Drilling Tools International Q1 2024 Earnings Call Transcript

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Provided by Quartr
May 9, 2024

There are 6 speakers on the call.

Operator

Greetings, and welcome to the Drilling Tools International 20 24 First Quarter Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ken Dennard.

Operator

Thank you. Please go ahead.

Speaker 1

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 Q1 results and outlook before opening the call for your questions.

Speaker 1

There will be a replay of today's call and it will be available by webcast on the company's website at drillingtools.com

Speaker 2

and there

Speaker 1

will 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.

Speaker 1

The listener or reader is encouraged to read the annual report on Form 10 ks, quarterly reports on Form 10 Q and current reports on Form 8 ks 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 reconciliations 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.

Speaker 1

Wayne? Thank you, Ken, and good morning, everyone. It has only been 6 weeks since our last call when we reported our 2023 Q4 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.

Speaker 1

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 close activities related to the SDP transaction, including the S-four filing and integration planning. Once we close on STP, 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 SEP.

Speaker 1

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.

Speaker 1

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 operate from our headquarters in Houston, Texas and from 16 service and support centers across North America and maintain 7 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.

Speaker 1

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, VP Chevron, ConocoPhillips, EOG, Exxon, Oxy, SLB and many other prominent firms in our industry.

Speaker 1

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, whole sizes, geographies and engineering requirements. There are just too many variables in our dynamic industry 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 and P customers have continued their record pace of consolidation. So we occasionally find ourselves working for customers on both sides of the larger deals.

Speaker 1

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 the Middle East. In a steady state environment, our business consistently delivers 30 plus percent adjusted EBITDA margins and double digit adjusted free cash flow margins. We are proud of the progress and track record that we built.

Speaker 1

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 hallmark of DTI. As we stated on our last call, we believe that the North America rig count bottomed in the Q4 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 oil demand to continue to grow through 2,050.

Speaker 1

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 demand slated to come online in 20252026 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 and A framework and robust M and A quick overview was helpful in providing 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 and 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 accretive acquisitions in the future.

Speaker 1

With that, I'll turn it over to our CFO, David Johnson for a review of our financial results and outlook. David?

Speaker 3

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 Q1. DTI generated total consolidated revenue of $37,000,000 in the Q1 of 2024. 1st quarter tool rental net revenue was approximately $30,000,000 and product sales net revenue totaled 7,000,000 dollars First quarter operating expenses were $31,800,000 and operating income was $5,100,000 Adjusted net income for the Q1 was $3,800,000 1st quarter adjusted EBITDA was $10,900,000 and adjusted free cash flow was $4,700,000 As of March 31, 2024, we had approximately $14,000,000 of cash, net debt of $11,000,000 and an undrawn $80,000,000 ABL credit facility.

Speaker 3

We saw a sequentially flat U. S. Land rig count during the Q1 of 2024 and a 19% decline in rig count compared to the Q1 a year ago. Despite this decline in rig count and activity, our revenues in the Q1 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.

Speaker 3

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 3 month period ending March 31, 2024, maintenance CapEx was approximately 9% of total consolidated revenue.

Speaker 3

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 SGP's impact once we close the transaction. We expect 2024 revenue to be in the range of $170,000,000 to $185,000,000 We expect adjusted EBITDA to be within the range of $50,000,000 to $58,500,000 Gross capital expenditures are expected to be between $30,000,000 $33,000,000 Adjusted net income for the full year is expected to be between $15,600,000 $21,900,000 And finally, we expect adjusted free cash flow to more than double prior year adjusted free cash flow and be in the range of $1,000,000 to $25,500,000 for 20.24. 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 20 24.

Speaker 3

This change will help normalize that portion of our guidance as we execute on our M and A strategy. That concludes my financial review and outlook

Speaker 1

Before opening up the line for Q and A, I am pleased to say that first quarter results came in as expected and we have reaffirmed our 2024 outlook. Rotomsteer and Drill N Ream 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 Q2. We are working as quickly as possible to get all filings and regulatory portions of the SDP deal administered and still on track to close in the Q3.

Speaker 1

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 oilfield 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 in driving our success and I extend my heartfelt appreciation for their

Operator

Today's first question is coming from Jeff Grampp of Alliance Global Partners. Please go ahead.

Speaker 2

Good morning, guys. Good morning. Question on the guidance for revenue. It looks like kind of an implication is we should see some sequential increases in revenue going forward. Just hoping you could comment on kind of how you see the pace of progression throughout the rest of 2024 and kind of the main drivers for the growth?

Speaker 2

Thanks.

