Drilling Tools International Q2 2024 Earnings Report

Drilling Tools International EPS Results

• Actual EPS: $0.10
• Consensus EPS: $0.12
• Beat/Miss: Missed by -$0.02
• One Year Ago EPS: N/A

Drilling Tools International Revenue Results

• Actual Revenue: $37.53 million
• Expected Revenue: $42.72 million
• Beat/Miss: Missed by -$5.19 million
• YoY Revenue Growth: N/A

Drilling Tools International Announcement Details

• Quarter: Q2 2024
• Date: 8/6/2024
• Time: N/A
• Conference Call Date: Tuesday, August 6, 2024
• Conference Call Time: 7:00AM 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 Q2 2024 Earnings Call Transcript

Key Takeaways

• Completed acquisitions of Superior Drilling Products and Deep Casing Tools expected to deliver over $4.5 million in SG&A synergies, significant CapEx savings, and enhance proprietary product offerings.
• Reported Q2 revenue of $37.5 million, flat year-over-year despite a 15% US rig count decline, with adjusted EBITDA of $9 million and a $3.2 million improvement in adjusted free cash flow.
• Implemented a cost reduction program yielding $2.4 million in annual savings and managed capital expenditures to align operations with current activity levels while preserving growth initiatives.
• Maintained full-year 2024 guidance, forecasting $155–170 million in revenue, $41–47 million in adjusted EBITDA, and $20–25 million in adjusted free cash flow despite market softness.
• Expanded international presence with a PDC bit repair facility in Dubai and leveraged SDP’s engineering and manufacturing capabilities to pursue growth across the Middle East and beyond.

Presentation

[Operator]

Greetings, and welcome to the Drilling Tools International Conference Call. At this time, all participants are in a listen-only mode. A 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. Sir, the floor is yours.

[Ken Dennard, DTI 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 in the industry as DTI. We welcome you to DTI's conference call and webcast. With me today are Wayne Prejean, Chief Executive Officer, David Johnson, Chief Financial Officer, and Jamison Parker, VP of Corporate Development.

[Ken Dennard, DTI Investor Relations at Drilling Tools International]

Following my remarks, management will provide a high-level commentary of the benefits of the SDP acquisition, a review of the 2024 Q2 results, and updated outlook before we turn the call to you for your questions. There will be a replay of today's call that'll be available by webcast on the company's website at drillingtools.com, and there'll be a telephonic recorded replay feature available until August thirteenth.

[Ken Dennard, DTI Investor Relations at Drilling Tools International]

Please note that any information reported on this call speaks only as of today, 6 August 2024, and therefore you're advised the time-sensitive information may no longer be accurate 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.

[Ken Dennard, DTI Investor Relations at Drilling Tools International]

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 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.

[Ken Dennard, DTI Investor Relations at Drilling Tools International]

The comments today may also include certain non-GAAP financial measures, including, but not limited to, Adjusted EBITDA and adjusted free cash flow. These non-GAAP results are for informational purposes, and they should not be considered in isolation from the most directly comparable GAAP measures.

[Ken Dennard, DTI Investor Relations at Drilling Tools International]

A discussion of why we believe the 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, which is on our filings page or 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, Ken, and good morning, everyone.

[Wayne Prejean, CEO at Drilling Tools International]

I will begin my remarks with a quick review of our Superior Drilling Products acquisition and synergies, observations on Q2 results, and discuss how we are dealing with the market softness in North America. After that, I will hand off the call to David to go through the financials and our revised 2024 outlook. Also on hand today is our VP of Corporate Development, Jamison Parker, available during Q&A for comments on our recent acquisitions.

[Wayne Prejean, CEO at Drilling Tools International]

Starting with SDP, we believe this acquisition, along with Deep Casing Tools completed in March, has created a step change for DTI to offer current and prospective customers proprietary products into expanding markets, both domestic and international. These two transactions are outstanding examples of how we are showcasing DTI's growth opportunities with a particular focus on our presence in the Middle East. Our rationale for the SDP acquisition is quite compelling.

