Drilling Tools International Corporation

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.

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.

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?