CARBO Ceramics Inc. (CRR) CEO Gary Kolstad on Q2 2019 Results - Earnings Call Transcript

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About: CARBO Ceramics Inc. (CRR)
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Earning Call Audio

CARBO Ceramics Inc. (NYSE:CRR) Q2 2019 Results Conference Call July 25, 2019 12:30 PM ET

Company Participants

Gary Kolstad - President and CEO

Ernesto Bautista - VP, CFO

Conference Call Participants

Ben Carl - Simmons Energy

Bill Dezellem - Tieton Capital Management

Operator

Hello, and welcome to today's CARBO Ceramics Inc. Second Quarter 2019 Earnings Conference Call. Please be advised, this call is being recorded today, July 25, 2019, and your participation implies consent to our recording this call. If you do not agree to these terms, simply disconnect.

Some of our comments today may include forward-looking statements, reflecting the Company's views about future prospects, revenues, expenses, or profits. These matters involve risks and uncertainties that could cause actual results to differ materially from our forward-looking statements. These statements reflect the Company's beliefs based on current conditions that are subject to certain risks and uncertainties that are detailed in the Company's press release and public filings.

Our comments today also include non-GAAP financial measures. These non-GAAP measures, include EBITDA and adjusted EBITDA, are not a substitute for GAAP measures and may not be comparable to similar measures of other companies. A reconciliation of net loss to EBITDA and adjusted EBITDA as discussed on this call is presented in the Company's earnings release, which is available on its Web site.

Your host for today's call is Mr. Gary Kolstad, Chairman and Chief Executive Officer of CARBO Ceramics, Inc. Mr. Kolstad, please begin your call.

Gary Kolstad

Good morning. And welcome to everyone to our second quarter 2019 earnings call. As I did last quarter, I'll spend time discussing where we're at in the transformation process and then also highlight what we're doing to accelerate that. The strategy to transform the company is not an easy task nor is it a quick one, but we believe our strategy to diversify is the correct one for the long term sustainability of our business given the extreme volatility of the oil and gas market.

You might ask why do we believe we'll be successful in our transformation strategy. In short, it will be by leveraging CARBO's four core strings which are material science, technology solutions, manufacturing expertise and marketing and sales and client expertise. We're a very unique company and that our technology, skills and products can be transformed and sold into other industries that really sets us apart from other companies.

We are well along the way in executing our transformation strategy to diversify our revenue streams into more profitable businesses and reduce our reliance on oil and gas activity. For the first half of 2019, our industrial environmental revenues made of approximately 25% of our total revenue, which is up from 20% in the first half of 2018.


In addition, we continue to see better margin results from cost reductions and an improved product mix. In addition, in recent months, we have started to accelerate our strategy through inorganic opportunities. Myself and several other members of the management team are spending the majority of our time looking for opportunities, ranging from joint marketing agreements, to partial investments to acquisitions. These efforts are evidenced by our recently announced agreement with FracGeo to enhance our FRACPRO software offerings.


This agreement will allow revenue sharing opportunities and a larger addressable market opportunity with these enhanced technology offerings. We believe this opportunity could expand into an ownership investment. We are also in the process of making additional enhancements to FRACPRO, whereby individual well that will be available on the cloud for use by operators. This will allow operators to assess and analyze completion data real-time, allowing modification real-time, as well as an integration of completions data into common platforms for further analysis.

We are targeting our software revenues to grow approximately 20% plus in 2020, primarily driven by our FRACPRO FracGeo agreement and our cloud enhancements for FRACPRO. Additionally, we signed an exclusive marketing agreement with DAKOT, an industrial ceramic grinding media manufacturer to expand our suite of CARBOGRIND grinding products to include larger ceramic media sizes and heavier densities. These products are needed for certain milling equipment specifications, as well as certain raw ore requirements. These are offerings we did not have in our products suite previously, and increased our ability to address a wide range of client needs and geographies. We expect this agreement alone to provide an approximately 10% revenue growth in our industrial ceramic revenue in 2020.

In addition to these two examples, we are in active discussions regarding acquisition opportunities to further diversify and expand product offerings across multiple markets, including bringing value-added technologies to the industrial and agricultural markets. We expect to have something to announce here by the end of the year.

