Superior Drilling Products [SDPI] Conference call transcript for 2022 q3
2022-11-11 13:49:03
Fiscal: 2022 q3
Operator: Greetings. Welcome to Superior Drilling Products, Inc. Third Quarter Fiscal Year 2022 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation Please note, this conference is being recorded. I will now turn the conference over to your host Craig Mychajluk. You may begin.
Craig Mychajluk: Thank you. And welcome everyone to our third quarter 2022 earnings call. Certainly appreciate you joining us today. Joining me 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. You should also have copies of slides that accompany our conversation today. If not, both documents can be found on our website at sdpi.com. Turning 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 the Securities and Exchange Commission. These documents can be found on our website 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. With that, please turn to Slide 3 and I'll turn it over to Troy to begin. Troy?
Troy Meier: Thanks, Craig. Thanks everyone for joining us for our third quarter 2022 call. We had another strong growth quarter with revenue of $5.2 million. Year-over-year, we have seen a 45% revenue growth, sequentially up 14% with an adjusted EBITDA margin just under 30%. We have had and continued to have some very strong customer demand. One of the things that I'd like to talk about a little bit is the hiring and training we have done throughout the first two quarters of this year coming into the third quarter and the benefit that we are seeing from that now, and we expect to continue to see this strong revenue growth throughout the remainder of the year and throughout 2023. We've seen a higher number of rigs using the flagship Drill-N-Ream tool. We've seen a 6% increase in new wells drilled, improved market conditions and increased drilling activity driving demand for our services. I want to say that the overall rig count was up right about 7%, which is a big plus for us. When you look at the balance sheet, one of the things we want to point out is the Hard Rock note is paid off. And that was -- we did that early on in October, but that's nice to have behind us and it's something the team has done a good job in getting that goal accomplished and moving forward. When you look at the capacity that we have in our facility, one of the things that we have done throughout the third quarter that I want everybody to be aware of is, we have continued to build out, as we look at our raising capacity, our machining capacity, this is all stuff throughout the quarter, that we have been working on very diligently. The one thing that we have is the equipment now that we have fabricated. We've doubled the ability to -- we've doubled our capacity in equipment, not in the human capital, but in the equipment. We've got that manufactured and put into place to support our growth. And as we hire and continue to hire, and train individuals to put this equipment to work that will allow us to bring more units through our facilities, I think you are going to see a big benefit by that as we go forward. One of the things I'd like to mention is we're extremely proud of our team's performance thus far in 2022 and their ability to capture the growth without sacrificing service, quality or safety. The team has done a phenomenal job. We're seeing our department leads take ownership, their understanding, their role in the business and they're doing a phenomenal job and we are very proud of that. And with that, I'm going to pass it on to Chris to talk about the numbers and then I'll come back and finish up. Chris?
