Q3 2024 Drilling Tools International Corp Earnings Call

Speaker Change: At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.

Operator: If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded.

As a reminder, this conference is being recorded.

Ken Denard: It's now my pleasure to introduce your host, Ken Denard.

Speaker Change: Now my pleasure to introduce your host Ken Dennard. Thank you Sir Please go ahead.

Unknown Executive: Thank you, sir. Please go ahead.

Unknown Executive: Thank you, operator.

Ken Dennard: Thank you operator, and good morning, everyone. We appreciate you joining us for drilling tool International's 2024 third quarter conference call and webcast with me today are Wayne praise on Jeep.

Ken Denard: And good morning, everyone. We appreciate you joining us for Drilling Tool International's 2024 third quarter conference call and webcast. With me today are Wayne Prejean, Chief Executive Officer, and David Johnson, Chief Financial Officer. Following my remarks, management will provide a review of third quarter results and the updated outlook before opening the call for your questions.

Ken Dennard: Keep executive Officer, and David Johnson, Chief Financial Officer.

Ken Dennard: Following my remarks management will provide a review of third quarter results and the updated outlook before opening the call for your questions.

Ken Denard: There will be a replay of today's call that will be available by webcast on the company's website at DrillingTools.com, and there will also be a telephonic recorded replay available until November 21st. Please note that any information reported on this call speaks only as of today, November 14th, 2024, and therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay listening or transcript reading. Also, comments on this call will contain forward-looking statements within the meaning of the United States Federal Securities Law. These forward looking statements reflect the current views of DTI's management.

Ken Dennard: There will be a replay of today's call. It will be available by webcast on the company's website at drilling tools Dot com.

Ken Dennard: And it will also be a telephonic recorded replay available until.

Ken Dennard: Until November 21st please note that any information reported on this call speaks only as of today November 14th 2024, and therefore, you're advised that time sensitive information may no no.

Ken Dennard: Longer be accurate as of the time of any replay listening or transcript reading.

Ken Dennard: Also comments on this call will contain forward looking statements within the meaning of the United States Federal Securities laws.

Ken Dennard: These forward looking statements reflect the current views of <unk> management.

Ken Denard: However, various risks and uncertainties and contingencies could cause actual results, performance, or achievements to differ materially from those expressed in the statements made by managers.

Ken Dennard: However, various risks uncertainties and contingencies could cause actual results performance or achievements to differ materially from those expressed in the statements made by management.

Ken Denard: The listener or reader is encouraged to read the Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K to understand certain of those risks, uncertainties, and contingencies. The comments today will also include certain non-GAAP financial measures included but not limited to adjusted EBITDA and adjusted free cash flow. We provide these non-GAP results for informational purposes, and they should not be considered in isolation from the most directly comparable GAP measures. A discussion of why we believe these non-GAAP measures are useful to investors, certain limitations of using these measures, and reconciliations to the most directly comparable GAAP measures can be found in our earnings release and in the filings with the SEC.

Ken Dennard: Listeners or reader is encouraged to read the annual report on Form 10-K quarterly reports on Form 10-Q, and current reports on form 8-K.

Ken Dennard: Understand certain of those risks uncertainties and contingencies.

Ken Dennard: The comments today will also include certain non-GAAP financial measures, including but not limited to adjusted EBITDA and adjusted free cash flow.

Ken Dennard: We provide these non-GAAP results for informational purposes, and they should not be considered in isolation from the most directly comparable GAAP measures.

A discussion of why we believe these non-GAAP measures are useful to investors certain limitations of using these measures and reconciliations to the most directly comparable GAAP measures can be found in our earnings release and in our filings with the SEC.

Ken Denard: And now with that behind me, I'd like to turn the call over to Wayne Prejean, DTI's Chief Executive Officer.

Speaker Change: And now with that behind me I'd like to turn the call over to Wayne praise on Dts, Chief Executive Officer Wayne.

Wayne Prejean: Wayne. Thanks, Ken, and good morning, everyone. I will provide some opening remarks and the call to David to go through the numbers and return with closing comments before we open it up for questions.

Wayne Praise: Thanks, Ken and good morning, everyone I will provide some opening remarks and the call to David to go through the numbers and return with closing comments before we open it up for questions.

Wayne Prejean: Let's get started. As you saw yesterday, we released our third quarter results after market. We continue to experience headwinds in the third quarter, including recount softness in U.S. land, U.S. Gulf of Mexico, and Middle Eastern markets. However, we are pleased to have sequentially grown our revenue, adjusted net income, adjusted diluted EPS, adjusted EBITDA, and our adjusted free cash flow from our 2024 second quarter results. Our total revenue came in at $40.1 million. Adjusted EBITDA was $11.1 million in the quarter, and adjusted free cash flow was $7.8 million, which is more adjusted free cash flow than we produced for the entire year of 2023.

Speaker Change: Let's get started.

Speaker Change: As you saw yesterday, we released our third quarter results. After market, we continued to experience headwinds in the third quarter, including rig count softness in U S land U S Gulf of Mexico, and Middle Eastern markets. However, we are pleased to have sequentially grown our revenue adjusted net income adjusted diluted EPS.

Speaker Change: <unk> adjusted EBITDA and our adjusted free cash flow from our 2024 second quarter results.

Speaker Change: Our total revenue came in at $41 million adjusted EBITDA was $11 1 million in the quarter and adjusted free cash flow was $7 8 million, which is more adjusted free cash flow than we produce for the entire year of 2023.

