Drilling Tools International Q1 2025 Earnings Call Transcript

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May 14, 2025

Key Takeaways

  • First quarter revenue grew 16% year-over-year and adjusted EBITDA was up 18% year-over-year (flat sequentially), driven by strong rental and product sales performance.
  • Management launched a two-phase strategy—including supplier/customer negotiations and a multilevel cost reduction program—to achieve $6,000,000 in annual savings starting in Q2.
  • Full-year 2025 guidance was lowered, with revenue expected between $145 million and $165 million and adjusted EBITDA of $32 million to $42 million, due to anticipated rig-count declines and market volatility.
  • Board approved a $10,000,000 share buyback authorization, citing the company’s undervalued stock price as a compelling capital deployment opportunity.
  • Recorded a non-cash goodwill impairment charge of approximately $1,900,000 related to certain reporting units, though it does not affect liquidity or adjusted EBITDA.
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Earnings Conference Call
Drilling Tools International Q1 2025
00:00 / 00:00

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Operator

Greetings, and welcome to the Drilling Tools International First Quarter twenty twenty five Earnings Conference Call. At this time, all participants are in a listen only mode. A 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, Mr. Ken Dennard. Thank you. You may begin.

Ken Dennard
Ken Dennard
Investor Relations at Drilling Tools International

Thank you, operator, and good morning, everyone. We appreciate you joining us for Drilling Tool International's twenty twenty five First Quarter Conference Call and Webcast. With me today are Wayne Prijon, Chief Executive Officer and David Johnson, Chief Financial Officer. Following my remarks, management will provide a review of first quarter results and 2025 outlook before opening the call for your questions. There will be a replay of today's call and it will be available by webcast on the company's website at drillingtools.com.

Ken Dennard
Ken Dennard
Investor Relations at Drilling Tools International

And there's also a telephonic recorded replay available until May 21. You can find information on how to access those replays in the press release from yesterday. Please note that any information reported on this call speaks of today, 05/14/2025, and therefore you are advised that any time sensitive information may no longer be accurate as of time of any replay listening or transcript reading. Also, 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.

Ken Dennard
Ken Dennard
Investor Relations at Drilling Tools International

However, various risks and uncertainties and contingencies could cause actual results, performance or achievements to differ materially from those expressed in the statements made by management. The listener or reader is encouraged to read its annual report on Form 10 ks, quarterly reports on Form 10 Q and current reports on Form eight 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 reconciliation to the most directly comparable GAAP measure can be found in our earnings release and our filings with the SEC.

Ken Dennard
Ken Dennard
Investor Relations at Drilling Tools International

And now with that behind me, I'd like to turn the call over to Wayne Prejon, DTI's Chief Executive Officer. Wayne?

Wayne Prejean
Wayne Prejean
CEO & President at Drilling Tools International

Thanks, Ken, and good morning, everyone. I will provide some opening remarks before handing the call over to David to review the financials. I'll then come back and provide a few additional thoughts before we open it up for questions. We are pleased to report first quarter sequential and year over year revenue growth and solid adjusted EBITDA despite industry headwinds. Revenue grew 16% over last year's first quarter and was up nearly 8% over twenty twenty four fourth quarter results.

Wayne Prejean
Wayne Prejean
CEO & President at Drilling Tools International

Adjusted EBITDA grew nearly 18% year over year and was flat sequentially. Our team has much to be proud of and has skillfully managed the recent volatility in commodity prices and rig counts. We have yet to experience tangible disruptions to our forecast in North America for the rental or sale of our tools. However, we do see increased volatility and uncertainty in the marketplace due to the impact of tariffs, a potential recession that could lower demand for hydrocarbons, and OPEC plus's decision to increase production, among other challenges. In anticipation of when, not if, these potential disruptions impact our order flow, DTI has begun executing on a two phase strategy.

Wayne Prejean
Wayne Prejean
CEO & President at Drilling Tools International

We are proactively negotiating with our suppliers and our customers to ensure stability and profitability. We are implementing a multilevel internal cost reduction program. Phase one, implemented in Q2, will result in an estimated $6,000,000 in annual cost reductions. Both David and I, along with our entire management team, have decades of experience working through multiple commodity cycles and prudently rightsizing the business when demand for our products and services changes. The anticipated rig count drop in The U.

