Drilling Tools International Corporation

Greetings and welcome to the Drilling Tools International First Quarter 2025 Earnings Conference Call. At this time, all participants are on a listen-only mode. A 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, Mr. Kandenhard.

Thank you. You may begin. Thank you,

operator, and good morning, everyone. We appreciate you joining us for Drilling Tools International's 2025 First 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 first quarter results and 2025 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's also a telephonic recorded replay available until May 21st. You can find information on how to access those replays in the press release from yesterday. Please note that any information reported on this call speaks of today, May 14th, 2025, and therefore you are advised that any time-sensitive information may no longer be accurate as the time of any replay listing 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 its 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 reconciliation to the most directly comparable GAAP measure can be found in our earnings release and our filings with the SEC. And now with that behind me, I'd like to turn the call over to Wayne Prajan, DTI's Chief Executive Officer. Wayne.

Thanks, Ken, and good morning, everyone. I will provide some opening remarks before handing the call over to David to review the financials. I'll then come back and provide a few additional thoughts before we open it up for questions. We are pleased to report first quarter sequential and -over-year revenue growth and solid adjusted EBITDA despite industry headwinds. Revenue grew 16% over last year's first quarter and was up nearly 8% over 2024 fourth quarter results. Adjusted EBITDA grew nearly 18% -over-year and was flat sequentially. Our team has much to be proud of and has skillfully managed the recent volatility in commodity prices and rig counts. We have yet to experience tangible disruptions to our forecast in North America for the rental or sale of our tools. However, we do see increased volatility and uncertainty in the marketplace due to the impact of tariffs, a potential recession that could lower demand for hydrocarbons, and OPEC Plus's decision to increase production, among other challenges. In anticipation of when, not if, these potential disruptions impact our order flow, DTI has begun executing on a two-phase strategy. We are proactively negotiating with our suppliers and our customers to ensure stability and profitability. We are implementing a multi-level internal cost reduction program. Phase 1 implemented in Q2 will result in an estimated $6 million in annual cost reductions. Both David and I, along with our entire management team, have decades of experience working through multiple commodity cycles and prudently right-sizing the business when demand for our products and services changes. The anticipated rig count drop in the U.S. will challenge all service providers. I am confident we will prove to the investment community and shareholders our ability to sustain solid EBITDA and free cash flow in the face of volatility. While we cannot control global economic forces, we do believe that our input costs, or cost of goods, are strategically positioned to minimize the increase in the expenditures associated with any near-term tariff risk for three reasons. Should the industry experience a significant reduction in rig count? DTI can quickly curtail planned growth capex. DTI has a strong and diverse manufacturing base in North America. In addition to manufacturing for our own consumption, DTI already sources a large amount of Made in America steel. And our international footprint and diverse supply chain provides us flexibility in the concentrations of rigs that may not lay down as quickly as U.S. shale producers. So based on this volatility and uncertainty, we are proactively adjusting our annual revenue, adjusted EBITDA, and adjusted free cash flow guidance ranges for 2025. David will discuss our updated guidance in his formal remarks. We remain committed to identifying future cost reduction opportunities and maintaining agility to quickly respond to this challenging environment, furthering our mission to enhance shareholder value. Also related to our capital deployment strategy, our board of directors has unanimously approved a share buyback authorization. This authorization is up to $10 million of buybacks. We believe our undervalued stock price presents one of the most compelling return on investment opportunities to deploy our capital. David will now take you through the first quarter financials and discuss our 2025 outlook updates in more detail. David.

