Drilling Tools International Corporation

Greetings and welcome to the Drilling Tools International 2024 First Quarter Earnings Conference Call. At this time, all participants are on 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. Please go ahead.

Thank you, operator, and good morning, everyone. We appreciate you joining us for Drilling Tools International, or more commonly referred to in the industry as DTI. We welcome you to DTI's conference call and webcast to review 2024 first quarter 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 of its 2024 first quarter results and outlook before opening the call for your questions. There will be a replay of today's call, and it will be available by webcast on the company's website at drillingtools.com, and there will also be a telephonic recorded replay until May 17th. Please note that any information reported on this call speaks only as of today, May 10th, 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, 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, including 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 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.

Thank you, Ken, and good morning, everyone. It has only been six weeks since our last call when we reported our 2023 fourth quarter and year-end. Not much has changed in that short span of time relative to our results, messaging, or outlook. Today, I will begin my remarks with a quick overview of our integration activities, make a few observations, and then hand off the call to David to go through the financials and our 2024 outlook. To begin, we have been extremely busy integrating deep casing tools since we acquired them in mid-March. We have also been working diligently on pre-closed activities related to the SDP transaction, including the S4 filing and integration planning. Once we close on SDP, we believe the combination of these two acquisitions creates a step change for DTI by offering current and prospective customers' proprietary products into expanding markets, both domestic and international. In addition to driving incremental revenue, we will also be eliminating duplicate costs and improving margins. We will provide more details on the positive financial impacts and potential synergies after we close on SEP. But as I have said before, both of these 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. For those of you that have listened to our conference calls since becoming public, you'll note that I provided a longer form history of DTI during our first conference call in November, and then gave an overview of our company during our year-end call on March 28th. If you haven't listened to or read the transcripts of our first two public calls, you can access those webcast replays on our website. Here's a quick overview for our new investors and those following the company since our last call. 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 operate from our headquarters in Houston, Texas, and from 16 service and support centers across North America, and maintain seven 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. Our business model has historically relied 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 a rental model. The tool recovery revenue, also known as lost or damaged equipment charges, allows us to sustain our fleet, which enables us not only to remain relevant, but also generate positive adjusted free cash flow throughout the energy industry cycles. Lastly, the recent deep casing tools acquisition brings high margin product sale revenues with it. requires comparatively low capital expenditures to support, and allows our adjusted free cash flow margin profile to expand. We support the needs of blue chip customers like Aramco, Adnock, Baker Hughes, BP Chevron, ConocoPhillips, EOG, Exxon, 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 all of their own tools. Bottom line, our customers rent tools from DTI because we provide high quality, service, and value along with our substantial fleet of tools to best serve their needs. Additionally, our E&P customers have continued their record pace of consolidation, so we occasionally find ourselves working for customers on both sides of the larger deals. We have generally aligned ourselves with the industry consolidators and have extensive business relationships in place to meet their growing rental tool and service demands. Plus, our sales and operations teams make certain to maintain the continuity of business relationships across the industry to mitigate changes in our customer base. 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 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. In addition to our positive financial results throughout these industry cycles, our safety, quality, and reliability of performance continue to be the hallmark of DTI. As we stated on our last call, we believe that the North America rig count bottomed in the fourth quarter of 2023 and is expected to remain relatively flat throughout 2024. Longer-term demand trends remain robust, with projections from agencies such as the EIA expect oil demand to continue to grow through 2050. In addition, Many industry experts are forecasting that the medium to long-term natural gas demand outlook is very strong, particularly with the new LNG demand slated to come online in 2025 and 2026 and electricity demand rising rapidly. As an example, the expected growth of AI data centers. 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 we can 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. I hope this quick overview was helpful in providing basic background information for our current investors and our prospective investors. We have been extremely active in the M&A market since going public to position DTI 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 and outlook. David?