Superior Drilling Products, Inc.
Q4 2016 Earnings Call Transcript

Published: 10 Mar 2017

[Operator:]

Greetings and welcome to Superior Drilling Products Fourth Quarter and Full Year 2016 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Ms. Deborah Pawlowski. Thank you. Please go ahead.

[Deborah Pawlowski:]

Thank you and good morning or good afternoon everyone, depending on where you are. We certainly appreciate you joining us today and for 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 the full year of 2016, and provide an update on the Company's strategic process. You should have a copy of the financial results that were released after the market closed, well actually this morning as well as the slides that will accompany our conversation today. You can access both on our website at www.sdpi.com. If 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 the 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:]

Thanks, Deb. And again, thanks everybody for joining us today. Let's turn to Page 4 on our slide deck. We'll get right into our revenue model. But before we get into this, let me talk a little bit about what we were doing in the fourth quarter. As you all know, 2016 was a tough year in our industry. And as you've been witnessing that the second half was much different than the first. But I also want to talk a little bit about what we have done as a company in the second half of the year and particularly the fourth quarters. I think you ought to know, some of the things that our team is done in this fourth quarter is we really looked at the optimization of processes and controls, and what kind of equipment we use in our facility. We have what we call a DPM optimization which is designed programming and machining. And so we look at every step of the process that we have. And within that, our team is created what we call RIP or RIP, which is not rest in peace by the way. This is a Rapid Iteration Prototyping. This is phenomenal. This is the incredible program that allows us to what use to take us days to create a design and then go from the CAD into the CAM. We now do that in hours. It's a great program that our team has developed and we are very excited to start, really utilizing those benefits. We've designed some new computer programs that are tracking inventory in time to better facilitate, the team Chris is building on the financial side of things. We've gone into all of our equipment in the manufacturing side and serviced it with in-depth service, so that we're prepared for what we're now seeing. The machines are all like new again ready to roll. And we've also attracted some high-end companies that are utilizing our skills and talents, and we're very – picky on who we bring in to do perform these services for. And our reasoning for looking at companies that want to utilize our talents in the manufacturing world are to really identifying, help us to identify channel partners for the future for some of this technology that will start rolling out that we'll be talking about. With all of that being said, I'm going to go ahead and go into this slide as we talk about the solid revenue and the business model here. As you all know, we went to a channel partner business model about this time last year and what we have a company that now RIP are Drill-N-Ream tool and they've started doing that in May. And what you'll see is the growth of this relationship. You see the purchase of tools, and as they've been purchasing tools, you know we talk about this program and how it grows legs. And I think that's something you're going to start seeing in the first quarter of this year and the second and the third is as this fleet now has to be serviced and maintain. And then it is also ages and these tools have got to be replaced. So, we are excited for this exit as this channel partnership starts to develop, so you'll see this fleet build out. You'll also see that the contracted services, what we're seeing in the industry as the rig count bottomed out in May at 404 and there was lot of inventories that had to be utilized with very few rigs to do it. As that rig count now is come back and I believe last week we were like 753 I believe with the rig count somewhere in there. It's seems to start – it's starting to plateau some right now rig count. The increase every week is slowing down, but we are really comfortable with where we're at right now in this – and the opportunities that this current rig count is giving us. Our contracted services are really starting to develop nicely and that's what I was talking about bringing in the higher valued customer into that contract service that we can look at as a channel partner. So there is little method toward madness there. Let's go on to the next Slide, number 5. As we go into that again, this is the Drill-N-Ream. This was our flagship tool that we talk about. This tool is really starting to get it, it's just recognition now. Leading operators in a lot of basins now are adopting this technology and they understand the value that it's giving them. And what we see is the efficiencies that Drill-N-Ream create are vast. We have – some companies that run this tool because they're getting better P rates and some companies are running this tool because it helps them their Rotary Steerable Systems as they're coming off a bottom. And other companies are saying that this Drill-N-Ream helps them and get their Rotary Steerable Systems around the curve. While other companies run it because it's taking the shop and buy out of their BHA, so their MWDs are lasting longer. If you see, stick slip go away and you're not seeing this chunking of the motors, the down-hole motors. And you look at wear and tear on drill pipe is down. And this all goes to good quality wellbore and this is what Drill-N-Ream does. We have companies that – casing companies and they brag about how they're casing, their liner now goes right on bottom. This technology is what we've been climbing it. And it's starting to really get it's – it's getting what it deserves. So, let's move on to Slide 6, and as we talk about technology and how it's going to keep changing the game, what we look at there, you know if you look at just the basins today that are busy, those basins were thought to be drilled up, but yet technology comes in and now it redefines what a quality basin is. Well we got to keep improving our drilling efficiencies that we can no longer take tools that we use to drill vertical wells. And lay those tools down sideways and expect them to perform like they should. So there is a lot of opportunity here as these laterals get longer as most all of the wells being drilled now are going out sideways. There is a lot of opportunity there and we're excited to start introducing more and more into this market. We'll talk a little bit about the patents that we've been awarded over the last two years. SDPI has been awarded 11 patents. We just received one this morning. Another one that goes along with the technology that it is driving force behind Strider. And so that's two on Strider that we've gotten just recent and these patents are very important for the tools that we're going to be introducing here in the near future. So as we look at – let's just talk about Strider and what we've done with that that the coiled tubing Strider. That technology will introduced in January. It's being used by multiple service companies in multiple basins. We're not going to make the same mistake introducing that as we did the open hole and we've tested it in a lot of basins and making sure that the drilling parameters we designed for and this tool is working very well. We are now looking for that channel partner and we're in early negotiations with some companies that are very interested and being our channel partner on that coiled tubing Strider. So we're excited about that tool. And then what's going to follow that up is, it's taking the same proven technology and introducing into the open hole. That's a tool that we've wrestled with for a while and we're on top of that and we're going to be introducing that tool in the second half of the year and we're very excited for that. So, we're going to continue to deliver innovative tools this marketplace. We're going to find those companies that are best to get our tools out there. So, with that being said, I am going to turn the time over to Chris and he can go over the financials.

