Q1 2025 Drilling Tools International Corp Earnings Call

Operator: Greetings and welcome to the Drilling Tools International first quarter 2025 earnings conference. At this time, all participants are on the Question and Answer Session will follow. If anyone should require operator assistance during the conference call, please call 1-866-333-4255. Press star zero.

Greetings and welcome to the drilling tools International first quarter 2025.

Earnings Conference call at this time, all participants are in a listen only mode.

<unk> 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.

Speaker Change: As a reminder, this conference is being recorded it is now my pleasure to introduce your host Mr. Ken Dennard. Thank you you may begin.

Unknown Executive: It is now my pleasure to introduce your host. Thank you. Thank you, operator.

Ken Dennard: Thank you operator, and good morning, everyone. We appreciate you joining us for drilling tool International's 2025 first quarter conference call and webcast.

Unknown Executive: And good morning, everyone. We appreciate you joining us for Drilling Tool International's 2025 first quarter conference call and webcam. With me today are Wayne Prejean. Chief Executive. and David Johnson, Chief Financial Officer.

Speaker Change: With me today are Wayne pre John.

Speaker Change: Chief Executive Officer, and David Johnson, Chief Financial Officer.

Unknown Executive: Following my remarks, management will provide a review of first quarter results and 2025 outlook before opening the call for your questions. There will be a replay of today's call and it will be available by webcast on the company's website at drillingtools.com. And there's also a telephonic recorded replay available until May 21st. You can find information on how to access those replays in the press release from yesterday.

Speaker Change: Following my remarks management will provide a review of first quarter results and 2025 outlook before opening the call for your questions. There will be a replay of today's call and it'll be available by webcast on the company's website at drilling tools Dot com.

Speaker Change: And there's also a telephonic recorded replay available until May 21.

Speaker Change: You can find information on how to access those replace in the press release from yesterday. Please note that any information reported on this call speaks of today May 14 2025.

Unknown Executive: Please note that any information reported on this call speaks of today, May 14th, 2025, and therefore you are advised that any time-sensitive information may no longer be accurate as 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. 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.

Speaker Change: And therefore, you're advised that any time sensitive information may no longer be accurate at the time of any replay listening or transcript reading.

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

Speaker Change: These forward looking statements reflect the current views of D T Oz management.

Speaker Change: However, various risks uncertainties and contingencies could cause actual results.

Speaker Change: Performance or achievements to differ materially from those expressed in the statements made by management.

Unknown Executive: The listener or reader is encouraged to read its 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, including but not limited to adjusted EBITDA and adjusted free cash flow. We provide these nine gap results for informational purposes, and they should not be considered in isolation from the most directly comparable gap. A discussion of why we believe these non-gap measures are useful to investors, certain limitations of using these measures.

Speaker Change: Or reader is encouraged to read it's 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, including but not limited to adjusted EBITDA and adjusted free cash flow.

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

Speaker Change: A discussion of why we believe these non-GAAP measures are useful to investors certain limitations of using these measures Andrew.

Unknown Executive: and Reconciliation to the Most Directly Comparable Gap Measure can be found in our earnings release and our filings with DSA.

Speaker Change: And reconciliation to the most directly comparable GAAP measure can be found in our earnings release and our filings with the SEC.

Wayne Prejean: And now that behind me, I'd like to turn the call over to Wayne Prejean, DTI's Chief Executive Officer. Wayne. Thanks, Ken, and good morning, everyone. I will provide some opening remarks before handing the call over to David to review the financial. I'll then come back and provide a few additional thoughts before we open it up for questions. We are pleased to report first quarter sequential and year-over-year revenue growth and solid adjusted EBITDA despite industry headwinds. Revenue grew 16% over last year's first quarter and was up nearly 8% over 2024 fourth quarter results. Adjusted EBITDA grew nearly 18% year over year and was flat sequentially.

Now with that behind me I'd like to turn the call over to Wayne pre John D. G. I was chief Executive Officer Wayne.

Wayne: Thanks, Kim and good morning, everyone.

Speaker Change: I will provide some opening remarks before handing the call over to David to review the financials.

Wayne: I'll then come back and provide a few additional thoughts before we open it up for questions.

Wayne: We are pleased to report first quarter sequential and year over year revenue growth and solid adjusted EBITDA despite industry headwinds.

Wayne: Revenue grew 16% over last year's first quarter and was up nearly 8% over 2020 for fourth quarter results.

Wayne: Adjusted EBITDA grew nearly 18% year over year and was flat sequentially.

Wayne Prejean: Our team has much to be proud of and has skillfully managed the recent volatility in commodity prices and rig counts. We have yet to experience tangible disruptions to our forecast in North America for the rental or sale of our tools. However, we do see increased volatility and uncertainty in the marketplace due to the impact of tariffs, a potential recession that could lower demand for hydrocarbons, and OPEC Plus's decision to increase production, among other challenges. In anticipation of when, not if, these potential disruptions impact our order flow, DTI has begun executing on a two-phase strategy. We are proactively negotiating with our suppliers and our customers to ensure stability and profitability.

Wayne: Our team has much to be proud of and has skillfully manage the recent volatility in commodity prices and rig counts.

Wayne: We have yet to experience tangible disruptions to our forecast in North America for the rental or sale of our tools.

