Superior Drilling Products, Inc.
Q4 2015 Earnings Call Transcript

Published: 11 Mar 2016

[Operator:]

Greetings and welcome to the Superior Drilling Products Fourth Quarter and Full-Year 2015 Financial Review. At this time, all participants are in 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, Ms. Pawlowski. You may begin.

[Deborah Pawlowski:]

Thanks, Chris, and good day, everyone. We certainly appreciate your time and your interest in Superior Drilling Products. On the call we have today Troy Meier, our Chairman and CEO; Annette Meier, our President and COO; and Chris Cashion, our Chief Financial Officer. Troy and Chris will review the results for the fourth quarter and full-year and provide an update on where we are with the company’s strategic progress. You should have a copy of the financial results that were released before the market open this morning. If not, you can access the release on our website at www.sdpi.com. By the way, it is a newly redesigned website too, if you want to take a look. We have our slides posted there as well that will accompany this teleconference, and we will be following along with those. If you turn to Slide 2, where we have the Safe Harbor statement. I’ll remind you that 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. These risks and uncertainties and other factors are provided in our earnings release, as well as with other documents filed by the company with the Securities and Exchange Commission. These documents can be found on our website or at sec.gov. So with that, I’ll turn it over to Troy to begin. Troy?

[Troy Meier:]

Thanks, Deb. Let’s now turn to Slide 4, and let’s talk about pushing through a challenging market. As we do that, we’re going to start with our contracted services, as we look at that, it’s down 70% year-over-year. As you all know, this is our bit refurb side of the business and this is a heavy reflection on the rig count, drop – extreme drop in our contracted service areas. This area as you know, the Rocky Mountains, Alaska, California, so you look at the number of rig – the rig count decline in this area has been quite dramatic. But on top of that we also have the reduction in the overflow that we normally get from the other areas within the Baker Hughes organization. You look at their representers that they have and they’re very keen on high turnaround time, keeping your width down, and we play a very instrumental role in that. Well, there’s slowdown there as well, and we lose that overflow work. So that’s why the 70%, and compared to the overall decrease in rig count of 61%. But if you look at this and you realize that when you look at this market and push into this market, let’s just look at our tool runs that we have. You can see the tool revenue decline year-over-year in the fourth quarter was 42%. But keep in mind, in 2014, that’s where we were hockey sticking very, very well. We looked at that. We had a 198 runs in that fourth quarter. And you look at the runs we had compared Q4 of 2015, we had a 155 runs, it’s a 21% decline versus 61% overall rig decline. So despite this market, we’re still seeing a lot of success with our tools and we’re getting it out there and get in front of people, and we’re building a business. Let’s turn to the next slide, and let’s talk about penetrating the market in this tough time. One of the big key takeaways here is, if you look at our market share, we’ve gone from 2% to 8% in this market that’s incredible. Our guys are still out there. They’re still getting those new customers. We’re still getting people running these tools like and what they’ve seen. If you look at the revenue, we talked about pricing pressure that we’ve been under revenue per tool is, look to seem to have stabilized in the fourth quarter around that $9.2K per run. But another real key thing to look at on this slide is the fact that our customer base has gone from 7 at the IPO to over 40. We believe this is going to have a major impact as this market comes back. We’re very excited about that and the job that our sales and marketing team is doing. So let’s go to the next slide. As we look at something that – there’s a drill [ph] where we signed a contract back in January, we believe that this is going to be a really neat way to get our tools out in front of some very high-end users. So we’ve been able to introduce this tool to several customers now through Baker Hughes. We’re very excited. We’re getting the training materials that we can go and do some in-house training. We’re putting together all the data – the technical data that supports what we have been saying, and that’s coming together very, very well. This is going to be a process that we’ll be working on very firmly through 2016. We’re building up our tool sizes of Strider, a lot of the country has gone to the monobore system, which takes a bigger tool than what we had. And Baker Hughes is at the top of their game with those rotary steerable systems in those monobores, and we know that that Strider is really, really, really going to play a big part in that. So with that being said, I’m going to turn this over to Chris, and let him tell you about the finances.

