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spk07: Greetings and welcome to the Drilling Tools International 2023 and fourth quarter earnings conference call. At this time, all participants are in a listen-only mode. A brief question 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ken Dennard. Thank you. You may begin.
spk18: 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 will be available by webcast on the company's website, and that's drillingtools.com. And there will 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 28, 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 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 gap 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.
spk11: Thanks, Ken, 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 blue chip firms like Baker Hughes, BP, Chevron, ConocoPhillips, 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 assorted configurations, hole sizes, geographies, and engineering requirements. There are just too many variables in our dynamic industry that make it inefficient for customers to own their own tools. Our customers rent tools from DTI because we provide high quality service and value along with our substantial fleet of tools to serve their needs. We operate from our headquarters in Houston, Texas, and from 16 service and support centers across North America and maintain eight international service and support centers across Europe and the Middle East. Many of our service locations have machining, inspection, and repair capabilities that enable us to efficiently service our equipment, which results in improved customer satisfaction, reliability, and efficient utilization of our assets. We also have full manufacturing capabilities, which allows us to support our vast fleet of assets and control the cost and delivery of many of our rental tool items. We have an enviable revenue stream from multiple product lines and numerous geographic locations, covering every significant onshore and offshore oil and gas producing region in North America, Europe, and the Middle East. In a steady state environment, our business consistently delivers 30 plus percent adjusted EBITDA margins and double digit adjusted free cash flow margins. We are proud of the progress and track record that we've built. In fact, the company has been EBITDA positive every single year during the last 10 years, including 2020 during the depths of COVID. Although we prefer a market that is stable and upward, We view downturns as opportunities to strengthen our business and we have done so in each cycle, including this current cycle. In addition to our positive financial results throughout these industry cycles, our safety, quality, and reliability of performance continues to be the hallmark of DTI. I hope this quick recap was helpful in providing some context for the rest of the call. Turning now to the market outlook for our business. In 2023, the expectation was that rig counts would be flat or tick up modestly throughout the year. Unfortunately, as we all experienced about a year ago, natural gas markets softened, which resulted in rig count declines in many areas throughout 2023. While U.S. rig activity declined approximately 20% from January 1st to December 31st, we continued executing on our strategic plan with revenue increasing over 17%, from the previous year, significantly outperforming the market. Looking at 2024, management believes that the North American rig count bottomed in the fourth quarter of 2023 and is expected to remain flat throughout 2024. Longer-term demand trends remain robust with projections from agencies such as the EIA expecting oil demand to continue to grow through 2050. and gas demand to increase materially in the next few years as in-process LNG plants come on stream. It is well documented that the industry has under-invested in recent years, and to meet future demand, additional drilling, completion, and production of oil and gas wells will be required worldwide. DTI's base business and ongoing acquisitions to expand our capabilities makes us competitively positioned across the entire industry. As we have stated before, our customers have requested we expand to serve them on a more global scale. In response, we expanded our rental tool fleet to the North Sea Europe market, and we have made steady progress expanding into the Middle East with new technologies as well as many of our core products. As you know, E&P customers continue their record pace of consolidation with over $100 billion of total mergers and acquisitions announced in 2023 in the Permian Basin alone. Our alignment with our blue chip customers has enabled us to be on the positive side of the recent wave of E&P consolidation. Our sales and operations teams make certain to maintain the continuity of business relationships across the industry to mitigate changes in our customer base. Now moving to the highly fragmented oil fuel services industry. We detailed while going public last year that there are meaningful consolidation opportunities that exist in our sector. It is our stated goal that by making thoughtful acquisitions, we believe it is possible to weaken double or triple the size of the company in the near future. We have established an M&A framework and robust M&A pipeline that will allow us to selectively and strategically consolidate numerous oilfield service, product, and rental tool companies that meet the criteria for our growth plan. Having said that, earlier this month, we announced that we closed on the acquisition of deep casing tools and announced the signing of a definitive agreement for our pending acquisition of Superior Drilling Products, currently trading as SDPI on the New York American Stock Exchange. We will provide more details on the positive financial impacts and potential synergies from these acquisitions after we close on SDPI. But both 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. We are confident that these and future acquisitions will drive innovation, expand our footprint and addressable market, enhance our product offerings, and as a result, increase shareholder value. We look forward to collaborating with the dedicated professionals from deep casing tools and superior drilling products, as well as providing their unique and differentiated products to our customers. On the balance sheet side of the business, we exited 2023 with no debt and an undrawn $60 million ABO credit facility. And as you probably saw earlier this month, that we improved our liquidity and further strengthened our balance sheet by amending and extending our credit facility that provides for an $80 million revolving line of credit, up from $60 million, and added a new term loan in a principal amount of $25 million, with both facilities maturing in March 2029. We are very pleased to get this refinancing in place with less restrictive covenants to offer more financial flexibility and further support our growth strategy. As you can see, we have been extremely busy since going public positioning the company for future growth, which is what we said we would do, and believe we are poised to make additional accretive acquisitions in the future. With that, I'll turn it over to our CFO, David Johnson, for a review of our financial results. David?
