Drilling Tools International Corp (DTI) 2024 Q3 法說會逐字稿

Greetings, and welcome to the Drilling Tools International Third Quarter 2024 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, Ken Dennard. Thank you, sir. Please go ahead.

Thank you, operator, and good morning, everyone. We appreciate you joining us for Drilling Tools International's 2024 Third 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 third quarter results and the updated 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 at drillingools.com, and there will also be a telephonic recorded replay available until November 21. Please note that any information reported on this call speaks only as of today, November 14, 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 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 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 reconciliations to the most directly comparable GAAP measures can be found in our earnings release and in the 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?

The most directly comparable GAAP measures can be found in our earnings release and in the filings with the SEC and now with that behind me, I'd like to turn the call over to Wayne Praj Dtis, Chief Executive Officer, Wayne, thanks Ken and good morning everyone. I will provide some opening remarks and the call to David to go through the numbers and return with closing comments before we open it up for questions.

Let's get started.

As you saw yesterday, we released our third quarter results after market, we continued to experience headwinds in the third quarter including rigco softness in us, land us Gulf of Mexico and Middle Eastern markets. However, we are pleased to have sequentially grown. Our revenue adjusted net income adjusted diluted S adjusted EBITA and our adjusted free cash flow from our 2024 2nd quarter results.

Our total revenue came in at $40.1 billion adjusted EBIDA was 11.1 million in the quarter and adjusted free cash flow was 7.8 million, which is more adjusted free cash flow than we produced for the entire year of 2023. In a moment, David will take you through the financials in more detail and provide our revised outlook, as we have been saying since going public last year, our goal is to become the premier drilling tools rental solution provider for servicing the world construction and casing installation market segments.

In order to accomplish this goal, we need scale to that end. We have been extremely active in the M&A market acquiring three companies in 2024 and announcing 1/4 which is expected to close in the first quarter of 2025.

Our first two acquisitions this year were deep casing and superior drilling products which we are currently integrating and operating.

We have spoken about these in detail on past calls.

Our latest two deals announced subsequent to the end of the third quarter include the acquisition of European drilling projects or EP for short which we closed on October 3rd.

We followed that with an announcement on October 31st that we signed a definitive agreement to acquire Titan tool services limited A UK based downhole tool withdraw company.

Let's start with EDP which is a global provider of next generation stabilizers, specialty reamers and global optimization technology for the drilling industry. They bring additional cutting edge drilling tool solutions to DTIS technology portfolio. Complementing our directional tools along with our global optimization technologies such as the drilling rig.

We're excited to offer these unique solutions to our customers addressing many known world bore construction issues faced with extended reach horizontal and directional drilling.

By securing Edp's innovative technology, intellectual property and key personnel. We can offer premium value added tools in a market segment typically characterized by commoditization, Ed P's Eastern hemisphere footprint and established market penetration. Further complements our global expansion strategies.

Moving to Titan, their strong presence in the North Sea Europe and Africa markets will allow us to better serve our international customers beginning in 2025 by combining our expertise in downhole drilling tools with Titan's commitment to service and support. We'll be able to offer a more comprehensive suite of solutions to the oil and gas and geothermal drilling industries worldwide.

Together all our acquisitions demonstrate our focus on international expansion and technology ownership.

This is a good segue for me to provide an update on our international operations and integration processes where we have coalesced around a strategy, we call one DTI integrating multiple businesses and operating groups is never simple. I recently spent two weeks in the Middle East region with our new team members reviewing BTIS past to market by product line and geography.

We have established a new leadership team for our Eastern Hemisphere business unit and sales efforts. This will facilitate the appropriate focus on structure and accountability in this important region while I was in the Middle East BT I exhibited at the Andrew Atap Convention in Abu Dhabi with great success and engagement giving us for international growth in future periods.

The goal for our one BT strategy is to firmly establish structure and accountability for our team to maximize synergies further enhance cost savings, foster better alignment across our global organization and focus our teams on common goals and objectives.

Our approach is to adopt best practices from all parties and we are immediately adopting a common accounting system and migrating Eastern hemisphere operations to our compass asset management platform to minimize replication and maximize accountability.

These systems will be implemented in the first half of 2025.

We believe collating the best in class systems and processes from BT I and our newly acquired businesses. We will have an organization and structure that generates excellent results for our customers, our employees and our shareholders. We look forward to reporting on our one DT I progress in next quarter's conference call.

We continue to believe there are meaningful consolidation opportunities that exist in our sector as our customers consolidate. So must the ofs phase we have a solid M&A process and robust 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.

We have a proven team and process to achieve these integration strategies.