Wayne Prejean
Wayne Prejean
CEO & President at Drilling Tools International

S. Will challenge all service providers. I am confident we will prove to the investment community and shareholders our ability to sustain solid EBITDA and free cash flow in the face of volatility. While we cannot control global economic forces, we do believe that our input costs or cost of goods are strategically positioned to minimize the increase in the expenditures associated with any near term tariff risk for three reasons. Should the industry experience a significant reduction in rig count, DTI can quickly curtail planned growth CapEx.

Wayne Prejean
Wayne Prejean
CEO & President at Drilling Tools International

DTI has a strong and diverse manufacturing base in North America. In addition to manufacturing for our own consumption, DTI already sources a large amount of made in America steel. And our international footprint and diverse supply chain provides us flexibility in the face of uncertainty and exposure to other concentrations of rigs that may not lay down as quickly as U. S. Shale Producers.

Wayne Prejean
Wayne Prejean
CEO & President at Drilling Tools International

So based on this volatility and uncertainty, we are proactively adjusting our annual revenue, adjusted EBITDA and adjusted free cash flow guidance ranges for 2025. David will discuss our updated guidance in his formal remarks. We remain committed to identifying future cost reduction opportunities and maintaining operational agility to quickly respond to this challenging environment, furthering our mission to enhance shareholder value. Also related to our capital deployment strategy, our board of directors has unanimously approved a share buyback authorization. This authorization is up to $10,000,000 of buybacks. We believe our undervalued stock price presents one of the most compelling return on investment opportunities to deploy our capital. David will now take you through the first quarter financials and discuss our 2025 outlook updates in more detail. David?

David Johnson
David Johnson
Chief Financial Officer at Drilling Tools International

Thanks, Wayne. In yesterday's earnings release, we provided detailed first quarter financial tables, so I'll use this time to offer further insight into specific financial metrics. Despite continued rig count softness and market choppiness in the first quarter of twenty twenty five, revenue increased over last year's first quarter by 16% in the face of a 6% global rig count decline over the same period. We believe this continues to validate our stated M and A strategy to further strengthen our business model and diversify our geographic footprint. Looking at our first quarter results, we generated total consolidated revenue of $42,900,000 comprised of tool rental revenue of approximately 34,500,000.0 and product sales revenue of $8,300,000 We reported total operating expenses of $39,600,000 and operating income was 3,300,000.0 First quarter adjusted EBITDA was $10,800,000 and adjusted free cash flow was $5,700,000 At the end of the first quarter, we had approximately $2,800,000 in cash and cash equivalents and net debt of $52,100,000 During the quarter, as part of our recent segment reorganization, we conducted a comprehensive goodwill impairment assessment.

David Johnson
David Johnson
Chief Financial Officer at Drilling Tools International

This process required us to allocate goodwill between all affected reporting units and test each for potential impairment. As a result, we have recorded a noncash goodwill write down attributable to our Vernal, Utah bit repair operations in the Western Hemisphere and the deep casing tools reporting unit in the Eastern Hemisphere. The approximately $1,900,000 impairment is a function of purchase price accounting and does not affect our day to day operations or our ability to execute on our strategic priorities. From a purchase accounting standpoint, it is important to note that the increase in our stock price pre close of the SDPI transaction caused the total allocated purchase price consideration to increase beyond the amount by which we underwrote the deal. Importantly, this charge is noncash in nature and does not impact liquidity, free cash flow, or adjusted EBITDA.

David Johnson
David Johnson
Chief Financial Officer at Drilling Tools International

Adjusted net income, which excludes this noncash charge, remains positive and in line with our strong operational performance for the quarter. We believe taking this impairment now provides a more accurate reflection of asset values in the current market environment and positions us for improved transparency and comparability going forward. As previously mentioned on our last call, our new Western And Eastern Hemisphere segment reporting structure began this quarter. Our Western Hemisphere segment, which includes products and services like directional tool rentals, wellbore optimization tools, premium tools, and bit repair remains steady. Moving to the Eastern Hemisphere, which is predominantly made up of deep casing tools, European drilling projects, and now Titan tools, you'll see some choppiness as we compare q one twenty four to q one twenty five.

