Drilling Tools International Q1 2026 Earnings Call Transcript

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Provided by Quartr
May 8, 2026

Key Takeaways

  • Positive Sentiment: The company is reaffirming its full‑year 2026 guidance of $155M–$170M revenue, $35M–$45M Adjusted EBITDA, and $17M–$22M Adjusted Free Cash Flow, assuming a softer H1 with improvement in H2.
  • Neutral Sentiment: First‑quarter results were largely as expected: total revenue of $38M, Adjusted EBITDA of $7.5M, adjusted net loss of $1.0M (≈$0.03/share), and an Adjusted Free Cash Flow loss of ≈$0.16M, while tool rental gross margin stayed above 70%.
  • Positive Sentiment: Management reports rising international and offshore demand for its differentiated products—particularly ClearPath, Drill‑N‑Ream, and Deep Casing Tools—which is driving Eastern Hemisphere momentum despite regional disruptions.
  • Positive Sentiment: The primary sponsor HHEP completed distribution of its remaining shares, increasing the public float to roughly 90% and refreshing the board, which the company says materially improves trading liquidity and governance.
  • Negative Sentiment: Liquidity and capital deployment risks remain—cash was $2.8M with net debt of $48.9M, Q1 CapEx was elevated at $7.7M, and management warns targeted incremental investments could push free cash flow toward the lower end of guidance.
AI Generated. May Contain Errors.
Earnings Conference Call
Drilling Tools International Q1 2026
00:00 / 00:00

There are 6 speakers on the call.

Speaker 3

Welcome to Drilling Tools International First Quarter 2026 Earnings Conference Call. It is now my pleasure to introduce your host, Ken Denard. Thank you, Mr. Denard. You may begin.

Speaker 2

Thank you, operator, and good morning, everyone. We appreciate your joining us for Drilling Tools International's 2026 first quarter conference call and webcast. With me today are Wayne Prejean, Chairman and Chief Executive Officer, and David Johnson, Chief Financial Officer. Following my remarks, management will provide a review of the first quarter results and 2026 outlook before opening the call for your questions. There'll be a replay of today's call. It'll be available by webcast on the company's website at drillingtools.com. There'll also be a telephonic recorded replay available until May 15th. Please note that information reported on this call speaks only as of today, May 8th, 2026, and therefore, you're advised that time-sensitive information may no longer be accurate as of the time of any replay listing or transcript rereading.

Speaker 2

Comments on this call will contain forward-looking statements within the meaning of the United States Federal Securities laws. These forward-looking statements reflect the current views of DTI's management. However, various risks and uncertainties and contingencies could cause actual results, performance, or achievements to differ materially from those expressed in the statements made by management. The listener or reader is encouraged to read the 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. The comments today will also include certain non-GAAP financial measures, including, but not limited to Adjusted EBITDA and Adjusted Free Cash Flow. The company provides these non-GAAP results for informational purposes, and they should not be considered in isolation from the most directly comparable GAAP measures.

Speaker 2

A discussion of why we believe these non-GAAP measures are useful to investors, certain limitations of using these measures, and the reconciliation to the most directly comparable GAAP measures can be found in our earnings release and our filings with the SEC. Now, with that behind me, I'd like to turn the call over to Wayne Prejean, DTI's Chairman and Chief Executive Officer. Wayne.

Speaker 5

Thanks, Ken, and good morning, everyone. I will provide some opening remarks before handing the call over to David to review the financials and touch on our outlook. I'll then come back and provide a few additional thoughts before we open it up for questions. Our first quarter results came in largely as anticipated. As we discussed in our year-end call in March, we expected activity to remain relatively soft through the first half of the year, with the possibility for improvement in the back half of 2026, driven by several potential catalysts across multiple geographies. The quarter played out consistently with that framework. Despite a softer start to the year, we generated total consolidated revenue of $38 million and Adjusted EBITDA of $7.5 million. Importantly, our outlook for the full year remains intact, and we are reaffirming our 2026 guidance ranges today.

Speaker 5

There were a few distinct factors that shaped our first quarter. North American land activity continued to be flat to slightly down. The earlier than expected spring breakup in Canada pulled some typical second quarter seasonality into the first quarter. While this compressed Q1 results, it also means the post-breakup rebound should begin earlier than usual, and we expect that to be a tailwind as we move into the second quarter. In the Middle East, the ongoing regional conflict has created some operational disruption that has muted what would otherwise have been a stronger first quarter contribution. That said, and this is an important point, our experience in the region is different from public statements expressed by the larger diversified service companies. Due to our more targeted footprint and specialized product focus, we have continued to see rising demand for our tools in the Middle East, even through this volatility.

