Q4 2024 Drilling Tools International Corp Earnings Call
David Johnson, Unknown Executive, David Johnson, Drilling Tool International
Greetings, welcome to Drilling Tool's International 2024 Year End of Fourth Quarter Earnings conference call.
At this time, all participants are in a listening mode. A question and answer session will follow the formal presentation.
Speaker Change: If anyone wants to require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. There's now my pleasure to introduce your host, Jack Von. Thank you, you may begin.
Thank you Operator, and good morning everyone.
Jack Vaughan: We appreciate you joining us for Drilling Tools International's 2024 year-end and fourth-quarter earnings conference call-and-webcast. With me today are Wayne, Prajjan, Chief Executive Officer, David Johnson, Chief Financial Officer.
Jack Vaughan: Following my remarks, management will provide a review of year end, fourth quarter results and 2025 outlook, before opening the call for your questions.
Jack Vaughan: There will be a replay of today's call that will be available by webcasts on the company's website at DrillingTools.com And there will also be a telephonic recorded replay available until March 21st.
Jack Vaughan: Please note that any information reported on this call speaks only as of today, March 14, 2025, and therefore, you revise that any time-sensitive information may no longer be accurate as of the time of any replay listening or transcript reading.
Jack Vaughan: These four looking statements reflect the current views of DTI's management. 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 management.
Jack Vaughan: The listener or reader is encouraged to read its annual report on Form 10K, quarterly reports on Form 10Q and current reports on Form 8K, to understand certain of those risks, uncertainties and contingencies.
Jack Vaughan: The comments today will also include certain non-GAAP financial measures, including but not limited to adjusted evita and adjusted free cash flow.
Jack Vaughan: We provide these non-GAAP results for informational purposes and they should not be considered in isolation from the most directly comparable GAAP measures .
Jack Vaughan: A discussion of why we believe these non-GAAP measures are useful to investors, certain limitations of using these measures and reconciliation to the most directly comparable GAAP measures can be found in our earnings release and our filings with the SEC.
Jack Vaughan: And now with that behind me, I'd like to turn the call over to Wayne, Prajjan, D.T.E.I.s Chief Executive Officer, Wayne.
Wayne Prejean: Thanks, Zach, and good morning, everyone. I will provide some opening remarks before handing the call over to David to review the numbers. I'll then provide a few final thoughts before we open it up for questions.
Let's get started.
Wayne Prejean: As you saw in our pre-release last month, and in our detailed earnings release yesterday, we are proud of our strong finish in a tough industry environment.
Wayne Prejean: Despite the industry wide headwinds that persisted in Q4, including Rick Count Saltness in U.S. land, U.S. Gulf, and Middle Eastern market, we generated 2024 revenue growth at the high end of our guidance, and our adjusted EBITDA was near the midpoint of our guidance.
Wayne Prejean: For adjusted net income, we finished the year above the high end of our guidance and we more than doubled our prior year adjusted free cash flow.
Wayne Prejean: We generated 2024 adjusted EBITDA of 40.1 million and adjusted free cash flow of 17.2 million.
Wayne Prejean: As of December 31st, 2024, we had approximately 6.2 million in cash and cash equivalents and net debt of 47.6 million.
Wayne Prejean: In a moment, David will take you through the year-end and fourth quarter financials in more detail and discuss our 20-25 outlook.
Speaker Change: We have now been a public company for seven quarters and our mission remains as clear today as when we began. We continuously demonstrate to our customers we are the premier Drilling Tool's rental solutions provider for servicing the well-balker structure and casing installation market
Speaker Change: We believe our expertise, experience, and market leading position enables us to continue our growth initiatives through expansion and consolidation.
Speaker Change: We've been extremely active in the M&A market to generate the scale needed to achieve our mission.
Speaker Change: As part of this process, throughout 2024, we acquired 3 companies, deep casing tools, superior drilling products, and European drilling projects. In the first quarter of 2025, we closed on our fourth acquisition, Titan Tool Services.