David Johnson
David Johnson
Chief Financial Officer at Drilling Tools International

With the addition of the European drilling projects and Titan tools, our tool rental revenue is up significantly over Q1 of 'twenty four. Our decline in product sales was primarily due to deep casing tools. We believe that the product sales at deep casing tools bottomed out in second half twenty twenty four, given their exposure to the Saudi offshore market and Mexico. These tools are high spec, and we expect demand for them to pick up internationally throughout 2025 as existing customer owned inventory is depleted. With our expanded offering of rental tools, including Meckloc drill pipe swivels, the Rubbilizer P and A tool, fixed blade stabilizers, Drill N Ream, and other BHA components, rental revenue is becoming a much larger percentage of the Eastern Hemisphere revenue mix, and we anticipate steady growth and better cost absorption in future quarters.

David Johnson
David Johnson
Chief Financial Officer at Drilling Tools International

Previously, we've spoken about the total revenue contribution from each hemisphere and indicated an expectation for the Eastern Hemisphere to grow to 18% of total revenue. As you can see in Q1 results, the Eastern Hemisphere accounts for 11% of revenue, but we expect the Eastern Hemisphere contribution to grow as the year progresses. Adjusted free cash flow in the first quarter was $5,700,000 We maintained our planned CapEx spend in the first quarter to support the momentum we have been experiencing from our organic RotoShear product growth story and our international expansion. Going forward, we will continue to review all CapEx spending with an eye on activity levels while demonstrating our ability to generate adjusted free cash flow. Looking at maintenance CapEx for the first quarter, it was approximately 10% of total revenue.

David Johnson
David Johnson
Chief Financial Officer at Drilling Tools International

Although up slightly in Q1, this portion of our capital investment has trended lower in the past several quarters due to decline in rig count and our customers' focus on drilling efficiencies, translating into fewer lost and hole and damaged beyond repair events. As a reminder, our maintenance capital is primarily funded by tool recovery revenue, which keeps our rental tool fleet relevant and sustainable regardless of market trends. To summarize the first quarter of twenty twenty five, we saw the positive effects of our acquisitions and organic growth in the ROTOSTREA product line, which offset some of the decline in our directional tool rentals and deep casing tools product lines. Pricing pressure, product mix, and activity declines have impacted our margins. We believe this will continue throughout 2025 with pricing pressure and further activity declines resulting from the fears of oversupply caused by a slowdown in demand and increased production.

David Johnson
David Johnson
Chief Financial Officer at Drilling Tools International

However, in the long position ourselves to improve our consolidated margin profile over time as we continue to manage our cost structure and add scale. As Wayne mentioned, we have proactively initiated cost reduction measures in Q2 that will result in approximately $6,000,000 of annual cost savings, which is reflected in our updated 2025 guidance. We have also updated our guidance to reflect a further decline in the North American land rig counts. Although we do not have a crystal ball, our previous assumption of a flat to slightly up market has shifted to a down market for the remainder of 2025.

David Johnson
David Johnson
Chief Financial Officer at Drilling Tools International

With that in mind, we now expect full year 2025 revenue to be in the range of $145,000,000 to $165,000,000 We expect adjusted EBITDA to be within the range of $32,000,000 to $42,000,000 Gross capital expenditures are expected to be between 18,000,000 and $23,000,000 And finally, we expect our 2025 adjusted free cash flow to range between $14,000,000 to $19,000,000 That concludes my financial review and outlook section. Let me turn it back over to Wayne to provide some summary comments.

Wayne Prejean
Wayne Prejean
CEO & President at Drilling Tools International

Thank you, David. Before we open up the lines for questions, I would like to highlight five points. First, over the past six weeks since the new administration's tariff policies were introduced, worldwide sentiment across the energy industry has become anxious.

