Greetings and welcome to the Drilling Tools International Conference Call. At this time, all participants are in a listen-only mode. A 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. Sir, the floor is yours.

Thank you, operator. 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. With me today are Wayne Prejean, Chief Executive Officer; David Johnson, Chief Financial Officer; and Jameson Parker, VP of Corporate Development. Following my remarks, management will provide a high-level commentary of the benefits of the SDP acquisition, a review of the 2024 second quarter results, and updated outlook before we turn the call to you for your questions. There will be a replay of today's call. It'll be available by webcast on the company's website at drillingtools.com, and there'll be a telephonic recorded replay feature available until August 13. Please note that any information reported on this call speaks only as of today, August 6, 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, 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 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 may also include certain non-GAAP financial measures, including not limited to, adjusted EBITDA and adjusted free cash flow. 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 the 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, which is on our filings page or 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, Ken, and good morning, everyone. I will begin my remarks with a quick review of our Superior Drilling Products acquisition and synergies, observations on second quarter results, and discuss how we are dealing with the market softness in North America. After that, I will hand off the call to David, to go through the financials and our revised 2024 outlook. Also on hand today is our VP of Corporate Development, Jameson Parker, available during Q&A for comments on our recent acquisitions. Starting with SDP, we believe this acquisition, along with Deep Casing Tools completed in March, has created a step change for DTI to offer current and prospective customers proprietary products into expanding markets, both domestic and international. These two transactions are outstanding examples of how we are showcasing DTI's growth opportunities, with a particular focus on our presence in the Middle East. Our rationale for the SDP acquisition is quite compelling. Over the next 12 months, we expect to realize an excess of $4.5 million in identifiable SG&A synergies and realizable NOL tax benefits. In addition, there are vertical and horizontal integration synergies that include, approximately 60% CapEx savings on new DNR tools and 45% margin capture on repair and maintenance of our global drilling remit assets. Superior is headquartered in Vernal, Utah. The team and state-of-the-art facility adds to DTI's offering additional engineering and product development, PDC cutter brazing and bit repair expertise, a substantial manufacturing facility with precision machining capabilities, and of course our ongoing Drill-N-Ream repair center. In addition, after a significant investment and three years of trials and development, a fully staffed and operational PDC bit and Drill-N-Ream repair facility in Dubai, UAE, a local bit repair contract with ongoing revenues, as well as several hundred fit-for-purpose DNR tools on the ground across the…

Thanks, Wayne, and thank you, everyone, for joining us today. In today's earnings release, we provided detailed financial tables, so I'll use this time to offer further insight into specific financial metrics for the second quarter. DTI generated total consolidated revenue of $37.5 million in the second quarter of 2024. Second quarter tool rental net revenue was $28.3 million, and product sales net revenue totaled $9.2 million. Second quarter operating expenses were $35.3 million, and income from operations was $2.2 million. Adjusted net income for the second quarter was $3 million, or adjusted diluted EPS of $0.10 per share. Second quarter adjusted EBITDA was $9 million, and adjusted free cash flow was negative $1.1 million, a $3.2 million improvement, compared to the second quarter of 2023. As of June 30, 2024, we had approximately $6.8 million of cash, net debt of $17.4 million, and an undrawn $80 million ABL credit facility. As Wayne mentioned, we saw the U.S. land rig count down sequentially during the second quarter. Rig count was down roughly 15% over the last 12 months. Despite this decline in rig count and activity, our revenues in the second quarter of 2024, were flat over the second quarter of 2023. Our acquisition of Deep Casing, our Tier 1 customer base, our wide distribution service and support network, and new product offerings have been integral in managing this challenging cycle. Moving to maintenance CapEx, as a reminder of what I have shared on previous calls, we are a downhole rental tool company, and 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 fleet relevant and sustainable.…

Thank you, David. Before opening up the line for Q&A, I'd like to reiterate we are extremely pleased, to welcome SDP's talented team to the DTI family and add SDP's products, service, and world-class manufacturing expertise into our broad reaching, and expanding global sales channels. In conclusion, I would like to reemphasize that one, we are very pleased to have closed in our two acquisitions in five months, and we believe we will see significant cost synergies as well as vertical and horizontal integration synergies, from the SDP acquisition that will lower our costs and improve our margins. Two, we have implemented an annualized $2.4 million internal cost reduction program, to adjust to the softer market conditions. Three, we are competitive and profitable despite the soft market and are well positioned to combat pricing pressures. Four, our RotoSteer technology continues to make positive commercial traction, but at a slower pace than we anticipated late last year, when the market outlet was flat to upward. We expect to have continued growth in this important technology, but have tempered our fleet development plans and deferred quarter-to-quarter increases to adjust our CapEx and fleet utilization. I am highly confident this product line will continuously grow. Stay tuned for updates as this exciting opportunity develops. And finally, we believe additional thoughtful consolidation opportunities exist in oilfield services that will supplement our organic growth initiatives. Throughout industry cycles, our focus on safety, quality, and reliability continue to be the hallmark of DTI. I would again like to express my sincerest gratitude to every member of the DTI, Deep Casing, and most recent addition, Superior team for their continuous dedication to safety, customer service, and the successful execution of our strategic initiatives. The commitment of our employees has been critical in driving our success, and I extend my heartfelt appreciation for their contributions. With that, we will now take your questions. Operator?

