Greetings and welcome to the Drilling Tools International 2024 First Quarter Earnings Conference Call. At this time, all participants are on the listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Ken Dennard. Thank you. Please go ahead.

Thank you, operator, and good morning, everyone. We appreciate you joining us for Drilling Tools International or more commonly referred to in the industry as DTI. We welcome you to DTI's conference call and webcast to review 2024 first quarter 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 of its 2024 first quarter results and outlook before opening the call for your questions. There'll be a replay of today's call and it'll be available by webcast on the company's website at drillingtools.com and there'll also be a telephonic recorded replay until May 17. Please note that any information reported on this call speaks only as of today, May 10, 2024, and therefore you are advised that time-sensitive information may no longer be accurate as of the time of any replay listening or transcript reading. Also, comments on this call will contain forward-looking statements within the meaning of the United States federal securities laws. These forward-looking statements reflect the current views of DTI's management. However, various risks, uncertainties, and contingencies could cause actual results, performance, or achievements to differ materially from those expressed in the statements made by management. The listener or reader is encouraged to read the annual report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K to understand certain of those risks, uncertainties, and contingencies. The comments today will also include certain non-GAAP financial measures, including, but not limited to, adjusted EBITDA and adjusted free cash flow. We provide these non-GAAP results for informational purposes, and they should not be considered in isolation from the most directly comparable GAAP measures. A discussion of why we believe these non-GAAP measures are useful to investors, certain limitations of using these measures, and reconciliation 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?

Thank you, Ken. And good morning, everyone. It has only been six weeks since our last call when we reported our 2023 fourth quarter and year-end. Not much has changed in that short span of time relative to our results, messaging, or outlook. Today, I will begin my remarks with a quick overview of our integration activities, make a few observations, and then hand off the call to David to go through the financials and our 2024 outlook. To begin, we have been extremely busy integrating Deep Casing Tools since we acquired them in mid-March. We have also been working diligently on pre-closed activities related to the SDP transaction, including the S4 filing and integration planning. Once we close on SDP, we believe the combination of these two acquisitions creates a step change for DTI by offering current and prospective customers proprietary products into expanding markets, both domestic and international. In addition to driving incremental revenue, we will also be eliminating duplicate costs and improving margins. We will provide more details on the positive financial impacts and potential synergies after we close on SDP. But as I have said before, both of these transactions are outstanding examples of how we are expanding DTI's growth opportunities, both domestically and internationally, with a particular focus on our presence in the Middle East. For those of you that have listened to our conference calls since becoming public, you'll note that I provided a longer form history of DTI during our first conference call in November, and then gave an overview of our company during our year-end call on March 28. If you haven't listened to or read the transcripts of our first two public calls, you can access those webcast replays on our website. Here's a quick overview for our new investors and…

Thanks, Wayne, and thank you everyone for joining us today. In yesterday's earnings release, we provided detailed financial tables. So today, I'll offer further insight into specific financial metrics for the first quarter. DTI generated total consolidated revenue of $37 million in the first quarter of 2024. First quarter tool rental net revenue was approximately $30 million and product sales net revenue totaled $7 million. First quarter operating expenses were $31.8 million and operating income was $5.1 million. Adjusted net income for the first quarter was $3.8 million. First quarter adjusted EBITDA was $10.9 million and adjusted free cash flow was $4.7 million. As of March 31, 2024, we had approximately $14 million of cash, net debt of $11 million, and an undrawn $80 million ABL credit facility. We saw a sequentially flat U.S. land rig count during the first quarter of 2024 and a 19% decline in rig count, compared to the first quarter a year ago. Despite this decline in rig count and activity, our revenues in the first quarter of 2024 are up 5% over the prior quarter and have declined by only 9%, compared to the same period of 2023. We attribute this outperformance to our Tier 1 customer base, our wide distribution service and support network, and new product offerings that have gained market traction. As I explained on our last call, I want to discuss our capital expenditures and the offsetting benefits of our tool recovery business model that obtains payment for lost or damaged tools. As a downhole rental tool company, our maintenance capital is funded by tool recovery revenue. The customer is responsible for all lost or damaged tools, while the tools are in their care, custody or control. This tool recovery component of our rental model helps keep our rental tool…

