Greetings, and welcome to the Drilling Tools International Third Quarter 2024 Earnings 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's now my pleasure to introduce your host, Ken Dennard. Thank you, sir. Please go ahead.

Thank you, operator, and good morning, everyone. We appreciate you joining us for Drilling Tools International's 2024 third quarter conference call and webcast. With me today are Wayne Prejean, Chief Executive Officer; and David Johnson, Chief Financial Officer. Following my remarks, management will provide a review of third quarter results and the updated outlook, before opening the call for your questions. There will be a replay of today's call that will be available by webcast on the company's website at drillingtools.com, and there will also be a telephonic recorded replay available until November 21. Please note that any information reported on this call speaks only as of today, November 14, 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 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 included, 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 reconciliations to the most directly comparable GAAP measures can be found in our earnings release and in the 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, Ken, and good morning, everyone. I will provide some opening remarks, hand the call to David to go through the numbers, and return with closing comments before we open it up for questions. Let's get started. As you saw yesterday, we released our third quarter results after market. We continue to experience headwinds in the third quarter, including rig count softness in U.S. land, U.S. Gulf of Mexico and Middle Eastern markets. However, we are pleased to have sequentially grown our revenue, adjusted net income, adjusted diluted EPS, adjusted EBITDA and our adjusted free cash flow, from our 2024 second quarter results. Our total revenue came in at $40.1 million. Adjusted EBITDA was $11.1 million in the quarter, and adjusted free cash flow was $7.8 million, which is more adjusted free cash flow than we produced for the entire year of 2023. In a moment, David will take you through the financials in more detail, and provide our revised outlook. As we have been saying since going public last year, our goal is to become the premier drilling tools rental solution provider, for servicing the wellbore construction and casing installation market segments. In order to accomplish this goal, we need scale. To that end, we have been extremely active in the M&A market, acquiring three companies in 2024, and announcing a fourth, which is expected to close in the first quarter of 2025. Our first two acquisitions this year, were Deep Casing and Superior Drilling Products, which we are currently integrating and operating. We have spoken about these in detail on past calls. Our latest two deals announced subsequent to the end of the third quarter, include the acquisition of European Drilling Projects, or EDP for short, which we closed on October 3. We followed that with an announcement…

Thanks, Wayne, and thank you, everyone, for joining us today. In yesterday's earnings release, we provided detailed financial tables, so I'll use this time to offer further insight into specific financial metrics for the third quarter. As Wayne mentioned, we saw continued rig count softness during the third quarter that impacted near-term synergy realization. But we're able to sequentially increase revenue, adjusted net income, adjusted diluted EPS, adjusted EBITDA, and adjusted free cash flow from the second quarter of 2024. DTI generated total consolidated revenue of $40.1 million in the third quarter of 2024. Third quarter tool rental revenue was $28.1 million, and product sales revenue totaled $12 million. Operating expenses were $35.8 million and income from operations was $4.3 million. Adjusted net income for the third quarter was $4.6 million, which represents an adjusted diluted EPS of $0.14 per share. Third quarter adjusted EBITDA was $11.1 million. And adjusted free cash flow was $7.8 million in the third quarter, which is more than the adjusted free cash flow we generated in all of 2023. As of September 30, 2024, we had approximately $12 million of cash, and net debt of $32.1 million. Maintenance CapEx for the third quarter of 2024, was approximately 8% of total consolidated revenue. This portion of our capital investment has trended lower this year, 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. As a reminder, our maintenance capital is funded by tool recovery revenue, which keeps our rental tool fleet relevant and sustainable regardless of the trend. Now moving on to our outlook. We are revising our 2024 ranges, which include a sequential slowdown due to anticipated holiday breaks, budget exhaustion and capital discipline being employed by our…

Thank you, David. Before we open up the line for questions, I want to welcome EDP's talented team to the DTI organization, and we look forward to the Titan team joining us in the first quarter of 2025. As we continue to integrate Deep Casing, SGP, EDP and will soon add Titan, we have greatly and purposefully expanded our geographical footprint, enhanced our technological capabilities and position DTI, as a leader in the evolving energy landscape. We believe One DTI will be able to provide our customers, with access to an even wider array of products and services, with the addition of these quality organizations. In conclusion, I would like to reemphasize that: first, we are competitive and profitable despite the soft market conditions, and we continue to be resourceful and innovative while combating pricing pressures. Second, we continue to evaluate our cost reduction program to adjust to market conditions. As we implement our One DTI strategy, we will take additional measures to adjust to lower near-term demand, and we believe we will be well positioned to come out stronger when the market recovers with the best personnel, processes, products and performance, all aligned on best practices. Third, we are very pleased with the execution of our acquisition growth strategy, especially in light of the headwinds our industry has experienced. We believe acquiring high-quality companies at attractive multiples positions DTI to successfully participate in the next three to five-year expected growth cycle. This elevated demand should further strengthen the need for our technology, our solutions, our products and our services globally. And finally, there is no finish line. We believe additional thoughtful consolidation opportunities exist in oilfield services that will supplement our organic growth initiatives. I would again like to express my sincerest gratitude, to every member of the DTI team for their continuous dedication to working in a safe, inspired and productive manner. 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] Our first question comes from the line of Jeff Grampp with Alliance Global Partners. Please proceed with your question.

