month for Q1 and that’s versus the 66 average from the month of Q4. So, there is a pull-back on Drill N Ream as well.

[Joseph Reagor:]

And do you know where your inventory count is on them right now?

[Troy Meier:]

Yes, that’s about a 150, and we have an inventory as of 12/31.

[Joseph Reagor:]

And remaining useful fleets, as well on it?

[Troy Meier:]

A good but lot of those -- many of those were built in the last half of 2014. So we’ve got a good solid fleet of tools with good long lives. So yes, as you may recall, in Q3, we went through a process of counting all of our tools and evaluating the quality of those tools and the cut out of the fleet. As I recall 35 or maybe 40 tools, this is back in Q3, that was one of the things that drove a loss from the disposition of assets that we reported in Q3 was cutting up those tools that didn’t meet our quality standards. So, on the last half of 2014, we cut up the low quality tools and we built a lot of tools, as our CapEx shows in Q4 that $2.6 million number, $1.5 million was for machine and 900,000 roughly was additional Drill N Ream tools. So, it's a good quality fleet that we have on hand.

[Joseph Reagor:]

And then one final thing, on the new tool, it sounds like you had to replace some of the revenue loss from the repair business. Again, the repair business, it was roughly $3 million in Q4, I think. So you are suggesting you can do $3 million per quarter in the new tools in the back half of 2015?

[Troy Meier:]

Joe we’re really trying to stay away from any specific quarterly guidance numbers. I mean, this is so fluid and volatile that we’re just trying to stay away from that stuff. We’ve given some data points I think that are pretty reasonable and you can kind of get to a good assumption. But again we’re staying away from quarterly guidance at this point.

[Operator:]

(Operator Instructions) Our next question comes from Jason Wangler with Wunderlich Securities. Please proceed with your question.

[Jason Wangler:]

Just one on the traditional business first, obviously, the color you kind of gave. So is it fair to say that as we look at that business, it proactive better work trails to the rig count with some sort of lag through this, so that’s how we should kind of think of it as we go forward, not only this year, but as we hopefully bottom out and see things change as we go forward?

[Troy Meier:]

I think that’s probably a pretty fair assessment. It is very much a function of the rig count. So yes, just as kind of as you see the rig count moving around in that basis we’re moving around with rig count.

[Jason Wangler:]

And you do agree kind of run down with Drill N Ream as far as inventories and everything else. And could you maybe talk about, with Strider or OrBit, how many products you have or what you're looking to build? I think you talked about building more because of the second half. But maybe what you have in the inventory now and just thought process as you go through the year on those two just to build up the inventory?

[Troy Meier:]

If you look at -- let's start with the Strider. If you look at that, we’ve got essentially plenty tools that we’ve built, we still want to do a few slight modifications on these 10. But the one thing to keep in mind is the steel needed to build these tools. So, we’re in very good shape there as far as material is needed we’re setting very well. If we look at OrBit we have bodies that we've been manufacturing. This is a process of essentially a one bearing system and two wheels if you guys have seen the OrBit what it looks like. But we haven't built the wheels yet until we get through this testing period. So, if you look at OrBit, we've got about, what we have less about 120 tools, 110 tools that we bought as part of this purchase deal but we do not want to get those out there, we feel it’s -- there may be an opportunity for those tools in the utility business. We’re now testing with some utility companies to use it. But we feel that they’ll be just fine they’re not going to see the torque and dusting of carbide like you can see in the oil and gas business. So, essentially our inventory that we have that’s going to go into the drill plugs the frac plug. We've got bodies done but until -- over the next couple of weeks as we prove-up the cutting structure, essentially there is no inventory or OrBit that will be going in the backlog it’s just that we have built yet. But we have all the materials to rapidly move forward for.

[Operator:]

There are no further questions at this time. At this point I'd like to turn the call over to Troy Meier for closing remarks.

[Troy Meier:]

Okay, thank you. In closing, I just want you all to realize that we know it's going to be a tough year. But we're very, very encouraged with what we've got going on. This year, like I said it earlier, it's going to be the year that we transform into a rental tool company. We've got the infrastructure in place and we've got the products that are very, very close to really, really fitting out there and helping out with our bottom line. We're very encouraged with the yearly results we see on OrBit, with Strider. And when we look at streamline, I mean, we're not showing a lot to the bottom line with the streamline reamer it's just a simple stabilization system. It's been around the industry for 50 years. But we're looking more of that increasing sale of DNR as we up sale. We're very encouraged about what this year is going to do for us. So, we want you to say encouraged with us and watch us throughout this year. And I think you will be pleasantly surprised. That being said, I will turn this back over. And I think we're all finished up.

[Deborah Pawlowski:]

You can just tell everyone to have a great weekend Troy.

[Troy Meier:]

Okay. So hey, everyone have a great weekend.

[Operator:]

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