DTI - NASDAQ

Greetings, and welcome to the Drilling Tools International 2025 Second Quarter Earnings Conference Call. [Operator Instructions] 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.

Thank you, operator, and good morning, everyone. We appreciate you joining us for Drilling Tools International 2025 Second Quarter Conference Call and Webcast. With me today are Wayne Prejean, Chief Executive Officer; and David Johnson, Chief Financial Officer. Following my remarks, management will provide a review of second quarter results and 2025 outlook before opening the call for your questions. There'll be a replay of today's call that will be available via webcast on the company's website at drillingtools.com. There will also be a telephonic recorded replay available until August 21. Please note that any information reported on this call speaks only as of today, August 14, 2025, and therefore, you're advised that time-sensitive information may no longer be accurate as of the time of any replay listening or transcript reading. Also, comments on this call will contain forward-looking statements within the meaning of the United States Federal Securities laws. These forward-looking statements reflect the current views of DTI's management. However, various risks and uncertainties and contingencies could cause actual results, performance or achievements to differ materially from those expressed in the statements made by management. The listener or reader is encouraged to read DTI's 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. DTI provides 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 the company believes these non-GAAP measures are useful to investors, certain limitations of using these measures and reconciliations to the most directly comparable GAAP measures can be found in the earnings release and our filings with the SEC. And now with that behind me, I'd like to turn the call over to Wayne Prejean, DTI's Chief Executive Officer. Wayne?

Thanks, Ken, and good morning, everyone. I will provide some opening remarks before handing the call over to David to review the financials and our reaffirmed annual 2025 outlook. I'll then come back and provide a few additional thoughts before we open it up for questions. Despite well-documented industry headwinds and global rig count declines, we are pleased to report that second quarter year-over- year total revenue grew nearly 5% and adjusted EBITDA grew 4%, this tracks ahead of our forecast plan as we reach the halfway point of the year. Our performance this quarter reflects strong execution across most of our business segments, though we continue to see some variability in specific areas. As you may recall last quarter, we felt it was prudent to revise our annual revenue, adjusted EBITDA and adjusted free cash flow guidance ranges based upon expected lower commodity prices resulting in reductions in rig count and pricing pressures. However, DTI benefited from solid progress on our strategic initiatives, particularly the integration of our recent acquisitions in the Eastern Hemisphere, European drilling projects and Titan Tools. Additional progress came from the cost reduction program we instituted early in Q1, and we benefited from outperformance in our DTR and pipe rentals product offerings in the Western Hemisphere. This was somewhat offset by a decrease in product sales due to market conditions and significant softness in our deep casing product line as a result of rig declines in the Middle East and Mexico. Overall, we delivered consolidated financial results that slightly exceeded our internal forecast for the second quarter. Another highlight for the quarter is we achieved positive adjusted free cash flow in the second quarter for the first time since becoming public. Historically, this has been our weakest quarter due to the impacts of front-loaded CapEx and seasonality effects in Canada. We also continue to benefit from our diversified geographic footprint and customer base. Sequentially, our Eastern Hemisphere operations grew revenue by 21% and contributed approximately 14% of our total revenue in the first half of this year. The Eastern Hemisphere is performing in line with our forecast plan, demonstrating our disciplined approach to capital allocation and our ability to successfully integrate new assets into our operations. During the second quarter, we saw a significant increase in utilization of the DNR tool fleet in the Middle East and throughout the Eastern Hemisphere. This increase in DNR tools deployed contributed to our Eastern Hemisphere growth and Middle East expansion during the quarter. As a result, I am pleased to report that our Drill-N-Ream Eastern Hemisphere Group achieved its first positive adjusted EBITDA month during the quarter, and this momentum is something we expect to build on in future periods. Looking forward, commodity prices continue to flex as world events have created volatility in the oil markets. Average rig count and activity levels have continued to trend downward. In the past, current oil prices would typically support higher drilling and completions activity than we are seeing today, but our customers have remained cautious as uncertainty persists. Our team continues to skillfully manage the current volatility in commodity prices and rig counts delivering resilient financial results while navigating the evolving energy landscape. While the market works to find its footing, we still expect uncertainty to continue causing disruptions through both pricing pressure and utilization. In anticipation of these disruptions, and as I mentioned earlier, we implemented a program in the first half of 2025 to cut expenses by an annual $6 million in order to align our spending with the activity levels of our customers. We are pleased to report that we are on track to exceed this goal. Should the market deteriorate further, we have contingency plans to continue adjusting the organization while maintaining operational flexibility to quickly respond to the current challenging environment. Despite these challenges, I'm encouraged by the momentum we're building across the organization. We are seeing the benefits of our investments beginning to materialize, and our personnel continues to execute well in a dynamic market environment. David will now take you through some second quarter and 6-month metrics as well as our reaffirmed annual 2025 outlook. David?