Thank you, David. Before opening up the line for Q&A, I am pleased to say that first quarter results came in as expected and we have reaffirmed our 2024 outlook. RotoSteer and [Drill-N-Ream] (ph) product revenue continues to grow and we continue to expand our scope of tools and services in existing product lines through technological advancements. We are furthering our customer penetration by growing rentals with our expanded capabilities, new tools and services. The Deep Casing integration is going well and we will have a full quarter of results to report to you in the second quarter. We are working as quickly as possible to get all filings and regulatory portions of the SDP deal administered and are still on track to close in the third quarter. We expect to continue our market leading strategy throughout 2024 and expand our customer base as we move into 2025. And we believe additional thoughtful consolidation opportunities exist in oil-filled services that will supplement our organic growth initiatives already in motion. To close, I would again like to express my sincerest gratitude to every member of the DTI team for their continuous dedication to safety, customer service, and the successful execution of our strategic initiatives. The commitment of our team members has been critical to driving our success, and I extend my heartfelt appreciation for their contributions. With that, we will now take your questions. Operator?

Thank you. The floor is now open for questions. [Operator Instructions] Today's first question is coming from Jeff Grampp of Alliance Global Partners. Please go ahead.

Good morning, guys.

Good morning.

Question on the guidance for revenue. It looks like kind of an implication is we should see some sequential increases in revenue going forward. Just hoping you could comment on kind of how you see the pace of progression throughout the rest of ‘24 and kind of the main drivers for the growth? Thanks.

This is Wayne. We feel like our guidance that we've given publicly is achievable throughout the rest of the year. Some of our growth initiatives were a little backloaded and they depend on the market being as expected. So we feel like those are still very achievable and we can continue to grow these new product lines and some of these new initiatives we have. So we feel pretty confident about that going forward.

Okay, great. And my follow-up, with respect to Deep Casing, can you just touch on the integration process there? I know it's only been a couple of months, but just update us on how you feel that integration process is going? And then also curious if you could touch on maybe some of the revenue synergy opportunities that you guys see with bringing that into the DTI platform?

Yes, great. We -- you know, the integration is going well. They have a really fine team. The Deep Casing Tools division now of DTI is integrating well. We are starting to work as a group on our Middle Eastern and international execution strategies, expanding to different markets and further taking advantage of what's already in motion in the Middle East and assisting them with more inventory and other support functions and removing some of their overhead and administrative burden, so they're now part of our team and that makes it easier for them to execute. We've had a number of team meetings and discussions on how to expand into the Western Hemisphere, which we can greatly assist them with that. So all of those things are in motion, and we hope to report some of those results here in the very, very near future.

Okay. Great. Look forward to it. Thank you, guys.

Thank you. The next question is coming from Steve Ferazani of Sidoti & Company. Please go ahead.

Good morning Wayne. Good morning, David. Did want to follow-up on the Deep Casing Tools question. Your EBITDA margin solid, but was at the lower end of your guidance range? Should we think, and I know you only had a couple of weeks of Deep Casing Tools in the quarter. I'm assuming you expect Deep Casing Tools to be margin accretive. Is that a mix of synergies or are there some higher margins from that acquisition?

Well, we're hoping for both. I think we're planning for some of that, but we also have to absorb some full-year PubCo cost.

Yes.

And so it does provide some free cashflow benefit, because it's a product sale platform and less of a rental time and return component. So we're happy about that. And we're kind of helping them deploy more and more inventory and more and more resources to get the product sale activity momentum in the direction that we want. They've done a really good job pre-closing and we had already planned post-closing on how to accelerate that and that's kind of what we're relying on. So, you know, the synergies between the two and -- should give us that upward momentum we see to kind of offset the current run rate, so…

Makes sense. Makes sense. Appreciate that. You talked about the fact that, again, this quarter, we didn't see the same kind of your revenue decline was far better than the decline of the rig count, which says you're outpacing activity. You noted that your significant business with Tier 1 operators, which certainly makes sense. It's helping. How does that help, and I would assume it does in terms of the significant consolidation we're getting among operators and how you think that's going to play out on your business moving forward?

Well, we think we're in a good position to mitigate all the changes and that's part of how we operate our business. Plan 1 and Plan 2, Plan A, Plan B. So things happen, you implement Plan B and then Plan C. So I think we've done a pretty good job of mitigating a linear decline relative to the general activity by implementing some new products, some new things in our offering that help us remain above the linear decline. I think we've done a good job of that and we'll continue to do that. Bigger operators want bigger rental partners. They want more substantial providers that have a substantial and significant fleet of equipment. So I think that plays into our hands.