[Wayne Prejean, CEO at Drilling Tools International]

Over the next 12 months, we expect to realize an excess of $4.5 million in identifiable SG&A synergies and realizable NOL tax benefits. In addition, there are vertical and horizontal integration synergies that include approximately 60% CapEx savings on new D&R tools and 45% margin capture on repair and maintenance of our global drill and rem assets. Superior is headquartered in Vernal, Utah.

[Wayne Prejean, CEO at Drilling Tools International]

The team and state-of-the-art facility adds to DTI's offering additional engineering and product development, PDC cutter brazing and bit repair expertise, a substantial manufacturing facility with precision machining capabilities, and of course, our ongoing drill and rem repair center.

[Wayne Prejean, CEO at Drilling Tools International]

In addition, after a significant investment and three years of trials and development, a fully staffed and operational PDC bit and Drill-N-Ream repair facility in Dubai, UAE, a local bit repair contract with ongoing revenues, as well as several hundred fit-for-purpose D&R tools on the ground across the Middle East.

[Wayne Prejean, CEO at Drilling Tools International]

This provides us fuel in the tank to serve our clients in the region. While our vertical and horizontal integration synergies are activity and backdrop driven, we believe they will prove to be quite significant once market activity stabilizes and the rig count improves into 2025 and beyond.

[Wayne Prejean, CEO at Drilling Tools International]

Adding to these synergies, we also gained an approximately $6.6 million receivable from the selling party to extinguish a note which will accrue to DTI's benefit, effectively reducing the total purchase price of the transaction from $32.2 million to $25.6 million, subject to purchase price accounting adjustments.

[Wayne Prejean, CEO at Drilling Tools International]

As you can see, the SG&A synergies of $4.5 million, the CapEx and cost reduction, the note due of $6.6 million, and millions in previously invested rentable assets and infrastructure, add up to a very meaningful long-term accretive value to DTI. Moving now to our 2024 Q2 operating results. The U.S. rig count experienced continued softness in the quarter compared to our flat rig count outlook earlier this year. So what have we done to adjust to the softer market conditions and rig count decline?

[Wayne Prejean, CEO at Drilling Tools International]

First, we have implemented a cost reduction program for an annualized savings of $2.4 million in overall cost. We will continue to appropriately scale our operations to adjust for the activity levels in North America, but we'll continue with our growth initiatives in other markets where growth opportunities are available.

[Wayne Prejean, CEO at Drilling Tools International]

Currently, our cost adjustment decisions are focused more on the near-term environment, realizing that our current and short-term needs must be met with a lower cost structure, while still keeping our eye on the long term. Additionally, we were able to manage capital expenditures during the quarter and improved our adjusted free cash flow by $3.2 million compared to last year's Q2. Our unique business model enables us to generate returns despite a decline in North American land activity.

[Wayne Prejean, CEO at Drilling Tools International]

As a result, we are maintaining our adjusted free cash flow guidance range from $20 to 25 million for the full year. David will add more commentary to our updated outlook shortly. Now, some observations of the market and what has transpired over the last few months as oil and gas customers have reduced activity. Our customers, the operators and oilfield service providers, became very focused in improving efficiency and producing more with less.

[Wayne Prejean, CEO at Drilling Tools International]

It appears E&P mega mergers have begun to slow, and operators have turned their attention to integrating, executing, and rationalizing their drilling programs. In essence, these operators are utilizing their best rigs as efficiently as possible by deploying their best crews to drill longer laterals with more producing footage, all with fewer rigs. Also important, they are much more efficient with a focus on minimizing drilling mistakes, like lost-in-hole events.

[Wayne Prejean, CEO at Drilling Tools International]

Operators will look to redeploy additional rigs when demand picks up, and we believe demand will eventually rise and should require more drilling and producing activity. Certainly, things have changed over the last decade, and although oil and gas operations are much more efficient, producing wells typically peak early in their life, then decline year by year.

[Wayne Prejean, CEO at Drilling Tools International]

If we believe demand will continue to rise, then more wells will be needed to meet that demand. For the next few months, and likely through mid-2025, we expect a soft activity pace for North America, and are confident rig counts and well counts should rise in 2025. International markets should be flat to upwards with less volatility. Due to the current North America market softness, we have had to align our core rental tool business to remain more competitive.