Wayne Prejean
Wayne Prejean
CEO & President at Drilling Tools International

Recently, various news outlets announced some adjustments to the tariff policy, and it appears negotiations are headed in a positive direction. Despite the ever changing news or trade policy shifts, we assume there is likely a negative impact to our business this year. Second, DTI has taken certain initiatives to remain competitive, including remaining resourceful and innovative when combating pricing pressures. Third, we are constantly evaluating customer activity levels and adjusting our operations to align with demand. Fourth, we are confident that elevated demand for complex wellbore solutions will further strengthen the need for our differentiated technology and the value added solutions we provide our clients across the globe.

Wayne Prejean
Wayne Prejean
CEO & President at Drilling Tools International

Finally, we believe our best in class, performance driven, technologically differentiated offerings, combined with our expanding global geographic footprint, will deliver solid results as energy markets recover. In closing, we value and appreciate our customers, our employees, and our shareholders. I would like to thank every member of the DTI team for their continuous dedication to working in a safe, inspired, and productive manner. This commitment by our employees is critical in managing this volatile commodity cycle and is vital to our future growth. With that, we will now take your questions. Operator?

Operator

Thank you. We will now be conducting a question and answer session. Our Our first question comes from Steve Farazani with Sidoti and Company. Please proceed with your question.

Steve Ferazani
Senior Equity Analyst - Diversified Industrials & Energy at Sidoti & Company, LLC

Good morning Wayne, good morning David. Appreciate the detail on the call. Also the detail around guidance, which always challenging, I imagine exceptionally challenging given the aftermath of Liberation Day. I want to ask about first just on obviously second half should be more challenging particularly in U. S.

Steve Ferazani
Senior Equity Analyst - Diversified Industrials & Energy at Sidoti & Company, LLC

Short cycle, but you're not moving free cash flow much. Looks like you're taking about $6,000,000 out of your growth CapEx. Talk a little bit about the fact that you can maintain pretty good free cash flow in this environment.

Wayne Prejean
Wayne Prejean
CEO & President at Drilling Tools International

Thanks.

David Johnson
David Johnson
Chief Financial Officer at Drilling Tools International

Do you want me take that one?

Wayne Prejean
Wayne Prejean
CEO & President at Drilling Tools International

Yes, sure.

David Johnson
David Johnson
Chief Financial Officer at Drilling Tools International

Yeah. Thanks, Steve. Yeah, part of that, I think is two pronged, obviously focusing on the cost reductions to keep preserve as much of the EBITDA margins as we can, obviously helps. And then as we look at the activity and projected activity going forward and our CapEx spend kind of making sure we coincide any purchases or defer same along the lines we did last year on future CapEx to make sure we preserve that ability to generate the free cash flow.

Steve Ferazani
Senior Equity Analyst - Diversified Industrials & Energy at Sidoti & Company, LLC

Great. It sounded like you're still expecting sequential Eastern Hemisphere growth this year. And I think you pointed to deep casing tools particularly. Can you talk a little bit about what you're seeing specifically in Saudi and otherwise in The Middle East?

Wayne Prejean
Wayne Prejean
CEO & President at Drilling Tools International

Yeah. So most of The Middle East is relatively flat. But the Saudi rig reduction in their offshore market, particularly the offshore market was impactful to us because we have many, many product sales going into that market. But we've managed to pivot and see some consumption in their other areas. And in parallel to that, our acquisition of ED projects has some technology in our fixed blade and sleeves and other stabilization technologies that are gaining more and more traction in that market.

Wayne Prejean
Wayne Prejean
CEO & President at Drilling Tools International

And in addition to that, our DNR product line is starting to gain some traction in that Middle East market. After the acquisition, had to kind of unpack and aggregate our teams there and kind of integrate all those groups together. And I think that most of that is behind us. And we feel like our momentum is picking up there. And despite that Saudi rig count softness that impacted everyone, I believe, we were able to start spreading our wings across the Middle Eastern market and gain traction there, which will offset some of the activities that are in possible decline here.

Wayne Prejean
Wayne Prejean
CEO & President at Drilling Tools International

And we've kind of baked all that in. That's kind of the impact.

Steve Ferazani
Senior Equity Analyst - Diversified Industrials & Energy at Sidoti & Company, LLC

So you're expecting, at least given the weakness, this growth in these acquisitions are certainly going to help offset in a challenging 2025?