spk20: 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 2023 was impacted by the additional operating expenses previously mentioned, as well as one-time transaction-related expenses 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 quarter of 2023 continued to see a rig count and activity decline, We were able to scale back on capital expenditures in order to meet our adjusted free cash flow target of 6 to 8 million. Adjusted free cash flow is defined as adjusted EBITDA, less gross capital expenditures, and is a unique lever that we have at our disposal to generate returns in lieu of top-line growth. We view this metric as a good measure of the overall performance of our business. As Wayne said earlier, DTI ended 2023 with strong financial flexibility, which included approximately 6 million of cash on hand and an undrawn 60 million ABL credit facility. Wayne also mentioned that we amended and extended our credit facility with PNC, which increased the ABL to 80 million and added the $25 million term loan, which now mature in March of 2029. Before moving on to guidance for 2024, I want to again take a moment to discuss our capital expenditures and the offsetting benefits of our tool recovery business model that obtains payment for lost or damaged tools. We regularly receive questions on this topic and appreciate that it is not well understood. As a downhole rental tool company, our maintenance capital is funded by tool recovery revenues. 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 business model helps keep our rental tool fleet relevant and sustainable. For the 12-month period ended December 31, 2023, maintenance capex was approximately 12.9% of total consolidated revenues. This portion of our capital investments has remained relatively consistent over the past couple of years. Now, moving on to our outlook for 2024, we are excited about our market opportunities and expect to more than double our adjusted free cash flow in 2024 as we prepare for increased market-driven demand for our rental tools and services for the remainder of the decade. While our growth has historically been tied to recounts, we have been positively impacted by the trend of longer laterals being drilled in multi-well pads. Additionally, the following full year 24 outlook includes the recent deep casing tools acquisitions estimated impact on 24 results, but does not include any contribution from the pending acquisition of superior drilling products. We will update 24 guidance for SDP's impact once we close the transaction. For full year 24, we expect revenue to be in the range of 170 million to 185 million. We expect adjusted EBITDA to be within the range of 50 million to 58.5 million. Gross capital expenditures are expected to be between $30 million and $33 million. Net income for the full year is expected to be between $15 million and $21 million. And finally, we expect adjusted free cash flow to more than double prior year adjusted free cash flow and be in the range of $20 million to $25.5 million for 2024. That concludes my financial review and outlook section. Let me now turn it back over to Wayne to provide some summary comments before Q&A.
spk11: 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 outperformance, 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 DeepCasing 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?
spk07: Thank you. Ladies and gentlemen, at this time, we'll be conducting a question and answer session. If you'd like to ask a question, you may press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would 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 star key. Our first question comes from the line of Jeff Gramp with Alliance Global Partners. Please proceed with your question.
spk02: Good morning, guys, and congrats on the recent acquisitions. Thank you. First, I wanted 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.
spk11: Thanks, Jeff. Let me start with mentioning that our new investor presentation is live and updated on our website, for those of you who might not be aware of that. 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. 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 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, you know, surely rapid expansion and acquisitions can, you know, is always challenging, but we feel like we're in good shape to 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 we're gonna be thoughtful and careful and make sure each, the timing and cadence of everything we do meets with our strategic goals.
spk02: 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, 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 bit here. What is the flexibility to move that up or maybe even down with changing market dynamics?
spk11: Good question. For most of that CapEx that's 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, we think, accretive over and above our current core business metrics. You know, we're holding, serving, 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's most of what that's for.
spk21: Great. Thanks so much for the time, Bess. Yeah.
spk07: Our next question comes from the line of Steve Farazani with Sedodian Company. Please proceed with your questions.
spk06: 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 for Q your tool rental revenue was essentially flat and we think about the rig county 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.
spk11: Yeah, so sure, we're no one's immune to activity changes and 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 we have good alignment with our customers on 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.
spk06: Great. And if I could A 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 are declining 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?
spk11: Well, thanks. We do have an emerging new product that we're investing in called RotorSteer. 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 that's focused on.
spk06: All right.
spk17: Good.
spk06: 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?
spk11: 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. Yeah, that's kind of how we move the needle up or down. But we believe that the gas will pick up eventually. 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.