[Wayne Prejean, CEO at Drilling Tools International]

As our customer landscape shifts with mergers and our customers rotate oilfield service suppliers to find best cost and value, we have had to be more flexible by adjusting commercial terms to meet our customers' changing needs. Although we have strategic modes for these events, we are not immune to this type of request and have installed key initiatives to deal with this transitory trend. In some product lines, we have adjusted to pricing reflective of footage drilled as opposed to price per day.

[Wayne Prejean, CEO at Drilling Tools International]

It's challenging, but we will prevail and be more vibrant coming out of this downturn like we have during so many other market downturns. As we have previously stated, in a steady state environment, our business consistently delivers 30%+ Adjusted EBITDA margins and mid- to high-teens Adjusted free cash flow margins.

[Wayne Prejean, CEO at Drilling Tools International]

While we have taken measures to adjust to lower demand, we believe we will be well positioned to come out stronger when the market recovers. Although we have acquired some new revenue streams with product sales, such as Deep Casing and service repair revenue, Superior Drilling Products, our business model has historically relied mostly on rental, repair, and recovery revenues. Our customers count on us to maintain a relevant and sustainable fleet of equipment.

[Wayne Prejean, CEO at Drilling Tools International]

The rental and repair income provides the basis for our rental model. The tool recovery revenue, also known as lost and 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. This is one of those cycles.

[Wayne Prejean, CEO at Drilling Tools International]

As I said previously, our blue-chip 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. 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.

[Wayne Prejean, CEO at Drilling Tools International]

This, along with our acquired new products and revenue opportunities, positions us to continue to capture a greater share of the industry on a global scale. Longer-term demand trends remain robust. Agencies such as the EIA expect oil demand to continue to grow through 2050.

[Wayne Prejean, CEO at Drilling Tools International]

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 capacity slated to come online in 2025 and 2026, and with electricity demand rising rapidly to accommodate the anticipated growth of data centers. DTI is well positioned for this industry trend.

[Wayne Prejean, CEO at Drilling Tools International]

We have been extremely active in the M&A market since going public in June 2023, as we work to position DTI for future growth, which is what we said we would do, and we continue to believe that there are meaningful consolidation opportunities that exist in our sector. It is our stated goal to make thoughtful acquisitions a significant part of our growth strategy.

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

[David Johnson, CFO at Drilling Tools International]

Thanks, Wayne, and thank you everyone for joining us today. In today's earnings release, we provided detailed financial tables, so I'll use this time to offer further insight into specific financial metrics for the Q2. DTI generated total consolidated revenue of $37.5 million in the Q2 of 2024. Q2 tool rental net revenue was $28.3 million, and product sales net revenue totaled $9.2 million.

[David Johnson, CFO at Drilling Tools International]

Q2 operating expenses were $35.3 million, and income from operations was $2.2 million. Adjusted net income for the Q2 was $3 million, or adjusted diluted EPS of $0.10 per share. Q2 adjusted EBITDA was $9 million, and adjusted free cash flow was negative $1.1 million, a $3.2 million improvement compared to the Q2 of 2023.

[David Johnson, CFO at Drilling Tools International]

As of 30 June 2024, we had approximately $6.8 million of cash, net debt of $17.4 million, and an undrawn $80 million ABL credit facility. As Wayne mentioned, we saw the U.S. land rig count down sequentially during the Q2. Rig count was down roughly 15% over the last 12 months. Despite this decline in rig count and activity, our revenues in the Q2 of 2024 were flat over the Q2 of 2023.

[David Johnson, CFO at Drilling Tools International]

Our acquisition of Deep Casing Tools, our Tier One customer base, our wide distribution service and support network, and new product offerings have been integral in managing this challenging cycle. Moving to maintenance CapEx, as a reminder of what I have shared on previous calls, we are a downhole rental tool company, and 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 model helps keep our rental tool fleet relevant and sustainable. For the three-month period ended 20 June 2024, maintenance CapEx was approximately 7% of total consolidated revenue.

[David Johnson, CFO at Drilling Tools International]

This portion of our capital investments is trending lower due to the decline in rig count and our customers' focus on efficiencies that have translated into fewer lost and wholly damaged beyond repair events. Now, moving on to our outlook, we are updating our 2024 ranges, which includes the estimated impacts of Deep Casing Tools and Superior Drilling Products on full year results. We expect 2024 revenue to be in the range of $155 million-$170 million.