Speaker 1

This is Wayne. We feel like our guidance that we've given publicly is achievable throughout the rest of the year. Some of our growth initiatives were a little back loaded and they depend on the market being as expected. So we feel like those are still very achievable and we can continue to grow these new product lines and some of these new initiatives we have. So, we feel pretty confident about that going forward.

Speaker 2

Okay, great. And my follow-up with respect to deep casing, can you just touch on the integration process there? I know it's only been a couple of months, but just update us on how you feel that integration process is going? And then also curious if you could touch on maybe some of the revenue synergy opportunities that you guys see with bringing that into the DTI platform?

Speaker 1

Yes, Greg. The integration is going well. They have a really fine team, the Deep Patient Tools division now of DTI is integrating well. We are starting to work as a group on our Middle Eastern and international execution strategies, expanding to different markets and further taking advantage of what's already in motion in the Middle East and assisting them with more inventory and other support functions and removing some of their overhead and administrative burden. So they're now part of our team and that makes it easier for them to execute.

Speaker 1

We've had a number of team meetings and discussions on how to expand into the Western Hemisphere, which we can greatly assist them with that. So all of those things are in motion and we hope to report some of those results here in the very, very near future.

Speaker 2

Okay, great. Look forward to it. Thank you, guys.

Operator

Thank you. The next question is coming from Steve Farazani of Sidoti and Company. Please go ahead.

Speaker 4

Good morning, Wayne. Good morning, David.

Speaker 2

I did

Speaker 4

want to follow-up on the deep casing tools question. Your EBITDA margin solid, but came was at the lower end of your guidance range. Should we think and I know you only had a couple of weeks of Deep Casing Tools in the quarter. I'm assuming you expect Deep Casing Tools to be margin accretive. Is that a mix of synergies or are there some higher margins from that acquisition?

Speaker 1

Well, we're hoping for both. I think we're planning for some of that, but we also have to absorb some full year pubco cost. And so it does provide some free cash flow benefit because it's a product sale platform and less of a rental time and return component. So we're happy about that. And we're helping them deploy more and more inventory and more and more resources to get the product sale activity momentum in the direction that we want.

Speaker 1

They've done a really good job pre closing and we had already planned post closing on how to accelerate that and that's kind of what we're relying on. So the synergies between the 2 and should give us that upward momentum we see to kind of offset the current run rate.

Speaker 4

Makes sense. Makes sense. Appreciate that. You talked about the fact that again this quarter, we didn't see the same kind of your revenue decline was far better than the decline of the rig count, which says you're outpacing activity. You noted that your significant business with Tier 1 operators, which certainly makes sense, it's helping.

Speaker 4

How does that does that help? And I would assume it does in terms of the significant consolidation we're getting among operators and how you think that's going to play out on your business moving

Speaker 1

forward? Well, we think we're in a good position to mitigate all the changes. And that's part of how we operate our business, right? You have a plan 1 and plan 2, plan A, plan B. So things happen, you implement plan B and then plan C.

Speaker 1

So I think we've done a pretty good job of mitigating a linear decline in relative to the general activity by implementing some new products, some new things in our offering that help us remain above the linear decline. I think we've done a good job of that and we'll continue to do that. Bigger operators want bigger rental partners. They want more substantial providers that have a substantial and significant fleet of equipment. So I think that plays into our hands.

Speaker 4

Great. David, I'm not sure if you gave this, but for the CapEx guidance for the year, did you provide the split on maintenance versus growth?

Speaker 3

Yes. I think we mentioned the kind of the percentage of maintenance of consolidated revenue. We do have that breakout in our investor presentation, which will be online or is online. But as I mentioned there, we're seeing just a slight decline in our trend from prior years in that maintenance percentage of consolidated revenue and all that has been factored into our CapEx considerations for the full year.

Speaker 4

Great. When we look what you reported on Q1, your with the sales of your of the lost downhole tools almost completely replaced CapEx and you ended up generating pretty good cash flow considering the working capital was a negative and your guidance is solid. So can you sort of walk through the mix and how you think that plays out through the year?

Speaker 3

Yes. I mean, we've got basically our CapEx slate is on order. And as those come in, we'll see that affect the rest of the year. But we're supporting obviously our organic growth strategy, particularly with the Roto Shear product line and our CapEx spend. And we're as again, as you can see, as you kind of look at the chart in the investor presentation, we are focused on the free cash flow component.

Speaker 3

So we're managing that growth portion of our CapEx and our free cash flow component of our EBITDA to kind of show that we can generate that free cash flow component this year compared to last year because we spent some money investing in top line growth last year. So we're seeing that come to fruition in 2024.