[Christopher Cashion:]

Thank you, Troy, and good morning, everyone. Let’s turn to Page 8. On that page we’d like to give you an overview of just how we have been managing the costs in this environment, very difficult environment, challenging environment, and all year throughout 2015, we have continued to bring down our operating expenses. So that’s the first thing I’d like to point out is, in Q4 2014, operating expenses were $6.1 million and we’ve brought it down to $4.2 million in Q4 of 2015. We’ve got a couple of unusual items in that Q4 2015, a charge in riding down to net realizable value our OrBit inventory. We’ve made the decision to exit that product line. And so that resulted in $125,000 charge to cost of goods sold. And then also in Q4, we have an adjustment to our payroll accrual. It was booked. We got caught up. So that the full-year numbers are accurate, but the adjustment pertained to previous quarter, specifically the first-half of the year. So it penalized Q4 about $117,000. Bottom line without those two items, we would have been able to bring down the operating expenses to an even $4.0 million, which is a significant increase over the year. We’ve done that through several different things, salary reductions, which I think most of you are aware of that we took in Q4 of 2015. We’ve reduced headcount by 31% throughout the year. And so another way to kind of look at how that those cost reduction actions have helped the system, look at the full-year operating expenses compared to 2014 to 2015, and that’s what the bar is at the bottom of this chart show you. It’s – on the surface, it looks like we’re down very marginally $18.5 million to $18.4 million. But if you look at operating expenses less than non-cash depreciation and amortization, you can see we’re down $1.5 million full-year over full-year. And on – and also bear in mind that in 2015, we had a full 12 months of public company costs, a Strider infrastructure cost that we put in place in the second-half of 2014, so only seven months of those costs in 2014. So let’s flip to Page 9, and look at the impact on cash a little more in-depth from those cost reduction actions we took. The first thing we like to point out is, we’ve reduced costs not only in staffing and salaries. I mean, that’s a big area of cost reduction for us, but we’ve also focused on operating efficiencies getting our freight costs down. Look at how we repair tools and getting those costs down, being more efficient in our sales and marketing programs and departments. So it’s not just about bringing headcounts down, it’s also about getting better on how we run the business. And so that’s also driving our ability to keep these expenses down and continue to get them down. One of the things we like to point out is, if you look at this adjusted EBITDA for Q3 2015, we were a little over break-even, roughly $100,000. In Q4 2015, EBITDA was $300,000. So we improved EBITDA a couple of hundred thousand dollars, and as Troy showed you the revenue quarter-to-quarter was down $300,000. So with revenue going down $300,000, we managed to improve EBITDA $200,000. And you can see that again with the adjusted net loss. The adjusted net loss was $1.3 million in Q3 2015, and it was $600,000 a reduction in net loss. Once again, quarter-to-quarter with a reduction in revenue. So you begin to see the impact, some of those cost reduction actions that we’ve taken. We grow into break-even level for our company to $1.1 million of revenue per month. So now let’s look at Page 10, and see how these operating actions are impacting our cash and our balance sheet. Now, the first thing we like to point out is the credit facility that we announced a couple of days ago. What that does for us is that it allows us to finance our growth. As Troy mentioned, we are very optimistic on where we’re going to be able to go to Strider throughout 2016. And as we develop that relationship with Baker Hughes, as we get more striders manufactured in the field, we increase the revenue, we increase AR [ph]. We now have a working capital like that will help us finance that growth. So that’s big for us. Putting that line in places, not only a strong testament