So to sum things up, we're pleased with the progress made on accelerating our transformation strategy during the quarter, from expanding our product offerings in industrial markets to enhancing our software offering, agreements that were signed will pave the way for future growth.

Now turning to a recap of our second quarter results. Revenues for the second quarter of $43 million decreased 9% sequentially and 27% year-on-year. The difficult North American oilfield market was the primary reason for both the sequential and year-on-year decline. Although, revenue was down 9% sequentially due to the continued challenges and volatility in the oil and gas markets, our adjusted EBITDA loss of $5.8 million improved $4.3 million sequentially as the revenue mix favored higher-margin technology products. There were a few large jobs that were delayed during the quarter, which if completed could provide a meaningful uplift in EBITDA for the second half of 2019.

Our oilfield sector revenue for the second quarter of 2019 comprised approximately 76% consolidated revenue. We are pleased that even in this difficult market, we continue to find success for our ceramic technologies in the oil and gas market. Revenue for those products increased 26% sequentially. Additional details of these highlights can be found in the technology and business highlights of our press release this morning.

Our industrial sector revenue for the second quarter comprised approximately 7% of consolidated revenue. We're very focused on getting our under-utilized plant capacity back to producing products. In this regard, we did see some success with contract manufacturing revenue increasing over 700% year-on-year. The growth in contract manufacturing results is in improved fixed cost absorption at our manufacturing facilities and benefits our profitability.

During the quarter, we executed the definitive agreements that will govern our previously announced strategic partnership with PicOnyx for the production of M-Tone, a new family of functional pigments for the plastics, paints, ink, coatings and adhesive markets. We continue to work with PicOnyx on the commercialization of the product, and we should start to see benefits in late 2019 with expansion in 2020 as PicOnyx expects to ramp up M-Tone product sales in the market.

We are excited for PicOnyx to start getting this product out in the market. Recall this product is targeting the high performance black pigment market, which is estimated to be close of $1.5 billion or $2 billion market. Our environmental sector revenue for the second quarter comprised approximately 17% of consolidated revenue. The difficult NAM oilfield impacted our environmental business. We have been very focused on growing our sales into other industrial applications, and are seeing some success. Sales of our products into industrial applications grew approximately 250% year-on-year. We're continuing to build a solid foundation of industrial sales with our ASSETGAURD products, which aligns with our overall corporate strategy to diversify our revenue streams across many markets.

Now, turning to the outlook. The CARBO over the past will not be the CARBO of the future. Our recently signed agreements to expand our product portfolio in industrial market and enhance our oil and gas software offering is just the beginning. As mentioned in our release this morning, late stage discussions are underway to capitalize on additional opportunities, including potential contract manufacturing opportunities with other companies. For context, these opportunities vary in size but in aggregate, could provide incremental EBITDA of $20 million annually if we execute on all these initiatives. We believe these opportunities will set CARBO on a new path by continuing to reduce reliance on oil and gas activity, and provide a platform for growth for many years to come.

Although, the first half of 2019 revenues were weaker than expected, we expect that revenue for the second half of 2019 to be stronger as delayed oil and gas projects from the first half are completed, as well as we expect to capitalize on some industrial opportunities. As a result, we believe EBITDA should continue to improve as we work to produce consistent positive cash flow. In addition, the recently signed agreements previously noted as possible additional opportunities to accelerate our path to achieve this consistent cash flow EBITDA and profitability.

In the oilfield, we expect a stronger half in the second half given the delays experienced for technology ceramic products during the second quarter. Both KRYPTOSPHERE HD and LD sales should see continued growth and contribute meaningfully to revenue. In addition, we anticipate technology sales of SCALEGUARD and CARBONRT to also have good results as we close out the year.

In the industrial sector, as mentioned previously, we experienced a temporary reduction in industrial sales due to clients' equipment process changed during the quarter. As this client presumes normal activity and we are able to capitalize on the positive results from a number of our industrial product trials, we anticipate industrial sales to grow in the second half compared to the first half. We continue to put an immense amount of effort into closing contract manufacturing opportunities.