Thanks, Wayne. In yesterday's earnings release, we provided detailed first quarter financial tables. So I'll use this time to offer further insight into specific financial metrics. Despite continued rig count softness and market choppiness in the first quarter of 2025, revenue increased over last year's first quarter by 16% in the face of a 6% global rig count decline over the same period. We believe this continues to validate our stated M&A strategy to further strengthen our business model and diversify our geographic footprint. Looking at our first quarter results, we generated total consolidated revenue of $42.9 million, comprised of tool rental revenue of approximately $34.5 million and product sales revenue of $8.3 million. We reported total operating expenses of $39.6 million and operating income was $3.3 million. First quarter adjusted EBITDA was $10.8 million and adjusted free cash flow was $5.7 million. At the end of the first quarter, we had approximately $2.8 million in cash and cash equivalents and net debt of $52.1 million. During the quarter, as part of our recent segment reorganization, we conducted a comprehensive goodwill impairment assessment. This process required us to allocate goodwill between all affected reporting units and test each for potential impairment. As a result, we have recorded a non-cash goodwill write-down attributable to our Vernal Utah BITREPARE operations in the Western Hemisphere and the Deep Casing Tools Reporting Unit in the Eastern Hemisphere. The approximately $1.9 million impairment is a function of purchase price accounting and does not affect our -to-day operations or our ability to execute on our strategic priorities. From a purchase accounting standpoint, it is important to note that the increase in our stock price pre-close of the SDPI transaction caused the total allocated purchase price consideration to increase beyond the amount by which we underwrote the deal. Importantly, this charge is non-cash in nature and does not impact liquidity, free cash flow, or adjusted EBITDA. Adjusted net income, which excludes this non-cash charge, remains positive and in line with our strong operational performance for the quarter. We believe taking this impairment now provides a more accurate reflection of asset values in the current market environment and positions us for improved transparency and comparability going forward. As previously mentioned on our last call, our new Western and Eastern Hemisphere segment reporting structure began this quarter. Our Western Hemisphere segment, which includes products and services like directional tool rentals, wellbore optimization tools, premium tools, and BITREPARE, remains steady. Moving to the Eastern Hemisphere, which is predominantly made up of deep casing tools, European drilling projects, and now Titan tools, you'll see some choppiness as we compare Q1-24 to Q1-25. With the addition of the European drilling projects and Titan tools, our tool rental revenue is up significantly over Q1 of 24. Our decline in product sales was primarily due to deep casing tools. We believe that the product sales at deep casing tools bottomed out in second half 2024, given their exposure to the Saudi offshore market and Mexico. These tools are high spec and we expect demand for them to pick up internationally throughout 2025 as existing customer owned inventory is depleted. With our expanded offering of rental tools, including Mechlok drill pipe swivels, the PNA tool, fixed blade stabilizers, drill and ream, and other BHA components, rental revenue is becoming a much larger percentage of the Eastern Hemisphere revenue mix and we anticipate steady growth and better cost absorption in future quarters. Previously, we've spoken about the total revenue contribution from each hemisphere and indicated an expectation for the Eastern Hemisphere to grow to 18% of total revenue. As you can see in Q1 results, the Eastern Hemisphere accounts for 11% of revenue, but we expect the Eastern Hemisphere contribution to grow as the year progresses. Adjusted free cash flow in the first quarter was $5.7 million. We maintained our planned capex spend in the first quarter to support the momentum we have been experiencing from our organic, roto shear product growth story and our international expansion. Going forward, we will continue to review all capex spending with an eye on activity levels while demonstrating our ability to generate adjusted free cash flow. Looking at maintenance capex for the first quarter, it was approximately 10% of total revenue. Although up slightly in Q1, this portion of our capital investment has trended lower in the past several quarters due to the decline in rig count and our customers' focus on drilling efficiencies, translating into fewer lost and whole and damaged beyond repair events. As a reminder, our maintenance capital is primarily funded by tool recovery revenue, which keeps our rental tool fleet relevant and sustainable regardless of market trends. To summarize the first quarter of 2025, we saw the positive effects of our acquisitions and organic growth in the roto shear product line, which offset some of the decline in our directional tool rentals and deep casing tools product lines. Pricing pressure, product mix, and activity declines have impacted our margins. We believe this will continue throughout 2025 with pricing pressure and further activity declines, resulting from the fears of oversupply caused by a slowdown in demand and increased production. However, in the long run, we believe we can position ourselves to improve our consolidated margin profile over time as we continue to manage our cost structure and add scale. As Wayne mentioned, we have proactively initiated cost reduction measures in Q2 that will result in approximately $6 million of annual cost savings, which is reflected in our updated 2025 guidance. We have also updated our guidance to reflect a further decline in the North American land rig counts. Although we do not have a crystal ball, our previous assumption of a flat to slightly up market has shifted to a down market for the remainder of 2025. With that in mind, we now expect full year 2025 revenue to be in the range of $145 million to $165 million. We expect adjusted EBITDA to be within the range of $32 million to $42 million. Gross capital expenditures are expected to be between $18 million and $23 million. And finally, we expect our 2025 adjusted free cash flow to range between $14 million to $19 million. That concludes my financial review and outlook section. Let me turn it back over to Wayne to provide some summary comments.

