Superior Drilling Products [SDPI] Conference call transcript for 2022 q1
2022-05-13 15:31:12
Fiscal: 2022 q1
Operator: Greetings. Welcome to the Superior Drilling Products, Inc. First Quarter 2022 Financial Results. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation . As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Deborah Pawlowski, Investor Relations for Superior Drilling. Thank you. You may begin.
Deborah Pawlowski: Thank you, Doug. And welcome, everyone to our first quarter 2022 earnings call. We certainly appreciate you time today and your interest in Superior Drilling Products Inc. Joining me on the call are Troy Meier, our Chairman and Chief Executive Officer; and Chris Cashion, our Chief Financial Officer. You should have a copy of the financial results that were released before the market this morning, as well as the slides that will accompany our conversation today. If you do not, these documents can be found on our Web site at sdpi.com. On that deck if you’ll turn to Slide 2, I'll point out that we may make some forward-looking statements during the formal discussion, as well as during the Q&A session. 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 are provided in the earnings release, the slides and other documents filed by the company with Securities and Exchange Commission. These documents can be found on our Web site or at sec.gov. I want to also point out that during today's call, we will discuss some non-GAAP financial 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 with comparable GAAP measures in the tables accompanying the earnings release, as well as in the slide deck. So with that, if you will turn to Slide 3, I'll turn it over to Troy to begin. Troy?
Troy Meier: Thanks, Deb. And thanks everybody for joining us for this first quarter of 2022 call. Welcome you all here. First of all, I'd like to start off, as we look at Slide 3 and we talk about the results of the strong execution that drives our enhanced results. One of the things that we've been developing in our processes is we get -- let's just start with, looking at the manufacturing side of our business and how we've enhanced that and what we've identified as more opportunity. We make a lot of high end parts for some servcos that in the past we've made these parts and then we've done our quality check on them and boxed them up and shipped them off. And what we're doing now is our customers are understanding that, hey, not only can you make these products as far as the machining of these products, but you also have the skill set to finish these products. So why don't you just go ahead and turnkey the process. And that's what we've been pushing, we pushed out all last year to our customers as far as saying, hey, look, we make these, you know that we can make you a good quality part. But let us finish that part. And that's a big important piece as we go forward, and we see these turnkey opportunities. So whether it's the blades, the bits, the EZCase, the reaming shoes, everything that we do, it has to be finished somewhere. And we have that expertise to do it. And if we don't have a skill set that would complete that process to get it done, we have hired and developed and trained for that skill set. So keep that in mind as we go forward and throughout this year and beyond and the opportunities that we were looking to develop. We’ve talked about the picking up a new machining centers and new, what we call, turnkey product line adoption. That center now that we've spent that we paid 1.4 million we now have in place. This is creating a lot of excitement with not just our customer base but within our team itself, because we know everywhere we're looking now we identify more opportunities. So this turnkey process is going to be exciting for us as we go throughout the year. This machining center that we've put in place, it'll be -- we have it installed, we are finishing the setup of the machine, the leveling of the machine and we'll be having it up and operational here within the next few weeks. And that's a true fabrication cell start to finish from a raw piece of steel to a finished product will all be developed in this cell. And this is going to be the blueprint to go forward and just repeat again and again and again. So we're very excited about that process. So that's just in the machining and -- side of our business, the fabrication side of our business. But keep in mind -- and these parts that we machine now go over and go into the side of our business that we call the refurb side and that's where we do the hard face, and we do the braising and we do the finishing of these products. So we look at it now when we machine a new product in one facility, we pass it over to the next facility that finishes that product up. And there's a tremendous opportunity there as we go forward. The Drill-n-Ream product line is still out there, still penetrating the market and is performing very well. We've got -- we're getting more and more demand on an international marketplace, we're looking for those channel partners internationally that can penetrate the markets. Still a phenomenal tool, works extremely well and the operator see the value of that and that shows with the product line and the new orders that