Speaker 5

Our tide is still rising in that market. The geopolitical backdrop has simply suppressed the slope. Offsetting these headwinds, we saw very encouraging momentum in our international offshore markets. Our ClearPath stabilizer technology continues to gain traction as customers adopt it for high-value offshore and land projects around the world, and the Drill-N-Ream is making steady progress in the Middle East, providing solutions for complex wellbore challenges, including micro doglegs, tortuosity, and getting casing to bottom. Our Deep Casing Tools product line, which saw utilization bottom out in 2024, has continued its recovery with a notable rebound in product sale purchase orders, particularly from the Middle East customers who have worked through their owned inventories.

Speaker 5

Together, these unique and value-based product lines are enhancing our Eastern Hemisphere growth and support our confidence in our full-year outlook. Looking ahead, we are confident that the forward price of oil is higher rather than lower for the foreseeable future. We believe a more constructive commodity backdrop will gradually help relieve the pricing compression that has characterized the last several quarters. In North America, there is a real disconnect today between available rig capacity and the fracturing horsepower capacity needed to convert drill wells into production, which tempers our near-term enthusiasm for a significant NAM recovery. We are seeing steady traction in the Gulf of America, the North Sea, and offshore markets in other parts of the world. Our differentiated portfolio is positioning us well to capture that work. Before I turn it over to David, I want to highlight an important milestone achieved during the first quarter.

Speaker 5

Our primary private equity sponsor, HHEP, completed the distribution of its remaining DTI shares to its limited partners. This is an event which we have been signaling to the market since going public in 2023, and it materially increases our public float and our trading liquidity. This distribution event, together with the recent refreshment of our board of directors, represents a significant transition for DTI into a fully independent public company with broader ownership and strengthened governance aligned with our next phase of growth. Now I'll pass it over to David to take you through the results in greater detail and provide an update on our 2026 outlook. David?

Speaker 1

Thank you, Wayne. In yesterday's earnings release, we provided detailed first quarter financial tables. Well, I'll use this time to offer further insight into specific financial metrics. Looking at our first quarter results, we generated total consolidated revenue of $38 million. First quarter tool rental revenue was $28.9 million, and product sales revenue totaled $9 million. Net loss attributable to stockholders for the first quarter was $1.5 million, or a loss of $0.04 per share. Adjusted net loss was $1 million, or an adjusted loss per share of $0.03. First quarter Adjusted EBITDA was $7.5 million, and Adjusted Free Cash Flow was a loss of approximately $160,000. I'll offer a bit more color on the movement in tool rental revenue and margins.

Speaker 1

The year-over-year decline reflects a combination of softer North American land activity, the earlier-than-expected Canadian spring breakup that Wayne described, and some continued pricing pressure in certain segments of our rental fleet. Even with that compression, our tool rental gross margin remained above 70%, which we view as a strong baseline that validates the underlying quality of our rental business. As activity levels improve through the year, and as our value-add product lines continue to gain share, we expect both revenue and margins to benefit. Capital expenditures in the quarter were approximately $7.7 million. Although elevated compared to our typical first quarter run rate, it is not unexpected as we prepare for the year ahead. We expect this to trend downward as the year progresses.

Speaker 1

However, we could see some opportunities to make strategic investments in the coming months to support early adoption of our ClearPath technology and other growth opportunities in international markets. These are attractive project-based opportunities with sticky revenue characteristics, and we believe the returns justify the incremental investment. Maintenance CapEx for the 1st quarter was approximately 13% of total revenue, primarily fueled by higher-than-average tool recovery revenue. As always, we like to remind everyone our Maintenance CapEx is primarily funded by tool recovery revenue, which keeps our rental tool fleet relevant and sustainable regardless of market trends. Now, turning to the balance sheet. As of March 31, 2026, we had $2.8 million of cash and cash equivalents and net debt of $48.9 million.

Speaker 1

Our net debt increased modestly during the quarter, which is consistent with our typical first quarter seasonal working capital pattern, including the payout of prior year incentive compensation combined with the elevated first quarter CapEx I just described. We expect to see improved cash flow over the remainder of the year and reduce leverage from here, consistent with how we have managed the business historically. On the capital allocation front, we continued our share buyback activity in the first quarter with approximately $700,000 of repurchases. As Wayne mentioned, the more significant development during the quarter was the completion of the share distribution by our former sponsor, HHEP, to their limited partners. Following that distribution, the vast majority of our outstanding shares, approximately 90%, are now held in the public float, with the former sponsor and insiders collectively holding a low double-digit minority.