[Christopher Cashion:]

Okay. Thank you, Troy. Let's continue our discussion by looking at Slide 8. The title of that slide is revenue strength continues. And so, you saw with Troy's – on Troy's slides that revenue for the fourth quarter came in just a little bit better than revenue in the third quarter. We had communicated that we thought Q4 would look like Q3, and it did, and we're really pleased about that. And this chart highlights several things that that really encourages about the way we ended the year. As you may recall Q3 was roughly 100% increase over Q2. And so, one of the take-aways on this Slide 8 is, just how low our revenues got in the first half of 2016. Roughly $1.8 million and this is just the tool revenue. $1.8 million in the first half of 2016 and we managed to double that in the second half of 2016. And so, Q3, what we saw that beginning, we were optimistic that we had hit the bottom and we were coming up off the bottom and Q4 validates that. So, we're really pleased that how we've established another level if you will baseline here for the business. It was pretty rough in the first half year obviously. The others take away on this chart is, if you just look at Q4 2015 total tool revenue, it's right at the same number of Q4 2016 with 22% less average rigs in Q4 2016 versus Q4 2015. And so we're really pleased about that, that the shift that we undertook with shifting from a rental tool business to a sales business, and how a part of that is reflected in ongoing maintenance revenue and royalty revenue that that in addition to the sales dollars, really, you start to see that when you look at the other related revenue line here in this chart, you start to see that number grow, that's where we got the royalty in the tool maintenance. Embedded within the tool sales and rental number is a mix shift that we talked about in the press release. Q4 2015, our rental tool business, total rental revenues and predominantly, and so in Q4 2016 it's predominately sales business. So, the strategic shift that we introduced midyear last year is playing out the way that we had hoped it would. As most of you probably remember this business model, we managed to decrease our cost of revenue by not having or needing the tool distribution infrastructure and people and locations like we had. So we've gotten some benefit and we'll see that when we look at the adjusted EBITDA just in a few slides here. Capital requirements much lower, roughly $300,000 in CapEx for 2016 and $1.3 in 2015. And so, we're really pleased about how the year progressed particularly in last half of year, and then how thing starts to improve. Let's go to Slide 9, the next slide. We see the reduce cost structure and I hit on a few of those points a few minutes ago about how cost of revenue is lower and why that is. As you look at the top part of this slide, you see three bars and you see Q4 2016 $3.6 million of SG&A, D&A and cost of revenue. In Q4 we took an impairment charge against a product that we have introduced in 2015 that we began deemphasizing in 2015, call the OrBit. And we went ahead and road-off the rest of the inventory value with that product. That's a $200,000 expense that you see in Q4 2016, that's not recurring. So, if you make just a minimal adjustment and brought that number down to $3.4 million, and then look at that compared to Q4 2015. You see a 20% decrease in expenses. Some of that is in the D&A where as a sales company, we don't have the rental tool fleet that we're depreciating. So CapEx is lower and depreciation expense is lower. And then you see on the cost of revenue, the decline from Q4 2015 to Q4 2016. That's referencing back to the field tool distribution infrastructure we spoke of, that we no longer have now that we had a year ago. SG&A is up slightly from Q3 to Q4. Within SG&A we put our engineering, our research and development expenses within that part of the bar. And the commercialization efforts of coiled tubing Strider led to some R&D spending that we had in Q4. As we continue to field test that tool as Troy mention, we went through we believe an exhaustive process of field testing to coiled tubing Strider in multiple basins, to sure ourselves that there was broad market application for that tool, and so our R&D spending was a little higher in Q4 versus Q3. And then as most of you know we had a follow-on equity offering that we closed early October, early Q4 and that lead to us some higher professional fees associated with that. So that, the little bump that we have from Q3 to Q4 on an adjusted a couple of hundreds. We really believe a lot of that increase is non-recurring. If we now go to Page 10, we can