Chris Cashion: Thank you, Troy, and welcome, everyone. Now let's turn to Slide 4. While we review our strength in top-line, as Troy just mentioned, our Q3 revenue increased 45% to $5.2 million, that's an increase over the prior year period of 45% and we grew 14% sequentially. We have continued to benefit from the, for the improvement in the North American oil and gas industry. And our success can also be attributed to the strong demand for our manufacture and refurbishment of drill bits and other related tools for our long-term legacy customer. North America revenue, which comprised 89% of our total revenue grew 52% year-to-year, largely due to the improving industry conditions and growing demand for our flagship tool, the Drill-N-Ream, which continues to demonstrate its value to operators by improving drilling efficiencies and reducing production costs. The U.S. rig count continued to grow in the quarter, although at a slower pace than previous periods. Average us rig count of 761 in Q3 was up 45 rigs sequentially, and up 264 rigs from last year's third quarter. We expect growth and the rig count to be flat this quarter versus Q3. And as of last Friday, the count stood at 770 rigs. Over the last year international market growth has been at a slower rate compared with our domestic market, but we are now beginning to see some improvement. Also as Troy Meier discuss, we are encouraged with the initiatives we have to expand our presence internationally. Now, let's please turn to Slide 5 to review our tool and contract services revenue, both of which are significantly higher. In an effort to simplify how we think about our business, we have combined all tool related revenue into one bucket. That's the navy blue part of those bar graphs. This bucket includes the sum of new drilling room tools, tool rental revenue, tool royalties and fleet maintenance fees. Total revenue for the quarter was $3.3 million, which represented almost two-thirds of our business and is completely derived from the Drill-N-Ream. This revenue line can have some lumpiness given the timing of new tool purchases by our channel partner with these tool purchases tending to come in batches. Overall, our revenue growth has been driven by higher market activity which is demanding more of our tools or more rigs. Of note, our international revenue, which is all from the Drill-N-Ream is contained in this tool revenue bucket. Now, let's move to contract services revenue. That was up 51% to 1.8 million as we have leveraged our improved capacity to support significant rise in demand from our legacy customer as they continue to value our high quality PDC bit and other tool manufacturing and refurbishment services. This part of our business has seen steady growth and we're working hard to expand our relationships with other major industry players, which over time is expected to bolster this revenue line. As you can see on Slide 6, total operating expenses were actually down 2% sequentially, as our teams have done a nice job on cost control efforts, while we still made the necessary investments to help us capture increasing demand for our products and services. On a year-over-year basis, the increase in expenses reflects global inflationary headwinds, which specifically have impacted our payroll expenses, supplies and repair and maintenance costs. We've also expanded our workforce to accommodate our growth with talent being added in the areas of quality, safety, and general manufacturing support. Importantly, we continue to demonstrate strong leverage on the SG&A line, specifically, which went from 43.6% of revenue and last year's third quarter, down to 33.3% of revenue in this year's third quarter, a significant improvement. Depreciation and amortization expense decreased approximately 11% year-over-year primarily because of fully amortizing a portion of intangible assets and fully depreciating some of our manufacturing center equipment. Inflationary pressures are expected to endure for at least the near-term, where our teams are working to optimize our processes build relationships, as we expand our global presence. On the labor front, we have had some success adding talent and moving those associates up the learning curve to be more productive and efficient. However, this is a daily battle to find and cultivate talent as we prepare for additional demand. As we discussed last quarter, we're using pricing to help combat the inflationary headwinds around materials and labor. We made some pricing changes in July and again in October, and we'll certainly use that labor next year if warranted. Our intellectual property lawsuit is progressing well. We're now entering the phase of interrogatory, production requests and depositions and expect related legal expenses to increase in Q4, 2022. The court has ordered both parties to be ready to go to trial by April 2023 and we expect a trial date to be set for late summer early fall 2023. That was depicted on Slide 7, our bottom line and adjusted EBITDA bounce back in third quarter nicely. We delivered net income of $639,000, $0.02 per diluted share, and achieved EBITDA of $1.5 million. Now this is our highest level in more than four years. Our adjusted EBITDA margin expanded 560 basis points to 29.5%. Now moving on to Slide 8, we take a look at our balance sheet. Cash was down sequentially during working capital timing and higher levels of inventory to combat supply chain inefficiencies and in support of the Company's growth. Cash generated by operations for the year ended period was $1.3 million. We did receive significant receivable remittances in early October, just after the quarter closed, as some of our larger customers were managing their own cash flows around quarter end. CapEx year-to-date was $2.6 million is related to machining capacity expansion. Higher maintenance initiatives and an increase in our Middle East drilling rig rental tool fleet. Those expenditures happened primarily in the first