Drilling Tools International Corp (DTI) 2024 Q4 法說會逐字稿

Greetings. Welcome to Drilling Tools International's 2024 year-end and fourth quarter earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Jack Van. Thank you, you may begin.

Thank you, operator, and good morning, everyone. We appreciate you joining us for Drilling Tools International's 2024 year-end and fourth quarter earnings conference call and webcast. With me today are Wayne Prejean, Chief Executive Officer; David Johnson, Chief Financial Officer. Following my remarks, management will provide a review of year-end fourth quarter results and 2025 outlook before opening the call for your questions. There will be a replay of today's call that will be available via webcast on the company's website at drillingtools.com, and there will also be a telephonic recorded replay available until March 21.

Please note that any information reported on this call speaks only as of today, March 14, 2025, and therefore, you're advised that any 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 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.

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 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 Prejean, DTI's Chief Executive Officer. Wayne?

Thanks, Jack, and good morning, everyone. I will provide some opening remarks before handing the call over to David to review the numbers. I'll then provide a few final thoughts before we open it up for questions. Let's get started. As you saw in our prerelease last month and in our detailed earnings release yesterday, we are proud of our strong finish in a tough industry environment.

Despite the industry-wide headwinds that persisted in Q4, including rig count softness in US land, US Gulf and Middle Eastern markets, we generated 2024 revenue growth at the high end of our guidance and our adjusted EBITDA was near the midpoint of our guidance. For adjusted net income, we finished the year above the high end of our guidance, and we more than doubled our prior year adjusted free cash flow. Total rental revenues were $117.9 million and product sales $36.5 million for our full year 2024 consolidated revenue of $154.4 million.

Adjusted net income for 2024 was $10.1 million, and adjusted diluted EPS for 2024 was $0.31 per share. We generated 2024 adjusted EBITDA of $40.1 million and adjusted free cash flow of $17.2 million. As of December 31, 2024, we had approximately $6.2 million in cash and cash equivalents and net debt of $47.6 million. In a moment, David will take you through the year-end and fourth quarter financials in more detail and discuss our 2025 outlook. We have now been a public company for seven quarters, and our mission remains as clear today as when we began.

We continuously demonstrate to our customers, we are the premier Drilling Tools rental solutions provider for servicing the wellbore construction and casing installation market segments. We believe our expertise, experience and market-leading position enables us to continue our growth initiatives through expansion and consolidation. We've been extremely active in the M&A market to generate the scale needed to achieve our mission. As part of this process, throughout 2024, we acquired three companies, Deep Casing Tools, Superior Drilling Products and European Drilling Projects. In the first quarter of 2025, we closed on our fourth acquisition, Titan Tools Services.

These acquisitions, which I have detailed in prior calls, demonstrate our focus on international expansion and technology ownership. Our integration approach is to adopt best practices from all parties and implement a common accounting system that migrates all Eastern Hemisphere operations to our Compass Asset Management platform to minimize replication and maximize accountability.

These systems conversions will be completed in the first half of 2025. We believe collating the best-in-class systems and processes from DTI and our newly acquired businesses will foster an organization and structure that generates excellent results and efficiencies for our customers, our employees and our shareholders. We look forward to reporting on our progress in future conference calls.

Over the past several years, our customers have consolidated to gain scale and so has DTI. We continue to believe there are meaningful consolidation opportunities that exist in our sector. 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 synergies. We believe our best-in-class performance-driven, technologically differentiated offerings, combined with our expanding global geographic footprint, will deliver solid growth as energy markets recover.

Looking at the 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, DTI is well positioned for these industry trends.

Before I turn the call over to David, I want to commend our employees for their unwavering commitment to safety. In 2024, DTI achieved a remarkable total recordable incident rate of 1.15, marking a significant 6.5% improvement year-over-year. This achievement is particularly noteworthy given the challenges faced in our industry.

Our employees' proactive approach to safety, combined with effective safety protocols and training programs has been instrumental in driving this improvement. We are proud of this accomplishment and look forward to continuing our efforts to ensure a safe and healthy workplace for everyone.

With that, I'll turn it over to our CFO, 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 a detailed year-end fourth quarter financial tables, so I'll use this time to offer further insight into specific financial metrics. Wayne gave an overview of full year results in his opening comments, so I will provide some color on our fourth quarter results. We generated consolidated revenue of $39.8 million with tool rental revenue of approximately $31.5 million and product sales revenue of $8.3 million. While we saw continued rig count softness and some fourth quarter budget exhaustion in 2024, revenue was nearly flat sequentially.