However, we do see increased volatility and uncertainty in the marketplace due to the.

Wayne: The impact of tariffs or.

Wayne: A potential recession that could lower demand for hydrocarbons.

Wayne: And OPEC pluses decision to increase production among other challenges.

Wayne: In anticipation of when not if these potential disruptions impact our order flow DTI has begun executing on a two phase strategy.

Wayne: We are proactively negotiating with our suppliers and our customers to ensure stability and profitability.

Wayne Prejean: We are implementing a multi-level internal cost reduction program. Phase 1, implemented in Q2, will result in an estimated $6 million in annual cost reduction. Both David and I, along with our entire management team, have decades of experience working through multiple commodity cycles and prudently right-sizing the business when demand for our products and services changes. The anticipated rig count drop in the U.S. will challenge all service providers. I am confident we will prove to the investment community and shareholders our ability to sustain solid EBITDA and free cash flow in the face of volatility. While we cannot control global economic forces, we do believe that our input costs, or cost of goods, are strategically positioned to minimize the increase in the expenditures associated with any near-term tariff risk for three reasons.

Wayne: We are implementing a multi level internal cost reduction program phase one implemented in Q2 will result in an estimated $6 million in annual cost reductions.

Speaker Change: Both David and I, along with our entire management team has decades of experience working through multiple commodity cycles and prudently right sizing the business when demand for our products and services changes.

Speaker Change: The anticipated rig count drop in the U S will challenge all service providers.

Speaker Change: I am confident we will prove to the investment community and shareholders, our ability to sustain solid EBITDA and free cash flow in the face of volatility.

Speaker Change: While we cannot control global economic forces, we do believe that our input costs our cost of goods are strategically positioned to minimize the increase and the expenditures associated with any near term tariff risk for three reasons.

Wayne Prejean: Should the industry experience a significant reduction in rig count? DTI can quickly curtail planned growth capex. DTI has a strong and diverse manufacturing base in North America. In addition to manufacturing for our own consumption, DTI already sources a large amount of made in America steel and our international footprint and diverse supply chain provides us flexibility in the face of uncertainty and exposure to other concentrations of rigs that may not lay down as quickly as U.S. shale produced.

Speaker Change: The industry experienced a significant reduction in rig count.

D T I can quickly curtail planned growth capex.

Speaker Change: D T I has a strong and diverse manufacturing base in North America. In addition to manufacturing for our own consumption D. T. I already sources, a large amount of maiden America steel.

Speaker Change: And our international footprint and diverse supply chain provides us flexibility in the face of uncertainty and exposure to other concentrations of rigs that may not lay down as quickly as U S shale producers.

Wayne Prejean: So based on this volatility and uncertainty, we are proactively adjusting our annual revenue, adjusted EBITDA, and adjusted free cash flow guidance ranges for 2025.

Speaker Change: So based on this volatility and uncertainty we are proactively adjusting our annual revenue adjusted EBITDA and adjusted free cash flow guidance ranges for 2025.

Wayne Prejean: David will discuss our updated guidance in his formal remarks. We remain committed to identifying future cost reduction opportunities and maintaining operational agility to quickly respond to this challenging environment, furthering our mission to enhance shareholder value.

David will discuss our updated guidance in his formal remarks.

Speaker Change: We remain committed to identifying future cost reduction opportunities and maintaining operational agility to quickly respond to this challenging environment furthering our mission to enhance shareholder value.

Wayne Prejean: Also related to our capital deployment strategy, our Board of Directors has unanimously approved a share buyback authorization. This authorization is up to $10 million of buyback. We believe our undervalued stock price presents one of the most compelling return on investment opportunities to deploy our capital.

Speaker Change: Also related to our capital deployment strategy, our board of directors has unanimously approved a share buyback authorization.

Speaker Change: This authorization is up to $10 million of buybacks, we believe our undervalued stock price presents one of the most compelling return on investment opportunities to deploy our capital.

David Johnson: David will now take you through the first quarter financials and discuss our 2025 Outlook updates in more detail, David. Thanks, Wayne. In yesterday's earnings release, we provided detailed first quarter financial tables. So I'll use this time to offer further insight into specific financial Despite continued rig count softness and market choppiness in the first quarter of 2025, revenue increased over last year's first quarter by 16 percent in the face of a 6 percent global rig count decline over the same period. We believe this continues to validate our stated M&A strategy to further strengthen our business model and diversify our geographic footprint.

David will now take you through the first quarter financials and discuss our 'twenty twenty-five outlook updates in more detail David.

David Johnson: Thanks, Wayne and yesterday's earnings release, we provide a detailed first quarter financial tables. So I'll use this time to offer further insight into specific financial metrics.

David Johnson: Despite continued rig count softness and market Choppiness in the first quarter of 'twenty twenty-five revenue increased over last year's first quarter by 16% in the face of a 6% global rig count decline over the same period. We believe this continues to validate our stated M&A strategy to further strengthen our.

David Johnson: Business model and diversify our geographic footprint.