Thank you, David. Before we open up the lines for questions, I would like to highlight five points. First, over the past six weeks since the new administration's tariff policies were introduced, worldwide sentiment across the energy industry has become anxious. Recently, various news outlets announced some adjustments to the tariff policy, and it appears negotiations are headed in a positive direction. Despite the ever-changing news or trade policy shifts, we assume there is likely a negative impact to our business this year. Second, DTI has taken certain initiatives to remain competitive, including remaining resourceful and innovative when combating pricing pressures. Third, we are constantly evaluating customer activity levels and adjusting our operations to align with demand. Fourth, we are confident that elevated demand for complex, well-bore solutions will further strengthen the need for our differentiated technology and the value-added solutions we provide our clients across the globe. Finally, we believe our -in-class, performance-driven, technologically differentiated offerings, combined with our expanding global geographic footprint, will deliver solid results as energy markets recover. In closing, we value and appreciate our customers, our employees, and our shareholders. I would like to thank every member of the DTI team for their continuous dedication to working in a safe, inspired, and productive manner. This commitment by our employees is critical in managing this volatile commodity cycle and is vital to our future growth. With that, we will now take your questions. Operator?

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please 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 keys. Our first question comes from Steve Faravazani with Sidoti & Company. Please

proceed with your question.

Morning, Wayne. Morning, David. Appreciate the detail on the call, also the detail around guidance, which is always challenging, I imagine exceptionally challenging given the aftermath of Liberation Day. I want to ask about first, obviously second half should be more challenging, particularly in US short cycle, but you're not moving free cash flow much. Looks like you're taking about $6 million out of your growth capbacks. Talk a little bit about the fact that you can maintain pretty good free cash flow in this environment.

Thanks, Steve. You want me to take that one? Yeah, sure. Yeah, thanks, Steve. Part of that, I think, is two pronged, obviously focusing on the cost reductions to keep, preserve as much of the EBITDA margins as we can, obviously helps. As we look at the activity and projected activity going forward and our capex spend, kind of making sure we coincide any purchases or defer, same along the lines we did last year on future capex to make sure we preserve that ability to generate the free cash flow.

Great. It sounded like you're still expecting sequential Eastern Hemisphere growth this year, and I think you pointed to deep casing tools particularly. Can you talk a little bit about what you're seeing specifically in Saudi and otherwise in the Middle East?

Yeah. So, most of the Middle East is relatively flat, but the Saudi rig reduction in their offshore market, particularly the offshore market, was impactful to us because we had many, many product sales going into that market. But we've managed to pivot and see some consumption in their other areas. And in parallel to that, our acquisition of ED projects has some technology in our fixed blade and sleeves and other stabilization technologies that are gaining more and more traction in that market. In addition to that, our DNR product line is starting to gain some traction in that Middle East market. After the acquisition, we had to kind of unpack and aggregate our teams there and kind of integrate all those groups together. And I think that most of that is behind us. And we feel like our momentum is picking up there. And despite that Saudi grid count softness that impacted everyone, I believe, we were able to start spreading our wings across the Middle Eastern market and gain traction there, which will offset some of the activities that are impossible to climb here. And we've kind of baked all that in. So that's kind of the impact.

So you're expecting, at least given the weakness, this growth and these acquisitions are certainly going to help offset in a challenging 2025.

Right. We have some emerging products that are gaining ground. One of the products that we acquired in deep casing was the MeckLock Swivel and the -A-Lizer product, one for installing complex casing strings and horizontal wells, which is the swivel. And then the -A-Lizer is more of a plug-in abandonment technology that couples well with a lot of applications. And those were in their infancy at the time of acquisition. So they were not a material part of the acquisition value. They are kind of in addition to, as we call it in Louisiana, lagniope, a little bit extra for something for nothing. So we are now moving those in the full commercial stage and they're gaining traction and offsetting some of the drop in the product sales that I spoke of earlier.

Got it. Got it. That's helpful. You noted you haven't seen the tangible impact in North America yet. I mean, we're hearing, we're seeing RIG kind of come down, but it seems like it's the smaller operators. But we know the guides we're seeing for CapEx is down a bit. I'm assuming the guidance changes primarily second half in terms of cadence to the guidance. Does 2Q look similar to 1Q based on what you know right now with obviously with six weeks to go?

David, how do you think we answer that one?

I mean, yeah, I think we're looking at the rest of the year in totality and it's hard to predict the combination of activity and pricing and so forth. But on a blended basis, we've got that kind of spread out over the year.