The process is long, but we're optimistic recent successful manufacturing field trials will result in project awards. These projects vary in size but some opportunities at hand could observe very substantial amount of our idled assets. This is important considering our profit and loss statement has been burned by more than $14 million of under absorption and idling costs already in 2019.

I want to discuss the specifics of these projects in a strict confidentiality agreement we have in place. But when these projects are awarded, they provide predictable and profitable work utilizing our idled assets. These opportunities are key to overcoming the profitability challenges we face today. And it's imperative we get our assets back to work. In the environmental sector, additional industrial sales resource were added during the second quarter of 2019. We expect these additions to lead to increased industrial sales for ASSETGAURD products over the remainder of the year.

In addition, our client count is growing to our e-commerce platform, CARBODIRECT, which overtime will lower client acquisition costs and improve working capital. Maintaining healthy cash flow is a high priority as we continue our transformation process. Excluding any potential M&A transactions and assuming oil and gas activity stabilizes, we anticipate our cash levels to remains fairly flat for the remainder of the year.

And with that said, I will turn it over for questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session [Operator Instructions]. And our first question comes from Ben Carl of Simmons Energy. Please go ahead.

Ben Carl

Just a couple of quick ones from me. First can you just talk about maybe cost absorption, and what that may look like with higher activity in Q3, Q4 and how that may affect margins?

Gary Kolstad

So really it's going to depend on the production cadence as we're managing inventory. So I would say as we're producing at higher level, that particular under absorption goes down, that's of the way the math works. At the moment, I would say, we would estimate that given activity at least into the third quarter that that under absorption would subside some as we're able to capitalize more into the inventory. Ultimately, the margins flatten, I guess, because your driver either absorbing in an inventory or you are taking that as a period cost. But at least for third quarter, I think we would see a little bit of benefit.


Q - Ben Carl

And then just one more, I guess on technology product mix and how that helps margins in Q2 and just with adding technology to the portfolio. Can this be more of a sustained margin tailwind in Q3 second half going forward? Or just what does that look like, going forward?

Gary Kolstad

I think we think the second half will be better than the first half for sure, and the second quarter was better than the first quarter in oil field technology. And in the industrial world, our products there have, of course, much better margin than, let's say, a lot of the products in oilfield, the base ceramic or sand, stuff like that. So any growth in industrial ceramic is very, very good for us. And environmental business actually has decent margins too. So we've been expected to be better in the second half.

Operator

Our next question comes from Bill Dezellem of Tieton Capital Management. Please go ahead.

Bill Dezellem

Thank you. I have a group of questions here, and so if I go too long, please just cut me off. First of all, would you please discuss the -- is it DAKOT grinding agreement, however, that is properly pronounced?

Gary Kolstad

Yes, it's a manufacturer of industrial ceramic media. We've made an agreement and also manufacturing suppliers' agreement, as well as a regional exclusivity marketing and sales agreement with them. Our portfolio, while pretty good, needed to expand to get to larger sizes and heavier densities, and they were in that business. So we're fortunate to develop a relationship. And it could farther than what we're at today, like a lot of these things we're looking at, we talk about. I think I threw out the words joint marketing agreement, initial investment, or acquisition. That's the model we're looking at a lot of these projects we're working on in the background. But these guys produce a good product and we're going to take it to market.

Bill Dezellem

And is this product that you are not able to produce in your facilities, or that you believe your facilities are better suited for other products that you think you're going to be selling them with?

Gary Kolstad

No, Bill, it was just a matter of the size and the density. So you have a combination of both the raw material, as well as the processing side of it and we didn't have that capability. So it's a nice little marriage.

Bill Dezellem

And the timing of when you're going to be able to begin selling these products, and just how big this -- the market is that they address?

Gary Kolstad

We're in business right now. And I think we -- we don't want to spill too much of that out. But what we did say is that it'll probably increase our industrial ceramic revenue next year by 10% because of that agreement alone. So that's how we'd characterized it.

Bill Dezellem

Let me shift then to your comments in the release about contract manufacturing and field trials. Provide some details around that and fill in as many of the planks if you can please?