Good morning, guys. Was curious to start first on the tool rental side of things. Revenue was pretty flat sequentially, but gross margins improved pretty noticeably. So I just wanted to dive into that a bit more. I know we were expecting some benefit from the Superior Drilling merger, and some of those cost synergies. So I just wanted to confirm if it was largely that. Any other factors going on and kind of expectations to continue that kind of level going forward? Thanks.

Jeff, happy - this is David. Happy to take that question. Yes, I think you kind of hit on it. A lot of that is due to the vertical integration of our Superior Drilling Products benefiting the Drill-N-Ream product rental. So a lot of those costs flowed through and improved the margins on that side of the business, from that acquisition. I think we also had a little bit better utilization on some of our pipe, and that's a pretty accretive margins when we get that utilization that benefited our margin as well.

Great. Appreciate that. And maybe sticking on the Superior Drilling side of things. Can you guys just touch on how that integration process is going? And then also some of the revenue upside synergies that you guys have talked about as well. I know particularly the Middle East was an area you guys were excited about for the potential for the Drill-N-Ream?

Yes, Jeff, this is Wayne. We've completed our integration with them in the Western Hemisphere, and have each team focused on their respective responsibilities, and that's going well in the Eastern Hemisphere, as I've mentioned in the call, spent a lot of time there in the last few weeks, along with meeting with various team members trying to organize the multitude of Deep Casing and EV projects and the SEP team to get us all focused on one execution model, and that's in motion and going well and the rental activity is starting to get traction. We should see some of that come to fruition in the Q4, and hopefully early in 2025, as we build momentum there with the acquisition of EDP, and the integration with SDP. So that's moving definitely in the right direction. And the Middle East market is albeit I'm not going to say soft, but not overly vibrant like it was before with a few rigs being idled, but it is still a very vibrant market, very big opportunity for us.

Great. Thanks, Wayne. If I could sneak one more in on the M&A side of things. The updated slide presentation still referenced a handful of targets that you guys are working on. So I was just hoping you could share maybe kind of a flavor in terms of size, geographic focus, anything along those lines. And then just broadly wondering, you guys have obviously had a very active 2024 in terms of deals. I know some of them have been a little smaller, but just the overall comfort level to continue to be active on the M&A side of things?

So the opportunity landscape consists of everything from tuck-ins to transformational mergers that are out there that we're looking into doing some work on, and we're going to continue to feed the pipeline of opportunities for M&A and find and pick what we think are the best types of deals that make sense for our strategy. So they're up there, they're still out there, and we think the valuations are definitely range bound within the market. And I think the arbitrage between buyers and sellers is narrowing, because people understand the way the industry is trending, and that this type of cooperation between buyers and sellers and mergers and consolidations makes sense more now than ever. So I think, we'll continue to pursue those opportunities, and they're out there for us.

Okay. Great. Best of luck. I appreciate the time. Thank you guys.

Thank you. Our next question comes from the line of Steve Ferazani with Sidoti & Company. Please proceed with your question.

Good morning, Wayne. David, appreciate the detail on the call. I want to start by - let me follow up on the M&A topic. The two acquisitions you made recently, EDP, I understand the fit there with the focus on premium tools in international markets. Titan Tools seemed a little bit different, beyond just getting you more international exposure. Can you help us understand how Titan Tools fits the M&A strategy?

Yes, Steve, Titan is also a nice tuck-in with our directional tool rentals platform, where we're basically renting tools across the BHA support segment. In addition, they also have hole openers and other product lines that they bring, and add to our portfolio. What I particularly like about them is their presence in Europe and many, many projects that initiate for West Africa and places like that, usually originate from the Aberdeen area. There's a lot of technology incubators there. So they bring a nice geographic addition to what we already do. And we were already partnered with them, somewhat as they were our distributor for many of our products in that area. So this is a nice bolt-on for us and a good cultural group that aligns well with us, with a couple of facilities that help us launch more and more of our other products. So blended all together, it gives us better infrastructure, better spread and better portfolio offering.