Fourth quarter revenue also increased over last year's fourth quarter by 13% despite a 4% global rig count decline over the same period. We believe this is a true testament to the resiliency of our business model and diversified geographic footprint. Total operating expenses were $38 million, and income from operations was $1.8 million. Net loss for the fourth quarter was $1.3 million and adjusted net income was $600,000. Diluted EPS for the fourth quarter was a loss of $0.04 per share and adjusted diluted EPS was a profit of $0.02 per diluted share.

Fourth quarter adjusted EBITDA was $9.1 million, and adjusted free cash flow was $5.9 million. While we made decisions throughout the year to delay or defer CapEx, we've maintained our CapEx spend to support the momentum we are seeing from our organic [rotosterier] product growth story. As a result, adjusted free cash flow was slightly below our expectations in the fourth quarter, but important to note that adjusted free cash flow was still more than double the prior year.

Consolidated gross profit was mostly flat compared to the prior quarter and increased 9.5% over Q4 2023 with the increase over the prior year coming mainly from the effect of acquisitions. Gross profit margin was down just slightly from the prior quarter and declined 2.5% over Q4 2023.

While we are seeing top line growth, pricing pressure, lower tool recovery revenue and a change in the overall product mix related to acquisitions is impacting our gross profit margins as expected. However, despite the lower gross margin, the product sale additive mix is accretive to adjusted free cash flow since it does not require CapEx.

Our SG&A expense increased in the fourth quarter due to the full impact of recent acquisitions. For 2024, our SG&A expenses reflect the first full year of public company costs plus the acquisitions that were not reflected in the prior year. Looking at maintenance CapEx for the fourth quarter, it was approximately 8.5% of total revenue.

This portion of our capital investment trended lower in 2024 due to the decline in rig count and our customers' focus on drilling efficiencies, translating into fewer lost and hold 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 the trend. To summarize the full year of 2024, we saw the effect of acquisitions and the organic growth in the (technical difficulty) product line more than offset some of the decline in our directional tool rentals product line revenue and tool recovery revenue. Both directional tool rentals and tool recovery revenue were impacted by the activity decline, many of our customers faced in 2024. Pricing pressure, product mix and fully burdened public company costs have impacted our overall margins.

However, we will be able to improve the overall margin as we continue to build scale and manage costs. Now moving on to our outlook. We expect 2025 revenue to be in the range of $163 million to $183 million. We expect adjusted EBITDA to be within the range of $40 million to $50 million. Gross capital expenditures are expected to be between $23 million and $29 million.

And finally, we expect our adjusted free cash flow to range between $17 million to $21 million for the full year 2025. As we discussed last quarter and coinciding with the closing of the acquisition of Titan Tools Services in January, we have realigned DTI's operations to support our strategic initiatives to expand our global operations and reach new markets, particularly in the Eastern Hemisphere.

As a result, effective January 1, 2025, the company will be reporting results in two segments, Eastern Hemisphere and Western Hemisphere. This realignment of our reportable segments corresponds with changes to our operating model, management structure, and organizational responsibilities. As of December 31, 2024, this realignment has not yet been reflected within the company's financial statements.

Therefore, beginning with the first quarter, our 10-Qs for 2025 will reflect the new reporting segments and corresponding information for prior periods will be retrospectively revised to reflect this change in our reporting segments. This new reporting structure reflects our commitment to enhancing transparency and aligning our operations with our global growth objectives. 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 turn it back over to Wayne to provide some summary comments before taking your questions.

Thank you, David. Before we open up the lines for questions, I want to officially welcome Titan's talented team to the DTI family. As we continue to integrate Deep Casing, SDP, EDP and Titan, we have greatly expanded our geographical footprint, enhanced our technological capabilities and positioned DTI as a leader in the evolving energy landscape.

We believe we 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. I would like to point out that we remain competitive and profitable despite soft market conditions, and we continue to be resourceful and innovative while combating pricing pressures.

We constantly evaluate customer activity levels and adjust our operations to align with the 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 focused on best practices. And finally, as I have said before, we believe additional, thoughtful consolidation opportunities exist in oilfield services that will supplement our organic growth initiatives. We believe acquiring high-quality companies at attractive multiples positions DTI to successfully participate in the next three- to five-year expected growth cycle.

We are very pleased with the execution of our acquisition growth strategy, especially in light of the headwinds our industry has experienced. Our acquired technologies are gaining traction due to their unique value and differentiated technological advantages. Some examples are: Our Deep Casing group deployed our Meclockswibel for installing extended reach completion tools, and it is making steady progress on locations across the globe. Our Rubelizer tool is also gaining traction in the wellbore abandonment segment. Our proprietary Stabilizer and Reamer technology acquired from ED Projects is also growing rapidly and making a contribution in both hemispheres on land and offshore markets.