Speaker Change: These acquisitions, which I have detailed in prior calls, demonstrate our focus on international expansion and technology ownership.
Speaker Change: Our integration approach is to adopt best practices from all parties and implement a common accounting system that migrates all Eastern hemisphere operations to our Compass Asset Management platform to minimize replication and maximize accountability.
Speaker Change: These systems conversions will be completed 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 will foster an organization and structure that generates excellent results and efficiencies for our customers, our employees, and our shareholders.
Speaker Change: We look forward to reporting on our progress in future conference calls.
Speaker Change: We have a solid M&A process and robust pipeline that will allow us to selectively and strategically consolidate numerous oil-filled service product and rental tool companies that meet the criteria for our growth plan.
Speaker Change: We have a proven team and process to achieve these integration synergies.
Speaker Change: We believe our best-in-class performance driven technologically differentiated offerings combined with our expanding global geographic footprint will deliver solid growth as energy markets
Looking at the longer term, Energy Demand Trends Remain Robust.
Speaker Change: Many industry experts are forecasting that the medium to long-term natural gas demand outlook is very strong.
Speaker Change: Particularly with the new LNG capacity slated to come online in 2025 and 2026, and with Electricity Demand Rising, DTI is well positioned for these industry trends.
Before I turn the call over to David,
Speaker Change: I want to commend our employees for their unwavering commitment to safety.
Speaker Change: in 2024, DTI achieved a remarkable total recordable incident rate of 1.15, marking a significant 6.5% improvement year-over-year. This achievement is particularly noteworthy given the challenges faced in our industry.
Speaker Change: Our employees' proactive approach to safety combined with effective safety protocols and training programs has been instrumental in driving this improvement. We are proud of this accomplishment and look forward to continuing our efforts to ensure safe and healthy workplace for everyone.
Speaker Change: With that, I'll turn it over to our COFO, David Johnson, for a review of our financial results and outlook. David, thanks, Wayne, and thank you everyone for joining us today.
David Johnson: In yesterday's earnings release, we provided detailed year-end, fourth quarter financial tables. So I'll use this time to offer further insight into specific financial metrics.
Speaker Change: Wayne gave an overview of full-year results in its opening comments, so I will provide some color on our fourth quarter results.
Speaker Change: We generated consolidated revenue of $39.8 million with tool rental revenue of approximately $31.5 million and product sales revenue of $8.3 million.
Speaker Change: While we saw continued recount softness and some fourth quarter budget exhaustion in 2024, Revenue was nearly flat sequentially.
Speaker Change: Fourth quarter revenue also increased over last year's fourth quarter by 13%, despite a 4% global recount decline over the same period. We believe this is a true testament to the resiliency of our business model and diversified geographic footprint.
Speaker Change: Total operating expenses were $38 million and income from operations was $1.8 million. Net loss for the fourth quarter was $1.3 million and adjusted net income was $600,000.
Speaker Change: Deluded EPS for the fourth quarter was a loss of four cents per share, and adjusted Deluded EPS was a profit of two cents per deluded share.
Speaker Change: Fourth quarter, adjusted EBITDAW was 9.1 million, and adjusted free cash flow was 5.9 million.
Speaker Change: While we made decisions throughout the year to delay or deferir CAPEX, we maintained our CAPEX been to support the momentum we are seeing from our organic rotissier product growth story.
Speaker Change: As a result, adjusted free cash flow was slightly below our expectations in the fourth quarter, but important to note that adjusted free cash flow was still more than double the prior year.
Speaker Change: Gross Prophet Margin was down just slightly from the prior quarter and declined 2.5% over a queue for 2023.
Speaker Change: While we are seeing top line growth, pricing pressure, lower tool recovery revenue, and a change in the overall product mix related to acquisitions is impacting our growth's profit margins as expected.
Speaker Change: However, despite the lower gross margin, the product sale additive mix is accretive to adjusted free cash flow since it does not require capex.
Speaker Change: Our S-GNA expense increased in the fourth quarter due to the full impact of recent acquisitions. For 2024, our S-GNA expenses reflect the first full year of public company cost plus the acquisitions that were not reflected in the prior year.