Steve, we've anticipated some softness in the US market throughout the rest of the year. But what's interesting is, and we're also going through the Canadian seasonality dip right now. So, you know, that will ramp back up and help out as well in the rest of the year. And there's been some reports where Canada might be a little more immune to some of this downturn because of their particular situation in production and cost and economics and things of that nature. So we're happy that we have a strong business in Canada and very, solid and sustainable operation there. What's kind of interesting about the US market and I think what has most of the companies, OFSs and everything perplexed is the lack of a swift downturn. It's more of just a slow leak. And that's what's happened over the last year. And now we have some additional leakage, excuse the expression, but that's kind of leakage. It's a slow burn. Historically, when we would have downturns, you'd have a swift rig downturn and everyone would correct. Well, when it goes slow, it's a little more challenging for each company to decide how they make those adjustments. And we've done this before. We've seen this movie a few times and we're adjusting, you know, understanding that, you know, that metric of our customers of how they manage their rig counts.

Perfect. That's helpful. If I get one more in just on capital allocation and the guide, you have a pretty wide range on the full year interest expense. Is that because it's how much debt you may or may not reduce in the remainder of the year?

I think that's very accurate, Steve. Obviously, depending on the capital spend and where we exercise that pre-cash flow deployment, we have an opportunity to lower our debt if we pull back on the capbacks and adjust according to the activity. So that's all happens in the downturn. We've also obviously, as you saw, kind of consider the share buyback as part of our use of cash as well, that opportunity. So we'll kind of look at that as time progresses.

Right. Thanks, Wayne. Thanks, David.

Thank you,

Steve. Our next question comes from Josh Jane with Daniel Energy Partners.

Please proceed with your question.

Thanks. Good morning. First question, I just want to dive into North America a little bit more. I think in your slide deck, you highlight that 60 percent of the drilling rig in North America utilize DTI tools and equipment. So just given your broad exposure, could you talk about how you're thinking about the back half of the year? I know you said probably flattish or maybe look similar spread across the last three quarters. But could you talk through what regions may be the most at risk in North America for a little bit of a pullback and what regions may hold up better than some others?

That's a great question, Josh, because as you well know, the economics in these different basins will drive the behavior of the operators and the rig count will result. You know, thereof, those economics. So the resiliency of each area is going to be challenged here in the next few months if oil prices keep dropping. You know, something in the 60s helps many of them continue with what they're doing. If it drops it with a five handle for a significant amount of time, we're pretty sure that we'll see some reductions in, you know, areas where the economics aren't as strong. I would hate to lean into exactly which areas, you know, whether it's D.J. or the Oklahoma Oily Basins or if it's Permian Midland or Delaware Basin. There's a lot of narratives and information out there on which ones have the strength to sustain lower oil prices. But there is. So the Hainesville tends to be the gassy areas tend to be more sustainable. So we have good exposure to every area. We're heavy in the Permian. We have really good operations in the Hainesville as well. We're renting a lot of tools, pipe and downhole tools, reamers, you name it. So our spread and diversity gives us the strength to move around in these basins respective to activity. And we can ebb and flow and pull the levers up and down in our locations and move tools to where they need to be in the activity that is most vibrant. So it's going to be interesting. It's going to be an interesting next few months.

OK, thanks. And then I just wanted to follow up on capex because you know that you could potentially curtail growth capex if the macro was, you know, turns out to be more unfavorable. Could you comment on your capex program for this year on the growth side and the things that you're spending money on and, you know, what which regions you're ultimately trying to growth with that growth capex would be great.

Thank you. So most of our focus on anything growth related in that category will be in new technology and new types of tools that have growth potential. And we'll be we'll continue to sustain our existing rental fleet, our color legacy fleet, which is, you know, your common stuff on a day to day basis. But our new stabilizer technology, our new swivels, that swivel technology I spoke of earlier with MECLOC, our rotor steer product line, which is which is gaining steady traction in the U.S. and finding its niche in certain directional and horizontal drilling applications. We are continuing to make sure we put the appropriate amount of capital for the future, even though we see the softness in our general marketplace today. We see the future in the next year to come that we need to put these tools in motion and get their stickiness and commercial traction with our clients so that we have a long term participation in the drilling program. So that's that's where most of our capex focus.

Thanks. I'll turn it back. This now

concludes our question and answer session. I'd now like to turn the floor back over to Wayne Prejean for closing comments.

Thank you. I would like to thank everyone for their participation and interest today in our earnings call and make everyone aware that

our

company is continuing to be competitive and is ready to meet all the challenges that we face in our industry going forward. And we thank you for your interest and have a great day.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.