David Johnson: Looking at our first quarter results, we generated total consolidated revenue of $42.9 million, comprised of tool rental revenue of approximately $34.5 million and product sales revenue of $8.3 million. We reported total operating expenses of $39.6 million and operating income was $3.3 million. First quarter adjusted EBITDA was $10.8 million and adjusted free cash flow was $5.7 million. At the end of the first quarter, we had approximately $2.8 million in cash and cash equivalents and net debt of $52.1 million. During the quarter, as part of our recent segment reorganization, we conducted a comprehensive goodwill impairment assessment. This process required us to allocate goodwill between all affected reporting units and test each for potential impairment.

David Johnson: Looking at our first quarter results, we generated total consolidated revenue of $42.9 million comprised of tool rental revenue of approximately 34.5 million and product sales revenue of 8.3 million. We reported total operating expenses of 30.

David Johnson: $9.6 million and operating income was $3.3 million.

David Johnson: First quarter adjusted EBITDA was 10.8 million and adjusted free cash flow was 5.7 million at the end of the first quarter, we had approximately 2.8 million in cash and cash equivalents and net debt of 52.1 million.

David Johnson: During the quarter as part of our recent <unk>.

David Johnson: Segment reorganization, we conducted a comprehensive goodwill impairment assessment.

This process required us to allocate goodwill between all affected reporting units and test each for potential impairment.

David Johnson: As a result, we have recorded a non-cash goodwill write-down attributable to our Vernal, Utah bit repair operations in the Western Hemisphere and the Deep Casing Tools Reporting Unit in the Eastern Hemisphere. The approximately $1.9 million dollar impairment is a function of purchase price accounting and does not affect our day-to-day operations or our ability to execute on our strategic priorities. From a purchase accounting standpoint, it is important to note that the increase in our stock price pre-close of the SDPI transaction caused the total allocated purchase price consideration to increase beyond the amount by which we underwrote the deal.

David Johnson: As a result, we have recorded a noncash goodwill write down attributable to our vernal, Utah bit repair operations in the western hemisphere, and the deep casing tools reporting unit in the eastern Hemisphere. The approximately 1.9 million dollar impairment as a function of purchase price accounting.

David Johnson: And does not affect our day to day operations or our ability to execute on our strategic priorities for.

David Johnson: From a purchase accounting standpoint, it is important to note that the increase in our stock price pre close of the S. D. P. I transaction caused the total allocated purchase price consideration to increase beyond the amount by which we underwrote the deal and.

David Johnson: Importantly, this charge is non-cash in nature and does not impact liquidity, free cash flow, or adjusted EBITDA. Adjusted net income, which excludes this non-cash charge, remains positive and in line with our strong operational performance for the quarter. We believe taking this impairment now provides a more accurate reflection of asset values in the current market environment and positions us for improved transparency and comparability going forward.

David Johnson: Importantly, this charge is noncash in nature and does not impact liquidity free cash flow or adjusted EBITDA.

David Johnson: Adjusted net income, which excludes this noncash charge remains positive and in line with our strong operational performance for the quarter. We believe taking this impairment now provides a more accurate reflection of asset values in the current market environment and positions us for improved <unk>.

David Johnson: <unk> parents, he and comparability going forward.

David Johnson: As previously mentioned on our last call, our new Western and Eastern Hemisphere Segment Reporting Structure began this quarter. Our Western Hemisphere segment, which includes products and services like directional tool rentals, wellbore optimization tools, premium tools, and bit repair, remains steady. Moving to the Eastern Hemisphere, which is predominantly made up of deep casing tools, European drilling projects, and now Titan tools. You'll see some choppiness as we compare key 124 to key 125. With the addition of the European Drilling Projects and Titan Tools, our tool rental revenue is up significantly over Q1 of 24. Our decline in product sales was primarily due to deep casing tools.

David Johnson: As previously mentioned on our last call, our new Western and Eastern Hemisphere segment reporting structure began this quarter.

David Johnson: Our western Hemisphere segment, which includes products and services like directional tool rentals, wellbore optimization tools premium tools and bit repair remains steady.

David Johnson: Moving to the eastern Hemisphere, which is predominantly made up of deep casing tools European drilling projects and now tightened tools.

David Johnson: You'll see some choppiness as we compare Q1 'twenty four to Q1 'twenty five.

David Johnson: With the addition of the European drilling projects and tightened tools, our tool rental revenue is up significantly over Q1 of 'twenty four.

David Johnson: Our decline in product sales was primarily due to deep casing tools, we believe that the product sales at deep casing tools bottomed out in second half 'twenty 'twenty four given their exposure to the Saudi offshore market and Mexico. These tools are high spec and we expect demand for them to pick up.

David Johnson: We believe that the product sales at deep casing tools bottomed out in second half 2024 given their exposure to the Saudi offshore market and Mexico. These tools are high spec and we expect demand for them to pick up internationally throughout 2025 as existing customer owned inventory is depleted. With our expanded offering of rental tools, including MEK-LOK drill pipe swivels, the Rub-A-Lizer P&A tool, fixed blade stabilizers, drill and ream, and other BHA components, rental revenue is becoming a much larger percentage of the Eastern Hemisphere revenue mix, and we anticipate steady growth and better cost absorption in future quarters.

David Johnson: Internationally throughout 'twenty 'twenty five as the existing customer owned inventory is depleted.

David Johnson: With our expanded offering of rental tools, including backlog drill pipe swivels. The rubble is our PNA tool fixed blade stabilizers drill N ream and other BHA components rental revenue is becoming a much larger percentage of the eastern hemisphere revenue mix, and we anticipate steady growth and better car.