half of the year. A comparable period in 2021 had just under $600,000 of capital spending. Now, we did refine our capital spending expectations for fiscal 2022 to a range of between $3.5 million to $4 million. As a reminder, we announced at the end of September that we were awarded a grant of up to $750,000 by the state of Utah as part of their manufacturing modernization grant program. This grant has been flagged towards the cost of new high speed tight tolerance CNC machines and to-date we met the requirements to receive $675,000 of that grant and have recorded on the balance sheet and other current assets that receivable. The corresponding liabilities were recorded as deferred income. After the quarter closed in October, the $675,000 receivable was received and is now in the bank. Total debt was $3 million at quarter end. We did finance 70% or 675,000 at the purchase of one of our machines. Subsequent to the quarter end, as Troy just mentioned, we made our final $750,000 principal payment on our Hard Rock note. Now many of you may remember that the balance of this note was $12.5 million at the IPO of our company in May 2014. As Troy said, we are really pleased that, this obligation is now behind us. We are looking at our capital allocation priorities, assuming the consummation of the sale of the first stage of our Middle East drilling fleet the Bin Zayed. As we noted, we have increased our capital plan to support our growth expectations and also looking at paying off some higher interest cost debt. Now Slide 9 provides our expectations for 2022. With one quarter to go, we have refined our expectations in revenue and adjusted EBITDA for the year, revenues expected to come in between $22 million and $24 million, which implies a top-line growth at the midpoint of 72%. We're expecting our SG&A expenses to be between $7 million and $7.3 million and the net result is that we expect adjusted EBITDA to be in the range of $6.5 million to $7.5 million, which at the midpoint equates to an adjusted EBITDA margin of around 30% for the full year. Keep in mind these expectations do take into account the $3.8 million Stage 1 Middle East Drill-N-Ream tool fleet sale to Bin Zayed Petroleum in this quarter. If that sale does not occur during the fourth quarter, then our expectations for 2022 revenue would be between $18 million and $20 million. Adjusted EBITDA would be between $4 million and $5 million, both still significantly higher than last year. Now with that, I'll turn the presentation back to Troy to wrap up with a review of our future growth opportunities. Troy?
Troy Meier: Thanks, Chris. So looking forward, we are very optimistic about the rest of the year. Our outlook for 2023 is very pleasant as well. When we look at North America, the contract services, like I told you earlier, we have expanded with the equipment, that's needed to bring on other major industry companies. We have got a talent there that is really, really needed throughout the industry. When you look at the international opportunities, the MENA facility that we talk about, the refurbishment facility that's in Dubai, we have moved our technical and sales team in there. We are currently fabricating the equipment needed to do the refurbishment services there like we do here in North America. And we are looking to get that facility up and running in Q1 of '23 and that's going to open up all kinds of opportunities over there for us. We've been enhancing our sales and marketing team. We have been over in the past and we've gone over there mainly with technical people, and we are now focused on bringing on some high-end PDC professionals. And as we do that, we see major improvements to our revenue line. We continue to work with the Bin Zayed team, as we look at strengthening our opportunities in the Middle East and penetrate that market. So looking at the enhancing the manufacturing and support capacity, like I mentioned, we've doubled our brazing capacity. We have built that equipment. Most everything we use in our facility is fabricated by us. So when you look at the braise stations, the media blasters, this equipment that we use if we do buy something, it takes modification, but it's all made in-house and we've got most of that equipment built and ready to go. We continue to bring on new team members and train those. We're hiring very well. We're retaining very well. So, we're hiring at the speed that we can train. We do have problems with finding the right people, but our HR departments and our leads and each department, they've done a fantastic job of identifying the type of personnel that they want to bring in, that we can train and to perform the services we need done. So, we're very happy with that. When you look at the CapEx we're spending, we talked about it a minute ago. We've got two new 5 Axis machining centers coming in. There one is already in place and we've got it just about ready to start turning production parts that was purchased for a turnkey opportunity that we have on a product line for a major well filled service company. And the second 750 that we've got come in it's been boxed up and shipped right now out of Chicago coming our way. And we'll have it up and running in January, probably, I would say by the end of January, it should be up and running. And that's to support the need of the large parts that the 750 that we've talked about in the past, that's our very large 5 Axis machining center and we now have a duplicate to that machine that's going to one give us a little more comfort knowing that if one of the machines go down, we have a backup to that large machine. We'll continue to focus on gaining market share, get some strategic pricing in place, and we'll build strong Middle East relationships as we look at the end of this year and going into next year. We're very excited about what we've got ahead of us, and we look forward to reporting back to you all in March. So with that, let's turn it over to some Q&A.