Thanks, Wayne. In yesterday's earnings release, we provided detailed second quarter and 6-month financial tables. So I'll use this time to offer further insight into specific financial metrics. Both total revenue and adjusted EBITDA increased over last year's second quarter by 4.8% and 4.1%, respectively, in the face of a 7% global rig count decline over the same period. These results reflect our continued focus on operational discipline and the successful contribution from our recent acquisitions. The integration of Eastern Hemisphere acquisitions is proceeding as planned with these businesses contributing nicely to our overall results. We believe this continues to validate our stated growth and M&A strategy to further strengthen our business model and diversify our geographic footprint. Looking at our second quarter results, we generated total consolidated revenue of $39.4 million, comprised of tool rental revenue of approximately $32.8 million and product sales of $6.7 million, in line with our forecast expectations despite a drop in deep casing sales compared to last year. Our tool recovery revenue has remained slightly elevated and continues to underpin our product sales performance and fund our maintenance CapEx. While pleased with this performance, we continue to gather forecast intel as our best-in-class commercial team works diligently to monitor market conditions and customer demand patterns closely. Second quarter adjusted EBITDA was $9.3 million and adjusted free cash flow was $1.8 million. At the end of the second quarter, we had approximately $1.1 million in cash and cash equivalents and net debt of $55.8 million. We are focused on driving sustainable improvements in our cost structure while maintaining our investment in growth opportunities. Looking at our geographic segment mix, we continue to benefit from our diversified geographic footprint and customer base. Our Western Hemisphere activities slowed in the second quarter compared to the first quarter of 2025. And as Wayne mentioned, while the majority of our company is performing at or above expectations, our deep casing business continues to lag behind our other product lines, which impacted overall sales. However, we expect to see gradual improvement in this area with additional product sales and rental opportunities as rigs are added back in the Middle East and customers' existing inventories are depleted. The Eastern Hemisphere segment has helped offset some of the activity decline in North America by contributing to our overall positive trajectory throughout the first half of the year. Specifically, our Eastern Hemisphere operations grew sequential revenue by 21% and contributed approximately 14% of our total revenue. We expect the Eastern Hemisphere contribution to grow in the second half of the year. Adjusted free cash flow in the second quarter was $1.8 million, a positive indicator given that we have reported negative adjusted free cash flow in every second quarter since we went public in 2023. Additionally, our planned CapEx spend in the second quarter was considerably lower than in the first quarter. Going forward, we expect CapEx to be significantly lower in the second half of this year than it was in the first half. 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 second quarter, it was approximately 10% of total revenue. As a reminder, our maintenance CapEx is primarily funded by tool recovery revenue, which keeps our rental tool fleet relevant and sustainable regardless of market trends. Before I turn to our outlook discussion, let's recap our first 6-month results. 6-month revenue totaled $82.3 million. Adjusted EBITDA was $20.1 million. Capital expenditures were $12.6 million and adjusted free cash flow during the first 6 months of 2025 was $7.5 million. Our teams have executed well across multiple fronts from operational efficiency to customer satisfaction to strategic initiatives. As a result, our financial results are slightly ahead of where we expected to be at the halfway point of 2025. As we disclosed in yesterday's earnings release and as Wayne mentioned earlier, we are maintaining our full year 2025 revenue outlook to be in the range of $145 million to $165 million. We continue to expect adjusted EBITDA to be within the range of $32 million to $42 million. Gross capital expenditures are expected to be between $18 million and $23 million. And finally, we expect our 2025 adjusted free cash flow to range between $14 million to $19 million. As I stated during our first quarter conference call, pricing pressure, product mix and activity declines have impacted our margins. While we didn't experience significant pricing pressure in the second quarter, we believe the margin compression from pricing pressure will emerge in Q3 and Q4, while activity declines may continue, albeit at a slower pace than before. However, in the long run, we believe we can position ourselves to improve our consolidated margin profile over time as we continue to manage our cost structure and add scale. The strategic acquisitions to our portfolio are positioning us for international growth and also providing valuable synergies that will benefit our long-term growth trajectory. Finally, as an update on our capital allocation strategy, we are constantly evaluating opportunities to strategically deploy capital with the sole focus of maximizing value for our shareholders. Back in May, we added another tool to our tool belt with the initiation of a share repurchase program. I am pleased to announce that during the second quarter, we repurchased $600,000 of DTI common stock at an average price of $3 per share. We recognize that there is a significant disconnect between the price of the stock and our perceived value, and we feel it is prudent to act accordingly. We will continue to prioritize financial strength through a disciplined approach and we'll strategically utilize all the tools at our disposal when the opportunity presents itself. That concludes my financial review and outlook section. Let me turn it back over to Wayne to provide some summary comments.