Speaker Change: Looking at maintenance capex for the fourth quarter, it was approximately 8.5% of total revenue.
Speaker Change: This portion of our capital investment trended lower in 2024 due to the decline in rig count and our customers focus on drilling efficiencies translating into fewer lost and whole and damaged beyond repair events.
Speaker Change: As a reminder, our maintenance capital is primarily funded by tool recovery revenue, which keeps our rental tool fleet relevant and sustainable regardless of the trend.
Speaker Change: To summarize the full year of 2024, we saw the effect of acquisitions and the organic growth in the rotissier product line, more than offset some of the decline in our directional tool rentals product line revenue and tool recovery revenue.
Speaker Change: Both directional tool rentals and tool recovery revenue were impacted by the activity decline Many of our customers faced in 2024
Speaker Change: Pricing pressure, product mix, and fully burdened public company cost have impacted our overall margins. However, we will be able to improve the overall margin as we continue to build scale and manage cost.
Speaker Change: Now moving on to our outlook, we expect 2025 revenue to be in the range of 163 to 183 million dollars.
Speaker Change: We expect adjusted EBITDA to be within the range of $40 to $50 million.
Speaker Change: Gross Capital expenditures are expected to be between $23 and $29 million and finally we expect our adjusted free cash flow to range between $17 to $21 million for the full year 2025.
Speaker Change: As we discussed last quarter, and coinciding with the closing of the acquisition of Titan tools services in January , we have realigned DTI's operations to support our strategic initiatives to expand our global operations and reach new markets, particularly in the Eastern Hemisphere.
Speaker Change: As a result, effective January 1, 2025, the company will be reporting results in two segments, Eastern Hemisphere and Western Hemisphere.
Speaker Change: This re-alignment of our reportable segments corresponds with changes to our operating model, management structure, and organizational responsibilities.
Speaker Change: As of December 31, 2024, this realignment has not yet been reflected within the company's financial statements.
Speaker Change: Therefore, beginning with the first quarter, our 10 keys for 2025 will reflect the new reporting segments and corresponding information for prior periods, will be retrospectively revised to reflect this change in our reporting segments.
Speaker Change: This new reporting structure reflects our commitment to enhancing transparency and aligning our operations with our global growth objectives. 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 turn it back over to Wayne to provide some summary comments before taking your questions.
Wayne Prejean: Thank you, David. Before we open up the lines for questions, I want to officially welcome Titan's talented team to the DTI family.
Wayne Prejean: As we continue to integrate deep casing, STP, EDP, and Titan, we have greatly expanded our geographical footprint, enhanced our technological capabilities, and positioned DTI as a leader in the evolving energy landscape.
Wayne Prejean: We believe we 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: I would like to point out that we remain competitive and profitable despite soft market conditions and we continue to be resourceful and innovative while combating pricing pressures.
Wayne Prejean: We constantly evaluate customer activity levels and adjust our operations to align with the demand.
Wayne Prejean: and we believe we will be well positioned to come much stronger when the market recovers with the best personnel, processes, products and performance all focused on best practices.
Wayne Prejean: And finally, as I have said before, we believe additional thoughtful consolidation opportunities exist in oil field services that will supplement our organic growth initiatives.
Wayne Prejean: We believe acquiring high quality companies and attractive multiples positions DTI to successfully participate in the next three to five year expected growth cycle.
Wayne Prejean: We are very pleased with the execution of our acquisition growth strategy, especially in light of the headwinds our industry has experienced.
Wayne Prejean: Our Quad technologies are gaining traction due to their unique value and differentiated technological advantages.
Wayne Prejean: Some examples are, our deep casing group deployed our mech lock swivel for installing extended reach completion tools and it is making steady progress on locations across the globe. Our Rebelizer tool is also gaining traction in the well bore abandonment segment.
Wayne Prejean: Our proprietary stabilizer and reamer technology, acquired from ED projects, is also growing rapidly and making a contribution in both hemispheres on land and offshore markets.