Elevated demand for complex wellbore solutions will further strengthen the need for our differentiated technology and the value-added solutions we provide our clients across the globe. 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 crucial in driving our success and is integral to our future growth.

With that, we will now take your questions. Operator?

(Operator Instructions) Jeff Grampp, Alliance Global Partners.

First, I wanted to start on the M&A market. Obviously, super busy last 9, 12 months for you guys. Can you talk about kind of current trends or themes in the M&A market broadly? And I guess, curious, your overall level of optimism about, I guess, the number of opportunities as well as the transactability of those, for lack of a better term?

Sure, sure. We still have -- this is Wayne. Thanks, Jeff, for the question. We still have a steady pipeline of opportunities that are out there. And we continue to look at deals on a strategic level of how they fit into organization.

You can see there's been some deals done in the industry over the last year, not only ours, but a few others. And I think that develops deal metrics and how the expectations between the buyers and the sellers are starting to come together. And I think that's productive for all of us. So I feel like we still have quite a few opportunities on the horizon and hopefully be acting on those this year.

Okay. And for my follow-up, somewhat related on the balance sheet side of things, I think you guys ended the year maybe a little over 1 times leverage on a trailing basis. How important is delevering this year when we look at that adjusted free cash flow guide? Is the first use of that to pay down debt? And how do you think about potentially using some of that free cash or further using your balance sheet for M&A opportunities?

I'll let David take that one. Dave?

Yes, Jeff, thanks for the question. Yes, when you kind of look at the balance sheet and how we ended the year, the net debt number of approximately, I think it was $47 million or so. Basically the full use of that was related to the cash portion of the acquisitions. So that kind of tells us, obviously, that was planned, number one; and number two, we basically used all of our -- all the CapEx was funded out of our free cash flow. So we can see that trend continuing.

We'll be able to support our CapEx needs for '25 as well as have that free cash flow to pay off debt or do further M&A, kind of again, pull those levers as we need to based on the opportunities that come up in '25.

Okay. So I guess to rephrase the answer. Essentially, we should think about potential use of the balance sheet is still in the cards for you guys in the context of M&A? Like you guys feel good with the balance sheet position that you're in. There's not an imminent urgency to attack the debt side of things at the detriment of M&A?

No, absolutely. I think we're well positioned on the balance sheet. We still have availability under the credit facility, but we are obviously mindful in keeping an eye on our leverage overall, and we'll do the right strategic decisions there depending on the M&A opportunities, but focus on aggressive pay down of debt with our free cash flow.

And David, further to that, Jeff, we're very mindful of keeping an eye on the activity trends of the industry. We're assuming flat to -- and we have some baked in potential downward activity bets placed into our forecast. But if we saw the industry changing, we would pivot and we have the means and the wherewithal in the cash flow to accelerate any kind of delevering that might be required.

Steve Ferazani, Sidoti & Company.

I know it was a very, very active 2024. I'm sure it's going to be an active 2025 as well. I did want to ask about the mix in 4Q. On the tool rentals, I was surprised at the sequential growth, given that US land, as you noted, was sequentially drilling was flat to maybe even down a little bit.

So I'm curious if that was just international growth or if you can any share on the rentals? And then product sales the sequential decline, how much of that is typical seasonality? Or is there something else in play?

I think I can answer the first question with the product sales. We did -- the reduction in Saudi activity did affect our Deep Casing product sales flow into that market. as well as softness in PEMEX. We have pivoted a lot of those efforts to other parts of the world, and they're gaining traction steadily. But the -- we're not immune to that Saudi decline.

I can assure you. As far as our tool rental activity, I think we've just had a little surge of general activity. We have gains and losses in the ebb and flow of the business, and deployment of new tools, some of the newer technologies that we have are getting more and more traction at higher pricing. So that's helping neutralize some of the other activity fluctuations. So I guess that would be the general answer to that question about tool rentals changing.

Great. And then on your CapEx being high. Expect your guide is for higher in 2025. And obviously, after very low CapEx in the second half of '24. Is '25 a catch-up after a very low CapEx in the second half of '24? Are there any specific growth initiatives you want to highlight behind the higher CapEx, which is not high, but higher?

I understand. David, do you want to?

Steve, I'll take that question. Yes, basically, we're seeing the change in '25 related primarily to the growth in the Eastern Hemisphere following these acquisitions, with some of the new technology that we've acquired, the CapEx to support that Eastern Hemisphere growth is really what we're seeing as the difference from '24 to '25.