come in for that. PDC refurbishment, that legacy business, there's tremendous opportunity there. When we look at the expansion of that specific product that we do or procedure that we perform for our customers, we have now condensed some operations into one of our facilities. When we look at the buildings, numbered one through five, but we've condensed building one and four so that we can now we've opened up a whole new building for additional work from additional customers. And we're looking forward to going out there and getting those customers and fulfilling that demand that we see out there. We get a lot of requests for it. When you look at the -- as we go down the road of saying, do we have the right people, do we have the right team in place. I want you to know that the things that we talked about in third and fourth quarter of last year and the things that we were doing and the people that we were hiring and the systems that we were putting into place are really now starting to show and it's really out there. When you look at our QMS processes, it's the whole company, the whole team is now involved in that and it's really starting to show some good processes and controls. We brought on a world class HS&E manager that's going to direct our efforts in the HS&E process. We have some of the barriers that we hit as we were trying to penetrate the Mideast market with the drilling ream, was the HS&E portion of this ISO 14001. There was countries that were running our tools and they were running very well, but we got shut down because we did not have that portion of the qualification in place. And we now have that individual in place and he's building a team, he's building the processes, controls and I think you'll all be very happy with what you see there. One of the things to keep in mind as well is when we went through the 2020 and the 2021, it was the biggest downturn in our industry's history. And when you look at the turnover rate and with amongst our employees, amongst our team members, in July of 2021, we had hit a peak of turnover of 6.7%. Today, I'm proud to say we are down to 3.3% and that's with an economy, very strong here in Utah. It's with in Bernal we are an oil and gas community and it's building and it's building strong, and we are able to retain these employees, our team members, because of the processes and controls and the ownership that they have in this company and what they are doing. And it's going to really, really reflect as we go forward throughout this year. You're going to see what these systems are and the managers what they are doing. You are all going to be -- you're going to like what you see. So we are very excited about -- when you look at the 70% year-over-year revenue growth, we are very excited about that, and I think you should be too. And I'm going to turn it over to Chris to talk in details and then I'll come back and talk about the outlook and opportunities. Chris?
Chris Cashion: Okay. Thank you, Troy and welcome everyone. Let's continue our review by turning to Slide 4, where we will take a look at that revenue growth quarter-over-quarter. You can see that 70% number that Troy just mentioned, $4.1 million is what we did in Q1 2022 and sequentially, the revenue grew 4.5% from Q4 2021. And driven by the operating efficiencies that you just heard about, staffing enhancements, getting right people in the right places, processes, those kinds of things internally that we have been doing, as well as market demand continues to increase for our tools and services, and our expertise. North America revenue was about some 90% of our total revenue, that's been growing due to the extended industry recovery, the stronger market share for our Drill-n-Ream, Wellbore Conditioning tool and the growing demand for the other related tool and contract services. Internationally, revenues up 16%. And while it's showing some improvement, it still remains hampered by pandemic related restrictions, tribal, labor recruitment, those kinds of things. Although, we are starting to see things open up a little bit in the Middle East. It's still affecting us and hampering our business. The increasing rig count, of course, it's driving demand for our tools and services. And then once again, as Troy just outlined, the recognition of our quality processes and our tools, that recognition is expanding. And of course, the rig count increasing is great. Average US rig count for Q1 2022 was 633 rigs, up 74 sequentially and up 240 over last year's first quarter. And the percentage of those tools continues using the Drill-n-Ream tool. And we expect North American activity to continue to improve throughout 2022. And at the end of April, the US rig count stood almost at 700, and we continue to be confident. As Troy just got through saying, we can grow and the gradual improvement in rig count, we don't expect any booming rig count, but we do expect it to gradually improve and continue to take share from operators who are continue to seek drilling efficiencies. Now let's go to Slide 5 and take a look more closely at our tool and contract service businesses, both of which showed significant increases. Total tool revenue, which as you may recall, is a sum of the other related tool revenue and tool