Wayne Prejean: Elevated Demand for Complex World War Solutions will further strengthen the need for our differentiated technology and the value-edith solutions we provide our clients across the globe.
Inclusion
Wayne Prejean: We value and appreciate our customers, our employees and our shareholders.
Wayne Prejean: I would like to thank every member of the DTI team for their continuous dedication to working in a safe, inspired, and productive manner.
Wayne Prejean: This commitment by our employees is crucial in driving our success and is integral to our future growth. With that, we will now take your questions. Operator?
Speaker Change: Thank you. If you would 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 would like to remove your question from the queue.
Speaker Change: and for a participant choosing speaker equipment and maybe necessary to pick up your handset before pressing the star keys. One moment will we pull for questions.
Speaker Change: Our first question is from Jeff Grampp with Alliance Global Partners. Please proceed.
Morning, guys. Thanks for the time.
I'm going to jump. First, I want to start on the B&A market, obviously.
Speaker Change: Super busy last nine, 12 months for you guys. Can you talk about kind of current trends or themes in the M&A market broadly and I guess curious your overall level of optimism about I guess the number of opportunities as well as the transactability of those for lack of a better term. Thanks.
Speaker Change: Sure, sure. We still have this Wayne. Thanks, Sheriff, for the question. We still have a steady pipeline of opportunities that are out there. And we continue to look at deals on strategic.
Speaker Change: Level of how they fit into organization. We, you know, you can see there's been some deals done in the industry over the last year not only hours but a few others.
Speaker Change: And I think that develops a deal metrics and how the expectations between the buyers and the sellers are starting to come together and I think that's productive for all of us. So I feel like we still have, you know, quite a few opportunities on the horizon.
and I hope to be acting on those this year.
Okay.
Speaker Change: Great. Thank you. And from my follow up, somewhat related on the balance sheet side of things, I think you guys ended the year maybe a little over one times.
Speaker Change: Leverdont Trailing Basis. How important is de-lovering this year when we look at that adjusted pre-casual guide.
Speaker Change: is the first use of that to pay down debts and how do you think about potentially using some of that free cash or further using your balance sheet for M&A opportunities.
Speaker Change: I'll let David take that one, Dave. Yeah, Jeff. Thanks for the question. Yeah, when you look at the balance sheet and how we ended the year, the net debt number of approximately, I think it was 47 million or so, was basically the full use of that was related to the cash portion of the acquisitions.
Speaker Change: So that kind of tells us obviously that was planned number one and number two we basically used all of our you know
Speaker Change: All the CAP-X was funded out of our free cash loads.
Speaker Change: So we can see that trend continuing. We'll be able to support our CAPEX needs, you know, for for 25 as well as have that free cash low to pay off debt or do further M&A kind of again pull those levers as we need to based on the opportunities that come up in 25.
Speaker Change: Okay, so I guess to rephrase the answer, essentially, we should think about, you know,
Speaker Change: Potential use of the balance sheet is still in the cards for you guys in the context of M&A. Like you guys feel good with the balance sheet position that you're in. There's not an imminent urgency to attack the death side of things at the detriment of M&A.
Speaker Change: No, absolutely. I think we're well positioned on the balance sheet. We still have availability under the, you know, credit facility, but we are obviously mindful and keeping an eye on our leverage, you know, overall.
Speaker Change: and we'll do the right strategic decisions there depending on the M&A opportunities, but focus on, you know, aggressive pay down a debt with our free cash flow.
and David further that jump.
Speaker Change: We're very mindful of keeping our on the activity trends of the industry, you know, we're human flat to
Speaker Change: and we have some baked-in potential downward activity, you know, bets placed into our
Speaker Change: But if we saw the down industry changing, we would pivot and we have the means and the wherewithal in the cash flow to accelerate any kind of de-lovering that that might be required.
Understood. All right, I'll turn it back. Thank you guys.
Speaker Change: Our next question is from Steve Ferzani with Sedodian Company. Please proceed.