Gary Kolstad

We've recently done a trial or two with some companies. And in this case, they are fairly large companies. And what they are looking for is additional capacity to increase the volume of products they can put out. So you can come and see us. We can make them. You don't have to put in capital to build plants and all that stuff. So it's the essence of contract manufacturing. And like said, we can't tell you what product it is nor the company because of the agreements. So that's one of them.

On the second part, we're also trying to get in with just pure raw processing of, let's call it, more raw materials. So not necessarily taking it all the way to finished product type of level. And so any of those, if we can get into high volume and start to consume a line at one of the plants, it really makes a material difference. And the sales cycle is long. But if we get these things worked out, I think just the general agreements are pretty long as well, the client stickiness is pretty good and we're pretty darn good at manufacturing, and we've got some wonderful folks set at these plants. So the relationship we've had with clients is very good, and we got a lot of knowhow there. So I think it's starting to work and we will communicate more after we lend some of these.

Bill Dezellem

And to what degree do you think there's a chance to land either of them by the end of the year?

Gary Kolstad

I think we -- on the one, we'll probably know within third quarter. The second one, I think we'll know within the fourth quarter.

Bill Dezellem

And it's the large company for that with the undisclosed product that would be Q3, and the raw material of production in Q4?

Gary Kolstad

Probably. Although, the raw material might be a trial in Q3, which will determine the Q4.

Bill Dezellem

And then did we hear correctly that the oilfield technology product sales were up 26% sequentially?

Gary Kolstad

Yes, from Q1, they are up. And we expect a little stronger performance assuming that the couple of large jobs that got pushed. So if they complete those, you'll see -- we should see a better second half too. And that should take place. Some in these big jobs are really to move around a lot though just given the complexity of the wells.

Bill Dezellem

And would you talk about what you're seeing on that front and that push and pull, and why the push took place out of Q2 and the risk of pushing further?

Gary Kolstad

In the offshore world and into very complex wells that a lot of things can happen, we never disclose client names. But we had one well not last year -- not last year, well actually, we completed last year and supposed to be complete the year before, so almost a delay of one year on a well. And there are unbelievably expensive wells, or unbelievably critical. So that's one that can move around a lot. I would also characterize that we're seeing a lot of success internationally with our oilfield technology products.

Everybody knows the difficultly of the low quality rocks in U.S. onshore and partial of Canada too. So everybody is trying to see how they can possibly make these lower quality rocks work. But internationally, where you have more conventional reservoirs, we're seeing more adoption of our technology and next year our base ceramic too. So our guys have done a good job definitely.

Bill Dezellem

And then a couple of our financial questions. To what degree is the Wilks credit agreement supportive of or encouraging acquisitions versus this is more your strategy and I guess I'll say there going along with it?


A - Gary Kolstad

Bill, I think I'd characterize it as; one, the refinancing allowed us some room in the form of cash to really pursue some of these opportunities in earnest that those funds would otherwise -- would have been repaid. In addition, we have some latitude built into the existing credit facility that allows us to pursue certain types of acquisitions maybe, by that I mean size, maybe even be a little creative on how we fund them. As we continue to identify opportunities, there's a likelihood that we would turn to our senior lender and involve them in certain cases where an opportunity maybe bigger than what we were maybe eligible to do or allowed to do. And see if there's some creative way of working through it to allow us to exploit that opportunity.

Ernesto Bautista

I'd say they've been very supportive. Good deal is a good deal, Bill. So we can come up with something that financially makes sense, I think it'll be very supportive.

Bill Dezellem

And I posed the question in the spirit of them having the warrants and the agreement, expanding their ability to purchase more stock. So just on the surface, it seemed as though this was something different than your typical bank relationship where all they want is their interest and money back. These guys appear as though they might be looking for more. That's what I was trying to capture with the question.


A - Gary Kolstad

I think, I would make the statement that it's been a very constructive relationship and we believe it'll continue to be constructive.

Bill Dezellem

Thank you. And then did I hear correctly that the new initiatives that you're working on could increase your EBITDA by $3 million to $20 million? And if I did hear that correctly, would you talk about that difference that's a pretty wide gap, this $20 million would actually take you up to net income breakeven. So walk through that if you would please?