spk05: Great. Thanks, Wayne. Thanks, David.
spk11: Thank you.
spk07: Our next question comes from the line of John Daniel with Daniel Energy Partners. Please proceed with your question.
spk03: Good morning, Wayne and team. Thank you for including me. 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, you know, exposed primarily to gas markets versus those international offshore? Is there opportunities to be, you know, opportunistic, if you will, and just any color there?
spk11: Yeah, sure. Always getting the expectations from sellers and buyers to align is challenging, but there are some technologies and 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 available to them before on our distribution platform helps that. Valuations kind of remain range-bound. You know, the bid-ask spread is, you know, narrow. So I think people are realizing, you know, 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 from our side.
spk03: Got it. And then, Wayne, your margins relative to a number of your OFS peers are better? How do you preserve those sort of strong margins with the M&A strategy? I mean, are most of the deals you look at, would they be margin accretive, or how would you? Just some thoughts on that.
spk11: So 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 value. 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 or strengthen our existing core business. Maybe a little moat building, an opportunity to strengthen our existing distribution platform. Those are some examples of how we look at acquisitions. We're not in the mode of just bolting on and smash code strategy where we just, you know, 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, so.
spk03: Okay. The final one for me, I think if I heard you correctly, some of the growth CapEx is tied to perhaps a development of a new tool. Is that, did I hear it correctly?
spk11: Yeah, it's correct, but it's commercially active and growing, and we've got it baked into our guidance this year.
spk03: Okay. 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.
spk11: Well, we spent 22 and 23 getting it past its first two stages, and now it's fully commercialized with its own asset team and You know, we're following a number of rigs and growing month by month. You know, we've passed the incubation period and we're, you know, 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. Great. Thank you very much. All right.
spk08: Well, any more questions?
spk07: There are no other questions in the queue at this time. I'd like to hand it back to management.
spk11: All right. Well, we appreciate everyone's participation on the call and interest in Drilling Tools International. Like I said before, you know, please feel free to look at our investor presentation on drillingtools.com. And we look forward to demonstrating our continued growth and success and improving shareholder value. Thank you.
spk07: 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. you Thank you. Thank you. Greetings and welcome to the Drilling Tools International 2023 and fourth quarter earnings conference call. At this time, all participants are in a listen-only mode. A brief question 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ken Dennard. Thank you. You may begin.
spk18: 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 will be available by webcast on the company's website, and that's drillingtools.com. And there will 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 28, 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 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.
spk11: Thanks, Ken, 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 blue chip firms like Baker Hughes, BP, Chevron, ConocoPhillips, 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 assorted configurations, hole sizes, geographies, and engineering requirements. There are just too many variables in our dynamic industry that make it inefficient for customers to own their own tools. Our customers rent tools from DTI because we provide high quality service and value along with our substantial fleet of tools to serve their needs. We operate from our headquarters in Houston, Texas, and from 16 service and support centers across North America and maintain eight international service and support centers across Europe and the Middle East. Many of our service locations have machining, inspection, and repair capabilities that enable us to efficiently service our equipment, which results in improved customer satisfaction, reliability, and efficient utilization of our assets. We also have full manufacturing capabilities, which allows us to support our vast fleet of assets and control the cost and delivery of many of our rental tool items. We have an enviable revenue stream from multiple product lines and numerous geographic locations, covering every significant onshore and offshore oil and gas producing region in North America, Europe, and the Middle East. In a steady state environment, our business consistently delivers 30 plus percent adjusted EBITDA margins and double digit adjusted free cash flow margins. We are proud of the progress and track record that we've built. In fact, the company has been EBITDA positive every single year during the last 10 years, including 2020 during the depths of COVID. Although we prefer a market that is stable and upward, We view downturns as opportunities to strengthen our business, and we have done so in each cycle, including this current cycle. In addition to our positive financial results throughout these industry cycles, our safety, quality, and reliability of performance continues to be the hallmark of DTI. I hope this quick recap was helpful in providing some context for the rest of the call. Turning now to the market outlook for our business. In 2023, the expectation was that rig counts would be flat or tick up modestly throughout the year. Unfortunately, as we all experienced about a year ago, natural gas markets softened, which resulted in rig count declines in many areas throughout 2023. While U.S. rig activity declined approximately 20% from January 1st to December 31st, we continued executing on our strategic plan with revenue increasing over 17%, from the previous year, significantly outperforming the market. Looking at 2024, management believes that the North American rig count bottomed in the fourth quarter of 2023 and is expected to remain flat throughout 2024. Longer-term demand trends remain robust with projections from agencies such as the EIA expecting oil demand to continue to grow through 2050. and gas demand to increase materially in the next