to the quality of our receivables, but also to the lenders confidence in us as a company to put up facility like this in place in this kind of a market, it’s really quite a vote of confidence that we feel that we got from the lender, as to what we’re doing and where we’re going. Capital expenditures in 2015, as you might recall, the majority of that $1.3 million in CapEx was spent in revenue generating tools. We started building our Strider tools and we also started building more of our larger diameter Drill N Ream tools. And Troy kind of alluded to that a little earlier. That’s one of the things we saw developing through the year, as the demand for that larger tool. And in 2016, we’re looking at a little more CapEx $1.5 million, once again it’s – majority of it is going into revenue generating capital, equipment, tools, strider, as well as the larger tool – the larger Drill N Ream tool. As we go forward and looking on our financing strategy, we’re going to continue to do, what we’ve done in 2015. We restructured long-term debt on a number of occasions in 2015, and we’re going to continue to do that. We’re going to continue restructuring debt and that will allow us to continue to meet our obligations as this year unfolds. If you turn the page to Page 11. And on this page we want to give you a few bullet points – few data points. The first thing we want to say is, this market is not getting any easier to navigate in 2016. We’re seeing a rig count go down from 698 active rigs U.S. land at the end of December 2015 down to 489, as of the Baker count this past Friday, one week ago today, a 30% reduction. So the rig count continues to drop. Oil is dynamic, I guess it would be the best way to put that. It goes down to the mid-20s and now it’s 37, 38. It’s really volatile. And so this marketplace continues to be a very complex marketplace for us. And we’re just not comfortable trying to quantify guidance for the rest of this year. What we want to communicate here and I believe you’re saying is that our ability to navigate whatever the market is. We’ve demonstrated that we can react to it and we can make proper steps, and we’ll continue to do that, no matter what we’re faced with. The upside potential for us, Troy, just got that touching. Now that’s just is distribution channel through a company like Baker Hughes with our new tool Strider, we’re very optimistic about that. We have tools, Drill N Ream and Strider, value adding tools that lower the cost of putting a wellbore in the ground. And that’s what this industry is looking for tools and equipment that can lower the cost of drilling and that’s what we have with our products. And now with Baker in their sales and marketing distribution, we’re really optimistic about where we believe this can go. It will take a little time to get the relationship fully developed. It won’t happen overnight. But we’re very optimistic that we’ll see some through these efforts in 2016. We continue to have to fight the cost reductions, rig count down 30%. We’ve gone through some more staffing reductions in Q1, while our staffing down another 24% from what it was at the end of calendar year 2015. We’re reducing office costs in the field and we’ve implement a program whereby the Board, our C-Suite, our VPs, our managers broad participation in a program, where we’re giving up cash salary for stock options. And that’s resulting in $160,000 of cash savings in this quarter. And we’re doing that to manage cash. We’ve got the credit facility in place. so we’ve got short-term liquidity needs are fine. We’re putting this in place to manage that cash and to also make a statement to the industry, to the marketplace that we’re confident on where we’re going so much so that we’re willing to give up cash compensation for equity. And that’s on top of salary reductions that we took in Q4 2015. So we’re very excited, as this year continues to rollout. And we’ll continue to restructure and renegotiate long-term debt in order to make sure that that we can satisfy our obligations throughout calendar year 2016. With that, I’m going to turn the presentation back over to Troy, who’ll give you some more details regarding our outlook.