[David Johnson, CFO at Drilling Tools International]

We expect Adjusted EBITDA to be within the range of $41 to 47 million. Gross capital expenditures are expected to be between $21 million and $22 million. Adjusted net income for the full year is expected to be between $9.9 million and $13.5 million. Finally, since a majority of our CapEx was incurred in the first half of this year, and we have curtailed or deferred other planned CapEx, we are maintaining our

[David Johnson, CFO at Drilling Tools International]

Adjusted free cash flow to be between $20 to 25 million for 2024, which is more than double the Adjusted free cash flow in 2023. That concludes my financial review and outlook section. Let me turn it back over to Wayne to provide some summary comments before Q&A.

[Wayne Prejean, CEO at Drilling Tools International]

Thank you, David. Before opening up the line for Q&A, I'd like to reiterate, we are extremely pleased to welcome SDP's talented team to the DTI family and add SDP's products, service, and world-class manufacturing expertise into our broad reaching and expanding global sales channels.

[Wayne Prejean, CEO at Drilling Tools International]

In conclusion, I would like to reemphasize that, one, we are very pleased to have closed on our two acquisitions in five months, and we believe we will see significant cost synergies as well as vertical and horizontal integration synergies from the SDP acquisition that will lower our cost and improve our margins.

[Wayne Prejean, CEO at Drilling Tools International]

Two, we have implemented an annualized $2.4 million internal cost reduction program to adjust to the softer market conditions. Three, we are competitive and profitable despite the soft market and are well positioned to combat pricing pressures.

[Wayne Prejean, CEO at Drilling Tools International]

Four, our RotoSteer technology continues to make positive commercial traction, but at a slower pace than we anticipated late last year when the market outlook was flat to upward. We expect to have continued growth in this important technology, but have tempered our fleet development plans and deferred quarter-to-quarter increases to adjust our CapEx and fleet utilization.

[Wayne Prejean, CEO at Drilling Tools International]

I am highly confident this product line will continuously grow. Stay tuned for updates as this exciting opportunity develops. Finally, we believe additional thoughtful consolidation opportunities exist in oil field services that will supplement our organic growth initiatives. Throughout industry cycles, our focus on safety, quality, and reliability continue to be the hallmark of DTI.

[Wayne Prejean, CEO at Drilling Tools International]

I would again like to express my sincerest gratitude to every member of the DTI, Deep Casing Tools, and most recent addition, Superior team, for their continuous dedication to safety, customer service, and the successful execution of our strategic initiatives. 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?

[Operator]

Thank you. We will now be conducting a question-and-answer session. If you would 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.

[Operator]

You may press one if you would like to remove yourself from the question queue. For participants using speaker equipment, it is necessary to pick up your handset before pressing the star key. Thank you. Our first question comes from Jeff Grampp from Alliance Global Partners. Go ahead, Jeff, your line is open.

[Jeff Grampp, Analyst at Alliance Global Partners]

Good morning, everyone. Wanted to first start on, on the Superior integration here now that we've closed. I understand we're only, you know, in the first week here, but, do you guys have any kind of preliminary estimate for when you could potentially see some traction or, or signs of, of success on the revenue synergy sub side, particularly in the, in the Middle East and elsewhere internationally? Is that, is that a 2024 event where you guys could maybe see some green shoots of success, or, is that more of a, a 2025 event we should stay tuned for?

[Wayne Prejean, CEO at Drilling Tools International]

Thanks, Jeff. This is Wayne Prejean. We expect to see, you know, some green sprouts, you know, starting to occur, you know, throughout the remainder of this year. We've, we've been slowly having discussions on between our team and their team on, on how we might integrate post-closing, and now that that has happened.

[Wayne Prejean, CEO at Drilling Tools International]

We're ready to implement some of those initiatives and, you know, accelerate the efforts between our commercial team and, you know, their teams and get things really ramping up in, in that market. Probably more of a 2025 event to see the true traction. Quarter by quarter, we expect to make steady, steady progress, so.

