Drilling Tools International Corporation

Thank you for standing by, and welcome to Drilling Tools International's third quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 1 on your telephone. To remove yourself from the question queue, you may press star 1 1 again. I would now like to hand the call over to Siobhan Hickey, Investor Relations for Drilling Tools International. Please go ahead.

Thank you, Lateef. And welcome everyone to Drilling Tools International's third quarter conference call. I am joined today by Wayne Prejean, our President and Chief Executive Officer, and David Johnson, our Chief Financial Officer. Before we start, I would like to remind everyone that some of today's comments include forward-looking statements. These statements are subject to many risks and uncertainties that could cause our actual results to differ materially from any expectations we expressed in or are implied by these statements. Please refer to our latest Securities and Exchange Commission filings for risk factors and cautions regarding forward-looking statements. Our comments today also include non-GAAP financial measures. The underlying details and a reconciliation of GAAP to non-GAAP financial measures are included in our third quarter earnings press release, which can be found on our website. Lastly, as a reminder, today's call is being webcast and a recorded version will be available for replay on the investor relations section of the company website shortly after the conclusion of this call. With that, I'll hand it over to Wayne Prigent, Chief Executive Officer.

Good morning and thank you for joining our first earnings call as a public company. My name is Wayne Frazier and I'm Chief Executive of DTI. For those of you who are new to our company's story, I will begin my remarks with an overview of Drilling Tools International, which is more commonly referred to in the industry as DTI. DTI is an industrial service company whose distinct 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 construction process. In addition, our tools also serve the emerging geothermal and carbon capture business. We employ a loyal and dedicated group of people who believe in our values and share our vision for the future. Our competitive advantage continues to be the people we employ who drive the strength, innovation, and performance of our company. The reason DTI exists is because our customers such as SLB, Baker Hughes, Exxon, Chevron, and Oxy would not find it efficient to own and maintain their own fleet of downhole rental tools. There are just too many assorted configurations, hole sizes, geographies, and engineers' preferences that make it inefficient for customers to own their own rental tool fleet. Although David Johnson, our CFO, will explain results in more detail later, I will briefly describe how our business works. 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. Our 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. These financial results provide DTI tremendous flexibility across a variety of business strategies. We are debt-free and have an enviable income stream from multiple product lines and numerous geographic locations. covering every significant oil and gas producing region in North America. We also think we have some of the best professionals in the industry. In a steady state or non-growth environment, our business consistently delivers mid-30% adjusted EBITDA margins and a high team percentage of adjusted pre-cash flow. I hope this overview was helpful in providing some context for the rest of the call. Now we'll take a few minutes to discuss a little bit about our company history, market conditions, how we are executing, a review of the quarter, and our outlook for the remainder of 23 before opening the line for questions. So let's get started. DTI was founded in 1984 as Directional Rentals in Lafayette, Louisiana. After 28 years of Gulf Coast success and expanding from one to three locations, the company was sold in 2012 to private equity firm HICS Equity Partners. Oilfield Services is an industry where experience and relationships matter. A dedicated group of employees led by experienced management is the key to sustainable success. This means the strength of our management team is important. In 2013, the company recruited and hired additional senior management to execute a long-range growth plan and soon after rebranded Drilling Tools International. The senior leadership team in place today has worked together for over 10 years. We have decades of industry experience between us and have successfully managed the business through numerous industry cycles. Over the last decade, DTI has grown from a small regional tool supplier, primarily servicing independent directional drilling clients, to a well-established oil field services company, supplying the top tier oil and gas service companies worldwide, providing downhole tools for both the land and offshore drilling markets. Our primary focus is tools and technology used in drilling completion and work over operations. We have a fleet of mission critical tools that include bottom hole assembly components such as subs, stabilizers, drill collars, premium drill pipe and drill pipe accessories, tubing, pressure control equipment, reamers, borehole enlargement tools, and production desanders. We also offer some proprietary well bore optimization products such as patented drill and ream