Drilling Tools International Corp. (NASDAQ:DTI) Q1 2024 Earnings Call Transcript

Drilling Tools International Corp. (NASDAQ:DTI) Q1 2024 Earnings Call Transcript May 10, 2024

Drilling Tools International Corp. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings and welcome to the Drilling Tools International 2024 First Quarter Earnings Conference Call. At this time, all participants are on the listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Ken Dennard. Thank you. Please go ahead.

Ken Dennard: 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'll be a replay of today's call and it'll be available by webcast on the company's website at drillingtools.com and there'll also be a telephonic recorded replay until May 17. Please note that any information reported on this call speaks only as of today, May 10, 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 reconciliation 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?

Wayne Prejean: 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 SDP. 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 28. 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 well bore 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 and 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 our 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, Adnoc, 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 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 homework 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 all 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 demands 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 products 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 agreement 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?

David Johnson: Thanks, Wayne, and thank you everyone for joining us today. In yesterday's earnings release, we provided detailed financial tables. So today, I'll offer further insight into specific financial metrics for the first quarter. DTI generated total consolidated revenue of $37 million in the first quarter of 2024. First quarter tool rental net revenue was approximately $30 million and product sales net revenue totaled $7 million. First quarter operating expenses were $31.8 million and operating income was $5.1 million. Adjusted net income for the first quarter was $3.8 million. First quarter adjusted EBITDA was $10.9 million and adjusted free cash flow was $4.7 million. As of March 31, 2024, we had approximately $14 million of cash, net debt of $11 million, and an undrawn $80 million ABL credit facility.

We saw a sequentially flat U.S. land rig count during the first quarter of 2024 and a 19% decline in rig count, compared to the first quarter a year ago. Despite this decline in rig count and activity, our revenues in the first quarter of 2024 are up 5% over the prior quarter and have declined by only 9%, compared to the same period of 2023. We attribute this outperformance to our Tier 1 customer base, our wide distribution service and support network, and new product offerings that have gained market traction. As I explained on our last call, I want to discuss our capital expenditures and the offsetting benefits of our tool recovery business model that obtains payment for lost or damaged tools. As a downhole rental tool company, our maintenance capital is funded by tool recovery revenue.

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 model helps keep our rental tool fleet relevant and sustainable. For the three month period ending March 31, 2024, maintenance CapEx was approximately 9% of total consolidated revenue. This portion of our capital investments is trending lower than it has over the past couple of years, and some of this has already been factored into our gross capital expenditure considerations. Now moving on to our outlook, we are reaffirming our 2024 outlook, which includes deep casing tools, estimated impact on full-year results, but does not include any contribution from the pending acquisition of superior drilling products.

We will update 2024 guidance for SDP's impact once we close the transaction. We expect 2024 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. Adjusted net income for the full-year is expected to be between $15.6 million and $21.9 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. Please note, we have substituted adjusted net income for net income in the guidance grid, since we now have non-recurring acquisition and related one-time charges in 2024. This change will help normalize that portion of our guidance as we execute on our M&A strategy.

That concludes my financial review and outlook section. Now let me turn it back over to Wayne to provide some summary comments before Q&A.

Wayne Prejean: Thank you, David. Before opening up the line for Q&A, I am pleased to say that first quarter results came in as expected and we have reaffirmed our 2024 outlook. RotoSteer and [Drill-N-Ream] (ph) product revenue continues to grow and we continue to expand our scope of tools and services in existing product lines through technological advancements. We are furthering our customer penetration by growing rentals with our expanded capabilities, new tools and services. The Deep Casing integration is going well and we will have a full quarter of results to report to you in the second quarter. We are working as quickly as possible to get all filings and regulatory portions of the SDP deal administered and are still on track to close in the third quarter.

We expect to continue our market leading strategy throughout 2024 and expand our customer base as we move into 2025. And we believe additional thoughtful consolidation opportunities exist in oil-filled services that will supplement our organic growth initiatives already in motion. To close, I would again like to express my sincerest gratitude to every member of the DTI team for their continuous dedication to safety, customer service, and the successful execution of our strategic initiatives. The commitment of our team members has been critical to driving our success, and I extend my heartfelt appreciation for their contributions. With that, we will now take your questions. Operator?

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