sales and rental revenue, that increased by 66% to $2.8 million from the prior year period. Once again, this increase reflects the continued growth in rigs using our Drill-n-Ream tool, as well as increased drilling activity just across the market. Breaking that down and just looking at tool sales in rental. While still strong in the quarter, we did see a dip from the sequential fourth quarter, biven the timing voters from our channel partner DTI. DTI continues to do a great job penetrating the market. In this kind of quarter-to-quarter change that you see on this chart is somewhat typical where the order pattern can be lumpy with elevated new tool orders one quarter, and then the next quarter be kind of a more maintenance oriented. And so still strong sales as we continue to see that. Looking at the contract services business, it’s up 79% to $1.4 million and reflects our improved capacity to deliver on increased demand for the PDC bit refurbishment business and our other tool manufacturing services, as well as the increased drilling activity as we've mentioned. Now let's go to Slide 6 and take a look at costs. So you can see that we continue to effectively manage our costs with improved processes and operational efficiencies, while at the same time continuing to make strategic investments in our people, just as Troy kind of outlined. And so we're staying on top of our costs. And you can see that actually decreased a little bit $35,000 decrease or 1% sequentially. And that, as we just got through saying, was with an increase of revenue. So the decline in the cost of revenue as a percent of revenue, once again, was the result of strong operating leverage in our business, higher volumes combined with the proactive purchasing of steel to combat inflation. We're also seeing strong operating leverage on the SG&A line, which -- that declined 210 basis points from the sequential fourth quarter. Depreciation and amortization expense decreased approximately $279,000 or 40% year-over-year and that was primarily the result of fully amortizing a portion of our intangible asset pool and fully depreciating some manufacturing center equipment. Our attention to our costs combined with the higher demand in the market for our products and services led to an operating income of a little over $300,000, and that's up significantly over the sequential and prior year period. This is the fourth straight quarter of positive operating income, which is further evidence of the solid progress we're making. Inflationary pressures, pandemic related constraints continue. But our teams are working hard to optimize processes, continue to optimize processes, continue to become more efficient, build relationships to expand our presence in the marketplace. Staffing and training will continue to be a major focus as we move forward. Now, let's go to Slide 7. We see that our bottom line and adjusted EBITDA results continue to improve. Net income from the quarter was $150,000 or $0.01 per diluted share, up from a loss of $1.1 million or negative $0. 04 per diluted share in the first quarter of last year. Now net income for the sequential fourth quarter reflected an other income item of $700,000, which was associated with the recovery of principal and interest on a fully reserved related party note receivable. Adjusted EBITDA increased to $1 million or 24.5% of sales, that's up from 20.9% in the sequential fourth quarter, further indicating the robust operating leverage that we have in this business. Now go on to Slide 8, we focus on the balance sheet, which has continued to strengthen with reduced debt levels and higher cash generation. Cash at the end of the quarter was $2.9 million, up slightly from the end of 2021. Cash generated from operations was $1.1 million in the quarter versus $200,000 in the year ago quarter, reflecting the higher net income. We continue to bring total debt down. Total debt at the end of the quarter is now $2.3 million, which was 5% lower sequentially and we have our final $750,000 principle payment on our Hard Rock Note, that's due October 2022 this year. Capital spending was $900,000 in the quarter, that included a down payment of approximately $300,000 to secure that new CNC machine that Troy had mentioned in his comments. As he mentioned, we took possession of that machine, post the balance sheet date. So we now have that machine and we'll have it up and running, as Troy mentioned, in a couple of weeks, and continued investment in our Middle East Drill-N-Ream tool fleet. Our focus remains on deploying capital to enhance the quality of our services and deepen our market penetration, training and efficiency remain a priority, particularly as we look to reemerge into the international markets and successfully meet the increasing demands for our tools and services. Now lastly, I would like to report that our shareholders equity balance at quarter end continued to improve and was at $6.5 million, which is well within the New York Stock Exchange continued listing requirements. We will submit our continued listing quarterly report to the NYSC today and we'll await their final ruling. Thank you all. And I will turn the presentation back to Troy to wrap up with a review of our outlook and opportunities. Troy?