Wayne Prejean: In a moment, David will take you through the financials in more detail and provide our revised outlook. As we have been saying since going public last year, our goal is to become the premier drilling tools rental solution provider for servicing the World War construction and casing installation market sector. In order to accomplish this goal, we need scale. To that end, we have been extremely active in the M&A market, acquiring three companies in 2024 and announcing a fourth, which is expected to close in the first quarter of 2025. Our first two acquisitions this year were Deep Casing and Superior Drilling Products, which we are currently integrating and operating.

Speaker Change: In a moment David will take you through the financials in more detail and provide our revised outlook.

As we have been saying since going public last year. Our goal is to become the premier drilling tools rental solution provider for sure machine, the wellbore construction and casing installation market sections.

To accomplish this goal we need scale.

Speaker Change: To that end, we have been extremely active in the M&A market acquiring three companies in 2024 and announcing a fourth which is expected to close in the first quarter of 2025.

Speaker Change: Our first two acquisitions this year were deep casing and superior drilling products, which we are currently integrating and operating.

Wayne Prejean: We have spoken about these in detail on past calls. Our latest two deals announced subsequent to the end of the third quarter include the acquisition of European Drilling Projects, or EDP for short, which we closed on October 3rd. We followed that with an announcement on October 31st that we signed a definitive agreement to acquire Titan Tools Services Limited, a UK-based downhole tool rental company. Let's start with EDP, which is a global provider of next generation stabilizers, specialty reamers, and weldable optimization technology for the drilling industry. They bring additional cutting edge drilling tool solutions to DTI's technology portfolio, complementing our directional tool renovation, along with our weldable optimization technologies, such as the drilling rig.

Speaker Change: We have spoken about these in detail on past calls.

Speaker Change: Our latest two deals announced subsequent to the end of the third quarter include the acquisition of European drilling projects R. E. D. P for sure, which we closed on October four.

Speaker Change: We followed that with an announcement on October 31st that we signed a definitive agreement to acquire tightened tool services limited a U K based downhole tool with the company.

Speaker Change: Let's start with ETP, which is a global provider of next generation stabilizer specialty memories, and Wellbore optimization technology for the drilling industry.

Speaker Change: Bring additional cutting edge drilling tool solutions to D. T. I S technology portfolio complementing our directional tool rentals division, along with our well optimization technologies, such as the drilling rig.

Wayne Prejean: We're excited to offer these unique solutions to our customers addressing many known world war construction issues faced with extended reach horizontal and directional drilling. By securing EDP's innovative technology, intellectual property, and key personnel, we can offer premium value-added tools in a market segment typically characterized by commoditization. EDP's Eastern Hemisphere footprint and established market penetration further complements our global expansion strategy. Moving to Titan, their strong presence in the North Sea, Europe and Africa markets will allow us to better serve our international customers beginning in 2025. By combining our expertise in downhole drilling tools with Titan's commitment to service and support, we'll be able to offer a more comprehensive suite of solutions to the oil and gas and geothermal drilling industries worldwide.

Speaker Change: We're excited to offer these unique solutions to our customers addressing many known wellbore construction issues faced with extended reach horizontal and directional drilling.

Speaker Change: By securing edp's innovative technology intellectual property and Pete personnel, we can offer premium value added tools in our market segment typically characterized by commoditization.

Speaker Change: D P M eastern hemisphere footprint and establish market penetration further complements our global expansion strategies.

Speaker Change: Moving to tighten their strong presence in the North Sea Europe, and Africa markets will allow us to better serve our international customers beginning in 2025.

Speaker Change: By combining our expertise in downhole drilling tools with tightened its commitment to service and support will be able to offer a more comprehensive suite of solutions to the oil and gas and geothermal drilling industries worldwide.

Wayne Prejean: Together, all our acquisitions demonstrate our focus on international expansion and technology ownership. This is a good segue for me to provide an update on our international operations and integration processes where we have coalesced around a strategy we call One DTI. Integrating multiple businesses and operating groups is never simple. I recently spent two weeks in the Middle East region with our new team members, reviewing VTI's path to market by product line and geography. We have established a new leadership team for our Eastern Hemisphere Business Unit and sales efforts. This will facilitate the appropriate focus on structure and accountability in this important region.

Speaker Change: Together all of our acquisitions demonstrate our focus on international expansion and technology ownership.

This is a good segue for me to provide an update on our international operations and integration processes, where we have coalesced around a strategy we call one DTI.

Speaker Change: Integrating multiple businesses and operating groups is never simple. Our recently spent two weeks in the middle East region with our new team members with even the D. T. I S pasture market by product line and geography.

Speaker Change: We have established a new leadership team for our eastern Hemisphere business unit and sales efforts. This will facilitate the appropriate focus on structure and accountability in this important region.

Wayne Prejean: While I was in the Middle East, DTI exhibited at the annual ADIPEC convention in Abu Dhabi, with great success and engagement, giving us optimism for international growth in future periods. The goal for our One DTI strategy is to firmly establish structure and accountability for our team to maximize synergies, further enhance cost savings, foster better alignment across our global organization, and focus our teams on common goals and objectives. Our approach is to adopt best practices from all parties, and we are immediately adopting a common accounting system and migrating Eastern Hemisphere operations to our Compass Asset Management Platform to minimize replication and maximize accountability.

While I was in the Middle East DTI exhibited at the annual added Pet convention in Abu Dhabi with great success, and engagement, giving us optimism for international growth in future periods.

Speaker Change: The Gulf War or one D. T. Our strategy is to firmly establish structure and accountability for our team to maximize synergies.

Further enhanced cost savings foster a better alignment across our global organization and focused our teams on common goals and objectives.