Great. That's helpful. The adjustment to guidance is not a surprise. I think you're at the latter end of earnings season, we've heard budget exhaustion fairly repeatedly through the season. I want to get your sense, have you started to see the slowdown yet? I know frac spreads are down in the last couple of weeks, but rig counts held up. Or is that more what customers are saying? And if I could add to that question; last year, we saw that happen, but then there was a very slow start to 2024 before it ramped up. Would you expect a similar trend?

So we kind of joke among ourselves, and said this is the most organized downturn and stable downturn we've ever been a part of. But the reality is it's just been an adjustment of activity based on our customers' production needs. To answer your question, we see it flat we feel a flattish market. I think the rig count is going to ebb and flow. We might see some more softness before we see some uptick. But I think our customer base has made a commitment, particularly the oil and gas companies in the U.S. and North America. And I think even in the international markets, many of them have said they've got a stated goal to achieve a certain production target. And whatever that takes, that's what they'll do. If they can do it with less rigs, they will. If they need more, they will. Its footage based, it's performance-based. And all of them are operating on capital discipline. And as we follow that theme, we operate under the same thematic approach to our business, right?

When we think about the amount of headwinds in U.S. land this year, and clearly, it got more challenging than probably what a lot of us were thinking at the beginning of the year. You're still guiding for almost in the range of $20 million in adjusted free cash flow. What's the message there from your business model and the rental tool model?

So, we feel like despite the ups and downs of the market, we can always choose to run a sustainable business. And the way we do that, is what I just mentioned is equivalent capital discipline to the market. We do make investments in our fleet to make it sustainable, and we are going to support our customers. But at the same time, we're mindful of making too many aspirational investments, where we don't feel the market is in a position to reward you for that risk. So I think, it's risk-based capital disciplined investment in strategic materials fleet, knowing what your customers have, and we can generate a very healthy free cash flow margin that I think is peer competitive in the marketplace.

Thanks, Wayne.

Thank you. Our next question comes from the line of Blake McLean with Daniel Energy Partners. Please proceed with your question.

Hi, good morning, guys.

Hi, Blake. Good morning.

Hi, one more on M&A. You talked a lot about it here. You guys have great insights. Last two deals, a bit more international event. Are there differences in terms of what the M&A market looks like in North America versus internationally? And what would you share about that kind of opportunity set, and how they differ and how the market sentiment might differ or anything like that?

So to be clear, you're wondering what's the difference between the M&A market, Western Hemisphere versus Eastern Hemisphere?

Yes, sir.

Yes. All right. Great. There are numerous opportunities in both markets. I mean the ones in the Eastern Hemisphere are a little bit less transparent. What I mean by that is they're spread across multiple countries, whereas in North America, you kind of have a more seamless type of business, and legality of how the business operates and functions with customer bases. So - but there are numerous foreign companies based, with most of their business in the Eastern Hemisphere that some of them U.S. owned, some of them not, that are opportunistic for us that fit the profile of what we want to accomplish. May have a few more challenges in making those acquisitions, because of the complexity of multiple countries, and contracts and all of the nuances that go along with operating in those markets. But they're definitely out there with sticking power and the ability to be good bolt-on accretive type deals for us. In the U.S. market, I think we kind of all know where the lane is. It's all about range down valuations, and how we get more economies of scale. We have to be more competitive. I mean, doing acquisitions, particularly in North America, just makes us more competitive. We've got to lower our cost and deliver more value for our clients. And I think that's where the benefit comes here. So does that answer your question?

Absolutely. Thank you for that color. On the international piece, you've got different reporting going forward. Any sort of targets or aspirations that you guys might share in terms of, what that revenue mix might look like over the next few years, what the growth rate might be? Anything like that you might share?

So one of the reasons we adjusted our segment reporting as such is to - so we expect that market to grow, I think we've already stated that it was 1% of our income in '23. It will be 10% in '24, and we expect it to grow more significantly in the future. So that's - we'll be able to measure that year-to-year. So that's one of the reasons we took that approach.

Understood. Okay, thank you guys very much for the time this morning.

Thank you. This concludes our question-and-answer session. I'll turn the floor back to management for closing comments.

All right. Thanks, everybody, for listening and attending and your interest in Drilling Tools International. We look forward to reporting in future quarters and measuring our progress. Have a great day.

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.