David Johnson: Absorption in future quarters.

David Johnson: Previously, we've spoken about the total revenue contribution from each hemisphere and indicated an expectation for the Eastern Hemisphere to grow to 18% of total revenue. As you can see in Q1 results, the Eastern Hemisphere accounts for 11% of revenue, but we expect the Eastern Hemisphere contribution to grow as the year progresses. Adjusted free cash flow in the first quarter was $5.7 million. We maintained our planned CapEx spend in the first quarter to support the momentum we have been experiencing from our organic rotosteer product growth story and our international expansion. Going forward, we will continue to review all CapEx spending with an eye on activity levels while demonstrating our ability to generate adjusted free cash flow.

David Johnson: Previously we've spoken about the total revenue contribution from each hemisphere and indicated an expectation for the eastern hemisphere to grow to 18% of total revenue as you can see in Q1 results. The eastern hemisphere accounts for 11% of revenue, but we expect the eastern hemisphere contribution to.

David Johnson: Growth as the year progresses.

David Johnson: Adjusted free cash flow in the first quarter with $5.7 million, we maintained our planned capex spend in the first quarter to support the momentum we have been experiencing from our organic roto sphere product growth story and our international expansion.

Going forward, we will continue to review all capex spending with an eye on activity levels, while demonstrating our ability to generate adjusted free cash flow.

David Johnson: Looking at maintenance capex for the first quarter, it was approximately 10% of total revenue. Although up slightly in Q1, this portion of our capital investment has trended lower in the past several quarters 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.

David Johnson: Looking at maintenance Capex for the first quarter. It was approximately 10% of total revenue.

David Johnson: Although up slightly in Q1 this portion of our capital investment has trended lower in the past several quarters due to 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: As a reminder, our maintenance capital is primarily funded by tool recovery revenue, which keeps our rental tool fleet relevant and sustainable regardless of market To summarize the first quarter of 2025, we saw the positive effects of our acquisitions and organic growth in the rotosteer product line, which offset some of the decline in our directional tool rentals and deep casing tools product line. Pricing pressure, product mix, and activity declines have impacted our margins. We believe this will continue throughout 2025 with pricing pressure and further activity declines resulting from the fears of oversupply caused by a slowdown in demand and increased production.

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

David Johnson: To summarize the first quarter of 'twenty twenty-five we saw the positive effects of our acquisitions and organic growth in the road as to your product line, which offset some of the decline in our directional tool rentals and deep casing tools product lines.

David Johnson: Pricing pressure product mix and activity declines have impacted our margins. We believe this will continue throughout 'twenty twenty-five with pricing pressure and further activity declines, resulting from the fears of oversupply caused by a slowdown in demand and increased production.

David Johnson: However, in the long run, we believe we can position ourselves to improve our consolidated margin profile over time as we continue to manage our cost structure and add scales.

David Johnson: However in the long run we believe we can position ourselves to improve our consolidated margin profile over time as we continue to manage our cost structure and add scale.

David Johnson: As Wayne mentioned, we have proactively initiated cost reduction measures in Q2 that will result in approximately $6 million of annual cost savings, which is reflected in our updated 2025 guidance. We have also updated our guidance to reflect a further decline in the North American land rig count. Although we do not have a crystal ball, our previous assumption of a flat to slightly up market has shifted to a down market for the remainder of 2025. With that in mind, we now expect full year 2025 revenue to be in the range of $145 million to $165 million.

David Johnson: As Wayne mentioned, we have proactively initiated cost reduction measures in Q2.

David Johnson: That will result in approximately 6 million of annual cost savings, which is reflected in our updated 2025 guidance.

David Johnson: We have also updated our guidance to reflect a further decline in the North American land rig counts.

David Johnson: Although we do not have a crystal ball, our previous assumption of a flat to slightly up market has shifted to a down market for the remainder of 2020 five.

David Johnson: With that in mind, we now expect full year 'twenty twenty-five revenue to be in the range of $145 million to $165 million, we expect adjusted EBITDA to be within the range of 32 to 42 million.

David Johnson: We expect adjusted EBITDA to be within the range of $32 million to $42 million. Gross capital expenditures are expected to be between $18 and $23 million, and finally, we expect our 2025 adjusted free cash flow to range between $14 to $19 million.

David Johnson: Gross capital expenditures are expected to be between 18 and 23 million.

David Johnson: And finally, we expect our 20th twenty-five adjusted free cash flow to range between $14 million to $19 million.

David Johnson: That concludes my Financial Review and Outlook section.

That concludes my financial review and outlook section, let me turn it back over to Wayne to provide some summary comments.

Wayne Prejean: Let me turn it back over to Wayne to provide some summary comments. Thank you, David.

Wayne: Thank you David before we open up the lines for questions I would like to highlight five points first.

Wayne Prejean: Before we open up the lines for questions, I would like to highlight five points. First, Over the past six weeks, since the new administration's tariff policies were introduced, Worldwide sentiment across the energy industry has become Recently, various news outlets announced some adjustments to the tariff policy, and it appears negotiations are headed in a positive direction. Despite the ever-changing news or trade policy shifts, we assume there is likely a negative impact to our business this year. Second, DTI has taken certain initiatives to remain competitive, including remaining resourceful and innovative when combating pricing pressure. Third, we are constantly evaluating customer activity levels.