Steve Frisani: Good morning, Wayne David. Thanks for taking the questions this morning. I know it was a very, very active 2024. I'm sure it's going to be an active 2025 as well. I did want to ask about the mix in 4Q.
Steve Frisani: On the tool rentals, I was surprised at the sequential growth given that U.S. land, as you noted, was sequentially drilling was flat, maybe even down a little bit, so I'm curious if that was just international growth or if he gained any share.
Steve Frisani: on the rentals, and then product sales. The sequential decline, how much of that is typical seasonality, or is there something else in play?
Steve Frisani: I think I can answer the first question with the product sales. We did, you know, the reduction in Saudi activity did affect our deep casing products sales flow.
Steve Frisani: into that market, as well as softness and p-mex.
Steve Frisani: We have pivoted, you know, it's a lot of those efforts, you know, to other parts of the world and they're gaining traction steadily, but we're not immune to that study decline, I can assure you.
Steve Frisani: as far as our tool rental activity, I think we've just, you know, had a little surge of, you know, your general activity, you know, we're gains and losses in the ebb and flow of the business.
Steve Frisani: and deploying a new tool, some of the newer technologies that we have are getting more traction at higher pricing, so that's helping neutralize some of the other, you know, activity fluctuations.
Steve Frisani: I guess that would be the general answer to that question about tool-runnel changing.
Speaker Change: Great. Thanks. And then on the, I think your catbacks being high, expect your guide is for higher in 225 and obviously after very low catbacks in the second half of 24.
Speaker Change: is 25 a catch-up after a very low cat-backs in the second half of 24? Are there any specific growth initiatives you want to highlight behind the higher cat-backs, which is not high, but higher. I understand, David. I'll take that question. Basically, we're seeing the change in 25 related primarily to the growth in the Eastern hemisphere following these acquisitions.
Speaker Change: with some of the new technology that we've acquired, the Capix to support that Eastern Hemisphere growth is really what we're seeing the difference from 24 to 25.
Speaker Change: and supporting our latest year, which is continuing to grow off, you know.
Speaker Change: as well, which is some of our newer technologies we're funding, you know, as and we're kind of neutral to negative, not negative, but neutral on all about supporting all of our other products, but no catch up is like
Speaker Change: I think that the source of your question is are we trying to catch up because we were behind the answer is we're still in the neutral zone on those, but we're investing some of the new things that we're supporting to grow in other areas and other product lines.
Speaker Change: Fantastic. If I could just get one more in. Can you talk a little bit of, I mean, you're obviously appointed out. We know Saudi and Pemex specifically are areas for weakness in the first half of 25 is most expect and obviously started impacting in 24. Any particular successes you want to point to anything going better than expected with some of these acquisitions, integration, getting easier as you're getting more experience with it. If you can just
Speaker Change: Walk through your view of the international picture as 24 went on and how you're thinking about 25
David Johnson, Unknown Executive, David Johnson, Drilling Tool International
Yeah, so...
Speaker Change: I think we're starting the first the first part of that question is synergies. You know, we've painted a significant amount of cost savings to the the the SEPI transaction and we're really excited about that.
Speaker Change: and now our launch in the Middle East, notwithstanding the Saudi decline, is starting to gain traction and it's a slow evolutionary process here to reorganize the group, get things moving faster and faster. We're in...
Speaker Change: Dozens of countries in locations around the world, and so we've got a lot of diversification and traction and gaining, you know, it's disappointing the softness and anxiety that that one's, you know, kind of a little more impactful, but
Speaker Change: We see our indications or that will heal itself over a short period of time. They can't stay low forever, but short term that is slowed down our momentum.
Speaker Change: But the synergies are really taking place with the reduction in public cost, the reduction in repair cost, the reduction in royalties, all those are ongoing sustainable synergies that will get savings from per year to come.
Speaker Change: and add more value. Then some of the new acquisitions EDP and Titan are just gaining, you know, getting off the ground because they were later in the year or early this year. So we're really excited about the technology we acquired from EDP.