Troy Meier: Thanks, Chris. So as you look at our outlook and opportunities, first of all, I want to get this out there because we've been getting a lot of calls regarding the EV technologies that we talked about in our last call. I want you all to understand that this is a prototype startup, it's a great opportunity for us that fits in our diversification model really well. But it's going to take time to develop that and it's going to be strong once we get there but it's going to take a little bit of time. So just bear with us on that we'll continue to work it and you'll see some good results in the future on that quite sure. And so let's talk about our North American opportunities. When we look there, we talked about enhancing what we currently do with product line adoption, there's tremendous opportunity there. And on our legacy side what we do with the repairs and refurbishment of tools, we have a tremendous -- people are asking us all the time, can you do more, can you do more, and we're rising up to that opportunity and we're going to capture that throughout the year. When you look at international, like Chris had mentioned, we built the fleet, we've proven the tools out in quite a few countries over there and we are now looking in the works of identifying back channel partner. We’ve got several companies that we have been talking with. And I think here in the near future, you are going to see some good announcements regarding who our channel partnership will be with in the Middle East, and we are really looking forward to that. Tools still run well over there. We are getting new markets over there. We have gone from just the vertical where we started in these wells over there now into the curve, and now we are going into the horizontal where the Drill-I-Ream was designed and built for. So it's lots of opportunity there. So as we look forward throughout this year of 2022 and beyond, you can expect a lot from us. And I think you are going to be very pleased with what you see coming up in the very near future. So with that, I'm going to turn it over to some Q&A.
Operator: Thank you . Our first question comes from the line of John Sturges with Oppenheimer.
John Sturges: I'm just curious, the reports are nearing the bottom of usable drill but uncompleted wells. And I'm just -- there is a delay in how this reaches you in terms of increased business going through DTI. I would say, December looked like they were upping their inventory, getting ready for future business. And so that's a bit lumpy. Can you give me a sense of the reports that March was a very strong period for fracking companies? Some are now booked fully for the year. And when it's likely to filter to you with more increased drilling, now that the duct seem to be not available. So it sounds to me that we are going to have to really be drilling wells to completion as opposed to using up inventory.
Troy Meier: We’ve all kept our eyes on the duct inventory. And as we we watch those go down, we know at some point in time they are now going to start turning their focus on drilling new wells. So what we see is we are a little bit ahead of the information that we get on new customers that are coming on and rig count. It follows with our communications, with our channel partners, when they say, hey, look, you got to start ramping up in each sector of your business, because not only do we need new tools to meet the drilling demand but we're also going to need, because there is going to be more tools in the hole and being reused, you got to up that sides of your business as well. So yes, the request from our customer base is very loud and we hear it very well. And they are gearing up, not only -- I mean, every aspect of our business. So I believe that we have positioned ourselves very well for this growth opportunity that we're going to see, because it is going to be new wells they are going to have to drill, we are going to see more rigs stand up and we're very excited for that opportunity.
John Sturges: Just curious do you have -- can you provide any guidance when it's likely you'll have to increase capacity through additional hiring, or can you handle what you see for the next several quarters?