Wayne: Over the past six weeks since the new administration's tariff policies were introduced worldwide sentiment across the energy industry has become anxious.

Wayne: Recently, various news outlets announced some adjustments to the tariff policy and it appears negotiations are headed in a positive direction.

Wayne: Despite the ever changing news or trade policy shifts, we assume there was likely a negative impact to our business. This year.

Speaker Change: Second DTI has taken certain initiatives to remain competitive, including remaining resourceful and innovative when combating pricing pressures.

Speaker Change: Third we are constantly evaluating customer activity levels.

Wayne Prejean: and Adjusting Our Operations to Align with Demand. We are confident that elevated demand for complex wellbore solutions will further strengthen the need for our differentiated technology and the value-added solutions we provide our clients across the globe.

Speaker Change: And adjusting our operations to align with demand fourth.

Speaker Change: We are confident that elevated demand for complex Wellbore solutions will further strengthen the need for our differentiated technology and the value added solutions, we provide our clients across the globe.

Wayne Prejean: Finally, we believe our best-in-class, performance-driven, technologically-differentiated offerings, combined with our expanding global geographic footprint, will deliver solid results as energy markets recover.

Speaker Change: Finally, we believe our best in class performance, driven technologically differentiated offerings combined with our expanding global geographic footprint will deliver solid results as energy markets recover.

Wayne Prejean: In closing, we value and appreciate our customers, our employees, and our shareholders. I would like to thank every member of the DTI team for their continuous dedication to working in a safe, inspired, and productive manner. This commitment by our employees is critical in managing this volatile commodity cycle and is vital to our future growth.

Speaker Change: In closing, we value and appreciate our customers our employees and our shareholders I would like to thank every member of the DTI team for their continuous dedication to working in a safe inspired and productive manner.

Speaker Change: This commitment by our employees is critical in managing this volatile commodity cycle and is vital to our future growth with that we will now take your questions operator.

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

Operator: 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. A confirmation tone will indicate your line is in the question. 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 start key.

Speaker Change: Thank you we will now be conducting a question and answer session if.

Speaker Change: If you'd like to ask a question. Please press star one on your telephone keypad.

Speaker Change: A confirmation Kal 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.

Speaker Change: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

Speaker Change: Yeah.

Steve Ferazani: Our first question comes from Steve Farazani with Sidotium. Please proceed with your question. Morning, Wayne. Morning, David. Appreciate the detail on the call. Also, the detail around guidance, which always challenging, I imagine, exceptionally challenging, given the aftermath of Liberation Day. I want to ask about first, just on Obviously, second half should be more challenging, particularly in US short cycle. But you're not moving free cash flow much. Looks like you're taking about 6 million out of your growth capex. Talk a little bit about the fact that you can maintain pretty good free cash flow in this environment.

Steve <unk>: Our first question comes from Steve <unk> with Sidoti and company. Please proceed with your question.

Steve <unk>: Good morning, Wayne morning, David appreciate the detail on the call also the the the detail around guidance, which always challenging I imagine exceptionally challenging.

Steve <unk>: Given the apt aftermath of of Liberation day.

Steve <unk>: [laughter] I wanted to ask about first just on <unk>.

Steve <unk>: Obviously second half should be more challenging, particularly.

Steve <unk>: And in U S short cycle.

Steve <unk>: But you're not moving our free cash flow March it looks like you're taking about 6 million out of Oh.

Steve <unk>: Out of your growth Capex talk a little bit about the fact that you can maintain pretty good free cash flow in this environment.

Speaker Change: Oh, Thanks, So let me take that one sure yeah. Thanks, Steve Yeah part of that I think is two pronged obviously focusing on the cost reductions you know to keep you know preserve as much of the EBITDA margins as we can obviously helps and then you know as we look at the activity and projected.

Wayne Prejean: Let me take that one. Yeah, sure. Yeah, thanks, Steve. Part of that, I think, is two pronged, obviously focusing on the cost reductions, you know, to keep, you know, preserve as much of the EBITDA margins as we can, obviously helps. And then, you know, as we look at the activity and projected activity going forward, and our CapEx, you know, spend, kind of making sure we coincide any purchases or defer, you know, same along the lines we did last year on future CapEx to make sure we preserve that ability to generate the free cash flow. Great.

Speaker Change: Activity going forward and our Capex spend kind of making sure we coincide any purchases or defer you know same along the lines. We did last year on future Capex to make sure we preserve that ability to generate the free cash flow.

Speaker Change: Yeah.

Speaker Change: Great.

Wayne Prejean: It sounded like you're still expecting sequential Eastern Hemisphere growth this year, and I think you pointed to deep casing tools particularly. Can you talk a little bit about what you're seeing specifically in Saudi and otherwise in the Middle East? Yeah, so most of the Middle East is is relatively flat. But. The Saudi rig reduction in their offshore market, particularly their offshore market, was impactful to us because we had many, many product sales going into that market. But we've managed to pivot and see some consumption in their other areas. And in parallel to that, our acquisition of ED projects has some technology in our fixed blade and sleeves and other stabilization technologies that are gaining more and more traction in that market.