Wayne Prejean
Wayne Prejean
CEO & President at Drilling Tools International

Right. We have some emerging products that are gaining ground. One of products that we acquired in deep casing was the Meclok Swivel and the Rubblizer product. One for installing complex casing strings and horizontal wells, which is the swivel. And then the Rubblizer is more of a plug and abandonment technology that couples well with a lot of applications.

Wayne Prejean
Wayne Prejean
CEO & President at Drilling Tools International

And those were in their infancy at the time of acquisition. So they were not a material part of the acquisition value.

Steve Ferazani
Senior Equity Analyst - Diversified Industrials & Energy at Sidoti & Company, LLC

Oh, okay.

Wayne Prejean
Wayne Prejean
CEO & President at Drilling Tools International

They are kind of in addition to, as we call it Louisiana, Lawn Yop, a little bit extra for something, for nothing, you know? So we are now moving those into full commercial stage, and they're gaining traction and offsetting some of the drop in the product sales that I spoke of earlier.

Steve Ferazani
Senior Equity Analyst - Diversified Industrials & Energy at Sidoti & Company, LLC

Got it. Got it. That's helpful. You noted you haven't seen the tangible impact in North America yet. I mean we're hearing we're seeing rig count come down, but it seems like it's the smaller operators.

Steve Ferazani
Senior Equity Analyst - Diversified Industrials & Energy at Sidoti & Company, LLC

We know the guides we're seeing for CapEx is down a bit. I'm assuming the guidance change is primarily second half. In terms of cadence to the guidance, does 2Q look similar to 1Q based on what you know right now with, obviously, with six weeks to go?

Wayne Prejean
Wayne Prejean
CEO & President at Drilling Tools International

David, how do you think we answer that one?

David Johnson
David Johnson
Chief Financial Officer at Drilling Tools International

I mean, yeah, I think we're looking at the rest of the year in totality, and it's hard to obviously predict the combination of activity and pricing and so forth. But on a blended basis, we've got that kind of spread out over the year.

Wayne Prejean
Wayne Prejean
CEO & President at Drilling Tools International

Steve, we've anticipated some softness in The US market throughout the rest of the year. But what's interesting is, and we're also going through the Canadian seasonality dip right now. So that will ramp back up and help out as well in the rest of the year. There's been some reports where Canada might be a little more immune to some of this downturn because of their particular situation in production and cost and economics and things of that nature. So we're happy that we have a strong business in Canada and very, very solid and sustainable operation there.

Wayne Prejean
Wayne Prejean
CEO & President at Drilling Tools International

What's kind of interesting about The US market, and I think what has most of the companies, OFSs and everything perplexed is the lack of a swift downturn. It's more of just a slow leak. That's what's happened over the last year. Now we have some additional leakage, excuse the expression, but that's kind of leakage. It's a slow burn.

Wayne Prejean
Wayne Prejean
CEO & President at Drilling Tools International

Historically, when we would have downturns, you'd have a swift rig downturn and everyone would correct. Well, when it goes slow, it's a little more challenging for each company to decide how they make those adjustments. And we've done this before. We've seen this movie a few times. And we're adjusting, understanding that metric of our customers of how they manage their rig counts.

Steve Ferazani
Senior Equity Analyst - Diversified Industrials & Energy at Sidoti & Company, LLC

Perfect. That's helpful. If I could get one more in just on capital allocation and the guide. You have a pretty wide range on the full year interest expense. Is that because it's how much debt you may or may not reduce in the remainder of the year?

David Johnson
David Johnson
Chief Financial Officer at Drilling Tools International

I think that's very accurate, Steve. Obviously, on the capital spend and where exercise that free cash flow deployment, we have an opportunity to lower our debt if we pull back on the CapEx and adjust according to the activity. So that's all happens in the downturn. And we've also obviously, as you saw, kind of consider the share buyback as part of our use of cash as well that opportunity. So we'll kind of look at that as time progresses.

Steve Ferazani
Senior Equity Analyst - Diversified Industrials & Energy at Sidoti & Company, LLC

Great. Thanks, Wayne. Thanks, David.

Wayne Prejean
Wayne Prejean
CEO & President at Drilling Tools International

Thank you, Steve.