Speaker 1

This is exactly the outcome we communicated to investors when we went public, and it positions DTI with the trading liquidity and broad ownership profile of a fully independent public company. You can find additional details around our updated shareholder composition in the investor presentation we posted to the investor relations section of our website on slide number 28. Turning to our geographic segment mix, our Eastern Hemisphere segment continued to be an important contributor in the first quarter, and we expect its contribution to grow as the year progresses. The growth is supported by ongoing adoption of our ClearPath technology, Deep Casing Tools momentum, and rising Drill-N-Ream utilization across complex Middle East wells. As we disclosed in yesterday's earnings release, we are reaffirming our 2026 full year guidance ranges.

Speaker 1

2026 revenue is expected to be in the range of $155 million-$170 million. Adjusted EBITDA is expected to be within the range of $35 million-$45 million. Finally, we continue to expect 2026 Adjusted Free Cash Flow in the range of $17 million-$22 million. These ranges reflect our previously communicated assumption of a relatively soft first half with improvement building in the second half of the year. Despite the ongoing uncertainty surrounding our industry as it relates to supply and demand dynamics, we remain confident in our full year trajectory. Also of note is that our ranges contemplate our current CapEx plan. However, as I mentioned earlier, we are actively evaluating additional targeted investments to support international growth opportunities in our technologically differentiated product lines, such as our ClearPath stabilizers and sleeves.

Speaker 1

To the extent we choose to accelerate investment in these areas to support customer orders, we may land at the lower end of our Adjusted Free Cash Flow range. Importantly, we view these customer-sponsored initiatives as attractive, high return uses of capital that will support durable revenue growth in 2026 and beyond as we meet our customers' needs in the anticipated upcycle. That concludes my financial review and outlook section. I will now turn the call back over to Wayne for closing comments.

Speaker 5

Thank you, David. Having largely completed the integration work over the past year, DTI now operates as a single unified company anchored by our one DTI platform. Common systems, processes, and our Compass asset management backbone have been essential in managing our global footprint, and the platform we have built is truly a strategic asset. One DTI allows us to deploy capital with greater precision, scale our differentiated technology portfolio across multiple geographies, minimizing fixed cost, and integrate future acquisitions on a materially shorter timeline that has historically been possible in our industry. We continue to believe the downhole drilling tool industry is fragmented and in need of consolidation. Our platform positions us to be a more effective acquirer as attractive opportunities present themselves. Now, before we open up the lines for questions, I would like to highlight a few key takeaways.

Speaker 5

We are reaffirming our 2026 full year guidance ranges. Our first quarter results are consistent with the seasonally softer first half we had planned for, and we continue to expect a stronger second half supported by technology adoption, an activity increase in major operating areas, and rising international utilization. Our ClearPath stabilizer technology is gaining meaningful traction in high-value offshore and complex well markets, domestic and internationally. Our Deep Casing Tools and Drill-N-Ream product lines are contributing to our growing Eastern Hemisphere story. These are exactly the differentiated technology-led offerings we strategically plan to scale. Our focused footprint and specialized product lines allow us to navigate Middle East volatility differently from the larger diversified service companies. Our tools remain in demand in the region, and we are continuing to win new work even in a disrupted environment.

Speaker 5

The completion of the sponsor share distribution and the addition of new board members mark a meaningful new chapter for DTI. We are entering this chapter as a fully independent public company with a broader ownership base, enhanced trading liquidity, and a board well-suited to guide our next phase of growth. Our past M&A activity, our capital discipline, and our differentiated technology portfolio have positioned us to generate resilient results in a choppy market and to capture meaningful upside as conditions improve. We believe a higher forward oil price environment will gradually relieve the pricing compression that has characterized the last several quarters and support a more constructive backdrop for our customers and for DTI. Finally, I want to address the ongoing conflict in the Middle East as it pertains directly to DTI. This is a fluid situation, and it seems that circumstances change daily.

Speaker 5

We have experienced some operational disruption, but our tools remain in demand, and our team on the ground continues to support our customers with remarkable professionalism under difficult conditions. I want to thank every member of the DTI organization for their continued commitment to working in a safe, inspired, and productive manner, with special thanks to our personnel in the Middle East. Our employees' commitment and dedication have been essential in navigating a constantly evolving environment and are central to the success and future growth we are building together. With that, we will now take your questions. Operator?