look at EBITDA. As I mentioned earlier, the improved revenues in the second half has translated, did translate into improved EBITDA in the second half. A little over break even, but not nearly like that every EBITDA loss that we saw in the first two quarters of 2016. As you can see from this chart, those numbers in the first half of 2016, there's roughly $1.7 million negative EBITDA going to roughly 250,000 of positive EBITDA in the she second half of the year. So, not knowing a dramatic revenue shift, but also a dramatic significant EBITDA shift from the first half of the year, last year till the second half of the year. So we're really pleased knowing about the revenue, but also how that's falling to the EBITDA line. And then once again you see EBITDA is a little weaker in Q4 versus Q3. And that has to do with those engineering cost of professional fees that we spoke about a bit earlier. We did have unusual charges, another asset impairment associated with a sale of Superior Auto Body. We worked really hard in Q4, getting that sale done and finally closed in February of this year. Now we had a third party appraisal of those assets. We got the appraisal in, in November, and it reflected an $800,000, the need for an $800,000 asset impairment, which we booked in Q4 2016, bringing those that asset, which is land and building, bringing those assets down to appraised value and then, as we reference on the next page, Page 11, February 9, 2017 we sold Superior Auto Body at the appraised value of $2.5 million and we took that cash and we paid down debt. So, a couple of takeaways from Page 11 is the follow-on offering yielded about $5 million in cash that was early in Q4 when we closed that and then subsequent to the balance sheet date, we sold Superior Auto Body at the appraised value of $2.5 million, and we took that cash and paid down debt. So, today, our debt is roughly $14.2 million. You see on the – at the bottom bar graph, how that debt has dome down from $20.2 million 12/31/2015 to $19.7 at September 30 last year, $16.7 million end of calendar year 2016 and then if we had another bar on this chart, it would be $14.2 million which represents the debt to-date, that's roughly a 30% increase over roughly a year in our debt, and then you can see the cash, that's on the balance sheet as of 12/31 $2.2 million. So, we were able to significantly strengthen our balance sheet through paying down debt and then offering from the following offering. If we go to Page 12, this is the first time we've provided any guidance, and a number of months. To be quite honest, I'm not sure the last time that we provided guidance, and the reason we haven't been providing guidance, as most of you know is the marketplace, 2016 was so uncertain. It's still uncertain, so don't takeaway that we think the certainty in this oil and gas market today that's you're seeing price of oil take a hit over the last couple of three days and that can happen anytime, so that's the nature of this business, is a lot of uncertainty. But we feel confident of now, that we think we got a pretty good view of how we think 2017 is going to rollout. And we think our revenue is going to be in $11 million to $13 million range. We think our operating margin is going to be 3% to 5%, interest expense roughly $950,000 less than $1 million of interest expense, and G&A little bit under $4 million and capital expenditures, we see it about the same level that we saw in 2016, we say about $300,000 to $350,000 of CapEx, as a bulk of that's going to be with the coiled tubing Strider. Well as Troy mentioned, we'll get out there like we're doing now. We'll rent the tool, we'll understand the value add, more and more as we actually get it into the hands of customers, but consistent with our strategy, we want to identify our channel partner, so that we can enter into some distribution agreement, much as we did with DTI and get that to a broad market through the hands of someone that's more experienced and more focused than we are on sales and marketing. So, it's not a – no change in our strategy. It's just through 2017 we'll spend a little time wringing it and customer interfacing ourselves, and so there will be little CapEx for some of those tools, that's the majority of what you see in the $350,000. Once again, that's CapEx for us when we were focusing on the rental tool business was in excess of $1 million a year. So, the model is playing out just the way we had hoped it would. And so that's our –that's our guidance for next year. We're optimistic about where we're going and I'm going to turn this back over to Troy, as he can go through some of the opportunities that we see.

