Drilling Tools International Q4 2023 Earnings Report

Drilling Tools International EPS Results

• Actual EPS: $0.13
• Consensus EPS: $0.13
• Beat/Miss: Met Expectations
• One Year Ago EPS: N/A

Drilling Tools International Revenue Results

• Actual Revenue: $35.19 million
• Expected Revenue: N/A
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

Drilling Tools International Announcement Details

• Quarter: Q4 2023
• Date: 3/27/2024
• Time: N/A
• Conference Call Date: Wednesday, March 27, 2024
• Conference Call Time: 10:00AM ET

Drilling Tools International (NASDAQ:DTI) Corporation provides oilfield equipment and services to oil and natural gas sectors in North America, Europe, and the Middle East. It offers downhole tool rentals, machining, and inspection services to support the global drilling and wellbore construction industry. The company also provides products are bottom hole assembly components, such as stabilizers, subs, non-magnetic and steel drill collars, hole openers, and roller reamers, as well as drill pipe and drill pipe accessories; ancillary equipment and handling tools to support its rental platform, including float valves, ring gauges, tool baskets, lift bail, lift subs, mud magnets, elevators, bracket and bail assemblies, slips, tongs, stabbing guides and safety clamps; and blowout preventers, and pressure control accessory equipment. In addition, it offers tool rental services, which consists of rental, inspection, machining, and repair services; rents downhole drilling tools used in horizontal and directional drilling of oil and natural gas; rents kellys, pip joints, work strings; maintains a fleet of rental equipment consisting of drill collars, stabilizers, crossover subs, wellbore conditioning tools, drill pipe, hevi-wate drill pipe, and tubing; rents surface control equipment, such as blowout preventers and handling tools; and provides downhole products for producing wells. Drilling Tools International Corporation is headquartered in Houston, Texas.

Drilling Tools International Q4 2023 Earnings Call Transcript

Key Takeaways

• In 2023 DTI delivered $152 million of revenue, up 17.4% year-over-year, and achieved a 24% increase in adjusted EBITDA to $51 million.
• The company ended 2023 with $0 debt, an undrawn $60 million ABL facility, and successfully extended its credit to an $80 million revolver plus a $25 million term loan maturing in 2029 to support growth.
• DTI closed the acquisition of Deep Casing Tools and signed a definitive agreement for Superior Drilling Products, expanding its international footprint—especially in the Middle East—and enhancing its M&A pipeline.
• For 2024 the company guides to $170 million–$185 million in revenue, $50 million–$58.5 million in adjusted EBITDA, and expects to more than double adjusted free cash flow to $20 million–$25.5 million.
• Higher personnel, transaction-related and ongoing public-company expenses, including one-time costs of approximately $6 million, drove net income down from $21.1 million in 2022 to $14.7 million in 2023.

Presentation

[Operator]

Greetings, and welcome to the Drilling Tools International 2023 fourth quarter earnings conference call. At this time, all participants are on a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ken Dennard. Thank you. You may begin.

[Ken Dennard, Head of Investor Relations at Drilling Tools International]

Thank you, operator, and good morning, everyone. We appreciate you joining us for Drilling Tools International, or more commonly referred to the industry as DTI. We welcome you to DTI's conference call and webcast to review full year 2023 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 on the operating and financial details for 2023, and then discuss its 2024 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, and that's drillingtools.com. There'll also be a telephonic recorded replay until April fourth. More information on how to access these replay features was included in yesterday's earnings release.

[Ken Dennard, Head of Investor Relations at Drilling Tools International]

Please note that any information reported on this call speaks only as of today, March 28, 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 DTI's Form 10-K for quarterly reports on Form 10-Q and current reports on Form 8-K to understand certain of those risks, uncertainties, and contingencies.

[Ken Dennard, Head of Investor Relations at Drilling Tools International]

The comments today will also include certain non-GAAP financial measures, including, but not limited to, Adjusted EBITDA and Adjusted Free Cash Flow. The company provides these non-GAAP measures for informational purposes, and they should not be considered in isolation from the most directly comparable GAAP measures. A discussion of why the company believes these non-GAAP measures are useful to investors, certain limitations of using these measures, and reconciliations to the most directly comparable GAAP measures can be found in the earnings release and in our filings with the SEC. Now, with that behind me, I'd like to turn the call over to Wayne Prejean, DTI's Chief Executive Officer. Wayne?