Speaker 3

Thank you. 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. You may press star two if you would like to remove your question from the queue, and for participants using speaker equipment, it may be necessary to pick up your headset before pressing the star keys. Our first question comes from Steve Ferazani with Sidoti & Company. Please proceed.

Speaker 4

Morning, Wayne. Morning, David. Appreciate all the color on the call. You certainly covered a lot of the topics I wanted to hit on. Wayne, I guess the surprise negative number to us in the quarter was the rental tools margins. I know the revenue was lower, but I'm trying to get a sense of the factors that impacted the tool rental margins. How much of it was straight utilization versus a mix of price, cost, and product mix?

Speaker 5

Well, you know, Steve, the soft market conditions in the U.S. in a, you know, a kind of a muted or an early breakup in Canada. We have a nice chunk of business there as well.

Speaker 4

Yep

Speaker 5

You know, kind of had a double effect on it. We also, you know, sometimes have a We push back on pricing in many areas, and there's a bit of a shuffle in our rental tool business from one client to another. If we push back a little harder, we lose than gain in certain areas. We're trying to be the price maker instead of the price taker. You know, given the soft and, you know, flattened market in North America, that creates its own set of challenges. This, you know, the muted effect of the war in the Middle East, we had some momentum gaining there, but it just kind of flattened that out. We're still holding pretty steady there.

Speaker 4

I guess the question is this, 'cause if I get to your EBITDA guide full year based on the midpoint of your revenue guide, your tool rental margins have to be more like they were last year by our model. Is that fair?

Speaker 5

Sure.

Speaker 4

Is that achievable?

Speaker 5

Sure

Speaker 4

based on the margin you reported in Q1?

Speaker 5

Yeah. We have some momentum and some new products.

Speaker 4

Okay

Speaker 5

There is gonna be an uptick in the North America market. I think that's probably more likely than not. That'll relieve some of the compression that's going on. I think we'll have an activity increase, and we'll be able to hold, you know, pricings indexes and possibly get some gains in certain areas depending on the products mix. You know, I think we have realistic optimism for what we see the rest of the year. You know, the first quarter does not define exactly the structure and the capability of where we're going and what we're doing.

Speaker 4

Right

Speaker 5

It is a soft quarter without a doubt.

Speaker 4

Got it. Can you quantify at all the impact of the early spring breakup, and then just how much you get back in 2Q?

Speaker 5

I don't know if I could really quantify that exactly.

Speaker 4

Sure

Speaker 5

You know, we usually see most of the softness occur in, you know, starting in late March or April, and it, you know, it happened earlier than March, right?

Speaker 4

Yep.

Speaker 5

Those cycles tend to affect your revenues differently each year, but it's usually the effect is in the second quarter, but we had more of it in the first quarter. We're hoping that, you know, some of the newer products we're launching, we get higher margins on, so that's helped offset some of the negativity in some of the other products. One of the good things about having new technologies layered on top of our existing rental tool fleet is it gives you that balance.

Speaker 4

Yep

Speaker 5

you know, we haven't had too much of a margin dilution on the overall rental fleet.

Speaker 4

Got it. Can you talk about product adoption with some of these? You pointed out some of the technology you've acquired primarily in 2024. I know ClearPath came from your last acquisition, as I recall, ED Projects. Deep Casing Tools, Drill-N-Ream, those were all acquired technologies. In terms of how you've used them on your platform and adoption.

Speaker 5

Sure, sure. We're getting a lot of traction in the high-value offshore markets with our ClearPath stabilization system. We've gone more from a product approach to a system approach, and that's really gaining solid traction for us in the North Sea and in high-value operations some parts of Asia and the Gulf of America. That's been helpful. You know, when we acquired Superior Drilling Products, we acquired a back a couple of years ago, we acquired a large fleet of tools and infrastructure in the Middle East. You know, given the softness in Saudi and some of the other areas for the last year or so, we've been able to rebound that quite nicely, and it's gaining steady traction in those markets.

Speaker 5

With our commercial team and our focus on high-value selling, we've been able to, you know, significantly increase the utilization and the revenue in that area from where it started after the acquisition. That is gaining traction. Also, our Deep Casing Tools product lines, you know, the MechLOK Swivel is one particular product that is part of our portfolio there. It's gaining traction in multiple markets, in Africa, in the Middle East, in the North Sea and Asia. Also our turbine tool product, which is the Deep Casing Tools products, TurboCaser or TurboRunner, is resurging in Saudi and other markets where historically we've done very well.