Speaker Change: It sounded like you're still expecting sequential eastern hemisphere growth this year and that I think you pointed to to keep casing tools, particularly can you talk a little bit about what you're seeing specifically in Saudi and otherwise in the middle East.

Speaker Change: Yeah. So.

Speaker Change: Most of the Middle East is relatively flat.

Speaker Change: But.

Speaker Change: The Saudi rig reduction in their offshore market, particularly the offshore market was impactful to us because we have many many sale product sales going into that market, but we've managed to pivot and see some consumption and there are other areas.

Speaker Change: And in parallel to that.

Speaker Change: Our acquisition of E. D projects has some technology in our fixed blade and sleeves and other stabilization technologies that are gaining more and more traction in that market and in addition to that our DNR product line is starting to gain some traction in that middle East market now after the acquisition, we had to kind of unpack in aggregate.

Wayne Prejean: And in addition to that, our DNR product line is starting to gain some traction in that Middle East market. You know, after the acquisition, we had to kind of unpack and aggregate our teams there and kind of integrate all those groups together. And I think that most of that is behind us. And we feel like our momentum is picking up there. And despite that Saudi rig count softness that impacted everyone, I believe we were able to start spreading our wings across the Middle Eastern market and gain traction there, which will offset some of the, you know, activities that are in possible decline here.

Speaker Change: Our our teams there and kind of integrate all of those groups together and I think that most of that is behind us and we.

Speaker Change: We feel like our momentum is picking up there and despite that Saudi rig count the softness that impacted every one I believe we were able to start spreading our wings across the the middle eastern market and gain.

Speaker Change: Action, there, which will offset some of the activities that are impossible declined here and we've kind of baked all of that in so oh, okay. That's that's kind of the impact.

Wayne Prejean: And we've kind of baked all that in. So, OK, that's that's kind of the impact. So you're expecting, at least given the weakness, that this growth and these acquisitions are certainly going to help offset in a challenging 2025. Right. We have some emerging products that are gaining ground. One of the products that we acquired in deep casing was the Mek-Lok swivel and the Rub-A-Lizer product, one for installing complex casing strings and horizontal wells, which is the swivel. And then the Rub-A-Lizer is more of a plug-in abandonment technology that couples well with a lot of applications.

Speaker Change: So you're expecting at least given the weakness to this growth and these acquisitions are certainly going to help offset.

Speaker Change: In a challenging 2025.

Speaker Change: Right, we have some emerging products that are gaining ground on our one of the act one of the products that we acquired in Dkc was it the <unk> swivel and the rubble watch erotic one for installing complex casing strings and horizontal wells at that which is just the swivel and then the rubble is yours more of a plug and abandonment.

Speaker Change: Technology that couples well with a lot of applications and those were in their infancy at the time of acquisition. So they were not a material part O. The acquisition Valeo. Okay are kind of in addition to and we as we call. It in Louisiana, Lonnie up little bit extra for something for nothing and also so we are now you know me.

Wayne Prejean: And those were in their infancy at the time of acquisition. So they were not a material part of the acquisition value. They are kind of in addition to, and as we call it in Louisiana, line you up a little bit extra for nothing, you know. So we are now, you know, moving those into full commercial stage and they're gaining traction and offsetting some of the drop in the product sales that I spoke of earlier. Got it, got it. That's helpful. You noted you haven't seen the tangible impact in North America yet. I mean, we're hearing, we're seeing rig count come down, but it seems like it's the smaller operators.

Speaker Change: Moving those into full commercial stage and there there are gaining traction and offsetting some of the drop in the product sales that I spoke of earlier so.

Got it got it that's helpful.

Speaker Change: You noted you haven't seen the tangible impact in North America, yet I mean, we're hearing what we're seeing rig count come down, but it seems like it's the smaller operators, but we know the guides we're seeing for Capex is down a bit I'm, assuming that's just the guidance change is primarily second half in terms of cadence to the guidance.

David Johnson: But we know the guides we're seeing for CapEx is down a bit. I'm assuming this, the guidance changes primarily second half. In terms of cadence to the guidance, does 2Q look similar to 1Q? Based on what you know right now with obviously with six weeks to go? Um, David, what do you think we answer that one? I mean, yeah, I think I think we're we're looking at the rest of the year in totality. And it's hard to predict the combination of activity and pricing and so forth. But yeah, on a on a blended basis, we've got that kind of spread out over the year.

Speaker Change: Just to kill look similar to one Q based on what you know right now with obviously, what six weeks to go.

Speaker Change:

Speaker Change: But what do you how do you think you answer that one I mean, yeah, I think I think we're looking at the.

Speaker Change: Rest of the year in totality, and it's hard to actually predict the combination of activity and pricing and so forth, but on a on a blended basis, we've got that kind of spread out over the year.

David Johnson: Steve, we've anticipated some softness in the U.S. market throughout the rest of the year, but what's interesting is, and we're also going through the Canadian seasonality dip right now, so that will ramp back up and help out as well in the rest of the year. And there's been some reports where Canada might be a little more immune to some of this downturn because of their particular situation in production and cost and economics and things of that nature. So we're happy that we have a strong business in Canada and very, very solid and sustainable operation there.

Speaker Change: Okay, we've kind of Steve we've anticipated some.