Speaker Change: Our approach is to adopt best practices from all parties and we are immediately adopting a common accounting system and migrating eastern hemisphere operations to our accomplished asset management platform to minimize replication and maximize accountability.

Wayne Prejean: These systems will be implemented in the first half of 2025. We believe collating the best-in-class systems and processes from DTI and our newly-acquired businesses, we will have an organization and structure that generates excellent results for our customers, our employees, and our shareholders.

Speaker Change: These systems will be implemented in the first half of 2025.

Speaker Change: We believe collating the best in class systems and processes from DTI and our newly acquired businesses. We will have an organization and structure that generates Exxon results for our customers our employees and our shareholders. We look forward to reporting on our one DTI progress in next quarters Conference call.

Wayne Prejean: We look forward to reporting on our One DTI progress in next quarter's conference call. We continue to believe there are meaningful consolidation opportunities that exist in our sector. As our customers consolidate, so must the OFS. We have a solid M&A process and robust pipeline that will allow us to selectively and strategically consolidate numerous oil field service product and rental tool companies that meet the criteria for our growth plan. We have a proven team in process to achieve these integration strategies. While our sequential growth this quarter was not as much as we had anticipated, we believe our best-in-class, performance-driven, technologically-differentiated offerings, combined with our expanded global geographic footprint, will deliver solid growth in the coming years as energy markets recover.

Speaker Change: We continue to believe there are meaningful consolidation opportunities that exist in our sector has.

Speaker Change: As our customers consolidate so it must be Oss face, we have a solid M&A process and robust pipeline that will allow us to selectively and strategically consolidate numerous oilfield service.

Speaker Change: And our rental tool companies that meet the criteria for our growth plan.

Speaker Change: We have a proven team and process to achieve these integration strategies.

Speaker Change: While our sequential growth this quarter was not as much as we had anticipated. We believe are best in class performance driven technologically differentiated offerings combined with our expanded global geographic footprint will deliver solid growth in the coming years as energy markets recover.

Wayne Prejean: As we discussed in our last call, we implemented a cost reduction program for an annualized savings of $2.4 million that may be subject to additional adjustments given the softer market conditions. We continue to appropriately calibrate our operations to adjust for activity levels and as one DTI, we will continue to look for ways to boost our operational efficiencies and pursue our growth initiatives in other markets where those opportunities are available.

Speaker Change: As we discussed in our last call we implemented a cost reduction program for an annualized savings of $2 $4 million that may be subject to additional adjustments given the softer market conditions.

Speaker Change: We continue to appropriately, California operations to adjust for activity levels and as one D. T. I, we will continue to look for ways to boost our operational efficiencies and pursue our growth initiatives and other markets, where those opportunities are available.

Wayne Prejean: Looking longer term, energy demand trends remain robust. Many industry experts are forecasting that the medium to long term natural gas demand outlook is very strong, particularly with the new LNG capacities slated to come online in 2025 and 2026, and with electricity demand rising rapidly to accommodate the anticipated growth of data centers. DTI is well positioned for this industry trend.

Speaker Change: Looking longer term energy demand trends remain robust many industry experts are forecasting that the medium to long term natural gas demand outlook is very strong, particularly with the new LNG capacity slated to come online in 2025, and 2026 and was electricity demand rising.

Speaker Change: Rapidly to accommodate the anticipated growth in data centers.

Speaker Change: <unk> is well positioned for this industry trend with that I'll turn it over to our CFO, David Johnson for a review of our financial results and outlook.

David Johnson: With that, I'll turn it over to our CFO, David Johnson, for a review of our financial results and outlook.

David Johnson: David. Thanks, Wayne, and thank you, everyone, for joining us today. In yesterday's earnings release, we provided detailed financial tables, so I'll use this time to offer further insight into specific financial metrics for the third quarter. As Wayne mentioned, we saw continued rig count softness during the third quarter that impacted near-term synergy realization. But we're able to sequentially increase revenue, adjusted net income, adjusted diluted EPS, adjusted EBITDA, and adjusted free cash flow from the second quarter of 2024. DTI generated total consolidated revenue of $40.1 million in the third quarter of 2024. Third quarter tool rental revenue was $28.1 million and product sales revenue totaled $12 million.

David Johnson: I did.

David Johnson: Thanks, Wayne and thank you everyone for joining us today and yesterday's earnings release, we provided detailed financial tables. So I'll use this time to offer further insight into specific financial metrics for the third quarter.

David Johnson: As Wayne mentioned, we saw continued rig count softness during the third quarter that impacted near term synergy realization.

David Johnson: We're able to sequentially increase revenue adjusted net income adjusted diluted EPS, adjusted EBITDA and adjusted free cash flow from the second quarter of 'twenty 'twenty four.

David Johnson: <unk> generated total consolidated revenue of $41 million in the third quarter of 'twenty 'twenty four.

David Johnson: Third quarter tool rental revenue was $28 $1 billion in product sales revenue totaled $12 million.

David Johnson: Operating expenses were $35.8 million and income from operations was $4.3 million. Adjusted net income for the third quarter was $4.6 million, which represents an adjusted diluted EPS of $0.14 per share. Third quarter adjusted EBITDA was $11.1 million. and adjusted free cash flow was $7.8 million in the third quarter, which is more than the adjusted free cash flow we generated in all of 2023. As of September 30, 2024, we had approximately $12 million of cash and net debt of $32.1 million. Maintenance CapEx for the third quarter of 2024 was approximately 8% of total consolidated revenue. This portion of our capital investment has trended lower this year due to the decline in rig count and our customers focus on drilling efficiencies translating into fewer lost in hole and damaged beyond repair events.