Great. David, I'm not sure if you gave this, but for the CapEx guidance for the year, did you provide the split on maintenance versus growth?

Yes, I think we mentioned the percentage of maintenance of consolidated revenue. We do have that breakout in our investor presentation, which will be online or is online. But as I mentioned there, we're seeing just a slight decline in our trend from prior years in that maintenance percentage of consolidated revenue. And all that has been factored into our CapEx considerations for the full-year.

Great. No, when we look at what you reported on Q1, the sales of the lost downhole tools almost completely replaced CapEx, and you ended up generating pretty good cash flow considering the working capital was a negative and your guidance is solid, so can you sort of walk through the mix and how you think that plays out through the year?

Yes, I mean, we've got basically our CapEx slate is on order, and as those come in, we'll see that affect the rest of the year. But we're supporting obviously our organic growth strategy, particularly with the roto shear product line and our CapEx spend. And we're, again, as you can see, as you kind of look at the chart in the investor presentation we're focused on the free cash flow component, so we're managing that growth, you know, a portion of our CapEx and our free cash flow component of our EBITDA to kind of show that we can generate that free cash flow component this year, compared to last year, because we spent some money investing in topline growth last year. So we're seeing that come to fruition in ‘24.

I mean in a normalized year where you wouldn't be making the investments in RotoSteer and understandable why you would given the demand, does the sale of the lost out downhole tools largely offset maintenance CapEx if you're in a pure maintenance CapEx year?

Yes, absolutely. That's the beauty of the downhole rental business model is that tool recovery component supports all of our maintenance CapEx. And again, the lever between free cash flow and growth CapEx is something that we can control up or down. So that's what we like about this particular business model.

Great. Thanks, Wayne. Thanks, David.

Thank you.

Thank you. Our next question is coming from John Daniel of Daniel Energy. Please go ahead.

Hey, guys. Thanks for including me. Wayne, I was hoping you could elaborate a little bit more on the international opportunity set, and if at all possible, maybe frame for us sort of what -- within your guidance what the expectation would be for year-over-year growth in international in ’24? And then what type of visibility you might have into ’25?

Great. Thanks, John. So as an example, our 2023 international revenue was less than 1% of our total. In ‘24, we expect that to be in a double-digit, you know, 10%, 11% range, or you know, at least double-digit. And that does not include the SDPI revenue that we anticipate, you know, closing and onboarding later in the year, hopefully sooner than later. So we see that percentage of our total growing in ‘25 and beyond in a more significant fashion. So we're allocating capital resources and acquisition strategies to execute on that, you know, component of our growth. Yes, so…

So here’s another one. Let's assume you've got a potential new client international that signs up. From the time you sign an agreement with them to start providing services, how long until the revenue actually shows up? What's a [Indiscernible] any color there would be appreciated?

That's a good question. With our current relationships and commercial paths with our acquired partners, we've been able to accelerate that from into more near-term. But if it's a complete new product or a complete new area, that could be three to six to nine months depending on the product and the timeline to get full approval and meet all the requirements of the local NOC. So it’s quite a lengthy process, much lengthier than the U.S., but it has greater stick and power, so…

Okay. And I guess this is somewhat of a leading question, so I apologize. But just -- it seems to me that all else being equal, the rate of growth ‘25 over ‘24 should be better than ‘24 over ‘23 for international. Is that within the realm of reason?

It is, but you know...

Okay, I know you are not getting to one more guidance. I understand. I'm just trying to put you a big picture. Okay.

We've put a general guidance out there and we can give more clarity to that as we, you know, make the rest of these, close the rest of these deals. And we're bullish on international. So I think that's…

That’s what I'm asking.

We're going to stay focused on that, yes.

Okay, thanks, guys.

Thank you.

Thank you. That concludes our question-and-answer session. I will turn it over to Mr. Prejean for closing comments.

All right. Thank you. And thanks, everyone, for joining and listening in and showing your interest. We're pretty enthused about where we're at and how we're competing and where we're going. As you heard, we're bullish in international. We still and continue to have and will continue to have a solid balance sheet, healthy income stream, a solid customer base, a talented group of employees, and we're making strategic investments in capital allocation in the areas that we think will provide the best returns. And we continue to believe and we'll continue to focus on all those initiatives that we've laid out publicly. So thank you for your interest in DTI and we look forward to the next call.

Ladies and gentlemen, this concludes today's event. You may disconnect your lines at this time or log off the webcast and enjoy the rest of your day.