While our sequential growth, this quarter was not as much as we had anticipated. We believe our best in class performance driven technologically differentiated offerings combined with our expended global geographic footprint will deliver solid growth in the coming years as energy markets recover as we discussed in our last call, we implemented a cost reduction program for an annualized savings of $2.4 million that may be subject to additional adjustments. Given the softer market conditions, we continue to appropriately calibrate our operations to adjust for activity levels. And as one BTI we will continue to look for ways to boost our operational efficiencies and pursue our growth initiatives in other markets where those opportunities are available.

Looking longer term energy demand trends remain robust. Many industry experts are forecasting that the medium to long term natural gas demand outlook is very strong, particularly with the new LNG capacity slated to come online in 2025 and 2026 and with electricity demand rising rapidly to accommodate the anticipated growth of data centers.

ET I is well positioned for this industry trend. With that. I'll turn it over to our co David Johnson for a review of our financial results and outlook. David.

Thanks Wayne and thank you everyone for joining us today. In yesterday's earnings release, we provided detailed financial tables. So I'll use this time to offer further insight into specific financial metrics for the third quarter.

As Wayne mentioned, we saw continued reco softness during the third quarter that impacted near term synergy realization. But we're able to sequentially increase revenue adjusted net income adjusted diluted EPS, adjusted ebita and adjusted free cash flow from the second quarter of 2024 et I generated total consolidated revenue of $40.1 million in the third quarter of 2024. 3rd quarter, tool rental revenue was $28.1 million and product sales revenue totaled 12 million operating expenses were $35.8 million. And income from operations was 4.3 million adjusted net income for the third quarter was $4.6 million which represents an adjusted diluted EPS of 14¢ per share.

Third quarter adjusted EBIDA was $11.1 million and adjusted free cash flow was $7.8 million in the third quarter, which is more than the adjusted free cash flow we generated in all of 2023.

As of September 30th 2024 we had approximately $12 million of cash and net debt of 32.1 million maintenance CapEx for the third quarter of 2024 was approximately 8% of total consolidated revenue. This portion of our capital investment has trended lower this year due to the decline in recount and our customers focus on drilling efficiencies, translating into fewer lost and hole and damaged beyond repair events. As a reminder, our maintenance capital is funded by tool recovery revenue which keeps our rental tool fleet relevant and sustainable regardless of the trend.

Now, moving on to our outlook, we are revising our 2024 ranges which include a sequential slowdown due to anticipated holiday breaks, budget exhaustion and capital discipline being employed by our customers. In the fourth quarter, we now expect 2024 revenue to be in the range of 145 to $155 million. We expect adjusted ebida to be within the range of 38 to $43 million. Gross capital expenditures are expected to be between 2022 million adjusted net income for the full year is expected to be between 7.7 and $9.8 million. And finally, since the majority of our CapEx was incurred in the first half of this year and we have curtailed or deferred other planned CapEx. We expect our adjusted free cash flow to range between 18 to $21 million for 2024 which remains more than double our adjusted free cash flow reported in 2023.

We conservatively estimate that our eastern hemisphere revenue mix will grow from approximately 1% of total revenue in 2023 to 10% or more when we report full year 24 results. Previously, the company did not disclose its operating result in segments starting in the fourth quarter with a footnote disclosure. We will be transitioning from 1 to 2 reporting segments, Eastern hemisphere and western hemisphere and this will be reflected in the company's annual report on form 10-K for the year ending December 31st 2024 the new reporting structure aligns perfectly with our ONE DP strategy and reflects our commitment to enhancing transparency and aligning our operations with our global growth objectives. As Wayne discussed earlier, we believe this change will enable us to better manage our business and allocate resources more effectively across different regions.

That concludes my financial review and outlook section. Let me now turn it back over to Wayne to provide some summary comments before taking your questions.

Thank you David. Before we open up the line for questions, I want to welcome Ed P's talented team to the DP I organization and we look forward to the Titan team joining us in the first quarter of 2025 as we continue to integrate deep casing STP EDP and will soon add tighten. We have greatly and purposefully expanded our geographical footprint, enhanced our technological capabilities and positioned DTI as a leader in the evolving energy landscape.

We believe one DT will be able to provide our customers with access to an even wider array of products and services with the addition of these quality organizations.

In conclusion, I would like to reemphasize that first, we are competitive and profitable despite the soft market conditions and we continue to be resourceful and innovative while combating pricing pressures.

Second, we continue to evaluate our cost reduction program to adjust to market conditions. As we implement our one BT strategy, we will take additional measures to adjust to lower income demand and we believe we will be well positioned to come out stronger when the market recovers with the best personnel processes, products and performance, all aligned on best practices. Third, we are very pleased with the execution of our acquisition growth strategy, especially in light of the headwinds. Our industry has experienced, we believe acquiring high quality companies that attracted multiple positions. DT I to successfully participate in the next 3 to 5 year expected growth cycle.

