Greetings and welcome to the Drilling Tools International 2023 and Fourth Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ken Denard. Thank you. You may begin.

Thank you, operator, and good morning, everyone. We appreciate you joining us for Drilling Tools International, or more commonly referred to the industry as DTI, we welcome you to DTI’s conference call and webcast to review full year 2023 results. With me today are Wayne Prejean, Chief Executive Officer; and David Johnson, Chief Financial Officer. Following my remarks, management will provide a high-level commentary on the operating and financial details for 2023 and then discuss its 2024 outlook before opening the call for your questions. There will be a replay of today's call that'll be available by webcast on the company's website, and that's drillingtools.com and there'll also be a telephonic recorded replay until April 4th. More information on how to access these replay features was included in yesterday's earnings release. Please note that any information reported on this call speaks only as of today, March 28th, 2024, and therefore you are advised that time sensitive information may no longer be accurate as of the time of any replay, listing or transcript reading. Also, comments on this call will contain forward looking statements within the meaning of the United States Federal Securities laws. 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 management. The listener or reader is encouraged to read DTI’s 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. The company provides these non-GAAP measures for informational purposes, and they should not be considered in isolation from the most directly comparable GAAP measures. A discussion of why the company believes 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 the earnings release and in our filings with the SEC. And now with that behind me, I'd like to turn the call over to Wayne Prejean, DTI's, Chief Executive Officer. Wayne?

Thanks Kane, and good morning, everyone. Welcome to our second earnings call as a public company. On our first call in November, I provided a long version history of DTI. Today, I will begin my remarks with a quick overview of the company, discuss our 2023 results, our flurry of activity since the year ended. Then hand off the call to David to go to the financials and our 2024 outlook. DTI is an industrial service company whose differentiated business model combines tools, technology, and equipment rental along with in-house manufacturing capabilities. We primarily serve the oil and gas upstream industry with downhole tools in the wellbore construction process. Our tools also serve the emerging geothermal and carbon capture sectors. We employ approximately 425 loyal and dedicated employees who believe in our values and share our vision for the future. The institutional knowledge of the tool rental business across our employee base and throughout our operations provides us with an infield competitive advantage relative to others in the industry. Our business model relies mostly on rental, repair, and recovery revenues. Our customers count on us to maintain a relevant and sustainable fleet of equipment. The rental and repair income provides the basis for our rental model. The tool recovery revenue, also known as lost or damaged equipment charges, allows us to sustain our fleet, which enables us to not only remain relevant, but also generate positive adjusted free cash flow throughout the energy industry cycles. Speaking of our customers, we support the needs of BlueChip firms like Baker Hughes, BP, Chevron, Conoco Phillips, EOG, Exxon Pioneer, Oxy, SLB, and many other prominent firms in our industry. These customers prefer to rent downhole tools because it would not be efficient to own and maintain their own fleet, due to the many…

Thanks Wayne and thank you everyone for joining us today. DTI generated total consolidated revenue of 152 million in 2023, an increase of 17.4% compared to 2022. 2023 tool rental net revenue was 119.2 million, an increase of 20.4% compared to the prior year, primarily due to a strong first half performance and maintaining a solid market share despite a declining rig count in the second half of ‘23. 2023 product sales net revenue totaled 32.8 million, an increase of 7.4% compared to 2022. The increase was driven by a strong first half as well as ongoing tool recovery revenue, which occurs as part of the rental tool lifecycle. 2023 operating expenses were 124.1 million compared to 104.3 million in 2022. The increase in operating expenses is primarily driven by personnel related expenses of 10.5 million, one-time transaction related stock expense of 1.7 million, as well as additional ongoing public company costs. These ongoing public company costs include an increase in accounting, legal, advertising and insurance expenses of approximately 2.6 million. 2023 net income was 14.7 million compared to net income of 21.1 million in the prior year. The lower result in ‘23 was impacted by the additional operating expenses previously mentioned, as well as one-time transaction related expense of approximately 6 million. We also had employee retention credit benefits of 4.3 million in 2022 that were not repeated in ‘23. 2023 adjusted EBITDA was 51 million, which was 24% higher compared to the prior year. 2023 adjusted free cash flow was 7.3 million compared to 16.5 million in 2022. The decrease was primarily due to approximately 19 million more in capital expenditure dollars spent in ‘23 compared to the prior year. This increased investment was made to meet customer demand for new products and future growth. While the fourth…