Gary Kolstad

So when I said during the commentary there, the joint marketing agreements, initial investment or acquisition, that's why we put such a broad range on it. I think what we -- couple of things that we landed will have positive EBITDA ratifications. Some of the things we think we're going to capture will have positive in it. The projects that we are -- myself and entire management team working on right now if we landed all of those, you'd probably that that's high range. So we want to put bookings on both sides of that, and it's one of the things that excites us and we're working hard on that. So I can tell you that it's every day we're trying to get more of these to cross the finish line.


Q - Bill Dezellem

And these are initiatives that would carry past of the end of the calendar. Am I understanding correctly that you're not expecting if you have always done by the end of the year or at least decisions by the end of the year?

Ernesto Bautista

I think that's an appropriate characterization, Bill. Some of these maybe to put it in this way, some as we noted with FracGeo, there was; step one, which is joint development, joint marketing; step two, we're looking at potential investment or acquisitions on some of the larger opportunities. That may be me to same courtship. It maybe that we start with a contract manufacturing arrangement, joint marketing arrangement, as Gary has indicated and then the broader step would be some type of M&A. And those unfortunately don't happen overtime, especially as -- and some of these might be very large, it just takes time from a diligence standpoint and obviously, back to having to be creative and how we approach them from a structural standpoint.

Bill Dezellem

I do have additional questions, and I can either re-queue or follow-up one on one. What is your preference?

Gary Kolstad

Please go ahead, Bill.

Bill Dezellem

So let's talk about the large jobs that were delayed from the second quarter. Can you talk about -- I agree these offshore that you're talking about. And what is the current schedule now?


A - Gary Kolstad

One of them is offshore. And we think that it's potentially at the end of the third quarter, good role into the fourth. The other one is in onshore well and you know what you're seeing a little bit, it's not just U.S. onshore but probably North America onshore. Clients are making some decisions to delay completion. And so there is means for us to sometimes get the cash if they change their mind and decide not to complete it in a quarter, so we wait. And having said that, I think Ernesto had characterized this correctly as we won't record revenue. But indeed we got material paid for that just sits on the balance sheet.

Ernesto Bautista

That's right. This is in keeping with something we've discussed in the past, Bill, where into the degree we can, we're trying to change a model and that is we're going to make an upfront investment in form of inventory or production that we try and recoup that upfront in addition to reducing the terms on our receivables. So as Gary mentioned, we look to try and get payments, even though -- upfront, even though the revenue itself may not be recognized until later point.

Bill Dezellem

And then you did see a blip here in your grinding media sales. Would you talk about that process, equipment process change that led to that? And please take it back to the real basic level, because I don't think I fully understand how the product is used and therefore, what an equipment change really means?

Gary Kolstad

Well, at the end of the day, the CARBOGRIND products are put into mills and they may be horizontal mills, meaning like a two that sit there rotating, and are beautiful around CARBOGRIND, pellets are put in there to grind up first minerals and this goes round and round till they grind it up. It would be a vertical mill too. So whenever clients go through things, such as changing out those mills or having to replace the liners of those mills, or just those type of things, it's not like a refinery downtime but there is a certain amount of time that's down. I'm not going to say their name obviously, but this is a mining company internationally, and it's our largest clients. And so -- but things are back to work now, so it's just those things that happen.

Bill Dezellem

And so really you could as much characterize this as a turnaround if we think about it in the refinery terms for the mining operations or the mining process operations rather than any wholesale change?

Gary Kolstad

Yes, it's not -- obviously, nothing is complex as a refinery turnaround. But yes, it'd be like us losing the kiln at a plant that's probably a better way to characterize it. You're down for a while, right, while you fix this.

Bill Dezellem

And is this change that they have done going to lead to either more or less ongoing sales of product from CARBO to them?

Gary Kolstad

I will say, this client has been a wonderful client and as we've introduced new products in this past year with high performance standards, they've been someone that adopts that. And usually, if you adopt the higher performance product, both sides will win on it. They'll get better performance. We'll probably get a little bit more money. So it's been a nice marriage for a lot of years now. And so the answer is yes.