This elevated demand should further strengthen the need for our technology, our solutions, our products and our services globally. And finally, there is no finish line. We believe additional thoughtful consolidation opportunities exist in oilfield services that will supplement our organic growth initiatives. I would again like to express my sincerest gratitude to every member of the DT team for their continuous dedication to working in a safe, inspired and productive manner. The commitment of our employees has been critical in driving our success and I extend my heartfelt appreciation for their contributions with that. We will now take your questions, operator.

Thank you. We'll now be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two. If you'd 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 the line of Jeff grant with alliance global partners. Please proceed with your question.

Morning guest was was curious to, to start first on the tool rental side of things. Revenue was pretty flat sequentially but gross margins improved. You know, pretty noticeably. So I just wanted to dive into that a bit more. I know we were expecting some, some benefit from the Superior Drilling Merger and some of those cost synergies. So just wanted to confirm if it was largely that any other factors going on and you know, kind of expectations to continue that kind of level going forward. Thanks. Jeff.

Happy. This is David. Happy to take that question. Yeah, I think you, you kind of hit on it. A lot of that is due to the vertical integration of our, you know, superior drilling products benefiting the drilling ream product rental. So a lot of those costs flow through and improve the margins on that side of the business from that acquisition. I think we also had a little bit better utilization on some of our pipe and that's a pretty accreted margins when we get that utilization that benefited our margin as well.

Great, appreciate that and, and maybe sticking on the superior drilling side of things. Can you guys just touch on, you know how that immigration process is going? And then also some of the revenue upside synergies that you guys have talked about as well. I know particularly the Middle East was an area you guys were, were excited about for the potential for for the drilling ring.

Yes, Jeff Wayne, we've completed our integration with them in the western hemisphere and you know, have each team focused on their respective responsibilities and that's going well in the eastern hemisphere, as I've mentioned in the call, spent a lot of time there in the last few weeks along with meeting with various team members trying to organize the multitude of deep casing and Ed projects and the SEP team to get us all focused on one execution model and that's, that's in motion and going well and the rental activity is starting to get traction. We should see some of that, you know, come to fruition in the in the Q4 and hopefully, you know, early in 2025 as we build momentum there with the acquisition of EDP and the integration with S&P. So that's, that's moving definitely in the right direction. And the Middle East market is, is albeit, you know, I'm not going to say soft but not, not overly vibrant like it was before with a few rig rigs being idled, but it is still a very vibrant market, you know, very, very big opportunity for us.

Great, thanks Wayne. If I could sneak one more in on the M&A side of things the the updated slide presentation still referenced, you know, a handful of targets that that you guys are working on. So I was just hoping you could share maybe kind of a flavor in terms of of size, geographic focus and anything along those lines. And then just broadly wondering, you know, you guys have obviously had a very active 2024 in terms of deals. I know, you know, some of them have been a little smaller but you know, just the overall comfort level to continue to be active on the M&A side of things.

So, you know, the opportunity landscape consists of everything from Tuck Ins to transformational, you know, mergers that, that are out there, that we're, you know, we're, we're, we're looking into doing some, you know, some work on and we're going to continue to feed the pipeline of opportunities for M&A and find and pick what we think are the best types of deals that make sense for our strategy. So they're out there, they're still out there. And we think the valuations are definitely rangebound within the market. And I think that the the arbitrage between buyers and sellers is is narrowing because people understand, you know, the way the industry is, is is trending and that, that this type of cooperation between buyers and sellers and mergers and consolidations would make sense, you know, more, you know now than ever. So I think you know, we'll continue to pursue those opportunities and they're out there for us.

Okay. Great. Best of luck. I appreciate the time. Thank you guys.

Great.

Thank you. Our next question comes from the line of Steve Frazzini with Sidon and company. Please proceed with your question.

Morning, Wayne David. Appreciate the detail on the call. I want to start by, let me follow up on the, on the M&A topic the two acquisitions you made recently EDP, I understand the fit there with the focus on premium tools and international markets. Titan tools seemed a little bit different beyond just getting you more international exposure. Can you help us understand how Titan tools fits the the M&A strategy?

Yeah, Steve Titan is, is also a nice tuck in with our directional tool rentals platform where where we're basically written tools across, you know, the BH A support segment. In addition, they also have whole openers and other product lines that they bring and add to our portfolio. What I particularly like about them is their presence in Europe and you know, many, many projects that initiate for West Africa and places like that, but you know, usually originate from the Aberdeen area. There's a lot of technology incubators there. So they bring a nice geographic addition to what we already do and we were already partnered with them somewhat as they were our distributor for many of our products in that area. So this is a nice bolt on for us and a good cultural group that aligns well, with us with a, with a couple of facilities that help us launch more and more of our other products. So blend it all together. It gives us better infrastructure, better spread and better, better portfolio offering.