few years as in-process LNG plants come on stream. It is well documented that the industry has under-invested in recent years, and to meet future demand, additional drilling, completion, and production of oil and gas wells will be required worldwide. DTI's base business and ongoing acquisitions to expand our capabilities makes us competitively positioned across the entire industry. As we have stated before, our customers have requested we expand to serve them on a more global scale. In response, we expanded our rental tool fleet to the North Sea Europe market, and we have made steady progress expanding into the Middle East with new technologies as well as many of our core products. As you know, E&P customers continue their record pace of consolidation with over $100 billion of total mergers and acquisitions announced in 2023 in the Permian Basin alone. Our alignment with our blue chip customers has enabled us to be on the positive side of the recent wave of E&P consolidation. Our sales and operations teams make certain to maintain the continuity of business relationships across the industry to mitigate changes in our customer base. Now moving to the highly fragmented oil field services industry. We detailed while going public last year that there are meaningful consolidation opportunities that exist in our sector. It is our stated goal that by making thoughtful acquisitions, we believe it is possible to weaken double or triple the size of the company in the near future. We have established an M&A framework and robust M&A pipeline that will allow us to selectively and strategically consolidate numerous oilfield service, product, and rental tool companies that meet the criteria for our growth plan. Having said that, earlier this month, we announced that we closed on the acquisition of deep casing tools and announced the signing of a definitive agreement for our pending acquisition of Superior Drilling Products, currently trading as SDPI on the New York American Stock Exchange. We will provide more details on the positive financial impacts and potential synergies from these acquisitions after we close on SDPI. But both 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. We are confident that these and future acquisitions will drive innovation, expand our footprint and addressable market, enhance our product offerings, and as a result, increase shareholder value. We look forward to collaborating with the dedicated professionals from deep casing tools and superior drilling products, as well as providing their unique and differentiated products to our customers. On the balance sheet side of the business, we exited 2023 with no debt and an undrawn $60 million ABO credit facility. And as you probably saw earlier this month, that we improved our liquidity and further strengthened our balance sheet by amending and extending our credit facility that provides for an $80 million revolving line of credit, up from $60 million, and added a new term loan in a principal amount of $25 million, with both facilities maturing in March 2029. We are very pleased to get this refinancing in place with less restrictive covenants to offer more financial flexibility and further support our growth strategy. As you can see, we have been extremely busy since going public positioning the company for future growth, which is what we said we would do, and believe we are poised to make additional accretive acquisitions in the future. With that, I'll turn it over to our CFO, David Johnson, for a review of our financial results. David?
spk20: 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 expenses 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 quarter of 2023 continued to see a rig count and activity decline, We were able to scale back on capital expenditures in order to meet our adjusted free cash flow target of six to eight million. Adjusted free cash flow is defined as adjusted EBITDA, less gross capital expenditures, and is a unique lever that we have at our disposal to generate returns in lieu of top line growth. We view this metric as a good measure of the overall performance of our business. As Wayne said earlier, DTI ended 2023 with strong financial flexibility, which included approximately 6 million of cash on hand and an undrawn 60 million ABL credit facility. Wayne also mentioned that we amended and extended our credit facility with PNC, which increased the ABL to 80 million and added the $25 million term loan, which now mature in March of 2029. Before moving on to guidance for 2024, I want to again take a moment to discuss our capital expenditures and the offsetting benefits of our tool recovery business model that obtains payment for lost or damaged tools. We regularly receive questions on this topic and appreciate that it is not well understood. As a downhole rental tool company, our maintenance capital is funded by tool recovery revenues. 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 business model helps keep our rental tool fleet relevant and sustainable. For the 12-month period ended December 31, 2023, maintenance capex was approximately 12.9% of total consolidated revenues. This portion of our capital investments has remained relatively consistent over the past couple of years. Now, moving on to our outlook for 2024, we are excited about our market opportunities and expect to more than double our adjusted free cash flow in 24 as we prepare for increased market-driven demand for our rental tools and services for the remainder of the decade. While our growth has historically been tied to recount, we have been positively impacted by the trend of longer laterals being drilled in multi-well pads. Additionally, the following full year 24 outlook includes the recent deep casing tools acquisitions estimated impact on 24 results, but does not include any contribution from the pending acquisition of superior drilling products. We will update 24 guidance for SDP's impact once we close the transaction. For full year 24, we expect revenue to be in the range of 170 million to 185 million. We expect adjusted EBITDA to be within the range of 50 million to 58.5 million. Gross capital expenditures are expected to be between $30 million and $33 million. Net income for the full year is expected to be between $15 million and $21 million. And finally, we expect adjusted free cash flow to more than double prior year adjusted free cash flow and be in the range of $20 million to $25.5 million for 2024. That concludes my financial review and outlook section. Let me now turn it back over to Wayne to provide some summary comments before Q&A.