[Troy Meier:]

Thanks Chris. So as we look at the opportunities going forward, I think we've talked about the Strider and the patents that we've been ordered on that tool, and we've talked about this a lot, and you've heard us talk about it, and it's really been one of these tools that we're growing out, we're drilling 20,000 plus length of wells with this tool, that's preforming extremely well and we believe now we're going to identify that partner, that channel partner that best fits the completion side of the business. As we look to hand this off to somebody and team up with them, and then we will look to do that same thing with the open-hole Strider. One of the things that we're doing is, we're making sure that we take care of – of our channel partners that we currently have, and you all know who they are. They have needs that are similar when we look at – we have to maintain the service to their fleet and we are very, very good at that, and so we're – we understand logistics for their fleet maybe a little bit – is an issue and we're in talks about that and how can we help them with quicker – making sure that they get products to us quicker and turn them out quicker. So, we're staying in close contact with our partners. We're going to continue to take the cost out of what we do. We're identifying any efficiencies that we may have and we're designing new equipment and tools that help us do our job better and perform what we do much better. We'll continue to innovate and roll-out more innovation out of our facility. We've got just in this coiled tubing Strider world, as we've been talking to people there, they are already requesting bolt-on tools that if we can do something like Strider, can we do these other tools that complement that BHA in the open-hole markets. And we're looking at those opportunities as well. So, we're excited to roll through 2017 and get moving forward. So, with that, we're going to turn it over to some question and answers.

[Operator:]

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

[Joseph Reagor:]

Good morning guys and thanks for taking the question. So, couple of different things. I guess the first one kind of you suggested a bit already that the G&A was elevated in the quarter. But what should we think about for a normalized run rate going forward, you know in the low $1 million, like $1.1 million, $1.2 million?

[Troy Meier:]

Yes. Per quarter?

[Joseph Reagor:]

Yeah, on a per quarter basis?

[Troy Meier:]

Yes. I think that's a good range. The $1.2 million probably that's Q3 at the $3.2 million is probably a pretty good number to annualize.

[Joseph Reagor:]

Okay. And then, looking at Drill-N-Ream in the DTI contract, can you give us an idea of you know when you guys did your year-end look at percent of market, what the math says there at on a percentage of market so far?

[Troy Meier:]

We hesitate to talk about that, Joe, because this is, DTI is the interface with the customer. It then plays with the end user and I think we can say that we feel confident that they are progressing well towards their minimum market share goals as you may recall in order to maintain exclusivity, they have to have 10% of the market by June 30th this year. And then they have to have 12.5% by the end of this year 12/31. So we're confident. They are on track to do that. That's really all – I think we can – we really should say that we're – think we're talking about their interface with customers and so we – we feel good that they are progressing well, let's put it that way.