Troy Meier: We continue to hire, because every single day we're being asked to increase our capacity. We've managed our capacity very well. We've got the machines in place this new purchase of the machining center that is going to be the heart of our turnkey process, is going to be a big plus for some of our capacity, because a lot of the bigger drilling tool products we were making or we do make was done on two machines. Out of all the machines we have, they're really hitting two of them really hard. And so our days to deliver was out there quite a ways. When you look at most of the servcos when they're asking us to do stuff, and they're not going to let you take them out more than 45 days, as far as when you give them a date when you're going to have a product done. But as soon as we say, okay, this one's done it’s ship into you, bam, we've got another one. With this new product line processes that we're putting in place will also absorb and take up some of that capacity off of those two large machining centers that have been doing a lot of the work, we were able to do that now on the spare capacity we have in this turnkey process. So that's going to be a major plus. But when we look at the team members that actually hands on, the , the welders, the fabricators, we continue to hire, it's a process that each department every single month, we're looking to bring in more and more to keep up with that capacity, and our HR team has done a marvelous job bringing them in place. So it's not that are we going to hire more and when, it's just a steady process of keeping up to the capacity that we're asking. There's a training process that has to happen. All those people that we were talking to, we were hiring in Q3 and Q4 of last year. Now they're knocking it out of the park, they're doing a tremendous job. So we have to hire people today, so that they can be very productive in a quarter or two from today, because there's a lot of training that's involved in with what we do.
Operator: Our next question comes from the line of John Bair with Wealth Advisors.
John Bair: So the international area seems to be kind of flat lining and I'm just wondering, Chris, I think you talked a little bit about it peers to be opening up. Do you really get a sense that some of the restrictions, travel restrictions and so forth, are easing up to where you can leverage your opportunities there?
Chris Cashion: I don't think, John, it's -- obviously the travel has really, really stifled us throughout that whole 2021 pandemic that we've gone through. The big problem that we had there is our engineers couldn't get out and get face to face, when we go from Dubai to Oman, or to Kuwait, or to Qatar, we couldn't get face to face with those customers and that's a big deal. And where we've been focusing on since Q3 of last year was identifying that channel partner, that already has those people in place. We're not a sales and marketing team and we tell people that right up front, that's not what we do, that's not who we are. There's channel partners that do that much better than we do. And so we've been identifying those channel partners that we thought would be the best fit for this, and I think that we have identified that channel partner. And I think that we've been just making sure we have the right inventory, making sure that we have the right tech support in place, which we do. We developed a filled still grading system that’s all digital. So it doesn't matter if the tool is running in Oman, or in Kuwait, or in Abu Dhabi. We have eyes on that tool when it's still graded and we can tell that customer, here's the -- there's an algorithm that runs that says you can run this tool again, or no, you need to send that back to us. And our technical team that we've put in place, which is a very good one, by the way, they're ready to hand this to a channel partner now and let them rock, and we're excited for that opportunity.
John Bair: Given it seems that you have more activity going on in North America, particularly with some opportunities opening up outside of your oil and gas, traditional oil and gas, or at least that's the sense I get from your press release. Is that really expanding quite a bit?
Chris Cashion: As far as the opportunities outside of oil and gas?
John Bair: Yes.
Chris Cashion: To be honest with you, it's expanding but we have not had the time to expand it as rapidly as it would like us to. The oil and gas, the marketplace, know that we've been in for 41 years. When it needs you, it needs you bad and when it does -- and of course, the other side of that. And we are still, we're still focused on diversification but the majority of our time is meeting the demand and keeping up with the demand that our customers need in the oil and gas. But we're not losing focus that -- there’s uptick, we’ll eventually go down like they always do and when they do, we need to be prepared for that. And that's -- so we're focusing on that. One of the things that you look at is, we've talked in the past about a Strider product line. We got Strider out, and you all heard me talk about Strider, this cool technology. And it is, it's phenomenal technology, and we got some good patents around it. And we built the first four of those tools that we sold to market in January or February of 2020. So a very high end customer who then that whole operation was shut down before they even got to use those, they tested them and had phenomenal results with them. Well, they just called here a couple months ago and said, hey, this project is kicking back off. We got these tools. We are going to put them in the hole. We're going to -- hopefully they work good for us. They work for them extremely well. And now the demand for that product line that we wasn't quite ready to resurrect yet, we know it's a good one, but we know there is a lot of possibilities there. So the people that we had working on this diversification model, I've had to pull off of that temporarily and get in these tools that are now coming in, that need to be repaired on this Strider coil tubing product line, and they are also saying get us more tools. We have a strong demand for that product line and request from customers. So that's one of the examples I like to give you when we are focusing on some diversification with a group of individuals. But then this comes back and we say, no, we've got to support that product line. It's going to be a good one. And then we'll get back to -- we are still looking at the diversification, but we'll get into it heavier as we get into the third and fourth quarter after we start ramping up this Strider product line.