Thank you, David. So to recap a few key items before opening up the line for Q&A. We are a market leader in numerous categories and have an enviable facility footprint. We have an extensive rental model, broad distribution capabilities, and diverse customer base across multiple basins, which provides us with a significant competitive advantage and through cycle out performance, especially during volatile commodity price cycles, we have a proven track record of successfully executing and integrating acquisitions. And we are very excited to welcome deep casing tools and the Superior Drilling Tool products team into the DTI family this year. And we're not done yet. We believe additional consolidation opportunities exist in oil field services that will supplement our organic growth initiatives already in motion. So with our strong balance sheet, ample credit and equity available to make acquisitions, we believe we are well positioned to achieve our strategic portfolio objectives. And as I said on last quarter's call, at our current stock price, we believe we provide an attractive entry point versus our peers. And most importantly, I would like to express my gratitude to every member of the DTI team for their unwavering dedication to safety, customer service, and the successful execution of our strategic initiatives. The hard work and commitment of our team members has been instrumental in driving our success, and I extend my sincere appreciation for their contributions. With that, we'll now take your questions, operator.

[Operator Instructions] Our first question comes from the line of Jeff Grampp with Alliance Global Partners.

First one to start there, two deals in the last couple months, obviously, keeping you guys busy. Would you consider yourselves still in the market for further M&A or are we kind of in a digestion timeframe now to kind of integrate these, get superior across the finish line? Just kind of curious your current appetite in the M&A market.

Let me start with mentioning that our new investor presentation is live and updated on our website, for those of you might not be aware of that. So, a lot of questions about that are answered in there, but I'll take that one on. We have a long history with SDPI, so we're very familiar with their business model and we've been working with them closely. So we feel like getting that one closed is almost like a partnership integration. We feel pretty good about that one. But for all of the compliance and administrative minutia, which always goes along with these the deep casing acquisition that's completed was a nice bolt on with new technologies and new expansion with a great team over there. So we feel pretty good about that as well. And surely, rapid expansion, you know, and acquisitions can, you know, is always challenging, but we feel like we're in good shape to, you know, take those on and integrate those efficiently. We do have some other deals that we're exploring, and in the pipeline, as we've stated in our previous statements. So, you know, we're going to be thoughtful and, you know, careful and make sure that each, the timing and cadence of everything we do meets with our strategic goals.

Great. I appreciate that. For my follow up, I'm curious more on the organic growth CapEx guide and you have a slide there that kind of details that nicely. I'm just kind of curious if, and maybe taking a moment, Wayne, to kind of explain the contractual nature of what supports that growth CapEx, and maybe help me understand that a bit better. Like, are those supported by kind of firm customer commitments? And then just broadly, you know, oil continues to catch a bid here. What is the flexibility to move that, you know, upper, maybe even down with changing market dynamics?

So, good question. You know, for most of that CapEx represented there is going to be things that are new that help us build some organic growth and supporting some of our new product lines that are, you know, we think accretive over and above our current core business, you know, metrics. So, you know, we're holding serve and maintaining well in our core businesses, you know, with the market, you know, cycles. But we have some new things that we're implementing that we're investing in. So that'll, that's most of what that's for.

Our next question comes from the line of Steve Ferazani with Sidoti & Company.

Thanks, morning Wayne, David, appreciate all the detail on the call and thanks for taking my questions. I guess the number that really stood out for me was 4Q, your tool rental revenue was essentially flat. And when we think about the rig count a year ago, and I would imagine the pricing environment, it can't be fantastic right now. Can you just give us a little bit of color how you maintain sort of flat revenue in this environment?