Supporting our roster, which is continuing to grow as well, which is some of our newer technologies we're funding and we're kind of neutral to negative -- not negative, but neutral on all our -- supporting all of our other products, but no catch-up is like -- I mean -- I think I think the source of your question is, are we trying to catch up because we were behind. The answer is we're still in the neutral zone on those, but we're investing some of the new things that we're supporting to grow in other areas and other product lines.

Fantastic. If I could just get one more in. Can you talk a little bit -- I mean, obviously, you pointed out we know Saudi and Pemex specifically are areas for weakness in the first half of '25, as most expected and obviously start impacting in '24. Any particular successes you want to point to, anything going better than expected with some of these acquisitions, integration getting easier as you're getting more experience with it? If you can just sort of walk through your view of the international picture as '24 went on and how you're thinking about '25?

Yes. So I think we're starting to -- the first part of that question is synergies. We're paying a significant amount of cost savings to the STPI transaction, and we're really excited about that. And now our launch in the Middle East, notwithstanding the Saudi decline is starting to gain traction. And it's slow evolutionary process there to reorganize the group, get things moving faster and faster.

We're in dozens of countries and locations around the world. And so we've got a lot of diversification and traction gaining. It's disappointing the softness in Saudi. That one's kind of a little more impactful. But we see -- our indications are that will heal itself over a short period of time. They can't stay low forever. But short term, that has slowed down our momentum.

But the synergies are really taking place with the reduction in public cost, the reduction in repair cost, the reduction in royalties, all those are ongoing sustainable synergies that we'll get savings from for years to come and add more value.

Then some of the new acquisitions, EDP and Titan are just getting off the ground because they were later in the year or early this year. So we're really excited about the technology we acquired from Mini Projects. We're starting to gain traction in so many parts of the world and with major customers around every operating environment, offshore land, you name it, North Sea, Europe land, Middle East, getting constant orders. So it's picking up steam, and I think those premium products will help offset some of the less than stellar activity issues that are ongoing in different parts of the world.

(Operator Instructions) Sean Mitchell, Daniel Energy Partners.

Wayne, maybe I hate to stay on the M&A theme, but just as you think about M&A opportunities over the course of the next year you guys are going to be reporting Eastern Hemisphere, Western Hemisphere. Can you give us some color around you think more M&A opportunities in the Eastern Hemisphere or Western or is it too early to tell? I mean, I know you're not breaking that out today on your financials, but just kind of thinking about the M&A market.

Well, we do have targets in both places. So we are working actively working on opportunities. I want to be careful not to say whacky, we're working on deals because we don't have any -- we're just working on opportunities. But to be clear, we do believe that there are significant opportunities in the Eastern Hemisphere, which we're actively working on. And there are some what we consider accretive bolt-on really tuck-ins that work for us here to strengthen our North America business.

And we have willing sellers and people who see the benefit of our platform and want to join the culture of our team and they see the opportunities. So it should be on both sides of the water. So -- and we'll just evaluate those as they come. It's kind of like -- we've got to hit a shot and put it in a fair way, then we've got to get it on the green next. So we're just going to keep moving through each deal as they present themselves and seize those opportunities.

Fair enough. Maybe one more for me, I'll sneak one in. Given your exposure in the international markets, kind of how are you guys thinking about tariffs? And where do you see the risk?

So do you want me to take that one, Wayne?

Yes, sure.

So yes, Sean, obviously, a very fluid and dynamic topic. -- but we have been kind of working with our US trade prance here. The short -- two short answers are, we believe, a diversified supplier base and a diversified manufacturing base are some of the best mitigating strategies, and I think we have both of those. So that's a good box that we can check.

The other thing, obviously, we're sort of contemplating is that the Canadian, US, Mexico, but mainly the Canada US affects our business the most. We believe right now that -- the long-term implications will be worked out sooner than later because I think the desire of both countries is to kind of create a free trade zone.

So we don't think those tariffs right now and our counsel kind of believes the same, but that they won't be long term in nature. So we just need to address the -- any short-term implications while they do last. And we can do that currently under the everything we do falls under the US MCA agreement or the Mexico Canada agreement there. So the way we move tools around and can divert raw material to different locations as needed and do repairs we have all that kind of working in our favor right now.

This now concludes our question-and-answer session. I would like to turn the floor over to management for closing comments.

Okay. Thank you, everyone. Appreciate your interest in Drilling Tools International and participating in the call. We are executing well throughout this challenging cycle. I think we've demonstrated our resilience and viability through this continued challenge in the marketplace, and we have some bright things that we're working on and continuing to grow our business. I want to invite everyone to we'll be participating at the Roth and Piper conferences next week and hope to see you all there. So thank you for your interest. Have a great day.

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.