[Wayne Prejean, CEO at Drilling Tools International]

Thanks, Ken, and good morning, everyone. Welcome to our second earnings call as a public company. On our first call in November, I provided a long version history of DTI.

[Wayne Prejean, CEO at Drilling Tools International]

Today, I will begin my remarks with a quick overview of the company, discuss our 2023 results, our flurry of activity since the year ended, then hand off the call to David to go through the financials and our 2024 outlook. DTI is an industrial service company whose differentiated business model combines tools, technology, and equipment rental, along with in-house manufacturing capabilities. We primarily serve the oil and gas upstream industry with downhole tools in the wellbore construction process. Our tools also serve the emerging geothermal and carbon capture sectors. We employ approximately 425 loyal and dedicated employees who believe in our values and share our vision for the future. The institutional knowledge of the tool rental business across our employee base and throughout our operations provides us with an in-field competitive advantage relative to others in the industry.

[Wayne Prejean, CEO at Drilling Tools International]

Our business model relies 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 to not only remain relevant, but also generate positive Adjusted Free Cash Flow throughout the energy industry cycles. Speaking of our customers, we support the needs of blue-chip firms like Baker Hughes, BP, Chevron, ConocoPhillips, EOG, ExxonMobil, Pioneer, 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.

[Wayne Prejean, CEO at Drilling Tools International]

There are just too many variables in our dynamic industry that make it inefficient for customers to own their own tools. Our customers rent tools from DTI because we provide high quality, service, and value, along with our substantial fleet of tools to serve their needs. We operate from our headquarters in Houston, Texas, and from 16 service and support centers across North America, and maintain eight 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. We also have full manufacturing capabilities, which allows us to support our vast fleet of assets and control the cost and delivery of many of our rental tool items.

[Wayne Prejean, CEO at Drilling Tools International]

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%+ adjusted EBITDA margins and double-digit adjusted free cash flow margins. We are proud of the progress and track record that we've 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, including this current cycle. In addition to our positive financial results throughout these industry cycles, our safety, quality, and reliability of performance continues to be the hallmark of DTI.

[Wayne Prejean, CEO at Drilling Tools International]

I hope this quick recap was helpful in providing some context for the rest of the call. Turning now to the market outlook for our business. In 2023, the expectation was that rig counts would be flat or tick up modestly throughout the year. Unfortunately, as we all experienced about a year ago, the natural gas market softened, which resulted in rig count declines in many areas throughout 2023. While U.S. rig activity declined approximately 20% from January 1 to December 31, we continued executing on our strategic plan, with revenue increasing over 17% from the previous year, significantly outperforming the market. Looking at 2024, management believes that the North American rig count bottomed in the fourth quarter of 2023 and is expected to remain flat throughout 2024.

[Wayne Prejean, CEO at Drilling Tools International]

Longer-term demand trends remain robust, with projections from agencies such as the EIA, expecting oil demand to continue to grow through 2050 and gas demand to increase materially in the next few years as in-process LNG plants come on stream. It is well documented that the industry has underinvested in recent years, and to meet future demand, additional drilling, completion, and production of oil and gas wells will be required worldwide. DTI's base business and ongoing acquisitions to expand our capabilities makes us competitively positioned across the entire industry. As we have stated before, our customers have requested we expand to serve them on a more global scale. In response, we expanded our rental tool fleet to the North Sea Europe market, and we have made steady progress expanding into the Middle East with new technologies as well as many of our core products.

[Wayne Prejean, CEO at Drilling Tools International]

As you know, E&P customers continued their record pace of consolidation, with over $100 billion of total mergers and acquisitions announced in 2023 in the Permian Basin alone. Our alignment with our blue-chip customers has enabled us to be on the positive side of the recent wave of E&P consolidation. Our sales and operations teams make certain to maintain the continuity of business relationships across the industry to mitigate changes in our customer base. Now moving to the highly fragmented oilfield services industry. 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 to we can double or triple the size of the company in the near future.

[Wayne Prejean, CEO at Drilling Tools International]

We have established an M&A framework and robust M&A pipeline that will allow us to selectively and strategically consolidate numerous oilfield service, product, and rental tool companies that meet the criteria for our growth plan. Having said that, earlier this month, we announced that we closed on the acquisition of Deep Casing Tools and announced the signing of a definitive agreement for our pending acquisition of Superior Drilling Products, currently trading as SDPI on the New York American Stock Exchange. We will provide more details on the positive financial impacts and potential synergies from these acquisitions after we close on SDP. But both 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.