Speaker Change: We're starting to gain traction in so many parts of the world and with major customers around every operating environment. Offshore land, you name it, North Sea, Europe land, Middle East, getting constant orders. So it's picking up steam and I think those premium products will help offset.
Speaker Change: Some of the, you know, the less than stellar activity issues that are ongoing in different parts of the world, so.
Thanks Wayne, thanks David.
Thank you.
Speaker Change: As a reminder, just star one on your telephone keypad if you would like to ask a question. Our next question is from Sean Mitchell with Daniels Energy Partners, please proceed.
Sean Mitchell: Good morning guys and thanks for taking my question. Wayne, maybe I hate to stay on the M&A team, but just as you think about M&A opportunities.
over the course of the next year or two.
Sean Mitchell: You guys are going to be reporting Eastern Hemisphere, Western Hemisphere. Can you give us some color around? You think more M&A opportunities in the Eastern Hemisphere or Western or is it too early to tell? I mean, I know you're not breaking that out today on your financials, but just kind of thinking about the M&A market.
Sean Mitchell: Well, we we do have targets in both places, so we are working actively working on
Sean Mitchell: Opportunities. I want to be careful not to say we're actually working on deals because we don't have any deal we're just working on opportunities but
Speaker Change: Debbie Clear, we do believe that there are significant opportunities in the Eastern hemisphere which we're actively working on. And there are some, well, we consider a creative bolt-on really tuck-ins.
Speaker Change: that work for us here to strengthen our North America business. And we have willing, you know, sellers and, you know, people who see the benefit of our platform and want to join the culture of our team and they see the opportunity. So
It should be on both sides of the water.
Speaker Change: and we'll just evaluate those as they come, you know, it's kind of like, you know, we've got to hit a shot and, you know, put it in the fairway then we've got to get it on the green neck. So it's like, so we're just going to keep moving through each deal as they present themselves and see those opportunities.
Speaker Change: Fair enough. Maybe one more for me, I'll sneak one in. Given your exposure in the international markets, kind of how are you guys thinking about tariffs? And where do you see the risk?
Speaker Change: Unknown Speaker 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Speaker Change: So, do you want me to take that one away? Yeah, sure, sure. So yeah, Sean, obviously a very fluid and dynamic topic, but we have been kind of working with our US trade council here. You know, the short two short answers are we believe a diversified supplier base and a diversified manufacturing base.
Speaker Change: are some of the best mitigating strategies and I think we have both of those.
Speaker Change: Got it. So that's a good box that we can check. The other thing obviously were, you know, sort of
Speaker Change: Contemplating is that the Canadian, US, Mexico, but mainly the Canada, US effects our business the most.
Speaker Change: You know, we believe right now that's, you know, the long-term implications will be worked out, you know sooner than later because
Speaker Change: Terrorist Right Now and our Council kind of believes the same but they won't be long-term in nature, so we just need to address any short-term implications while they do last.
Speaker Change: and we can do that currently under the, you know, everything we do falls under the US MCA agreement or the, you know, Mexico, Canada agreement there so...
Speaker Change: The way we move tools around and can, you know, divert raw material to different locations as needed and do repairs, we have all that kind of working in our favor right now.
Speaker Change: Got it. Thanks for taking my questions, guys. All right. Thanks, Sean.
Speaker Change: This now concludes our question and answer session. I would like to turn the floor over to management for closing comments.
Speaker Change: Jeffrey Grampp, Stephen Ferazani, Unknown Executive, David Johnson, Drilling Tool International
Speaker Change: Okay, thank you everyone. Appreciate your interest in Drilling Tool International and participating in the call.
Speaker Change: We are executing well throughout this challenging cycle. I think we've demonstrated our resilience and viability through this continued challenge in the marketplace, and we have some bright things.
Speaker Change: that we're working on and continuing to grow our business. We'll be participating at the Roth and Piper conferences next week and hope to see you all there. So thank you for your interest. Have a great day.
Speaker Change: Thank you. This will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.