[Wayne Prejean, CEO at Drilling Tools International]

Great. Thank you. On the revised guidance slide in your updated deck, and you touched a bit on this in the prepared remarks as well, Wayne, on M&A. five near-term priority targets, as you guys kind of call it.

[Wayne Prejean, CEO at Drilling Tools International]

Can you shed a bit more light on those, perhaps in terms of, I don't know, geographic focus, product line, maybe size in terms of what size businesses these are, to the extent, you know, you can kind of ring fence some of these opportunities in any broad strokes?

[Wayne Prejean, CEO at Drilling Tools International]

Thanks, Jeff. I've invited Jamison, our corporate M&A VP, to kind of comment on some of that. Jamison?

[Jameson Parker, VP of Corporate Development at Drilling Tools International]

Yeah. Speaking to the pipeline, Jeff, we have everything from product-specific tuck-ins that are identified and we're working on some kind of single product line companies, all the way up to significant mergers of equal or even larger.

[Jameson Parker, VP of Corporate Development at Drilling Tools International]

We're constantly plumbing the depths of the market to find the thoughtful consolidation opportunities that we speak to in the deck. I would say that funnel is very real when we speak to the opportunity set and the near-term opportunities that we're actively working on.

[Jeff Grampp, Analyst at Alliance Global Partners]

Okay, great. If I, if I could just tack a follow-up on that, Jamison.

[Jeff Grampp, Analyst at Alliance Global Partners]

What's kind of, you know, relative to the last call a few months ago, how would you guys kind of characterize, you know, bid-ask spreads, seller sentiment? You know, what is that overall market like today versus a few months ago?

[Jameson Parker, VP of Corporate Development at Drilling Tools International]

I think I, you know, in one of our kind of introductory calls, spoke to, you know, valuations being very range-bound still in oil field service. There is not, I think the bid-ask spread continues to narrow, and we've seen the complete departure of the private equity bidder in most of these processes. Some of these processes that we're doing are not, you know, the broadly marketed deals.

[Jameson Parker, VP of Corporate Development at Drilling Tools International]

These are individual, founder-driven companies that we've known or worked with for a long time, and the timing is right to take their products commercial. You know, I think that the acquisition landscape for consolidation remains robust for oil field service. We need to do what our customer base is doing and get larger and leaner.

[Jeff Grampp, Analyst at Alliance Global Partners]

Great. I appreciate those comments. I'll turn it back. Thank you, guys.

[Wayne Prejean, CEO at Drilling Tools International]

Thanks.

[Operator]

Thank you. Our next question comes from Steve Ferazani from Susquehanna. Go ahead, Steve.

[Steve Ferazani, Analyst at Susquehanna]

Morning, Wayne. Morning, everyone. Appreciate the detail on the call.

[Steve Ferazani, Analyst at Susquehanna]

Wanted to ask about the updated guidance because it now includes SDPI. Is there any kind of detail you can give us on the breakout or what you're expecting the contributions for SDPI is on the remainder of the year?

[Jameson Parker, VP of Corporate Development at Drilling Tools International]

Historically, we only speak to the percent contribution by the product lines at year-end. They were public prior, and you can see some of the results, and we spoke to the kind of margin capture and improvement by being vertically integrated.

[Jameson Parker, VP of Corporate Development at Drilling Tools International]

That's, that's kind of where things are trending now.

[Steve Ferazani, Analyst at Susquehanna]

Can you say if SDPI, your outlook on SDPI in terms of trends, are similar to your legacy business?

[Wayne Prejean, CEO at Drilling Tools International]

You know, we see their, you know, they have some bit repair business opportunities in the Middle East that are starting to get traction, so we anticipate that.

[Wayne Prejean, CEO at Drilling Tools International]

Contribution. You know, and also, you know, we have assets on the ground, rentable assets on the ground that we can put to work, we believe, as things kind of continue to ramp up as we integrate our efforts.

[Steve Ferazani, Analyst at Susquehanna]

Okay

[Wayne Prejean, CEO at Drilling Tools International]

You know, we, we factored in an appropriate amount of, of what we believe is, you know, sticky activity, so that, we, we feel like we feel pretty good about our guidance. You know, there's certainly potential for more opportunity in the future, so we'll just, we'll just have to gauge that, you know, quarter to quarter as we integrate these, these, these two businesses, so.