[Joseph Reagor:]

Okay. And then, obviously there is a lot of moving parts behind the scene to create your revenue number, besides revenue from DTI and you know the old manufacturing refurbishment business, was there any other tools sale revenue, I know you guys make a lot of little tools, and I know the Strider didn't end up getting into Q4, it sounds like it's Q1 only. Was there any revenue from that and if so, can you quantify it?

[Christopher Cashion:]

We did. First of all, let me just confirm that you're correct. In calendar year 2016, coiled tubing Strider was still prototype and so we were field testing that tool and so those costs were going into R&D expense. We formally announced commercialization in January 1, 2017. So yes, in calendar 2016 there is no coiled tubing Stride revenue. We'll have that going forward. As far as really breaking out the other types of products, let me say it this way, it's never been a big number for us. I shouldn't say never. There was a time, a couple years ago when we did quite a bit of third-party work. It's gotten down to a fairly small amount, so there is not a lot that you see in 2016, particularly in second half. So it's just a very small amount. But to kind of qualify that a little bit, that's kind of what we did in the second half of 2016. But I think as Troy mentioned, we've been getting a lot of pool from customers who recognize our abilities as a high end manufacturing company, doing custom manufacturing to do some work. I mean, so it's – one of our challenges that we – I believe we've solved it is, and if we don't want to turn that work away, we're not. But same time our focus is as you know is manufacturing our own tools, Drill-N-Ream, Strider, et cetera. So we're finding a way to take that that incremental third-party work. So I probably like to say it's not a big number looking back 2016, but going forward we're thinking that's going to be a more meaningful revenue line for us and we're able to do that without any expansion of CapEx, without any expansion of machining centers or roof line or anything like that. We are just getting as Troy mentioned, and one of the reasons Troy walked through the efficiencies that we're putting in place in our plan is to be able to do more with what we have. Certainly, as you look at the numbers in the historical numbers, a very small amount.

[Joseph Reagor:]

Okay. And then the last one, just on the drill bit refurbishment business, I know it's become a much smaller piece of the overall picture. But have you seen an uptick there as a rig count has risen in a previous few months?

[Troy Meier:]

We've seen the tremendous uptick there. Yeah, we're incredibly busy in that side of the business.

[Christopher Cashion:]

Thank you, Troy. I think – you probably know this is well Joe, that before 2016, we were getting our work from what we call non-contracted areas in the U.S., that work kind of pulled in by the channel partner. We weren't able to get as much work outside our contract, which is just so everyone knows that geographic contract is the Rockies, California and Alaska. But what we've seen is that work is coming to us from areas – around the U. S., so that's its flipped back the other way whereas that's where it was back in 2014, 2015. It shrinked, it got pretty small in the first half of 2016, but that work is started to come back to us as Troy alluded to. So that part of the businesses has seen a real mass uptick.

[Joseph Reagor:]

Okay. I'll turn it over. Thanks Guys.

[Christopher Cashion:]

Thanks, Joe.

[Troy Meier:]

Thank you, Joe.

[Operator:]

Our next question comes from Jason Wangler with Wunderlich Securities. Please proceed with your question.

[Jason Wangler:]

Good morning, guys. I wanted to ask a little bit more maybe on Strider, obviously it seem like the Drill-N-Ream, the way that you guys have marketed Drill-N-Ream in the last – I guess year or so now. Hence it is really done very well. As you look at bringing on distribution partner for Strider. Is it a similar type of structure that you seek as far as affectively you would obviously be the manufacturer and then you basically push that tool to them from an inventory aspect? Just kind of your thoughts as we think about what that could look like as that emerges year?

[Troy Meier:]

Correct. It's very similar. I mean you got a tool that we build and we look to sell. And then, once it's in somebody else's inventory, we retain the rights to repair that tool and that tool will give couple of runs and be sent in for repair.