David Johnson: Operating expenses were $35 $8 million and income from operations was $4 3 million.

David Johnson: Adjusted net income for the third quarter was $4.6 million, which represents an adjusted diluted EPS of 14 cents per share.

David Johnson: Third quarter, adjusted EBITDA was $11 $1 million.

David Johnson: And adjusted free cash flow was $7 $8 million in the third quarter, which is more than the adjusted free cash flow we generated in all of 2023.

As of September 30th 'twenty, 'twenty, four we had approximately $12 million of cash and net debt of $32 1 million.

David Johnson: Maintenance Capex for the third quarter of 'twenty 'twenty four was approximately 8% total consolidated revenue. This portion of our capital investment has trended lower this year due to the decline in rig count and our customers' focus on drilling efficiencies translating into fewer Boston hold and damage to be all repair events.

David Johnson: As a reminder, our maintenance capital is funded by tool recovery revenue, which keeps our rental tool fleet relevant and sustainable regardless.

David Johnson: As a reminder, our maintenance capital is funded by tool recovery revenue, which keeps our rental tool fleet relevant and sustainable regardless of the trend.

David Johnson: Now moving on to our outlook, we are revising our 2024 ranges, which include a sequential slowdown due to anticipated holiday breaks, budget exhaustion, and capital discipline being employed by our customers in the fourth quarter. We now expect 2024 revenue to be in the range of $145 to $155 million. We expect adjusted EBITDA to be within the range of $38 to $43 million. Gross capital expenditures are expected to be between $20 and $22 million. Adjusted net income for the full year is expected to be between $7.7 and $9.8 million. And finally, since a majority of our CapEx was incurred in the first half of this year, and we have curtailed or deferred other planned CapEx, we expect our adjusted free cash flow to range between $18 to $21 million for 2024, which remains more than double our adjusted free cash flow reported in 2023.

David Johnson: Now moving onto our outlook, we are revising our 2020 four ranges, which include a sequential slowdown due to anticipated holiday breaks budget exhaustion and capital discipline being employed by our customers in the fourth quarter.

David Johnson: We now expect 'twenty 'twenty four revenue to be in a range of $145 million to $155 million, we expect adjusted EBITDA to be within a range of $38 million to $43 million.

David Johnson: Gross capital expenditures are expected to be between 20 and $22 million adjust.

David Johnson: Adjusted net income for the full year is expected to be between 7.7 and $9.8 million.

David Johnson: And finally since a majority of our Capex was incurred in the first half of this year and we have curtailed or deferred other planned capex, we expect our adjusted free cash flow to range between $18 million to $21 million for 2024, which remains more than double our adjusted free cash flow reported in 2020.

David Johnson: Three.

David Johnson: We conservatively estimate that our Eastern Hemisphere revenue mix will grow from approximately 1% of total revenue in 2023 to 10% or more when we report full year 24 results.

David Johnson: We conservatively estimate that our eastern hemisphere revenue mix will grow from approximately 1% of total revenue in 'twenty, two 'twenty, 3% to 10% or more when we report full year 'twenty for results.

David Johnson: Previously, the company did not disclose its operating results in segment. Starting in the fourth quarter, with a footnote disclosure, we will be transitioning from one to two reporting segments. Eastern Hemisphere and Western Hemisphere. And this will be reflected in the company's annual report on form 10-K for the year ending December 31, 2024. The new reporting structure aligns perfectly with our One DPI strategy and reflects our commitment to enhancing transparency and aligning our operations with our global growth objectives as Wayne discussed earlier.

David Johnson: Previously the company did not disclose this operating result in segments.

David Johnson: In the fourth quarter with a footnote disclosure, we will be transitioning from one to two reporting segments.

David Johnson: Eastern hemisphere in the Western Hemisphere, and this will be reflected in the company's annual report on Form 10-K for the year ending December 31st 2024.

David Johnson: The new reporting structure aligns perfectly with our one D T I strategy and reflects our commitment to enhancing transparency and aligning our operations with our global growth objectives as Wayne discussed earlier.

David Johnson: We believe this change will enable us to better manage our business and allocate resources more effectively across different That concludes my financial review and outlook section.

David Johnson: We believe this change will enable us to better manage our business and allocate resources more effectively across different regions.

Speaker Change: That concludes my financial review and outlook section, let me now I'll turn it back over to Wayne to provide some summary comments before taking your questions.

Wayne Prejean: Let me now turn it back over to Wayne to provide some summary comments before taking your questions. Thank you, David.

Wayne Praise: Thank you David before we open up the lines for questions I want to welcome Edp's talented team to the DTI organization and we look forward to the tightened team joining us in the first quarter of 2025.

Wayne Prejean: Before we open up the lines for questions, I want to welcome EVP's talented team to the DPI organization. And we look forward to the Titan team joining us in the first quarter of 2025. As we continue to integrate deep casing, SEP, EDP, and we'll soon add Titan, we have greatly and purposefully expanded our geographical footprint, enhanced our technological capabilities, and positioned DTI as a leader in the evolving energy landscape. We believe 1DTI will be able to provide our customers with access to an even wider array of products and services with the addition of these quality organizations.

As we continue to integrate deep casing S. G. P. ETP and will soon that tightened we have greatly and purposely expanded our geographical footprint enhance our technological capabilities and position D. T I as a leader in the evolving energy landscape.

We believe <unk> will be able to provide our customers with access to an even wider array of products and services with the addition of these quality organizations.