Bill Dezellem

Then let me shift again, if I may, the pigment and paint market, that's a new one at least for me. Would you talk about that, talk about the opportunity and how that even came about?

Gary Kolstad

Well, they approached us, and this is PicOnyx. They approached us and we had idled equipment, and we have an extreme amount of knowhow at the plant. So it was some modifications, small amount of investments certain trial and error. We both worked together to be able to produce the product or certain amount of permits all that stuff it's needed everything, because it's a new product for the market. It's an incredible product. It's going to go into the high performance black pigment market. And it'll outperform literally anything on the market.

So we made an arrangement. The assets we contributed gave us a certain amount of equity. We have a manufacturing contract with them and an equity ownership. And so we're anxious, I think, we'll get product I think late Q3 or early Q4 out in the market. And so the sales process is a little bit long as well, but we're very appreciative of the PicOnyx management and they've been over and gave us their marketing and sales plan. So they've identified the clients, we're going to go to. And it's a little late weighting on us to get the product out the door and the way we go.

And for us I mean this is the kind of thing we really like a high performance high value product we have and an equity investment in the future or if things are successful, we may want to expand that. So this is the kind of product we like. This is like KRYPTOSPHERE HD, that's how you should think about it, Bill. This is the KRYPTOSPHERE HD of the black pigments.

Bill Dezellem

And then speaking of KRYPTOSPHERE, let's talk about KRYPTOSPHERE XT. Its interest -- I don't have a lot of familiarity with it. And yet, it seems as though the unconventional wells have shunned anything technology really at the expense of just having the lowest cost possible. And yet, you referenced in the release XT being used in unconventional wells. Would you please bridge the gap between what we think of this unconventional well usage of technology and XT being incorporated in?

Gary Kolstad

Well, XT is in between KRYPTOSPHERE LD and KRYPTOSPHERE HD. So it's in between meant to handle those stresses in balance sheet there. And it's probably much more a high profile well than your unconventionals. You are correct. The economics when you have to deal with low quality rocks, such as the shales, they're just trying to figure out how they can economically make it work and it's impacting the entire oilfield service industry, as well as E&P in the U.S. and part of Canada. So that's -- while we may do a job or two, that's probably really very deep, very high stress wells if it's on onshore. And internationally, it probably has so much more applications, offshore it has much more applications. But it's a product that's in between LD and HD.

Bill Dezellem

And you just said you think it has more application offshore than it does onshore?

Gary Kolstad

Yes. None of us are too happy with North America onshore and the economic challenges of dealing with low quality rocks and trying to make it work. So I need to characterize a little bit. If the oilfield picks up, we're there. But having said that, our focus is on oilfield technology ceramic, the software business in oilfield, and the rest of it will be what it may. But we absolutely want to move as much of the companies as we can into more of the industrial world and because it's a different value, right. People are struggling to make North America onshore work.

Bill Dezellem

So maybe follow up with this, KRYPTOSPHERE HD has primarily been used in those deep tertiary wells. And yet, there are a number of wells that are being drilled offshore that are not going into that zone. So what proportion of the non-HD wells, say in the Gulf of Mexico that are being drilled. Do you think that XD could be addressing.

Gary Kolstad

It's got to be fairly deep wells. We're selling some KRYPTOSPHERE LD for the shallower wells. We even sale CARBOLITE, one of our older products in the shallower wells. But you get that flow to tertiary type of depth and some people will be trying the XD for sure.

Bill Dezellem

Understood. Thank you both for the time and taking all the questions.

Operator

Our next question comes from [Fritz von Carp] of [Checkway] Capital Management. Please go ahead.

Unidentified Analyst

One question let me ask on the industrial business, you had one customer doing their process maintenance, or whatever they are were doing you talked about. How was the trend of revenue growth, excluding that? It's been a terrific growing business mid double digits. Aside from this temporary issue, are you still on that trajectory or has something changed?