Speaker Change: Softness in the in the in the U S market throughout the rest of the year, but what's interesting is and we're also going through the Canadian seasonality dip right. Now. So you know that will ramp back up and help help ourselves well in the rest of the year and I am there has been some reports where canada might be a little more immune to some of this downturn.

Speaker Change: Their particular situation in production in <unk>.

Speaker Change: Cost and economics and things of that nature. So we're happy that we have a strong business in Canada, and very very a solid and sustainable operation there.

David Johnson: What's kind of interesting about the U.S. market, and I think what has most of the company's OFSs and everything perplexed, is the lack of a swift downturn, it's more of just a slow leak. And that's what's happened over the last year. And now we have some additional leakage if, excuse the expression, but that's it's kind of leakage. It's a slow burn where, you know, historically when we would have downturns, you'd have a swift rig downturn and everyone would correct. Well, when it goes slow, it's a little more challenging for each company to decide how they make those adjustments.

Speaker Change: What's kind of interesting about the U S market and I think what has most of.

Speaker Change: Of the company's O F S as in everything perplexed is.

Speaker Change: The lack of a swift downturn, it's more of just a slow leak and that's what's happened over the last year and now we have some additional leakage if excuse the expression, but that's gets kind of leakage. It's it's a slow burn.

Speaker Change: You know historically when we.

Speaker Change: And we would have downturns you thought you'd have a swift rig downturn, everyone would correct well when it goes slow it's a little more challenging for each company to decide how they make those adjustments and we've done. This before we've seen this movie a few times and we're adjusting you know understanding that you.

David Johnson: We've done this before, we've seen this movie a few times and we're adjusting, you know, understanding that, you know, that metric of our customers of how they manage their rig count. Perfect. That's helpful.

Speaker Change: You know.

Speaker Change: That that metric of our customers of how they manage their rig counts.

Speaker Change: Perfect. That's helpful. If I get one more in just on capital allocation in the guide you have a pretty wide range on the full year interest expense is that because it's it. It's how much debt you may or may not reduce in the remainder of the year.

David Johnson: If I get one more in just on capital allocation and the guide, you have a pretty wide range on the full year interest expense. Is that because it's how much debt you may or may not reduce in the remainder of the year? Yeah, I think that's Very accurate, Steve. Obviously, depending on, you know, the capital spend and, you know, where we where we exercise that free cash flow deployment, we have an opportunity to, you know, lower our debt if we pull back on the capex and adjust according to the activity. So that's all happens in the in the downturn.

Speaker Change: Yes, I think that's very accurate Steve.

Speaker Change: Depending on the capital spend in <unk>.

Speaker Change: Now where are we where we exercise that free cash flow.

Speaker Change: Deployment, we have an opportunity to.

Speaker Change: Lower our debt if we pull back on the Capex and adjust according to the activity so that it all happens in the in the downturn and we've also obviously as you saw you know kind of consider the share buyback as part of our our use of cash as well that opportunity. So we'll kind of look excuse me look at that as time.

Steve Ferazani: We've also obviously, as you saw, you know, kind of consider the share buyback as part of our use of cash as well, that opportunity. So we'll kind of look, excuse me, look at that as time progresses. Great. Thanks, Wayne. Thanks, David. Thank you, Steve.

Speaker Change: Yes.

Speaker Change: Great.

Speaker Change: Thanks, Wayne Thanks, David.

Speaker Change: Thank you Steve.

Speaker Change: Okay.

Josh Jane: Our next question comes from Josh Jane with Daniel Energy Partners. Please proceed with your question. Thanks. Good morning. First question, I just wanted to dive into North America a little bit more. I think in your slide deck, you highlight that 60% of the drilling rigs in North America utilize DTI tools and equipment. So just given your broad exposure, could you talk about how you're thinking about the back half of the year? I know you said, you know, probably flattish or, you know, maybe look similar spread across the last three quarters. But could you talk through what regions may be the most at risk in North America for a little bit of a pullback and what regions may hold up better than some others?

Speaker Change: Our next question comes from Josh Jayne with Daniel Energy Partners. Please proceed with your question.

Josh Jayne: Thanks. Good morning first question I, just wanted to dive into North America, a little bit more I think in your slide deck, you highlight that 60% of the drilling rig.

Josh Jayne: DTI tools and equipment. So just given your broad exposure could you talk about how youre thinking about the back half the year. I know you said, you know probably flattish or maybe look similar spread across the last three quarters, but could you talk through what regions may be the most at risk in North America for <unk>.

Josh Jayne: A bit of a pullback in what regions may hold up better than some others.

Wayne Prejean: That's a great question, Josh, because as you well know, the economics in these different basins will drive the behavior of the operators, and the rig count will result, you know, thereof, those economics. So the resiliency of each area is going to be challenged here in the next few months, if oil prices keep dropping, you know, something in the 60s helps Many of them continue with what they're doing. If it drops it with a five handle for a significant amount of time, we're pretty sure that we'll see some reductions in, uh, you know, areas where the economics aren't as strong.

Josh Jayne: That's a great question, Josh because as you well know the economics in these different basins are will drive the behavior of the operators and the rig count will result.

Josh Jayne: Thereof, those economics so.