Wayne Prejean: In conclusion, I would like to reemphasize that, first... We are competitive and profitable despite the soft market conditions. and we continue to be resourceful and innovative while combating pricing pressures. Second, We continue to evaluate our cost reduction program to adjust to market conditions. As we implement our One DTI strategy, we will take additional measures to adjust to lower near-term demand, and we believe we will be well-positioned to come out stronger when the market recovers with the best personnel, processes, products, and performance all aligned on best practice. Third, we are very pleased with the execution of our acquisition growth strategy, especially in light of the headwinds our industry has experienced.

Wayne Praise: In conclusion, I would like to reemphasize that first.

Wayne Praise: We are competitive and profitable despite the soft market conditions.

And we continue to be resourceful and innovative work combating pricing pressures.

Wayne Praise: Good.

Wayne Praise: We continue to evaluate our cost reduction program to adjust to market conditions as we implement our one <unk> strategy, we will take additional measures to adjust to lower near term demand and we believe we will be well positioned to come out stronger when the market recovers with the best personnel processes products and performance all aligned.

Wayne Praise: On best practices.

Wayne Praise: We are very pleased with the execution of our acquisition growth strategy, especially in light of the headwinds our industry has experienced.

Wayne Prejean: We believe acquiring high quality companies at attractive multiples positions DTI to successfully participate in the next three to five year expected growth cycle. This elevated demand should further strengthen the need for our technology, our solutions, our products, and our services globally.

We believe acquiring high quality companies at attractive multiples positions DTI to successfully participate in the next three to five year expected growth cycle.

Wayne Praise: This elevated demand should further strengthen the need for our technology, our solutions, our products and our services globally.

Wayne Prejean: And finally, there is no finish line. We believe additional thoughtful consolidation opportunities exist in oilfield services that will supplement our organic growth initiative.

And finally, there is no finish line, we believe additional thoughtful consolidation opportunities exist in oilfield services that will supplement our organic growth initiatives.

Wayne Prejean: I would again like to express my sincerest gratitude to every member of the DTI team for their continuous dedication to working in a safe, inspired, and productive manner. The commitment of our employees has been critical in driving our success, and I extend my heartfelt appreciation for their contributions.

Wayne Praise: I would again like to express my Sincerest gratitude to every member of the DTI team for their continuous dedication to working in a safe and inspired and productive manner. The commitment of our employees has been critical in driving our success and I extend my heartfelt appreciation for their contributions with that we will now take your.

Wayne Prejean: With that, we will now take your questions.

Operator: Operator. Thank you.

Speaker Change: Questions operator.

Speaker Change: Thank you we will now be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is another question. Kim you May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing.

Operator: We'll now be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key.

Speaker Change: Mr. <unk>. Our first question comes from the line of Jeff Grant with Alliance Global Partners. Please proceed with your question.

Jeff Grampp: Our first question comes from the line of Jeff Grampp with Alliance Global Partners. Please proceed with your question.

Speaker Change: Good morning, guys.

David Johnson: was curious to start first on the tool rental side of things. Revenue was pretty flat sequentially, but gross margins improved, you know, pretty noticeably. So just wanted to dive into that a bit more. I know we were expecting some benefit from the superior drilling merger and some of those cost synergies. So just wanted to confirm if it was largely that, any other factors going on and, you know, kind of expectations to continue that kind of level going forward. Thanks.

What.

Speaker Change: I was curious to just start first on the rental side of things.

Speaker Change: Revenue was pretty flat sequentially, but gross margins improved you know pretty noticeably. So I just wanted to dive into that a bit more I know we were expecting some some benefit from the superior drilling merger and some of those cost synergies. So I just wanted to confirm if that was largely that any other factors going on and kind of expectations.

Speaker Change: To continue that kind of level going forward. Thanks.

David Johnson: Jeff, happy, this is David, happy to take that question. Yeah, I think you kind of hit on it. A lot of that is due to the vertical integration of our, you know, superior drilling products benefiting the drill and ream product rental. So a lot of those costs flow through and improve the margins on that side of the business from that acquisition. I think we also have a little bit better utilization on some of our pipe and that's a pretty accretive margins when we get that utilization that benefited our margin as well.

David Johnson: Yeah, Jeff Happy this is David happy to take that question.

Yes, I think you kind of hit on it a lot of that is due to the vertical integration of our no superior drilling products benefiting the drill N ream product rental.

David Johnson: So a lot of those costs flow through and improve the margins on that side of the business from that acquisition.

David Johnson: I think we also had a little bit better utilization on some of our pipe and that's a pretty accretive margins when we get that utilization that benefited our margin as well.

Jeff Grampp: Great, appreciate that.

Speaker Change: Great I appreciate that and then maybe sticking on the superior drilling side of things can you guys just touch on how that integration process is going.

Jeff Grampp: And maybe sticking on the superior drilling side of things, can you guys just touch on, you know, how that immigration process is going? And then also some of the revenue upside synergies that you guys have talked about as well. I know, particularly the Middle East was an area you guys were excited about for the potential for drilling.

Speaker Change: And then also some of the revenue upside synergies that you guys have talked about as well I know, particularly the middle East was an area you guys, where we're excited about for the potential for the drilling rig.

Wayne Prejean: Yeah, Jeff, this is Wayne.

Yeah, Jeff This is Wayne.

Wayne Prejean: We've completed our integration with them in the Western Hemisphere and, you know, have each team focused on their respective responsibilities, and that's going well. In the Eastern Hemisphere, as I've mentioned in the call, spent a lot of time there in the last few weeks, along with meeting with various team members, trying to organize the multitude of deep casing and ED projects and the SDP team to get us all focused on one execution model, and that's in motion and going well, and the rental activity is starting to get traction. We should see some of that, you know, come to fruition in the Q4 and hopefully, you know, early in 2025, as we build momentum there with the acquisition of EDP and the integration with SDP.