Gary Kolstad

Yes, I think the expansion of our product portfolio in the grinding products, CARBOGRIND, really is going to help us, because that held us back a little bit. Sometimes clients want to have the entire breath of product. So when they do contracts, if you can't supply the whole portfolio, sometimes you're excluded. Secondly, in the foundry business, we had hoped that would work faster given the OSHA issues regarding the permissible exposure limits and things like that. But that moves slower than we thought.

And our next path on here, which will be a multi-multiyear path, is moving into other categories, and in particular, filtering, catalyst support or catalysts. And we're in the process of actually adding, trying to add people, experienced people in those places. So that's a long-term growth and I think we're in the first inning.


Q - Unidentified Analyst

And the KRYPTOSPHERE wells that were delayed that you talked about. Is it -- just so I understand, is it the case that your client or clients is going forward with those wells, but it's like drilling is taking a little bit longer, one of those things? Or was it delayed prior to a final investment decision?

Gary Kolstad

The one is, yes, definitely just drilling operational delays. The second one, the well has been drilled but they're just waiting to complete. And you're going to -- you've seen a lot of that in gas areas and stuff like that, the commodity prices still are low. Oftentimes things are called DUCs, drilled but uncompleted. This is a much more high profile well but it was the same methodology, they just didn't complete it right now.


Q - Unidentified Analyst

And then just let me ask you to discuss generally your strategy regarding the balance sheet. I see you paid some debt down in the quarter, but unless I missed it, it didn't really -- it's not a detail breakdown of what you paid down. So what that did you pay down, are all the near term maturities, this year maturities paid off for? And just in general, what's your strategy for the balance sheet?

Ernesto Bautista

At the beginning of that quarter, we did pay down some debt, possibly $27 million that was due that came do. We also, during the quarter, made a payment on our senior notes and then subsequently refinanced that. So the senior debt remains at $55 million, but that gave us some additional liquidity to work with, as mentioned earlier, to work on some of these growth initiatives. We continue to have a very constructive relationship with our senior lender.

And I think on top of that maybe reiterating some of the things that we're doing just from a practice standpoint to help bolster cash reserves, the balance sheet that we are approaching our clients when there are large orders and asking them to at minimum cover our costs of a particular product, maybe cash cost of a particular product. And as opposed to running the risk of having to hold the inventory for an extended period of time, which has happened in the past. I think we're seeing some benefit from that, as well as some benefit from our initiative to reduce downturns as opposed to what we've seen historically with respect to DSO. Every client is treated a little bit differently just given circumstance, but that's the general trend that we're pushing forward.

I think that's where we are. We're going to continue to push hard at reducing cost, which will also help bolster cash. And as we've mentioned I think consistently throughout, the goal is to continue to push hard on this diversification strategy, these growth opportunities and where we may need to go back to our lender and think about creating ways to get some of them down we will.

Unidentified Analyst

So you have a pretty substantial amount of the cash on the balance sheet. If I just look at cash and debt, it would say the cash burn was about $5 million in the quarter, which is reasonably small. Is that about what it was, or it was a little bit more because of refinancing?

Ernesto Bautista

No, that's probably in the ballpark.

Unidentified Analyst

And just one last question, there was some new line items, some operating leases that were -- so I'm not sure if those are on the balance sheet. Is that new or is that related to the recent accounting change or what were those?

Ernesto Bautista

It's simply the accounting change where you now have to book both the liability and an asset for any leases that you have, be it office lease or whatever it might be.

Operator

This concludes the question-and-answer session. Mr. Kolstad, I will turn the call back to you for closing remarks.

Gary Kolstad

Okay, thanks everyone for joining us this morning. A couple of -- summarizing some key points for you. The management team, we're working tirelessly to find new growth opportunities to help us diversify away from the highly cyclical oil and gas industry. We're pretty unique company with our four core strengths, and that really allows us to transform our technology and our products into other industries relatively quickly. And the other unique thing about us is that, we have all these assets, people, plants, everything. So we don't need a lot of capital, let's say, to transform the company. Now we just need to get these assets back to work. So I thank you for joining us and we'll see you again next quarter. Thanks.

Operator

The conference is concluded. Thank you for attending today's presentation. You may now disconnect.