[Christopher Cashion:]

And then we'll also try to negotiate a royalty, on the revenue that they see as they rent that tool. So yes, we envision a model real similar to the model we have current – with our current channel partner around Drill-N-Ream, which is U.S. Canadian territory, but yeah.

[Jason Wangler:]

Okay. And then as far as Drill-N-Ream, I think you mentioned in the slides, you know you're now in I guess 10 basins. It seems like you are seeing better and better market penetration. Effectively I guess what I am asking is, maybe could you shed some light on kind of where all those are, at least roughly and are there any other areas that you're looking to get into or you may well be into about everything that you want to be in the near-term?

[Troy Meier:]

Well, we'd like to get into them all. What we're finding is the active basins that are looking for the efficiencies. I mean they're all looking for efficiencies. But, as things is getting rolled out, it's going to the basins that's most active. We're getting requests international as well. So, they try to tell you, again it's a channel partners that we deal with and we really respect their – not saying, we're not going to say too much, but they've got top operators in most all these basins that are now adopting this tool very rapidly. They're doing a phenomenal job and the operators are seeing tremendous success with the Drill-N-Ream.

[Jason Wangler:]

Okay, great. I will turn it back. Thank you.

[Troy Meier:]

Thank you.

[Christopher Cashion:]

Thanks, Jason.

[Operator:]

Our next question comes from John Stoltzfus with Oppenheimer. Please proceed with your question.

[John Stoltzfus:]

Thank you. I'm just curious, looks like there was a substantial inventory overhang with the existing bids. It looks like also you may have just crossing touching point for using them up and now they're beginning to be re-serviced.

[Christopher Cashion:]

This is Chris, John. Overhang with – speaking with regard to the Baker Hughes refurbishment business.

[John Stoltzfus:]

Well, yes. It's just the level of activity seems to have been a little slow, I mean rigs have doubled. You might have thought that you would have seen a little more revenue from just the basically refurbishing business, but we can understand where the excess of inventories that were left behind – Go to those first?

[Troy Meier:]

Absolutely, I do think there is some inventory – field inventory that they're using up first. The other thing to kind of bear in mind, our primary geographic area is the Rockies, Alaska and California.

[John Stoltzfus:]

Right.

[Troy Meier:]

We are getting some work as I mentioned earlier coming out of other basins. So, it may not track the exactly what the overall U.S. rig count, which is heavily driven by West Texas. So yeah, it may not be up a $1 for $1 increase, so that maybe some of the reasons that we see that our bit refurbishment revenue isn't tracking exactly with the U.S. rig count because our primary market is markets that really haven't responded a great deal. I mean there is a few rigs pick up in the Bakken. I mean the Bakken has gone from mid-20s to maybe mid-30s, so there has been some activity increase, but the big, big change as you know that it's been – it's been Midland-Odessa and the Permian. So, you're right. But we're really encouraged that we're getting some of that we call overflow work coming out of those basins. So, it's – our revenues are better, then if it was just driven off of our contracted area. But it's not quite as good as the overall rig count increase across the U.S. So, I think two things, John, I think is that, as field inventories if you will, that they are burning up first and then it's our areas, but primarily the Rockies which – the Rockies haven't come the way West Texas has.

[John Stoltzfus:]

I guess two more questions. One is the – I am just curious has to how DTI newer structure, their penetration measurement, because rates are now being pushed to two to three times, former utilization levels, so, is it on a per rig basis, or is that on a foot-drilled basis that?

[Christopher Cashion:]

It's a horizontal rig/well basis. It's not footage. It is rig and how that translates into wells.

[John Stoltzfus:]

And horizontal rigs are now the highest level ever out there. I think we closed, very close to 85%.

[Christopher Cashion:]

Yes. They are. They have been running in about mid 70s and you are right, they have recently popped up to about that mid-80s number, and so the mix is shifting more and more towards horizontal.

[John Stoltzfus:]

The other item, the other question is, with everyone, you've talked about Troy about the benefits that people are discussing with the use of Drill-N-Ream. Clearly it's bringing in efficiencies, people are noticing this. Is there a possibility of a rate increase for what it's doing in the field? I'm just curious if that's being discussed at all?