Wayne Praise: We've completed our integration with him in the Western Hemisphere and have each team focused on their respective responsibilities and that's going well in the eastern hemisphere as I've mentioned in the call I spent a lot of time there in the last few weeks along with meeting with various team members trying to organize that the multi.

Wayne Praise: Two to deep casing and E D projects and the FCB team to get US all focused on one.

Wayne Praise: Execution model and that's that's in motion and going well and the rental activity is starting to get traction we should see some of that come to fruition and then into Q4 and hopefully you know early in 2025 as we build momentum there with the acquisition of Edp and the integration with STP. So.

Wayne Prejean: that's that's moving definitely in the right direction. And the Middle East market is, is albeit, you know, I'm not going to say soft, but not not overly vibrant, like it was before, with a few rig rigs being idled. But it is still a very vibrant market, you know, very, very big opportunity.

Wayne Praise: That's that's moving definitely in the right direction in the Middle East market is as albeit.

Wayne Praise: I'm not going to stay soft, but not not overly vibrant like it was before.

Wayne Praise: New rig rigs being idled, but it is still a very vibrant market.

A big opportunity for us.

Wayne Prejean: Great. Thanks, Wayne.

Speaker Change: Great. Thanks, and if I can sneak one more in on the M&A side of things the updated slide presentation still referenced a handful of targets that you guys are working on so I was just hoping you could share maybe kind of a flavor in terms of of size geographic focus and anything along those lines and then just broadly wondering how you guys are obviously.

Jeff Grampp: If I can sneak one more in on the M&A side of things, the updated slide presentation still referenced, you know, a handful of targets that you guys are working on. So I was just hoping you could share maybe kind of a flavor in terms of size, geographic focus, and anything along those lines. And then just broadly wondering, you know, you guys have obviously had a very active 2024 in terms of deals. I know, you know, some of them have been a little smaller, but, you know, just the overall comfort level to continue to be active on the M&A side of things.

Speaker Change: A very active.

Speaker Change: 2024 in terms of deals I know you know some of them have been a little smaller, but just the overall comfort level to continue to be active on the M&A side of things.

Wayne Prejean: So, you know, the opportunity landscape consists of everything from tuck ins to transformational, you know, mergers that are out there that we're, you know, we're, we're, we're looking into doing some, you know, some work on and we're going to continue to feed the pipeline of opportunities for M&A and find and pick what we think are the best types of deals that make sense for our strategy. So, they're still out there and we think the valuations are definitely range-bound within the market and I think the arbitrage between buyers and sellers is narrowing because people understand, you know, the way the industry is trending and that this type of cooperation between buyers and sellers and mergers and consolidations makes sense, you know, more, you know, now than ever.

Speaker Change: Sure.

Speaker Change: The opportunity landscape consists of everything from tuck ins to transformational.

Speaker Change: Mergers.

Speaker Change: That are out there that we're worth.

Speaker Change: We're looking into doing some you know some work on and we're going to continue to feed the pipeline of opportunities for M&A and find and pick what we think are the best.

Speaker Change: Types of deals that make sense for our strategy.

They're still out there and we think the valuations are definitely range bound within the market and.

Speaker Change: The arbitrage between buyers and sellers is narrowing because people understand that.

The industry is trending and that this type of cooperation between buyers and sellers and mergers and consolidations make sense.

Speaker Change: More now than ever so I think.

Wayne Prejean: So, I think, you know, we'll continue to pursue those opportunities and they're out there.

Speaker Change: We will continue to pursue those opportunities and they are out there for us.

Jeff Grampp: Okay, great.

Speaker Change: Okay, Great best of luck I appreciate the time, Thank you guys.

Jeff Grampp: Best of luck. I appreciate the time. Thank you guys.

Speaker Change: Okay great.

Speaker Change: Thank you. Our next question comes from the line of Steve <unk> with Sidoti <unk> Company. Please proceed with your question.

Steve Ferazani: Our next question comes from the line of Steve Farazani with Sidonian Company. Please proceed with your question.

Steve Ferazani: Morning, Wayne, David, appreciate the detail on the call. I wanted to start by let me follow up on the on the M&A topic. The two acquisitions you made recently, EDP, I understand the fit there with the focus on premium tools and international markets.

Speaker Change: Good morning, Wayne and Dave I appreciate the detail on the call.

Speaker Change: Wanted to start by let me follow up on the on the M&A topic. The two acquisitions you made.

Speaker Change: Recently, Edp I understand the fit there with the focus on premium tools in international markets tightened tool seemed a little bit different beyond just getting you more international exposure can you help us understand how tightened tools fits the M&A strategy.

Wayne Prejean: Titan Tools seemed a little bit different beyond just getting you more international exposure. Can you help us understand how Titan Tools fits the M&A strategy?

Wayne Prejean: Yeah, Steve. Titan is also a nice tuck in with our directional tool rentals platform where we're basically renting tools across, you know, the VHA. In addition, they also have poll openers and other product lines that they bring and add to our portfolio. What I particularly like about them is their presence in Europe and many, many projects that initiate for West Africa and places like that, but usually originate from the Aberdeen area. There's a lot of technology incubators there. So they bring a nice geographic addition to what we already do. And we were already partnered with them somewhat as our distributor for many of our products in that area.

Yeah, Steve Titan is.

Speaker Change: Also a nice tuck in with our directional tool rentals platform, where we're basically written tools across you know for DHA.