Thank you. [Operator Instructions] Thank you. Our first question comes from Jeff Grampp from Alliance Global Partners. Go ahead, Jeff. Your line is open.

Morning, everyone. One of the first start on the Superior integration here now that we've closed. I understand we're only, you know, in the first week here, but do you guys have any kind of preliminary estimate for when you could potentially see some traction or signs of success on the revenue synergies upside, particularly in the Middle East and elsewhere internationally? Is that a 2024 event, where you guys could maybe see some green shoots of success, or is that more of a 2025 event we should stay tuned for?

Thanks, Jeff. This is Wayne Prejean. We expect to see, some green sprouts, starting to occur, you know, throughout the remainder of this year. We've been slowly having discussions on between our team and their team on how we might integrate post-closing, and now that that has happened, we're ready to implement some of those initiatives. And accelerate the efforts between our commercial team and their teams, and get things really ramping up in that market. Probably more of a 2025 event to see the true traction, so quarter-by-quarter we expect to make steady progress.

Great. Thank you. And on the revised guidance slide in your updated deck, and you touched a bit on this in the prepared remarks as well, Wayne, on M&A, so five near-term priority targets, as you guys kind of call it. Can you shed a bit more light on those, perhaps in terms of, I don't know, geographic focus, product line, maybe size in terms of what size businesses these are to the extent, you can kind of ring-fence some of these opportunities in any broad strokes?

Thanks, Jeff. I've invited Jameson, our Corporate M&A VP, to kind of comment on some of that. Jameson?

Yes, so speaking of the pipeline, Jeff, we have everything from product-specific tuck-ins that are identified and we're working on, some kind of single product line companies, all the way up to significant mergers of equal or even larger. So, we're constantly plumbing the depths of the market to find the thoughtful consolidation opportunities that we speak to in the deck. And I would say that that funnel, is very real when we speak to the opportunity set, and the near-term opportunities that we're actively working on.

Okay. Great. If I could just tack a follow-up on that, Jameson, what's kind of, relative to the last call a few months ago? How would you guys kind of characterize, bid-ask spreads, seller sentiment, what is that overall market like today versus a few months ago?

Yes, I think I, in one of our kind of introductory calls spoke to, valuations being very range-bound still in oilfield service. There is not, I think the bid-ask spread continues to narrow, and we've seen the complete departure of the private equity bidder in most of these processes. And some of these processes that we're doing are not, the broadly marketed deals. These are individual, founder-driven companies that we've known or worked with for a long time, and the timing is right to take their products commercial. So, I think that the acquisition landscape for consolidation remains robust for oilfield service. We need to do what our customer base is doing, and get larger and leaner.

Great, I appreciate those comments. I'll turn it back. Thank you, guys.

Thanks.

Thank you. And our next question comes from Steve Ferazani from Sidoti. Go ahead, Steve.

Good morning, Wayne. Good morning. Everyone appreciates the detail on the call. I wanted to ask about the updated guidance, because it now includes SDPI. Is there any kind of detail you can give us on the breakout, or what you're expecting the contributions for SDPI is, on the remainder of the year?

Historically, we only speak to the percent contribution by the product lines at year-end. I mean, they were public prior, and you can see some of the results, and we spoke to the kind of margin capture and improvement, by being vertically integrated. That's kind of where things are trending now.

Can you say if SDPI, your outlook on SDPI in terms of trends, are similar to your legacy business?

Yes, we see they have some bid repair business opportunities in the Middle East that are starting to get traction, so we anticipate that contribution. And also, we have assets on the ground, rentable assets on the ground that we can put to work, we believe, as things kind of continue to ramp up, as we integrate our efforts. So, we factored in an appropriate amount of what we believe is sticky activity, so that we feel like - we feel pretty good about our guidance. There's certainly potential for more opportunity in the future, so we'll just have to gauge that quarter-to-quarter as we integrate these two businesses.

Fair enough. When we think about the updated guidance, obviously rig count has continued to soften, but we're down about 20 rigs last quarter, and I know we're continuing to decline this quarter. But when I see the updated guidance, and you touched on it in your comments, there seems to be maybe a more severe pricing impact, or maybe it's utilization, and I'm trying to figure out how much consolidation is playing into that, even though you're probably the incumbent of the acquirer in a lot of these cases? Are you getting more pricing pressure from consolidation, or is it more just the slower rig count?