John Bair: And so with this increased demand for products, are you able -- are you running your production line on three shifts now, or are you doing a 12 and 12, or how are you addressing that?
Chris Cashion: One of the things that...
John Bair: Aside from just hiring people…
Chris Cashion: Again, I hate to talk about 2020, because it's just -- I like to just move on from there, but we learned a lot. We learned a lot about our business. We learned a lot about our managers, our team players, our company as a whole. And so as we looked at, how do you retain people as we are in this environment that we were in the last two years. And one of the things that our HR team came up with our managers is a work schedule, that's a 24/7 in our machining side of the business, our fabrication side of the business. So we have teams working 24/7. Now that's not even close to coming maxing out our capacity, because we have machining cells that still could be utilized within that 24 hour day as we hire more techs, more machinists to operate these cells. We have got plenty of capacity there. But yes, we do run 24/7 in the machining side of the business. And it's on a schedule that our team finds very appealing, they like it and it's helping with retaining our quality team members. And I think we are probably going to roll that into the repair and remanufacturing side of the company as well. I know our managers are studying that now but it seems to have a lot of appeal for the workers of today.
John Bair: Last quick question and that is, you put a down payment and apparently took delivery of your 1.1 million machine. How is the rest of the balance of that being taken care of, is it cash payment or we’re extended out for a period of time?
Chris Cashion: No, we have got a financing agreement in place with the manufacturer of that machine, . So we'll finance the other 70%, so basically 30% down. We use cash for the down payment. And then we'll finance 70%. And the machine itself is all about 956,000, but the additional 150,000 or so to get to the 1.1 million, we got to do special work to reinforce the concrete where the machine sits. We've got what's called rigging and powering it up and just other miscellaneous costs associated with getting it up and running. So basically 956,000 or 70% of that number is what will be financed, which is roughly 650,000, 660,000. But that's an agreement we've already got in place, that will be fixed rate. The rate does float until we start off with final acceptance. And so far, I mean, we stay real close to financing, and so far the rate has not moved. It's not tied to prime, thank goodness but it hasn't moved so far. And we're hopeful that it won't move until we get to the final acceptance date. As Troy mentioned earlier, that's probably a couple of weeks. And then once we accept then it will be a fixed rate of 5.5% over five years.
Operator: Our next question comes from line of Mark Kaufman with MLK Investment Management.
Mark Kaufman: So the new machinery, if I get this correct, it basically will allow you to add value, value add to the drills that you're currently producing by expanding the process, and it also will be enable you to increase production overall in the plant. Is that right?
Troy Meier: That is right.
Mark Kaufman: That's a win-win. Very good. Thank you.
Troy Meier: Yes, it is. It's a win-win. It also allows us, Mark, to take on some product lines that maybe the machinery that we had in place, maybe wasn't as efficient as is it could have been for that specific product line. And so we identified a product line that we thought would be really, really a good one for us to adopt and identified the machine to do that efficiently. So it's some additional work that we have never done before.
Operator: There are no further questions in the queue. I'd like to turn the call back to management for closing remarks.
Troy Meier: Again, I'd like to thank everybody for being part of the Superior community, and we appreciate all your support. We're very excited about what we've got in place, the team that we've got in place and the maturity of the team and bringing in the right people, and putting them in the right positions, and getting the certifications that we needed to get. We spent the last two years getting that all in place. We still got to get the HS&E ISO 14001 in place, but I'm quite certain we'll have that by year-end. So look forward to our next earnings call. Again, thank you all for all your participation.
Operator: Ladies and gentlemen, this does concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.