[Steve Ferazani, Analyst at Susquehanna]

Fair enough. When we think about the updated guidance, obviously, rig count has continued to soften, but we're down about 20 rigs last quarter, and I know we're continuing to decline this quarter. But when I see the updated guidance, and you touched on it in your comments, there seems to be maybe a more severe pricing impact or maybe it's utilization.

[Steve Ferazani, Analyst at Susquehanna]

I'm trying to figure out how much consolidation is playing into that, even though you're probably the incumbent of the acquirer in a lot of these cases. Are you getting more pricing pressure from consolidation, or is it more just the slower rig count?

[Steve Ferazani, Analyst at Susquehanna]

You know, when the rig count, the slow bleed of the rig count over the last 18 months has been kind of an interesting phenomenon within our industry, where it didn't go down just rapidly, you know, just kind of chipped away at as a slow, leak, if you will.

[Steve Ferazani, Analyst at Susquehanna]

The industry's had to learn how to adjust to that slow burn, right, of rig activity. As that's happened, you know, operators have had a chance to, A, consolidate, B, what I spoke to in the press release was the rotation of different vendors trying, you know, different ways to cut costs and put, you know, compressive pricing on different service providers and so on.

[Steve Ferazani, Analyst at Susquehanna]

You know, that's affected us because we've seen some of our core customers, you know, get shuffled around from this operator to that operator, and we've had to shuffle as well. We make those adjustments. As I spoke earlier, we have strategic moats built in.

[Steve Ferazani, Analyst at Susquehanna]

Those strategic moats are having the proper fleet, the most relevant types of connections and things in the industry that gives us the strongest sticking power. But as I've said previously in calls and with the different investors, no one is immune to compression of the market by our customers, so, yeah.

[Steve Ferazani, Analyst at Susquehanna]

How much can this reverse as we start seeing... I think you mentioned it, and certainly, we all think there's some recovery next year with all the LNG export capacity coming. How positive are you on some recovery on pricing and margins, if we get a recovery?

[Wayne Prejean, CEO at Drilling Tools International]

Well, I think it's just a, it's just a matter of time that our customers, you know, do put more activity in play because they have a desire to grow their business as well being the oil and gas customers. As far as pricing, you know, rising back up, what we've done, we've tried. We make every effort to maintain our pricing points, but we modify our commercial terms with utilization. You know, use tools and things like that, and standby rates and things like that when you have extra tools unutilized.

[Wayne Prejean, CEO at Drilling Tools International]

You know, our goal is to modify our commercial terms and then move our utilization efforts back to where the activity supports a better pricing model. We think we'll be in a competitive position to offer better products and more relevant products for the future.

[Wayne Prejean, CEO at Drilling Tools International]

Perfect. Last one for me. I mean, the international outlook as we come out of the first half, listening to, you know, some of the bellwether conference calls, the international outlook remains really, really healthy. A lot of people calling for a multi-year cycle here, with particular strengths in the Middle East. Can you touch on how that's, you know, your strategy with SDPI, Deep Casing? Can you give a little bit of a picture on how that affects your international strategy, and how that will play into sort of this international potential multi-year upcycle?

[Wayne Prejean, CEO at Drilling Tools International]

You know, Deep Casing, for example, has, you know, product line that's very contributory and beneficial to many of your Middle East and international offshore players. We see that business, you know, slowly growing and evolving and making a, you know, more significant contribution. Now that we have the SDP acquisition, you know, we've joined forces with them. We're no longer serving two masters.

[Wayne Prejean, CEO at Drilling Tools International]

We're now aligned and, and working together in unison. I think we can help, you know, that platform rapidly expand and set up, you know, repair centers in other locations and expand that product line. The opportunities are there.

[Wayne Prejean, CEO at Drilling Tools International]

For, you know, in addition to that, what Jamison didn't give you any real color on, 'cause he's, he's reserving his comments, but I'll add to it, is one of the criteria for our M&A strategies is to, you know, place high emphasis on what international impact and component these, these M&A deals can do for us.