So, with the rig count, the slow bleed of the rig count over the last 18 months has been kind of, an interesting phenomenon within our industry where it didn't go down just rapidly, just kind of kicked away as a slow leak, if you will. And the industry's had to learn how to adjust to that slow burn rate of rig activity. And - as that's happened, operators have had a chance to, A, consolidate. B, what I spoke to in the press release was the rotation of different vendors trying, different ways to cut costs. And put compressive pricing on different service providers and so on. And that's affected us, because we've seen some of our core customers, get shuffled around from this operator to that operator, and we've had to shuffle as well. So, we've made those adjustments. As I spoke earlier, we have strategic moats built in. Those strategic moats are having the proper fleet. The most relevant types of connections and things in the industry that gives us the strongest sticking power. But as I've said previously in calls and with the different investors, no one is immune to a compression of the market by our customers, so yes.

How much can this reverse as we start seeing, I think you mentioned it, and certainly we all think there's some recovery next year with all the LNG export capacity coming. How positive are you on some recovery on pricing and margins if we get a recovery?

Yes, I think it's just a matter of time that our customers, do put more activity in play because they have a desire to grow their business as well, being the oil and gas customers. As far as pricing, rising back up, what we've done, we've tried, we make every effort to maintain our pricing points, but we modify our commercial terms with utilization, use tools and things like that and stand-by rates and things like that, when you have extra - tools unutilized. So, our goal is to, modify our commercial terms and then, move our - utilization efforts back to where the activity supports, a better pricing model. And we think, we'll be in a competitive position, to offer better products and more relevant products for the future.

Perfect. Last one from me. I mean, the international outlook as we come out of the first half listening to, some of the Bellwether conference calls, the international outlook remains really, really healthy. A lot of people calling for a multi-year cycle here with particular strength in the Middle East. Can you touch on how that's, your strategy with SDPI Deep Casing? Can you give a little bit of picture on how that affects your international strategy, and how that will play into sort of this international potential multi-year up cycle?

So, Deep Casing, for example, has product lines that's very contributory and beneficial to many of your Middle East and international offshore players. So that we see that business, slowly growing and evolving and making a more significant contribution. Now that we have the SDP acquisition, we've joined forces with them. We're no longer serving two masters. We're now aligned and working together in unison. I think we can help, that platform rapidly expand and set up, repair centers in other locations, and expand that product line so the opportunities are there. And for - in addition to that, what Jameson didn't give you any real color on, because he's reserving his comments, but I'll add to it is one of the criteria for M&A strategies is to, place a high emphasis on what international impact and component these M&A deals can do for us. So, we pretty much, look at that as a higher value proposition than maybe just some tucking and bolt-ons in the North American market, which, many could be attractive, but we're focused and we're aiming more towards technology - and Middle East and international expansion as far, as when we make an M&A deal, that needs to make a significant contribution to our long-term strategy.

Fantastic. Thanks, Wayne.

And our next question comes from John Daniel from John Daniel Energy Partners. Go ahead.

Wayne, your margins are already better than a lot of your peers, and I was - just noteworthy when I saw the cost reduction efforts, the $2.4 million. Can you elaborate on what you guys are doing?

With regard to our cost reduction?

Yes. So, is it regional, yes how are you approaching that?

So, one thing interesting about our business is we can scale our business, according to activity and that's very challenging, but, some of its labor-centric, some of its deferring certain, aspirational costs. So, we've made those appropriate adjustments in North America. We have a tenured management team in all of our facilities, which is unique, and they all understand, what is required of them, quarter-to-quarter, year-to-year, and how the industry ebbs and flows. So, we've made those variable - cost adjustments, but we are a public company now, so we've had to take on some public company burdens that we're all aware of. So, we've been mindful of managing that, escalation as we grow and build muscle to take on more and more M&A and larger, broader enterprises. So, but most of it's been the variable cost component in North America. Where we see the - lever of ebb and flow of activity, and if the activity raises, or rises to a level that, requires more support, we're prepared to make those increases if needed to support the business.

And then just a follow-up, unrelated, but the - the press release calls out the bit repair facility in the UAE. I'm just curious, when you have a facility like that, what's the opportunity for additional roofline there, and how quickly could you start taking other product services into a facility like that? You could just expand, it will be helpful?

Well. Okay. Yes, thanks. The facility that's set up now was centrally located in the UAE, and that serves our needs for now, but we're looking at how to put something possibly in Saudi. We could, the roofline that we currently have could add support for some of our other product lines in the Middle Eastern market. So it's expandable. There's the bit repair business can be expanded, the drilling repair business can be expanded, and we have some machining capability that's being loaded into there, to add more repair capability to support room fleets. So, we're going to go for a while.

Good. Okay. That's all I had. Thank you for including me.

Thank you, John.

Thank you. This does conclude, sorry, this does conclude the question-and-answer session. I would now like to turn it to management for any closing remarks.

Well, thanks everybody for your interest in DTI. It's been a challenging year, but we've once again overcome those challenges, and we see a, pretty bright outlook going forward, and we look forward to keeping you posted in those events. Thanks for your interest.

Thank you. This does conclude today's conference. We thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.