[Wayne Prejean, CEO at Drilling Tools International]

We are confident that these and future acquisitions will drive innovation, expand our footprint and addressable market, enhance our product offerings, and as a result, increase shareholder value. We look forward to collaborating with the dedicated professionals from Deep Casing Tools and Superior Drilling Products, as well as providing their unique and differentiated products to our customers. On the balance sheet side of the business, we exited 2023 with no debt and an undrawn $60 million ABL credit facility. As you probably saw earlier this month, that we improved our liquidity and further strengthened our balance sheet by amending and extending our credit facility that provides for an $80 million revolving line of credit, up from $60 million, and added a new term loan in a principal amount of $25 million, both with both facilities maturing in March 2029.

[Wayne Prejean, CEO at Drilling Tools International]

We are very pleased to get this refinancing in place with less restrictive covenants to offer more financial flexibility and further support our growth strategy. ... As you can see, we have been extremely busy since going public, positioning the company for future growth, which is what we said we would do, and believe we are poised to make additional accretive acquisitions in the future. With that, I'll turn it over to our CFO, David Johnson, for a review of our financial results. David?

[David Johnson, CFO at Drilling Tools International]

Thanks, Wayne, and thank you everyone for joining us today. DTI generated total consolidated revenue of $152 million in 2023, an increase of 17.4% compared to 2022. 2023 tool rental net revenue was $119.2 million, an increase of 20.4% compared to the prior year, primarily due to a strong first half performance and maintaining a solid market share despite a declining rig count in the second half of 2023. 2023 product sales net revenue totaled $32.8 million, an increase of 7.4% compared to 2022. The increase was driven by a strong first half, as well as ongoing tool recovery revenue, which occurs as part of the rental tool life cycle.

[David Johnson, CFO at Drilling Tools International]

2023 operating expenses were $124.1 million, compared to $104.3 million in 2022. The increase in operating expenses is primarily driven by personnel-related expenses of $10.5 million, one-time transaction-related stock expense of $1.7 million, as well as additional ongoing public company costs. These ongoing public company costs include an increase in accounting, legal, advertising, and insurance expenses of approximately $2.6 million. 2023 net income was $14.7 million, compared to net income of $21.1 million in the prior year. The lower result in 2023 was impacted by the additional operating expenses previously mentioned, as well as one-time transaction-related expenses of approximately $6 million. We also had employee retention credit benefits of $4.3 million in 2022 that were not repeated in 2023.

[David Johnson, CFO at Drilling Tools International]

2023 Adjusted EBITDA was $51 million, which was 24% higher compared to the prior year. 2023 Adjusted Free Cash Flow was $7.3 million, compared to $16.5 million in 2022. The decrease was primarily due to approximately $19 million more in capital expenditure dollars spent in 2023 compared to the prior year. This increased investment was made to meet customer demand for new products and future growth. While the fourth quarter of 2023 continued to see a rig count and activity decline, we were able to scale back on capital expenditures in order to meet our Adjusted Free Cash Flow target of $6 million-$8 million. Adjusted Free Cash Flow is defined as Adjusted EBITDA less gross capital expenditures, and is a unique lever that we have at our disposal to generate returns in lieu of top-line growth.

[David Johnson, CFO at Drilling Tools International]

We view this metric as a good measure of the overall performance of our business. As Wayne said earlier, DTI ended 2023 with strong financial flexibility, which included approximately $6 million of cash on hand and an undrawn $60 million ABL credit facility. Wayne also mentioned that we amended and extended our credit facility with PNC, which increased the ABL to $80 million and added the $25 million dollar term loan, which now mature in March of 2029. Before moving on to guidance for 2024, I want to again take a moment to discuss our capital expenditures and the offsetting benefits of our tool recovery business model that obtains payment for lost or damaged tools. We regularly receive questions on this topic and appreciate that it is not well understood. As a downhole rental tool company, our maintenance capital is funded by tool recovery revenue.

[David Johnson, CFO at Drilling Tools International]

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 business model helps keep our rental tool fleet relevant and sustainable. For the 12-month period ended December 31, 2023, maintenance CapEx was approximately 12.9% of total consolidated revenue. This portion of our capital investments has remained relatively consistent over the past couple of years. Now, moving on to our outlook for 2024, we are excited about our market opportunities and expect to more than double our adjusted free cash flow in 2024, as we prepare for increased market-driven demand for our rental tools and services for the remainder of the decade.