world war conditioning tool, SafeFlow, a patented downhole pressure control valve, and our new patented rotosteer technology. All of these provide value-added solutions to the evolving challenges in the drilling industry. DTI operates from our headquarters in Houston, Texas, and from 20 service locations across North America, Europe, and the Middle East. Many of these 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 control all the cost and delivery of many of our rental-to-items. Our customers' drilling tool needs are ever-changing and evolving. To support and manage a complex fleet of assets, you must have a best-in-class quality system with a reliable maintenance process to meet the needs of the industry. To meet these needs, DTI created and deployed a customized state-of-the-art fleet management software system called COMPAS. COMPAS is an acronym for Customer Order Management Portal and Support System. This software system simplifies the complex task of managing a large inventory of tools spread out over numerous geographic locations with tools of various geometry and customer specifications. But most importantly, this system provides value of performance data to assist the management team with capital allocation priorities. For example, we've seen asset performance as defined by utilization rates. increased almost 10% since implementing the system in 2021, and it continues to improve. While most investors do not yet know us, it is worth noting that we are well-known within the industry and to our customers. We service a wide customer base, including blue-chip companies such as Chevron, Exxon, BP, Oxy, Pioneer, ConocoPhillips, EOG, SLV, Baker Hughes, and Phoenix Energy Services. In addition, we serve several independent EMP operators such as Mewburn, Endeavor, and Continental, as well as many others. We are proud of our progress and track record thus far. In fact, since 2013, 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 steady state or upward, We view downturns as opportunities to strengthen our business, and we have done so each cycle. It is noteworthy that Hicks Equity Partners has been the majority owner of BTI since 2012 and remains so today. The Hicks team has invested in the energy industry for over 40 years, and we are proud of our strong and enduring working relationship. Turning now to the market outlook and effect on our business. In Q4 of 2022, the forecast across the industry for 2023 began with rig counts expected to be flat to upward throughout the year. Unfortunately, near the end of the first quarter of 2023, natural gas markets softened, and shortly after, bank contagion fears created macro concerns of a major worldwide recession. This triggered a softer oil and gas market and resulted in rig count declines in many areas. While U.S. rig activity has declined approximately 19% from December 22 to September of 23, the company continues to execute on plan with a revenue decrease of less than the linear market decline. Essentially, we have outperformed the market. We will elaborate on this later in the call. Looking forward, management believes that the North American rig count has bottomed and will begin to move upwards in 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 is competitively positioned in North America land and in the U.S. offshore business as well. Our customers have requested we expand to serve them on a more global scale. We recently expanded our fleet to the North Sea Europe market, and we have made steady progress expanding into the Middle East. DTI continually works to provide tools, technology, and services to meet our customers' changing needs in markets throughout the world. Some discussion on growth, mergers and acquisitions, and industry consolidation. Given how highly fragmented the oilfield services industry is today, we believe there are meaningful consolidation opportunities which exist in the sector. And we have identified a substantial pipeline of accretive growth opportunities within our core competency. To pursue those opportunities, VTI became a public company in June of 2023 to gain public equity as well as other funding methods to execute transactions. Our targets include opportunities that would strengthen our technological capabilities, capture competitive positions or bolt-on assets, and expand our reach internationally. As has always been the case, we seek to execute on transactions which are aligned with our long-term portfolio strategy and increase shareholder value. It is our goal to make strategic acquisitions that double or triple the size of the company in relatively short order, and we spend a substantial part of our time each day driving towards this goal. We believe DTI has a proven track record of successfully deploying capital in a disciplined manner for select degree of acquisitions. DTI has executed six acquisitions since 2013, which have included companies, strategic asset purchases, and distribution agreements with technology advantages. Today, DTI has a fortress balance sheet, zero leverage, an undrawn $60 million ABL credit facility, public equity, which provide ample financial liquidity. We are poised for accretive growth in numerous areas of our business, have an excellent management team, and continue to execute well, generating strong, adjusted free cash flow. With that, I will turn it over to our CFO, David Johnson, for a review of our financial results. David?