Speaker Change: Segment. In addition, they also have whole openers and other product lines that they bring and add to our portfolio, what I, particularly like about them is their presence in.

Speaker Change: Europe and you know.

Speaker Change: Many many projects.

Speaker Change: Projects that initiate for West Africa, and places like that usually originates from the Aberdeen area. There's a lot of technology incubators. There. So they bring a nice geographic addition to what we already do and we were already partnered with them somewhat is there where our distributor for many of our products in.

That area. So this is a nice bolt on for us and a good cultural group that aligns well with us with a couple of facilities that help us launch more and more of our other products. So blended all together it gives us better infrastructure better spreads and better better portfolio offering.

Wayne Prejean: So this is a nice bolt-on for us and a good cultural group that aligns well with us, with a couple of facilities that help us launch more and more of our other products. So blended all together, it gives us better infrastructure, better spread, and better portfolio.

Steve Ferazani: Great, that's helpful. The adjustment to guidance, not a surprise. I think we've, you're at the latter end of earning season, we've heard budget exhaustion fairly repeatedly through the season.

Speaker Change: Great that's helpful.

Did the adjustment to guidance not a surprise I think with the law.

Speaker Change: End of earning season worker and budget exhaustion fairly repeatedly through the season I wanted to get your sense have you started to see the slowdown yet I know frac spreads are down the last couple of weeks, but rig count has held up or is that more what customers are saying and if I can add to that question laugh.

Steve Ferazani: I want to get your sense, have you started to see the slowdown yet? I know FRAC spreads are down the last couple of weeks, but rig counts held up. Or is that more what customers are saying?

Steve Ferazani: And if I could add to that question, last year we saw that happen, but then there was a very slow start to 2024 before it ramped up. Would you expect a similar trend?

Speaker Change: Year, we saw that happen, but then there was a very slow start.

Speaker Change: 2024 before it ramped up would you expect a similar trend.

Wayne Prejean: So, you know, we kind of joke among ourselves and said, this is the most organized downturn and stable downturn we've ever been a part of. But the reality is, it's just been an adjustment of activity based on, you know, our customers' production needs. To answer your question, we see it flat. We feel a flattish market. I think the recount's going to ebb and flow. You know, we might see some more softness before we see some uptick, but I think our customer base has made a commitment, particularly the oil and gas companies in the U.S. and North America, and I think in international markets.

Speaker Change: So you know we kind of joke among ourselves as I said. This is the most organized downturn and stable downturn, we've only been a part of it.

Speaker Change: Oh.

Speaker Change: But the reality is it's just been an adjustment of activity based on our customers' production needs to answer your question. We see it flat we feel that a flattish market I think the rig count is going to ebb and flow we might see some more softness before we see some uptick but.

Speaker Change: I think our customer base has made a commitment of particularly the oil and gas companies in you know in the U S. In North America, and I think even in the international markets. Many of them have said they've got a stated goal to achieve a certain production target.

Wayne Prejean: Many of them have said they've got a stated goal to achieve a certain production target. And whatever that takes, that's what they'll do. If they can do it with less rigs, they will. If they need more, they will. It's footage-based, it's performance-based, and all of them are operating on capital discipline.

Speaker Change: And whenever that takes that's what they'll do what they can do with less rigs. They will if they need more they will it's footage basis performance based and all of them are operating on capital discipline and as we follow that theme we.

Wayne Prejean: And as we follow that theme, we operate in under the same thematic approach to our business, right? When we think about the amount of headwinds in U.S. land this year, and clearly it got more challenging than probably what a lot of us were thinking at the beginning of the year. You're still guiding for almost in the range of $20 million in adjusted free cash flow.

Speaker Change: Operating under the same thematic approach to our business right.

Speaker Change: When we think about the amount of headwinds in U S land this year.

Speaker Change: And clearly, it's got more challenging and probably with a lot of us were thinking at the beginning of the year.

Speaker Change: Still guiding for almost in the range of $20 million and adjusted free cash flow, what's the message there from from your business model in the rental tool model.

Wayne Prejean: What's the message there from your business model and the rental tool model? So we feel like despite the ups and downs of the market, we can always choose to run a sustainable business. And the way we do that is what I just mentioned, is equivalent capital discipline to the market. We do make investments in our fleet to make it sustainable, and we are going to support our customers. But at the same time, we're mindful of making too many aspirational investments where we don't feel the market is in a position to reward you for that risk.

Speaker Change: So we you know we feel like the <unk>.

Speaker Change: Despite the ups and downs of the market. We all we can always choose to run a sustainable business in the way. We do that is what I. Just mentioned is it equivalent capital discipline to the market.

We do make investments in our fleet to make it sustainable and we are going to support our customers, but at the same time we are.

Speaker Change: We're mindful of making too many aspirational.

Speaker Change: Our investments, where we don't feel the market is in a position to reward you for that.

Speaker Change: That risk so I think its risk based capital disciplined investment and strategic materials fleet.

Wayne Prejean: So I think it's risk-based capital discipline investment in strategic materials, fleet, you know, knowing what your customers have, and we can generate a very healthy free cash flow margin that I think is peer competitive in the marketplace.

Speaker Change: Knowing what your customers have and we can generate a very healthy free cash flow margin that I think is peer competitive in the marketplace.

Okay.

Speaker Change: Thanks Lee.

Speaker Change: Yeah.

Speaker Change: Yeah.

Steve Ferazani: Thank you.

Speaker Change: Thank you. Our next question comes from the line of Blake Mclean with Daniel Energy Partners. Please proceed with your question.

Blake McLean: Our next question comes from the line of Blake McLean with Daniel Energy Partners.