Speaker 5

As a result of those rig count increases and activity increases, we're doing better and better each month-over-month, quarter-over-quarter, and I think we'll see those results throughout the year. The war and any more disruptions notwithstanding.

Speaker 4

Right. Fair enough. Fair enough. When I looked at your product sale line, there was some benefit from the acquisition as opposed to just being a straight higher loss-in-hole revenue. Am I right about that?

Speaker 5

David?

Speaker 1

Yeah, Steve, yeah, definitely, we definitely saw, like, I think we alluded to earlier, you know, where our Deep Casing Tools product sales had bottomed out much earlier.

Speaker 4

Yeah.

Speaker 1

We're starting to see a little bit of pickup in that as the customers have depleted their inventories. With Aramco, you know, picking up some rigs, we're seeing some more and more opportunity with that, and that improved a little bit in Q1, and we look to see continued improvement as well throughout the rest of 2026.

Speaker 4

Yeah, certainly that line was much higher than we were expecting, so congratulations.

Speaker 1

Yeah.

Speaker 4

-on getting that back on track. In terms of, you know, you both commented on CapEx and the plans for the year. Obviously, higher CapEx can be looked at as clearly a positive if there's more traction in getting more of those higher value-add equipment out there. What's the determination at this point? Is that gonna be second half activity driven to get to whether you're at the higher end of that guidance range?

Speaker 5

Yeah, that's another thing is, you know, we do front load a lot of our, you know, investments and trying to build momentum into each year, which is how we've always run the business. We see a lot of opportunities at the second half and moving into 2027 with, you know, putting our, you know, recovery income that comes from our loss-in-hole and DBR into what we call relevant fleet investments and some new technology investments to sustain our entire fleet. That has been moving a solid direction. We have some opportunities that present themselves that, you know, create a significant, you know, increase in revenue.

Speaker 5

We have to make strategic decisions that, you know, I think David mentioned, you know, we might have to, you know, invest in some more tools to get longer term contracts, and that may, you know, lower, put our free cash flow forecast in the lower end of our guidance, but we're mindful of making sure we stay within the ranges that we expect.

Speaker 4

Are you seeing your offshore mix growing at this point?

Speaker 5

Yes.

Speaker 4

Excellent. All right. That's what I got. Thanks, everyone.

Speaker 1

Thanks, Steve.

Speaker 5

Thanks, Steve.

Speaker 3

Our next question is from Colby Sasso with Daniel Energy Partners. Please proceed.

Speaker 1

Please proceed.

Operator

Hi. Thanks for having me on.

Speaker 5

My pleasure.

Operator

Just a quick question for me. You touched on it a bit earlier, with seemingly higher rig activity in North America in the back half of the year and with the ongoing geopolitical tension in the Middle East, how is DTI evaluating, like, investment opportunities across its global portfolio with, you know, Africa, North America, the Middle East? Just how are you thinking about all the different regions there?

Speaker 5

It's a great question, but what we looked at is, you know, the highest return opportunity and highest value for and having a sustainable and repeatable income stream from each of those markets. You know, it's our belief that, you know, if we continue to have a durable higher oil price metric and a durable nat gas price in, you know, in a forward strip looking forward, our customers in the States and North America will increase activity, but they will do it mindfully, thoughtfully, and, you know, I think in a manner that's, you know, somewhat organized. We have some really good opportunities in Norway, which is really a growing market for us, and the Middle East.

Speaker 5

Despite, you know, the, the Middle East conflict, Saudi and, and UAE have still been quite sustainable and growing upward and figuring out ways to continue with their activity, and we are participating in that nicely. There are some opportunities in Africa in the deep water and offshore operations there, but, you know, those are challenging markets to deal with in, you know, multiple countries and different rules and regs and type of customers. We're navigating that carefully. And Asia is, I think, another bright spot for us. We've spent a lot of time and effort laying the foundation for how that is gonna play out for us because our high value products that we just mentioned lend themselves well to solving complex wellbore problems, and those exist in all those markets.

Speaker 5

I think we've aligned ourselves well with the international expansion continuing to grow, and if the upcycle in North America continues, we'll enjoy that rising tide as well.

Operator

Thank you. That's all for me.

Speaker 3

There are no further questions at this time. I would like to turn the conference back over to Wayne for closing remarks.

Speaker 5

We appreciate everyone's interest in Drilling Tools International, and we'll continue our journey forward, and we'll look forward to the next call. Thank you for your interest, and thank you for participating.

Speaker 3

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

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