Speaker 4

I mean, in a normalized year where you wouldn't be making the investments in Roto Steer and understandable why you would given the demand. Does the sale of the lost outhaul tools largely offset maintenance CapEx if you're in a pure maintenance CapEx year?

Speaker 3

Yes, absolutely. That's the beauty of the downhole rental business model is that tool recovery component supports all of our maintenance CapEx. And again, the lever between free cash flow and growth CapEx is something that we can control up or down. So that's what we like about this particular business model.

Speaker 4

Great. Thanks Wayne. Thanks David.

Speaker 1

Thank you.

Operator

Thank you. Our next question is coming from John Daniel of Daniel Energy. Please go ahead.

Speaker 5

Hey, guys. Thanks for including me. Wayne, I was hoping you could elaborate a little bit more on the international opportunity set. And if at all possible, maybe frame for us sort of what within your guidance, what the expectation would be for year over year growth in international in 2024? And then what type of visibility you might have into 2025?

Speaker 1

Great. Thanks, John. So as an example, our 2023 international revenue was less than 1% of our total. In 2024, we expect that to be in a double digit, 10%, 11% range or at least double digit. And that does not include the SDPI revenue that we anticipate closing and onboarding later in the year, hopefully sooner than later.

Speaker 1

So we and we see that percentage of our total growing in 2025 and beyond in a more significant fashion. So we're allocating capital resources and acquisition strategies to execute on that component of our growth. So

Speaker 5

yes. Fair enough. Here's another one. Let's assume you've got a potential new client international that signs up. From the time you sign an agreement with them to start providing services, how long until the revenue actually shows up?

Speaker 5

What's any color there would be appreciated?

Speaker 1

That's a good question. With our current relationships and commercial paths with our acquired partners, we've been able to accelerate that from into more near term. But if it's a complete new product or a complete new area, that could be 3 to 6 to 9 months depending on the product and the timeline to get full approval and meet all the requirements of the local NOC. So it's quite a lengthy process, much lengthier than the U. S, but it has greater sticking power.

Speaker 5

Okay. And I guess this is somewhat of a leading question, so I apologize. But just it seems to me that all else being equal, the rate of growth 25 over 24 should be better than 24 over 23 for international. Is that within the realm of reason?

Speaker 1

It is, but

Speaker 2

Okay. I know you're

Speaker 5

not giving formal guidance. I understand. I'm just trying to put just big picture.

Speaker 1

We put a general guidance out there and we can give more clarity to that as we make the rest of these close the rest of these deals. And we're bullish on international.

Speaker 2

So I

Speaker 5

think

Speaker 1

that's Right.

Speaker 5

That's what I was asking.

Speaker 1

We're going to stay focused on that.

Speaker 5

Okay. Thanks guys.

Speaker 1

Thank you.

Operator

Thank you. That concludes our question and answer session. I will turn it over to Mr. Prejean for closing comments.

Speaker 1

All right. Thank you. And thanks everyone for joining and listening in and showing your interest. We're pretty enthused about where we're at and how we're competing and where we're going. As you heard, we're bullish in international.

Speaker 1

We still and continue to have and will continue to a solid balance sheet, healthy income stream, solid customer base, talented group of employees and we're making strategic investments in capital allocation in the areas that we think will provide the best returns. And we continue to believe and we'll continue to focus on all those initiatives that we've laid out publicly. So thank you for your interest in DTI and we look forward to next call.

Operator

Ladies and gentlemen, this concludes today's event. You may disconnect your lines at this time or lock off the webcast and enjoy the rest of your day.

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Key Takeaways

  • DTI reported Q1 2024 revenues of $37 million (up 5% Q/Q) with adjusted EBITDA of $10.9 million and adjusted free cash flow of $4.7 million, and reaffirmed full-year guidance of $170–185 million revenue and $50–58.5 million adjusted EBITDA.
  • The mid-March acquisition of Deep Casing Tools is integrating smoothly, expected to boost high-margin product sales, yield cost synergies and extend DTI’s international reach in key markets like the Middle East.
  • Pending Q3 close of Superior Drilling Products will further expand proprietary offerings, eliminate duplicate costs and supports DTI’s M&A goal to potentially double or triple company size through strategic sector consolidation.
  • DTI’s rental-repair-recovery model, where tool recovery funded approximately 9% of revenue in Q1, underpins sustainable free cash flow generation even during industry downturns.
  • International revenue, under 1% of total in 2023, is expected to grow to a double-digit percentage in 2024 as DTI leverages its 7 overseas service centers and regulatory filings to enter new markets.
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Earnings Conference Call
Drilling Tools International Q1 2024
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