[Troy Meier:]

Thanks, Chris. So let’s talk a little bit about our outlook. Let’s turn to Slide 13. As we look at 2016 and started 2016, again, like Chris said, we – there’s a – still a extremely past decline in the rig count, 40%. But what have we done with this in the decline, we’ve added five new customers. We’ve gone into – introduced our tools into a new basin, where we’ve had very successful run. And we’re looking at the opportunities in this challenging market give us. And one of them like we talked about what we’re doing with a extremely large service company is supplying them with high-quality services and tools, and that we know how to do. We’ve done that for our company’s whole career and we’re going to start tapping into that in a big way. So as we start introducing more and more quality Striders and Drill N Ream and getting into the hands of these people and relationships – these long-term relationships we’re very, very excited about our opportunities in 2015. We have the opportunity to license intellectual property. We have companies that come and ask us about tools that we have that – can they license them in another market that doesn’t compete with us. And so we’re going to explore that a little bit in 2016. We need to build up a fleet of both Drill N Reams and Striders. Like I said earlier, the monobore systems that everybody is going to has a great opportunity for us. When we first heard about monobores that really, really put the scare on us than we thought well, these rotary steerable systems likely need a tool that’s going to conditional well that their systems drill a pretty good hole. What we’re finding out there’s a huge need for the Drill N Ream in the rotary steerable system, and the data that our team has been gathering supports that very, very well. So we’re excited about these – this monobore technology. Our tools in the vertical section of the hole, Drill N Ream was designed for the laterals and we’re getting a lot of opportunity in vertical section of the holes, where we have, as we go into new basins and customers are having difficulties with sloughing formations or swelling shales. They’re finding out that that Drill N Ream let them increase that drift diameter and be able to get their tools back out on those vertical sections on their way down to the lateral, so that’s been great for us. And we’re going to keep designing and supplying the markets with the larger tools of Strider like we talked about. That’s going to be really big for us, as we go throughout 2016 to make sure that we deliver high-quality tools to these companies. And so as you look at the – and look at our outlook, we’re very, very positive about our outlook. Let’s turn to Slide 14. So as we talked about our future, we have got some really, really strong progress going. We continue to have that customer acceptance that we’ve talked about. We talked about going into the new basins. We talked about getting these expanding our markets by introducing our tools through other high-quality companies. And that’s what we’re doing is we’re interviewing these companies, we’re working with these companies. And so we’ve got something that they need and their customers need. And we’re going to really focus on getting that in the right hands to get into these markets and get our tools out into this marketplace, not just domestic, but we’re also going to be looking internationally. So there’s a tremendous opportunity going into 2016. And, again, we’re very, very happy with the data that we’re seeing that supports. Our tools would run on these high-tech rotary steerable systems, that’s very, very encouraging what we’re doing to help our customers tools perform better. And the fact that Strider when we look at that innovation behind Strider and what we design that tool to do is what that tool is doing. It is creating good Drill String Oscillation, good thrust. We’re not breaking down the BHA, the bottom hole assembly, we’re not hurting the motors, we’re not hurting the MWDs, but we have a very powerful tool that our team is really, really zeroing in on performance and they’re doing a phenomenal job. So that being said, I want to turn it over to the questions session and take some questions and answers.

[Operator:]

Thank you. At this time we’ll be conducting a question-and-answer session. [Operator Instructions] And our first question comes from the line of Jason Wangler from Wunderlich Securities. Please proceed with your question.

[Jason Wangler:]

Hey, good morning.

[Troy Meier:]

Hey, Jason.

[Jason Wangler:]

I was curious about the OrBit, just maybe get a little more information there just, I guess, the decision as to kind of move forward with Strider and Drill N Ream. But just maybe if you could provide some more color on that?

[Deborah Pawlowski:]

Okay.

[Troy Meier:]

Yes, what we’ve – we’re focusing on drilling down-hole drilling tools and equipment. That’s what we’ve done over the – Strider as you know, excuse me, OrBit as you know, that’s a completion market tool. And what we discovered in 2015 is, we really don’t understand that segment of the market like we should. It took a process of time. We – the last time we spoke we used the term we were deemphasizing that product, and we took another step and said, we’re going to exit that. And that that allows us to focus on what we know best and that’s down-hole drilling tools and equipment. And so that was what behind the decision. And so those are – it’s a product line, those are assets that we are holding for sale at this point.

[Jason Wangler:]

Okay, that’s helpful. And Troy, you mentioned kind of getting us some new basis, would you be able to maybe just kind of talk about some of the areas that you’re kind of getting into now? It seems like there’s couple of real active areas, specifically in the Mid-Con, but just kind of curious, where you’re seeing some of that activity just as it pertains to that rig count that you also talked about?

[Troy Meier:]

Yes, so we’re working in the Mid-Con and we’ve been down there, and we’ve got a team that’s developing that area. We feel really good about that area. It’s been a hard win to break into, but we’re getting there. The – with the one basin I was – talk that I – was mainly pointing out was the Utica/Marcellus. We’ve got some tool runs back there now that that we’re running, we’re getting very encouraged with that. And just the fact that the basins such as, if you look at the Permian, we’ve been down there, and we’re getting – we’re starting to get some fantastic tool runs and we’re ready to get that news and spread it around.

[Jason Wangler:]

Great. I appreciate. I’ll turn it back.

[Troy Meier:]

You bet.

[Operator:]

Our next question comes from the line of Joseph Reagor from ROTH Capital Markets. Please proceed with your question.

[Joseph Reagor:]

Good morning, guys, and congrats on getting the credit facility done in such a tough market.