[Troy Meier:]

It is and we've actually looked at you know the service companies, all took a pretty good hit as you know. So, I mean every think that you looked at service companies including, what we're doing is everything is rush and inventories are low, so it's good demand that higher prices we charged and I'm thinking as we look at this, it's going to be get really demanding June, July timeframe.

[John Stoltzfus:]

Steadfast. Okay.

[Troy Meier:]

Yeah.

[John Stoltzfus:]

Okay. I would have thought maybe you might probably get certain level of penetration sort of you know providing great benefits and let it go for about a year before you might do something?

[Troy Meier:]

You have to remember, when we talk, we're talking about really increase what our customer would be charging to their customer.

[John Stoltzfus:]

Right.

[Troy Meier:]

I mean because they are using these tools and using them very rapidly and they are showing some tremendous benefit. So, what our customer should be able to start getting out of this, it should start to go on an upward trend here by mid-year.

[John Stoltzfus:]

Okay. Very good. All my questions are answered. Thank you.

[Troy Meier:]

Thank you.

[Operator:]

[Operator Instructions] Our next question comes from John Bair of Ascend Wealth Advisors.

[John Bair:]

Thank you and good afternoon. The focus of course has been very much on the U.S. shale basins. My question pertains to our exposure to international markets and some of the deepwater offshore and applications of your tools in those environments, because we're talking about cost, obviously deepwater wells, offshore wells, internationally are pretty darn expensive. So, I would think that would be an area that offshore operators would be looking at as a way to improve their drilling efficiency.

[Troy Meier:]

We know that our channel partner is very familiar with the offshore side of the business. We were not. We have been looking at the international side of the business, for Drill-N-Ream in particular, because we've got a lot of request to, you know as we look at well profiles from different parts of you know the world, whether it's South America or the Mid-East, they struggle with the very things that Drill-N-Ream fixes, and in a big way. So, we believe there is some great opportunity, internationally for this tool.

[John Bair:]

Have you tested the product in pre or sub-salt drilling environment at all?

[Troy Meier:]

Yeah. I mean, if you look at what we're doing, I mean one of the things that Drill-N-Ream does help is and just when you get into a salt formation, the swelling that you get from salt one you go through and they come back in on you. so yeah, it's – you are talking a tool that we use quite regular and the condition of sub-salt.

[John Bair:]

Very good. Appreciate it.

[Troy Meier:]

Thank you.

[Operator:]

Our next question comes from Mike Breard of Hodges Capital. Please proceed with your question.

[Mike Breard:]

Do you have any way of knowing what operator uses your Drill-N-Ream? How many of these have been boarding that they are using it on every well?

[Troy Meier:]

You know again, there is some proprietary stuff that we want to keep proprietary, but it's very high. I mean, some of the majors are really – you know the efficiencies are so strong that you are now seeing if they – it's become – it's a standard part of operation for a lot of these operators now.

[Mike Breard:]

And a new operator wanted to use it, so how long would he have to wait to get their Drill-N-Ream?

[Troy Meier:]

He doesn't. We can manufacture these tools and we do on a regular basis, and you know in about three days, we get an order and DTI has been very good about rolling these tools out and getting them into the proper hands, the proper operators, and when they need a tool, they place and order and we get it done and get it done within three days and we've got plenty of capacity to do quite a few tools.

[Mike Breard:]

And then obviously the customer uses in Permian is satisfied and he may want to use it in the SCOOP and STACK, you are getting…

[Troy Meier:]

You're correct.

[Mike Breard:]

Lot of good word of mouth.

[Troy Meier:]

You are correct.

[Operator:]

There are no further questions. I'd like to turn the call back over to management for closing remarks.

[Troy Meier:]

Well, again, thanks everybody for joining us today. If you get an opportunity and you are in around LA next week, we're going to be presenting at the Roth Conference and we'd love to see you there. We're looking to get out and visit with you all this year. I mean we're going to get out into the marketplace and keep you informed on what it is we're doing and how we're doing it. But we're looking forward to 2017 and beyond, we're excited. So thanks again for joining us and have a good day.

[Operator:]

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