[David Johnson, CFO at Drilling Tools International]

While our growth has historically been tied to rig count, we have been positively impacted by the trend of longer laterals being drilled in multi-well pads. Additionally, the following full year 2024 outlook includes the recent Deep Casing Tools acquisition's estimated impact on 2024 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. For our full year 2024, we expect revenue to be in the range of $170 million-$185 million. We expect Adjusted EBITDA to be within the range of $50 million-$58.5 million. Gross capital expenditures are expected to be between $30 million-$33 million. Net income for the full year is expected to be between $15 million-$21 million.

[David Johnson, CFO at Drilling Tools International]

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-$25.5 million for 2024. That concludes my financial review and outlook section. Let me now turn it back over to Wayne to provide some summary comments before Q&A.

[Wayne Prejean, CEO at Drilling Tools International]

Thank you, David. To recap a few key items before opening up the line for Q&A. We are a market leader in numerous categories and have an enviable facility footprint. We have an extensive rental model, broad distribution capabilities, and diverse customer base across multiple basins, which provides us with a significant competitive advantage and through cycle outperformance, especially during volatile commodity price cycles. We have a proven track record of successfully executing and integrating acquisitions, and we are very excited to welcome Deep Casing Tools and the Superior Drilling Products team into the DTI family this year. We're not done yet. We believe additional consolidation opportunities exist in oilfield services that will supplement our organic growth initiatives already in motion.

[Wayne Prejean, CEO at Drilling Tools International]

So with our strong balance sheet, ample credit, and equity available to make acquisitions, we believe we are well positioned to achieve our strategic portfolio objectives. And as I said on last quarter's call, at our current stock price, we believe we provide an attractive entry point versus our peers. And most importantly, I would like to express my gratitude to every member of the DTI team for their unwavering dedication to safety, customer service, and the successful execution of our strategic initiatives. The hard work and commitment of our team members has been instrumental in driving our success, and I extend my sincere appreciation for their contributions. With that, we'll now take your questions. Operator?

[Operator]

Thank you. Ladies and gentlemen, at this time, we'll be conducting a question-and-answer session. If you'd like to ask a question, you may 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 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 key. Our first question comes from the line of Jeff Grampp with Alliance Global Partners. Please proceed with your question.

[Jeff Grampp, Senior Analyst at Alliance Global Partners]

Good morning, guys, and congrats on the recent acquisitions.

[Wayne Prejean, CEO at Drilling Tools International]

Thank you.

[Jeff Grampp, Senior Analyst at Alliance Global Partners]

First, wanted to start there, you know, two deals in the last couple of months, obviously, keeping you guys busy. Would you consider yourselves still in the market for further M&A, or are we kind of in a digestion timeframe now to kind of integrate these, get Superior across the finish line? Just kind of curious your current appetite in the M&A market.

[Wayne Prejean, CEO at Drilling Tools International]

Thanks, Jeff. Let me start with mentioning that our new investor presentation is live and updated on our website, for those of you who might not be aware of that. A lot of questions about that are answered in there, but I'll, I'll take that one on. You know, we have a long history with SDPI, so we're very familiar with their business model and, you know, we've been working with them closely, so we feel like, you know, getting that one closed is, is almost like a partnership integration. We feel pretty good about that one.

[Wayne Prejean, CEO at Drilling Tools International]

But for all of the, you know, compliance and administrative minutia, which always goes along with these, the Deep Casing acquisition that's completed was a nice bolt-on, with new technologies and new expansion, with a great team over there. So we feel pretty good about that as well. And, you know, and surely, rapid expansion, you know, and acquisitions can, you know, is always challenging, but we feel like we're in good shape to, you know, take those on and integrate those efficiently. We do have some other deals that we're exploring and in the pipeline, as we've stated in our previous statements.

[Wayne Prejean, CEO at Drilling Tools International]

So, you know, we're gonna be thoughtful and careful, you know, and make sure the timing and cadence of everything we do meets with our strategic goals. So...