Great, that's helpful. The the adjustment to guidance is not a surprise. I think we, you're the the latter end of of earning season. We've heard budget exhaustion fairly repeatedly through the season. I want to get your sense. Have you started to see the slowdown yet? I know frac spreads it down in the last couple of weeks, but rig count has held up or is that more what customers are saying? And if I could add to that question last year, we saw that happen, but then there was a very slow start to 2024 before it ramped up. Would you expect a similar trend?

So, you know, we, we kind of joke among ourselves and said this is the most organized downturn and stable downturn we've ever been a part of.

So, but the reality is it's just been an adjustment of activity based on, you know, our customers' production needs to answer your question. We see a flat, we feel a flattish market. I think the account is going to ebb and flow. You know, we might see some more softness before we see some up uptick. But I think our customer base has made a commitment, particularly the oil and gas companies in, you know, in the US and North America. And, and I think even in the international markets, many of them have said they've got a stated goal to achieve a certain production target and whatever that takes, that's what they'll do. If they can do a less, they will, if they need more, they will. It's, it's footage based, it's performance based and all of them are operating on capital discipline. And as we follow that theme, we operate under the same thematic approach to our business, right?

When we think about the amount of headwinds in the in us land this year. And clearly it got more challenging than probably what a lot of us were thinking at the beginning of the year, you're still guiding for almost in the range of 20 million in adjusted free cash flow. What, what's the message there from, from your business model and the rental tool model?

So we, you know, we feel like the despite the ups and downs of the market, we, we all we can always choose to run a sustainable business. And the way we do that is, is what I just mentioned is equivalent capital discipline to the market. We do make investments in our fleet to make it sustainable and we, we are going to support our customers. But at the same time, we're, we're, we're mindful of making too many aspirational investments where, where we don't feel the market is, is in a position to reward you for that, for that risk. So I think it's risk based capital, disciplined investment in strategic materials fleet. You know, knowing what your customers have and we can generate a very healthy free cash flow margin that I think is pure competitive in the marketplace.

Thanks Wayne.

[Blake McLean with Daniel Energy Partners].

Hey, good morning guys.

Good morning.

Hey, one more on M&A you talked a lot about it here. You guys have great insights. Last few deals, the more international event. Are there differences in terms of what the M&A market looks like in North America versus internationally? And, and, and what would you share about that kind of opportunity set and how they differ and how the market sentiment might differ or anything like that?

So, to be clear, you're wondering what's the difference between the M&A market? Western hemisphere versus eastern hemisphere?

Yes, sir.

Yes. All right, great. There are numerous opportunities in both markets. You know, I mean, the ones in the eastern hemisphere are a little bit less transparent when I what I mean by that is they're spread across multiple countries. Whereas in North America, you kind of have a more seamless type of business and, and legality of, of how the business operates and functions with customer bases. So, but there are numerous foreign companies based, you know, with most of their business in the eastern hemisphere that some of them us owned, some of them, not that, that are opportunistic for us that fit the profile of what we want to accomplish may have a few more challenges in making those acquisitions because of the complexity of multiple countries and contracts and, and, and all of the nuances that go along with operating in those markets. But they're, they're definitely out there with sticking power and the ability to be good both on the creative type deals for us in the US market. Yeah, I think we kind of know where the lane is. It's all about ringtone valuations and how we get more economies of scale. We have to be more competitive. I mean, both doing acquisitions particularly in North America just makes us more competitive. We've got to lower our cost and deliver more value for our clients. And I think that's where the benefit comes here. So that does that answer your question?

Absolutely. Thank you for that color. O on the international piece, you've got, you know, different reporting going forward a any sort of targets or aspirations that you guys might share in terms of what that revenue mix might look like over the next few years, what the growth rate might be. Anything like that you might share.

So one of the reasons we, we adjusted our segment reporting as such is, is to.

So we expect that market to grow. I think we've already stated that it was 1% of our, our income in 23 it will be 10% in 24 and we expect it to grow more significantly in the future. So, that's that, that we'll be, we'll be able to measure that, you know, year to year. So that, that's one of the reasons we took that approach.

Understood. Okay. Thank you guys very much for the time this morning.

Thank you. This concludes our question and answer session. I'll turn the floor back to management for closing comments.

All right. Thanks everybody for listening and attending and your interest in Drilling Tools International. We look forward to reporting in future quarters and you know, measuring our progress. Have a great day.

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.