spk11: 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 outperformance, 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 DeepCasing 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?
spk07: Thank you. Ladies and gentlemen, at this time, we'll be conducting a question and answer session. If you'd like to ask a question, you may press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would 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 star key. Our first question comes from the line of Jeff Gramp with Alliance Global Partners. Please proceed with your question.
spk02: Good morning, guys, and congrats on the recent acquisitions. Thank you. First, I wanted to start there. You know, 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.
spk11: Thanks, Jeff. Let me start with mentioning that our new investor presentation is live and updated on our website, for those of you who might not be aware of that. 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. 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 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, you know, and surely rapid expansion and acquisitions can, you know, is always challenging, but we feel like we're in good shape to 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 we're gonna be thoughtful and careful and make sure each, the timing and cadence of everything we do meets with our strategic goals.
spk02: Great. I appreciate that. For my follow-up, I'm curious more on the organic growth CapEx guide, and then you have a slide there that kind of details that nicely. I'm just kind of curious, 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 bit here. What is the flexibility to move that up or maybe even down with changing market dynamics?
spk11: Good question. For most of that CapEx that's 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, we think, accretive over and above our current core business metrics. You know, we're holding, serving, 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's most of what that's for.
spk21: Great. Thanks so much for the time, Bess. Yeah.
spk07: Our next question comes from the line of Steve Farazani with Sedodian Company. Please proceed with your questions.
spk06: 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 for Q your tool rental revenue was essentially flat. And when we think about the rig county 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.
spk11: Yeah, so sure, no one's immune to activity changes and 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 we have good alignment with our customers on 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.
spk06: Great. And if I could A 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 are declining 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?
spk11: Well, thanks. We do have an emerging new product that we're investing in called RotorSteer. 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 that's focused on.
spk06: All right.
spk17: Good.
spk06: 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?
spk11: 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. Yeah, that's kind of how we move the needle up or down. But we believe that the gas will pick up eventually. 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.
spk05: Great. Thanks, Wayne. Thanks, David.
spk11: Thank you.
spk07: Our next question comes from the line of John Daniel with Daniel Energy Partners. Please proceed with your question.
spk03: Good morning, Wayne and team. Thank you for including me. 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, you know, exposed primarily to gas markets versus those international offshore? Is there opportunities to be, you know, opportunistic, if you will, and just any color there?
spk11: Yeah, sure. Always getting the expectations from sellers and buyers to align is challenging, but there are some technologies and 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 available to them before on our distribution platform helps that. Valuations kind of remain range bound. You know, the bid-ask spread is, you know, narrow. So I think people are realizing, you know, 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 from our side.
spk03: Got it. And then, Wayne, your margins relative to a number of your OFS peers are better? How do you preserve those sort of strong margins with the M&A strategy? I mean, are most of the deals you look at, would they be margin accretive, or how would you, just some thoughts on that?
spk11: So we kind of have a decision tree and a criteria, you know, priority scale where we say, hey, it has to meet accretive value. It has to improve cash flow. It has to be, you know, a top-tier customer value. 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 or strengthen our existing core business. Maybe a little moat building, an opportunity to strengthen our existing distribution platform. Those are some examples of how we look at acquisitions. We're not in the mode of just bolting on and smash code strategy where we just, you know, put everything together for the sake of scale or growth. There is a very thoughtful and, and I think an experienced approach to understanding the impact of each and every acquisition or each and every deal we look at. So, okay.
spk03: Well, the final one for me, I think if I heard you correctly, you're some of the growth CapEx is tied to perhaps a development of a new tool. Is that, did I hear it correctly?
spk11: That's correct, but it's commercially active and growing. We've got it baked into our guidance this year. Okay.
spk03: 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.
spk11: Well, we spent 22 and 23 getting it past its first two stages, and now it's fully commercialized with its own asset team and You know, we're following a number of rigs and growing month by month. You know, we've passed the incubation period and we're, you know, 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. Great. Thank you very much. All right.
spk08: Well, any more questions?
spk07: There are no other questions in the queue at this time. I'd like to hand it back to management.
spk11: All right. Well, we appreciate everyone's participation on the call and interest in Drilling Tools International. Like I said before, you know, please feel free to look at our investor presentation on drillingtools.com. And we look forward to demonstrating our continued growth and success and improving shareholder value. Thank you.
spk07: 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.
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