[Jeff Grampp, Senior Analyst at Alliance Global Partners]

Great. I appreciate that. For my follow-up, I'm curious, the organic growth CapEx guide, and you have a slide there that kind of details that nicely. I'm just kind of curious if... And maybe taking a moment, Wayne, to kind of explain the contractual nature of what supports that growth CapEx and maybe help me understand that a bit better. Like, are those supported by kind of firm customer commitments? And then just broadly, you know, oil continues to catch a bid here. What is the flexibility to move that, you know, up or maybe even down with changing market dynamics?

[Wayne Prejean, CEO at Drilling Tools International]

So, good, good question. You know, for most of that CapEx that's represented there is going to be things that are new, that help us build some organic growth and supporting some of our new product lines that are, you know, we think, accretive over and above our current core business, you know, metrics. So, you know, we're holding serve and maintaining well in our core businesses, you know, with the market, you know, cycles, but we have some new things that we're implementing that are, we're investing in, so that'll, that's, that's most of what that's for.

[Jeff Grampp, Senior Analyst at Alliance Global Partners]

... Mm-hmm. Great. Thanks so much for the time, guys.

[Wayne Prejean, CEO at Drilling Tools International]

Yeah. Mm-hmm.

[Operator]

Our next question comes from the line of Steve Ferazani with Sidoti & Company. Please proceed with your question.

[Steve Ferazani, Senior Equity Analyst at Sidoti & Company]

Thanks. Morning, Wayne, David. Appreciate all the detail on the call, and thanks for taking my questions. I guess the number that really stood out for me was Q4. Your rental tool revenue was essentially flat, and when we think about the rig count a year ago, and I would imagine the pricing environment, it can't be fantastic right now. Can you just give us a little bit of color how you maintain sort of flat revenue in this environment?

[Wayne Prejean, CEO at Drilling Tools International]

Yeah, so sure, we're no one's immune to activity changes and pricing pressure, but we feel like we're in a pretty good competitive position because we have such a spread across all of our locations and business units. And, you know, we have good alignment with our customers on, you know, not being subject to just hedging quarter to quarter, so we have a little longer runway in our pricing. So, you know, it lessens the blow of an activity change. And then if you add that with a few other new products that we've that have come online and, you know, a few extras that have that have added to the mix, it's enabled us to stay flat, which is, we think, you know, probably a pretty good result considering, you know-

[Steve Ferazani, Senior Equity Analyst at Sidoti & Company]

Yeah

[Wayne Prejean, CEO at Drilling Tools International]

the decline that we've seen. So.

[Steve Ferazani, Senior Equity Analyst at Sidoti & Company]

Great. And if I could, my follow-up question, I just wanna follow up the previous speaker on the growth CapEx, 'cause it seems, and I think you detailed what you were spending it on for 2024. But I'm trying to get a sense, given that we had a decline in the rig count, we're flat probably this year, that's how it looks. Is there spending in 2024 ahead of... Are you thinking and planning for a recovery in 2025, given the LNG export capacity that's coming?

[Wayne Prejean, CEO at Drilling Tools International]

Well, thanks. We do have an emerging new product that we're investing in, called RotoSteer. That is a new product that's unique to the market that we're investing in. Also, some premium drill pipe that our customers are requesting that's already in motion and working. So, supporting those two initiatives, as well as a few smaller ones, those are the ones that's focused on, so. And, you know-

[Steve Ferazani, Senior Equity Analyst at Sidoti & Company]

But are you thinking?

[Wayne Prejean, CEO at Drilling Tools International]

Go ahead.

[Steve Ferazani, Senior Equity Analyst at Sidoti & Company]

But how are you thinking longer term, right? A lot of people are expecting gas, gas rig count to start recovering maybe late 2024, early 2025. How are you thinking about that, and how does that sort of set your budgeting?

[Wayne Prejean, CEO at Drilling Tools International]

Sure. Growth CapEx is the lever we can, you know, raise and lower as we move through the cycles. And so we just have to pick the timing appropriate with what is the relevant equipment and the relevant investment. So, that, yeah, that's, that's kind of how we, you know, move the needle up or down. But we, we believe that the gas will pick up eventually. It's just, we just have to make sure we time those investments and the activity and, and when the opportunities present themselves and the intel from our customers.

[Steve Ferazani, Senior Equity Analyst at Sidoti & Company]

Great. Thanks, Wayne. Thanks, David.

[Wayne Prejean, CEO at Drilling Tools International]

Thank you.

[Operator]

Our next question comes from the line of John Daniel with Daniel Energy Partners. Please proceed with your question.