[Troy Meier:]

Thanks, Joe.

[Christopher Cashion:]

Thanks, Joe.

[Joseph Reagor:]

So, I guess, first thing, you guys broke out the 155 combined total runs, but forgive me, if I missed it. But did you give individual runs by Drill N Ream and Strider separately, or is that something we’re not going to see going forward?

[Troy Meier:]

No, we did not break that out, Joe. So, yes, we’re – we want to talk about total tools that we are putting in a wellbore. And as we develop more tools, we really want to get away from individual tool statistics as far as communicating that data and just keep it total tools that we’re introducing into the market.

[Joseph Reagor:]

Okay. But the majority was still Drill N Ream in the fourth quarter?

[Troy Meier:]

Yes. That’s true.

[Joseph Reagor:]

Okay. Then kind of looking at the decline in rig count to start the year and kind of the outlook that the E&P companies are finally admitting their production is going to decline this year. We’re seeing some guides of 10% to 15% production declines, which means that, they’re definitely not drilling very much if at all. How is that – impacted your guys first quarter so far? Have you lost any customers, or is there any particular basins where you’ve seen better or worse conditions?

[Troy Meier:]

Yes, there is. It’s not that we’ve lost customers as much as just our customers have just laid down rigs. So, yes, again, you look at the Bakken and it’s been devastating.So, yes, we were fracturing there. We had some really strong customer relationships there, so yes, the Bakken.

[Annette Meier:]

That’s for the rig count declines 40% since – just as the beginning of the year.

[Joseph Reagor:]

Okay. And so would it be fair for us to assume that the total number of runs despite the contract with Baker Hughes will be declining in Q1? Would that be a fair assumption?

[Troy Meier:]

Sure.

[Annette Meier:]

Yes.

[Joseph Reagor:]

Okay. As far as the receivables facility, are there any covenants to that as well?

[Troy Meier:]

Yes. We do have financial covenants. We have three financial covenants.

[Joseph Reagor:]

Okay. What are those?

[Troy Meier:]

Yes, fixed charge coverage ratio, liquidity ratio, and then debt to net tangible work ratio.

[Joseph Reagor:]

Okay. And then given the current cash balance and obviously I credit the team for doing everything they can to reduce cash burn, while markets remain weak. But given the current cash balance in the year, are there any concerns about that repayment this year, or do you expect as payments come due, you’d be able to push them out with the loan still from the former owner of Drill N Ream?

[Christopher Cashion:]

We will continue to restructure our long term debt. We did that last year and we’ll continue to do that this year. So that’s going to be an ongoing process for us. And we’re very optimistic that we’ll get that done.

[Joseph Reagor:]

Okay. And one final one on the receivables front. Have you guys seen an improvement in days outstanding to start the year, I’ve seen from a couple of other companies they said that although the markets have gotten worse, the company have gotten better paying, because they’ve – they actually have budgets in hand and they’re taking, start paying those Q4 numbers that were still outstanding?

[Christopher Cashion:]

We’ve always had a very good DSO. So I wouldn’t say that it’s necessarily changed. We’re optimistic that it hasn’t gotten any worse. That’s – we still have not written off any of our receivables and so our receivables are still very strong.

[Joseph Reagor:]

Okay. I’ll turn it over. Thank you.

[Troy Meier:]

Thanks, Joe.

[Operator:]

There are no further question at this time. I’d like to turn the conference back over to Ms. Pawlowski, for any closing comments.

[Deborah Pawlowski:]

Thank you, Chris, and thank you, everyone. I just wanted to point out that the company is going to be presenting at the ROTH Conference on Tuesday, March 15. Our presentation will be webcast, it’s at 9 AM Pacific Time. And so you’ll be able to find that on our website – our new website, which I’ll mention again. And we’re very excited about our future and what our tools offer for the industries. So if you have any questions, don’t hesitate to give us call, happy to do calls with investors and analysts for – with management at your convenience. Thank you so much. Have a great day.

[Operator:]

Ladies and gentlemen, this does conclude today’s teleconference. We thank you for your time and participation. You may disconnect your lines at this time and have a wonderful rest of your day.