Operator

Our next question comes from Josh Jain with Daniel Energy Partners. Please proceed with your question.

Josh Jayne
Managing Director at Daniel Energy Partners

Thanks. Good morning. First question, I just wanted to dive into North America a little bit more. I think in your slide deck, you highlight that 60% of the drilling rigs in North America utilize DTI tools and equipment. So just given your broad exposure, could you talk about how you're thinking about the back half of the year?

Josh Jayne
Managing Director at Daniel Energy Partners

I know you said probably flattish or maybe look similar spread across the last three quarters. But could you talk through what regions may be the most at risk in North America for a little bit of a pullback and what regions may hold up better than some others?

Wayne Prejean
Wayne Prejean
CEO & President at Drilling Tools International

That's a great question, Josh, because as you well know, the economics in these different basins will drive the behavior of the operators and the rig count will result thereof those economics. The resiliency of each area is going to be challenged here in the next few months if oil prices keep dropping. You know, something in the 60s helps many of them continue with what they're doing. If it drops it with a five handle for a significant amount of time, we're pretty sure that we'll see some reductions in areas where the economics aren't as strong. I would hate to lean into exactly which areas, whether it's DJ or the Oklahoma oily basins or if it's Permian, Midland or Delaware Basin.

Wayne Prejean
Wayne Prejean
CEO & President at Drilling Tools International

There's a lot of narratives and information out there on which ones have the strength to sustain lower oil prices. The Haynesville tends to be, the gassy areas tend to be more sustainable. So we have good exposure to every area. We're heavy in the Permian. We have really good operations in the Haynesville as well.

Wayne Prejean
Wayne Prejean
CEO & President at Drilling Tools International

We're renting a lot of tools, pipe and downhole tools, reamers, you name it. So our spread and diversity gives us the strength to move around in these basins respective to activity. And we can ebb and flow and pull the levers up and down in our locations and move tools to where they need to be in the activity that is most vibrant. So it's going to be interesting next few months.

Josh Jayne
Managing Director at Daniel Energy Partners

Okay. Thanks. And then I just wanted to follow-up on CapEx because noted that you could potentially curtail growth CapEx if the macro was turns out to be more unfavorable. Could you comment on your CapEx program? And for this year on the growth side and the things that you're spending money on and which regions you're ultimately trying to grow with that growth CapEx would be great. Thanks.

Wayne Prejean
Wayne Prejean
CEO & President at Drilling Tools International

Thank you. So most of our focus on anything growth related in that category will be in new technology and new types of tools that have growth potential. And we'll continue to sustain our existing rental fleet, call it legacy fleet, is your common stuff on a day to day basis. But our new stabilizer technology, our new swivels, that swivel technology I spoke of earlier with Meclock, our rotor steer product line which gaining steady traction in The US and finding its niche in certain directional and horizontal drilling applications. We are continuing to make sure we put the appropriate amount of capital for the future.

Wayne Prejean
Wayne Prejean
CEO & President at Drilling Tools International

Even though we see the softness in our general marketplace today, we see the future in the next year to come that we need to put these tools in motion and get their stickiness and commercial traction with our clients so that we have a long term participation in their drilling program. So that's where most of our CapEx focus.

Josh Jayne
Managing Director at Daniel Energy Partners

Thanks. I'll turn it back.

Operator

This now concludes our question and answer session. I'd now like to turn the floor back over to Wayne Prejean for closing comments.

Wayne Prejean
Wayne Prejean
CEO & President at Drilling Tools International

Thank you. We'd like to thank everyone for their participation and interest today in our earnings call and make everyone aware that our company is continuing to be competitive and is ready to meet all the challenges that we face in our industry going forward. And we thank you for your interest and have a great day.

Operator

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.

Executives
    • Ken Dennard
      Ken Dennard
      Investor Relations
    • Wayne Prejean
      Wayne Prejean
      CEO & President
    • David Johnson
      David Johnson
      Chief Financial Officer
Analysts
    • Steve Ferazani
      Senior Equity Analyst - Diversified Industrials & Energy at Sidoti & Company, LLC
    • Josh Jayne
      Managing Director at Daniel Energy Partners
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