Yeah. So sure we're, no one's immune to activity changes in pricing pressure, but we feel like we're in a pretty good competitive position because we have such a spread across all of our locations and business units and, you know, we have good alignment with our customers on, you know, not being subject to just hedging quarter to quarter. So we have a little longer runway in our pricing. So, you know, it lessens the blow of an activity change. And then if you add that with a few other new products that have come online and, you know, a few extras that have added to the mix, it's enabled us to stay flat, which is, we think, you know, probably a pretty good result considering, you know, the decline that we've seen.

Great. And if I could, my follow up question, I just want to follow up the previous speaker on the growth CapEx. Because it seems, and I think you detailed what you were spending it on for ‘24, but I'm trying to get a sense, given that we had a decline in the rig count, we're flat probably this year. That's how it looks. Is there spending in ‘24 ahead of, are you thinking and planning for a recovery in ‘25 given the LNG export capacity that's coming?

Well, thanks. We do have an emerging new product that we're investing in called Rotor Steer, that is a new product that's unique to the market that we're investing in. Also, some premium drill pipe that our customers are requesting. That's already in motion and working. And supporting those two initiatives as well as a few smaller ones those are the ones that's focused on --

But are you taking,

Go ahead.

But how are you thinking longer term a lot of people are expecting gas rate count to start recovering maybe late ‘24, early ‘25. How are you thinking about that and how does that sort of set your budgeting?

Growth CapEx is the lever we can raise and lower as we move through the cycles. And so, we just have to pick the timing appropriate with what is the relevant equipment and the relevant investment. So yes, that's kind of how we move the needle up or down, but we believe that the gas will pick up eventually. It's just, we just have to make sure we time those investments in the activity and when the opportunities present themselves and the intel from our customers.

Our next question comes from the line of John Daniel with Daniel Energy Partners.

Just want to dig into the M&A strategy for a second. As you noted a lot of opportunities are out there. I'm curious, do you see any distinction between expectations from maybe some companies say exposed primarily to gas markets versus those international offshore do is there opportunities to be opportunistic if you will, and just any color there?

Yes, sure. Always getting the expectations from sellers and buyers to align is challenging. But there are some technologies in some companies that we've observed that need a good home to incubate either a unique product or maybe to achieve scale that wasn't further available to them before on our distribution platform helps that. Valuations kind of remain range bound. The bid ass spread is narrow. So I think people are realizing how the industry is functioning today and the activity that's available to it. So we're hoping that those valuations become a little more attractive, so from our side.

And then when your margins relative to a number of your OFS peers are better, how do you preserve those sorts of strong margins with the M&A strategy? I mean, are most of the deals you look at with, are they -- would they be margin accretive, or how would you, just some thoughts on that.

We kind of have a decision tree and a criteria priority scale where we say, hey, it has to meet accretive value, it has to improve cash flow. It has to be a top tier customer type of product. It has to help us, international, offshore, things like that. But at the end of the day, it has to make a positive contribution to our strategic goals, our strength in our existing core business. Maybe a little moat building and opportunity to strengthen our existing distribution platform. Those are kind of some examples of how we look at acquisitions. We're not in the mode of just bolting on and smash co strategy where we just put everything together for the sake of scale or growth. There is a very thoughtful and I think an experienced approach to understanding the impact of each and every acquisition or each and every deal we look at.

The final one for me, I think if I heard you correctly, some of the growth CapEx is tied to perhaps an, a development of a new tool. Did I hear correctly?

That's correct, but it's commercially active and growing. We've got it baked into our guidance this year.

I was just trying to understand like as you bring new product to market sort of simplistically, how long does it take to scale up? Just any type of color on that?

Well, we spent ‘22 and ’23 getting it past this first two stages and now it's fully commercialized with its own asset team. And number, we're following a number of rigs and growing month by month. We've passed the incubation period and we're full-scale commercial process. And there'll be more and more guidance coming on that as we get through each quarter, but it's looking very positive. Well, any more questions?

There are no other questions in the queue at this time. I'd like to hand it back to management.

Alright, well, we appreciate everyone's participation on the call and interest in Drilling Tools International. Like I said before, please feel free to look at our investor presentation on drilling tools.com and we look forward to demonstrating our continued growth and success and improving shareholder value. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.