[John Daniel, Founder and President at Daniel Energy Partners]

Hey, good morning, Wayne and team. Thank you for including me. Just wanna dig into the M&A strategy for a second. As you noted, a lot of opportunities are out there. I'm curious, do you see any distinction between expectations from maybe some companies, say, you know, exposed primarily to gas markets versus those international offshore? Is there opportunities to be, you know, opportunistic, if you will? And just any color there.

[Wayne Prejean, CEO at Drilling Tools International]

Yeah, sure. You know, always getting, you know, the expectations from sellers and buyers to align is challenging. But there are some technologies and some companies that we've observed that, you know, need a good home to incubate either a unique product or maybe to achieve scale that wasn't available to them before on our distribution platform, helps that.

[John Daniel, Founder and President at Daniel Energy Partners]

Mm-hmm.

[Wayne Prejean, CEO at Drilling Tools International]

Valuations kind of remain range bound. You know, the bid-ask spread is, you know, narrow. So, I think people are realizing, you know, how the industry is functioning today and the activity that's available to it. So we're hoping that those valuations become a little more attractive, so from our side, so.

[John Daniel, Founder and President at Daniel Energy Partners]

Got it. And then, Wayne, your margins relative to a number of your OFS peers are better. How do you preserve those sort of strong margins with the M&A strategy? I mean, are most of the deals you look at, would they be margin accretive, or how would you? Just some thoughts on that?

[Wayne Prejean, CEO at Drilling Tools International]

So we kind of have a decision tree and a criteria, you know, priority scale, where we say, "Hey, it has to meet accretive value, it has to improve cash flow, it has to be a, you know, a top-tier customer, a type of product, it has to help us international, offshore, things like that.

[John Daniel, Founder and President at Daniel Energy Partners]

Mm-hmm.

[Wayne Prejean, CEO at Drilling Tools International]

But at the end of the day, it has to make a positive contribution to our strategic goals, or strengthen our existing core business, you know, maybe a little moat building and, you know, opportunity to strengthen our existing distribution, you know, platform, so.

[John Daniel, Founder and President at Daniel Energy Partners]

Okay.

[Wayne Prejean, CEO at Drilling Tools International]

Those are kind of some examples of how we look at acquisitions. It's, you know, we're not in the mode of just bolting on and smash co strategy, where we just, you know, put everything together for the sake of scale or growth. There is a very thoughtful and, I think, an experienced approach to understanding the impact of each and every acquisition or each and every deal we look at, so.

[John Daniel, Founder and President at Daniel Energy Partners]

Okay. Well, the final one for me, I think if I heard you correctly, your, some of the growth CapEx is tied to perhaps a development of a new tool. Is that, did I hear correctly?

[Wayne Prejean, CEO at Drilling Tools International]

Yeah, it's correct, but it's, it's commercially active and growing. And we've got it baked into our, our guidance this year.

[John Daniel, Founder and President at Daniel Energy Partners]

Okay. I was just trying to understand, like, as you bring, you know, new product to market, sort of simplistically, how long does it take to scale up? Just any type of color on that.

[Wayne Prejean, CEO at Drilling Tools International]

Well, we spent 2022 and 2023 getting it past this first two stages, and now it's fully commercialized with its own asset team and, you know, number, you know, we're following a number of rigs and growing month by month. You know, we've passed the incubation period, and we're, you know, full-scale commercial production process. There'll be more and more guidance coming on that as we get through each quarter, but it's looking very positive.

[John Daniel, Founder and President at Daniel Energy Partners]

Great. Thank you very much.

[Wayne Prejean, CEO at Drilling Tools International]

All right. Well, any more questions?

[Operator]

There are no other questions in the queue at this time. I'd like to hand it back to management.

[Wayne Prejean, CEO at Drilling Tools International]

All right. Well, we appreciate everyone's participation on the call and interest in Drilling Tools International. Like I said before, you know, please feel free to look at our investor presentation on drillingtools.com. We look forward to demonstrating our continued growth and success and improving shareholder value. Thank you.

[Operator]

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation.

Participants

Executives

• David Johnson, CFO
• Ken Dennard, Head of Investor Relations
• Wayne Prejean, CEO

Analysts

• Jeff Grampp, Senior Analyst at Alliance Global Partners
• John Daniel, Founder and President at Daniel Energy Partners
• Steve Ferazani, Senior Equity Analyst at Sidoti & Company