[Wayne Prejean, CEO at Drilling Tools International]

You know, we pretty much, you know, look at that as a higher value proposition than maybe just some tuck-in and bolt-ons in the North American market, which, you know, many could be attractive, but we're focused and, you know, we're aiming more towards technology and technology and Middle East and international expansion as far as, you know, when we make an M&A deal, you know, that needs to make a significant contribution to our long-term strategy.

[Steve Ferazani, Analyst at Susquehanna]

Fantastic. Thanks, Wayne.

[Operator]

Our next question comes from John Daniel, from Daniel Energy Partners. Go ahead.

[John Daniel, Analyst at Daniel Energy Partners]

Wayne, your margins are already better than a lot of your peers, and I was interested, it was just noteworthy when I saw the cost reduction efforts, the $2.4 million. Can you elaborate on what you guys are doing?

[Wayne Prejean, CEO at Drilling Tools International]

With regard to our cost reduction?

[John Daniel, Analyst at Daniel Energy Partners]

Is it, is it regional or, yeah, how are you approaching that?

[Wayne Prejean, CEO at Drilling Tools International]

You know, one thing interesting about our business is we can scale our business to, you know, according to activity, and that's very challenging, but, you know, some of it's labor centric, some of it's deferring certain, you know, aspirational costs. We've made those appropriate adjustments in North America.

[Wayne Prejean, CEO at Drilling Tools International]

We have a tenured management team in all of our facilities, which is unique. They all understand, you know, what is required of them, you know, quarter to quarter, year to year, and how the industry ebbs and flows. We've made those variable cost adjustments.

[Wayne Prejean, CEO at Drilling Tools International]

You know, we are a public company now, so we've had to take on some publiccompany burdens that we're all aware of. We've been mindful of managing that, you know, escalation as we grow and, you know, build muscle to take on more and more M&A and larger, you know, you know, broader enterprises.

[Wayne Prejean, CEO at Drilling Tools International]

Most of it's been the variable cost component in North America, where we see the, you know, the, the lever of ebb and flow of activity. And if, if the activity raises, you know, or, or rises to a level that, you know, requires more support, we're prepared to make those increases if, if needed, to support the business.

[John Daniel, Analyst at Daniel Energy Partners]

Okay. Just a follow-up, unrelated, but you know, the press release calls out the bit repair facility in the UAE. I'm just curious, when you have a facility like that, you know, what's the opportunity for additional roof line there, and how quickly could you start taking other product services into a facility like that? If you could just expand-

[John Daniel, Analyst at Daniel Energy Partners]

It would be helpful.

[Wayne Prejean, CEO at Drilling Tools International]

I think. Okay, yeah, thanks. The facility that's set up now is centrally located in the UAE, and that serves our needs for now, but we're looking at how to, you know, put something possibly in Saudi. We could – the tool line that we currently have could add support for some of our other product lines in the Middle Eastern market.

[Wayne Prejean, CEO at Drilling Tools International]

It's expandable. It's, the bit repair business can be expanded, the Drill-N-Ream repair business can be expanded, and we have some machining capability that's being loaded into there to add more repair capability to support rental fleets. We're good to go for a while.

[John Daniel, Analyst at Daniel Energy Partners]

Good. Okay, that's all I had. Thank you for including me.

[Wayne Prejean, CEO at Drilling Tools International]

Thank you.

[Operator]

Thank you. This does conclude. Sorry. This does conclude the question and answer session. I would now like to turn it to management for any closing remarks.

[Wayne Prejean, CEO at Drilling Tools International]

Well, thanks, everybody, for your interest in DTI. You know, it's been a challenging year, but we've once again overcome those challenges, and we see a you know, pretty bright outlook going forward, and we, we look forward to keeping you posted on those events. Thanks for your interest.

[Operator]

Thank you. This does conclude today's conference. We thank you for your participation. You may disconnect your lines at this time and have a wonderful day.

Participants

Executives

• David Johnson, CFO
• Jameson Parker, VP of Corporate Development
• Ken Dennard, DTI Investor Relations
• Wayne Prejean, CEO

Analysts

• Jeff Grampp, Analyst at Alliance Global Partners
• John Daniel, Analyst at Daniel Energy Partners
• Steve Ferazani, Analyst at Susquehanna