Operator: And at this time, we will be conducting a question-and-answer session. And our first question comes from the line of Ignacio Bernaldez with EF Hutton. Please proceed with your question.
Ignacio Bernaldez: Good morning and thank you for your time today. Congratulations on the quarter. I'm calling on behalf of Ben Piggott here at EF Hutton. And we're wondering, looking at the impact of the DNR fleet sale, just how should we be thinking about the impact on the income statement in 2023 and beyond?
Troy Meier: We signed an agreement with Bin Zayed in June of this year. And we disclosed that in addition to this first stage tool sale, which is just under $4 million that we expect over a 12-month period of time $13 million in revenue. And so they -- we had initially thought that that initial stage sale would happen in Q3. But as we disclosed in our press release three or four weeks ago, that has slipped into Q4. So once we began the process of selling tools to them over the next 12-month period, so think in terms of 2023, roughly $9 million, total 13 minus 4 that we would get this quarter, roughly $9 million coming into this top line.
Operator: Our next question comes from the line of John Sturges with Oppenheimer & Company. Please proceed with your question.
John Sturges: Nice quarter gentlemen. I'm just curious about your hiring progress, progress was an initial goal of near 50 by the year-end, and I'm just -- I'm curious about how close you are to reaching that goal and if the available talent that you requires there?
Troy Meier: We've reached our goal, John. The talent that we've looked at one of the things that we've done is, as we've said, rather than trying to find someone that has braising experience or machining experience, we found that it's more productive for us to bring them up, if you will, through the Company. When we bring in an outside person that we don't know, we've never worked with before. Sometimes that's good, sometimes we're pleasantly surprised. And sometimes were unpleasantly surprised. And so, we've decided that we're going to take in and started at the ground level in our company and the employees, the team members that when we post the job opening that want to put in for that. That's what we do. We train that person. So, we've been fortunate with hires. We've hired very well. And we're doing some things in our manufacturing as far as machining. We have some talent there that is very good about teaching and training people on these high tech machines. And so, what we're able to do is we were bringing in a shop manager to manage the whole new product build facility. And the people that we have in there now we're really going to rely on them to train and train well. And that's what they do. So, I think we're in good shape there. And we have met our hiring goals.
John Sturges: I am curious also about the Bin Zayed business. You mentioned the actual product sales. I assume that may have included some tool rental. I'm curious about follow on tool rental and sales. Do you have an estimate for any of that?
Troy Meier: Yes, John. So that first $4 million tranche in Q4 that's all existing tool sales. There have been out a couple of million dollars that will follow in existing tool sales in early calendar year 2023. So, you have got roughly out that $13 million that I mentioned earlier. You will have about half of it, $6.5 $million of it, $6.5 million of it would be existing tool sales and then the rest of it will be selling Bin Zayed new tools and then sharing in a rental agreement in which we share revenue basically with Bin Zayed. So, roughly half of that $13 million in existing equipment sales and the other half in recurring ongoing sales.
John Sturges: Okay. And how should that play out? Will that be for the 2023 calendar year? Or should we think that goes to say like the third quarter? I'm just curious.
Troy Meier: Yes. Think in terms of calendar year 2023.
Operator: And we have reached the end of the question-and-answer session. I'll now turn the call back over to management for any closing remarks.
Troy Meier: Once again, thanks everyone for participating in this call and being part of what we are doing. Like I say, we are very optimistic about the remainder of the year and what 2023 is shaping up and looking like. And we look forward to reporting back to you in March, and we'll see you then. We sure appreciate it. Thanks.
Chris Cashion: Thank you.
Operator: This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.