Josh Jayne: The resiliency of each area is going to be challenged here in the next few months if oil prices keep dropping you know something in the sixties helps.

Josh Jayne: Many of them continue with what they're doing if it drops it with a five handle for.

Josh Jayne: A significant amount of time, we're pretty sure that we'll see some reductions in.

Josh Jayne: Areas, where the economics aren't as strong.

Wayne Prejean: I would, I would hate to lean and. into exactly which areas, you know, whether it's D.J. or, or the Oklahoma oily basins, or if it's, you know, Permian, Midland, or Delaware basin, there's a lot of, you know, narratives and information out there on which ones have the strength to sustain lower oil prices. But there is So the Haynesville tends to be the gassy areas tend to be more sustainable. So We have good exposure to every area. We're heavy in the Permian. We have really good operations in the Haynesville as well. We're renting a lot of tools, pipe and downhole tools, reamers, you name it.

Josh Jayne: I I I would hate to lean in.

Josh Jayne: <unk>.

Josh Jayne: And to exactly which areas you know, whether it's D. J R or the Oklahoma oily basins or report, which you know Permian Midland or Delaware Basin are.

Josh Jayne: There's a lot of.

Josh Jayne: Narratives and information out there on which ones have the strength to sustained lower oil prices, but.

Josh Jayne: There is.

Josh Jayne: So the haynesville tends to be the gassy areas tend to be more sustainable.

Josh Jayne: We we have good exposure to every area, where we're heavy in the Permian we have really good operations in the Haynesville as well, where we weren't in a lot of tools pipe and downhole tools Reamers you name it so.

Wayne Prejean: So. Our spread and diversity gives us the strength to move around in these basins respective to activity and we can ebb and flow and pull the levers up and down in our locations and move tools to where they need to be in the activity that is most vibrant.

Josh Jayne: Bar spread and diversity gives us the strength to move around.

Josh Jayne: In these basins, our respective to activity and we can ebb and flow and you know pull the levers up and down in our locations and move twos to where where they need to be in the activity that is most our most vibrant so.

Wayne Prejean: It's going to be interesting. It's going to be an interesting next few months.

Josh Jayne: It's going to be interesting, it's going to be an interesting next few months.

Wayne Prejean: Okay, thanks. And then I just wanted to follow up on CapEx, because you noted that you could potentially curtail growth CapEx if the macro was, you know, Transcripts provided by Transcription Outsourcing, LLC. Thank you. So most of our focus on anything growth related in that category will be in new technology and new types of tools that have growth potential. And we'll be we'll continue to sustain our existing rental fleet, our car legacy fleet, which is, you know, your common stuff on a day to day basis. But our new stabilizer technology, our new swivels, that swivel technology I spoke of earlier with MECLOC, our rotor steerer product line, which is which is gaining steady traction in the U.S.

Speaker Change: Okay. Thanks, and then I just wanted to follow up on Capex. Because you noted that you could potentially curtailed growth capex. If the macro was you know.

Josh Jayne: It turns out to be more on favorable could you comment on that.

Josh Jayne: That program for this year on the growth side, and the things that youre spending money on.

Josh Jayne: And you know what.

Josh Jayne: Which regions, you're ultimately trying to growth with that growth capex would be great. Thanks.

Josh Jayne: Thank you so most of our focus on anything growth related in that category will be in new technology, and new types of tools that have growth potential and we'll be we'll continue to sustain our existing rental fleet our car legacy fleet, which as you know your common stuff on a day to day basis, but our our new.

Josh Jayne: Stabilizer technology, our new Swivels, that's mobile technology I spoke of earlier with backlog a road roaster of product line, which is which is gaining steady traction in the U S and finding its niche in certain directional and horizontal drilling applications. We are continuing to make sure we put the appropriate amount of capital for their future.

Wayne Prejean: and finding its niche in certain directional and horizontal drilling applications. We are continuing to make sure we put the appropriate amount of capital for the future. Even though we see the softness in our general marketplace today, we see the future in the, you know, in the next year to come that we need to put these tools in motion and get their stickiness and commercial traction with our clients so that we have a long term participation in the drilling program. So that's that's where most of our cap.

Josh Jayne: <unk>, even though we see the softness in our general marketplace today, we see the future in the you know in the next year to come that we need to put these tools in motion and get their stickiness and commercial traction with our clients. So that we have a long term participation in their drilling programs. So that's that's where most of our capex focus.

Josh Jane: Thanks, I'll turn it back.

Josh Jayne: Thanks, I'll turn it back.

Josh Jayne: Yes.

Unknown Executive: This now concludes our question and answer session.

Josh Jayne: This now concludes our question and answer session I'd now like to turn the floor back over to Wayne John for closing comments.

Wayne Prejean: I'd now like to turn the floor back over to Wayne Prejean for closing comments. Thank you. I would like to thank everyone for their participation and interest today in Ernie's call and, you know, make everyone aware that our company is continuing to be competitive and is ready to meet all the challenges that we face in our industry going forward. And we thank you for your interest and have a great day.

Wayne John: Thank you we'd like to thank everyone for their participation and interest today and in our earnings call and you know make everyone aware that our company is continuing to be competitive and is ready to meet all the challenges that we face in our industry going forward and we thank you for your interest and have a great day.

Operator: Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.

Wayne John: Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.