Blake McLean: Hey, good morning, guys. Hey, one more on M&A. You talked a lot about it here. You guys have great insights. Last few deals, a bit more international bent. Are there differences in terms of what the M&A market looks like in North America versus internationally? And what would you share about that kind of opportunity set and how they differ and how the market sentiment might differ?

Speaker Change: Hey, good morning, guys.

Speaker Change: Good morning.

Speaker Change: Hey, one more on M&A, you've talked a lot about it here you guys have great insights and last few deals, but more international than.

Speaker Change: Are there differences in terms of what the M&A market looks like in North America versus internationally in and what would you share about that kind of opportunity set and how they differ and how the market sentiment might differ or anything like that.

Wayne Prejean: So to be clear, you're wondering what's the difference between the M&A market, Western Hemisphere versus Eastern Hemisphere? Yes, sir. Yes, all right, great. There are numerous opportunities in both markets. You know, I mean, the ones in the Eastern Hemisphere a little bit less Transparent, what I mean by that is they're spread across multiple countries, whereas in North America, you kind of have a more seamless type of business and legality of how the business operates and functions with customer basis. But there are numerous foreign companies based, you know, with most of their business in the Eastern Hemisphere that some of them U.S.

Speaker Change: So to be clear you're wondering what's the difference between the M&A market Western hemisphere versus eastern hemisphere.

Speaker Change: Yes, Sir.

Speaker Change: Alright, great.

Speaker Change: There are numerous opportunities in both markets.

You know I mean, the ones in the eastern hemisphere, a little bit less.

Speaker Change:

Speaker Change: What we're not what I mean by that is they are spread across multiple countries, whereas in North America, you kind of have a more seamless type of business and legality.

Of how the business operates and functions with customer basis. So.

Speaker Change:

Speaker Change: But there are numerous foreign companies based with most of their business in the eastern hemisphere that.

Wayne Prejean: owned, some of them not, that are opportunistic for us, that fit the profile of what we want to accomplish. We may have a few more challenges in making those acquisitions because of the complexity of multiple countries and contracts and all of the nuances that go along with operating in those markets. But they're definitely out there with sticking power and the ability to be good, bolt-on, accretive type deals for us.

Speaker Change: Some of them U S owned some of it not that are opportunistic for us that fit the profile of what we want to accomplish.

Speaker Change: May have a few more challenges in making those acquisitions.

Speaker Change: The complexity of multiple countries and contracts and all of the nuances to go along with operating in those markets, but they are definitely out there with sticking power and the ability to be good bolt on accretive deals.

Speaker Change: Deals for us.

Wayne Prejean: In the U.S. market, you know, I think we kind of all know where the lane is. It's all about range down valuations and how we get more economies of scale. We have to be more competitive. I mean, doing acquisitions, particularly in North America, just makes us more competitive. We've got to lower our costs and deliver more value for our clients, and I think that's where the benefit comes here.

Speaker Change: In the U S market.

Speaker Change: I think we kind of all know where the name is it's all about range down valuations and how we get more economies of scale, we have to be more competitive I mean, we'll do an acquisition, particularly in North America, just makes us more competitive.

Speaker Change: You've got a lower our cost and deliver more value for our clients and I think thats, where they have been if it comes here so.

Blake McLean: Does that answer your question? Absolutely.

Speaker Change: Does that answer your question absolutely. Thank you for that color.

Blake McLean: Thank you for that, Culler. On the international piece, you've got, you know, different reporting going forward.

Speaker Change: On the international piece, you've got different reporting going forward any sort of targets or aspirations that you guys might share in terms of what that revenue mix might look like over the next few years, what the growth rate might be.

Wayne Prejean: Any sort of targets or aspirations that you guys might share in terms of what that revenue mix might look like over the next few years, what the growth rate might be, anything like that you might share? So one of the reasons we adjusted our segment reporting as such is to... So we expect that market to grow. I think we've already stated that it was 1% of our income In 23, it'll be 10% in 24, and we expect it to grow more significantly in the future. So we'll be able to measure that year to year.

Speaker Change: Anything like that you might share.

Speaker Change: So one of the reasons, we adjusted our segment reporting as such as.

Speaker Change: Is too.

Speaker Change: Right.

Speaker Change: Yeah.

So.

Speaker Change: We expect that market to grow I think we've already stated that it was 1% of our our income.

Speaker Change: In 'twenty three it will be 10% and 24, and we expect it to grow more significantly in the future. So.

Speaker Change: That's done we'll be we will be able to measure that.

Blake McLean: So that's one of the reasons we took that approach. Understood.

Speaker Change: Year to year. So that's one of the reasons, we took that approach.

Speaker Change: Yeah.

Blake McLean: Okay.

Speaker Change: Understood. Okay. Thank you guys very much for the time this morning.

Wayne Prejean: Thank you guys very much for the time this morning.

Yeah.

Speaker Change: Okay.

Wayne Prejean: Thank you.

Speaker Change: Thank you.

Operator: This concludes our question and answer session.

Speaker Change: This concludes our question and answer session I'll turn the floor back to management for closing comments.

Wayne Prejean: I'll turn the floor back to management for closing comments. Alright, thanks everybody for listening and attending and your interest in Drilling Tools International. We look forward to reporting in future quarters and, you know, measuring our progress.

Alright, thanks, everybody for listening and attending and your interest in drilling tools International we look forward to reporting in future quarters in measuring our progress have a great day.

Unknown Executive: Have a great day. Thank you.

Speaker Change: Thank you. This concludes today's conference call you may disconnect. Your lines at this time. Thank you for your participation.

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