Thank you, David. Earlier this month, we eclipsed the 1-year anniversary for our SDP acquisition, and I would like to provide an update on the integration strategy that we launched a couple of quarters ago. It's called One DTI. This is an active consolidation effort to get all of our operating divisions synergized on the same systems and processes. We have recently relocated our U.S. Drill-N-Ream repair facility from Vernal, Utah to Houston, Texas, and it is now fully operational. This strategic relocation came 2 years ahead of schedule and is delivering expected cost savings and efficiency benefits. Additionally, we've made significant progress integrating our Eastern Hemisphere operations into our centralized accounting platform. This is a big step forward as it will further streamline workflows and maximize accountability. Finally, we are onboarding all of the acquired business units to our Compass platform to manage assets and customer transactions. We are continuing to make substantial headway on all of our synergy efforts, and we'll continue to provide updates in future quarters. Before we open up the lines for questions, I would like to highlight the following. Based on our solid first half performance and the momentum we're seeing across our business, we remain upbeat about our prospects for the remainder of 2025. While the activity declines to date have not been quite as severe as we initially anticipated, we are beginning to experience various pricing pressures, which we previously baked in that margin compression into the back half of this year. Despite these headwinds, I'm confident in our ability to adapt to the rapidly evolving market, preserve our financial strength and deliver meaningful shareholder value. Since the new administration's tariff policies were introduced, worldwide sentiment across the energy industry remains apprehensive. Despite the ever-changing news or trade policy shifts, we included any anticipated impact to our business this year into our annual guidance that we updated in the first quarter, which we have reaffirmed this quarter. We continue to see opportunities in our core markets. Our competitive position remains strong, and the acquisition integrations are positioning us well for sustained growth. We are confident that our 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. The foundation we built through our strategic acquisitions gives us confidence in our ability to capitalize on emerging opportunities that broaden our geographic reach, diversify our revenue streams and serve our customers even more effectively in key markets. Our past M&A activity has enhanced our competitive position, increased our resilience in a dynamic environment and has positioned us to move quickly when new value-creating opportunities present themselves. Finally, we again believe that our best-in-class performance-driven technologically differentiated offerings, expanding global geographic footprint, combined with disciplined M&A activity will deliver solid results as energy markets recover. In closing, we are on track as we reach midyear. It's exciting to see how we adapt and push ahead in a dynamic environment, building real momentum for the company. We value and appreciate our customers, our employees and our shareholders. I would like to thank every member of the DTI organization 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 and ability to deliver value to our shareholders. With that, we will now take your questions. Operator?

[Operator Instructions] Our first question comes from Steve Ferazani with Sidoti & Company.

I appreciate all the color on the call. I know a challenging quarter and challenging times ahead. So I appreciate all the detail. David, you spoke a little bit on the margins holding up pretty well, which is impressive given the decline in rig count in the quarter. I know you indicated pricing pressures are to come. Nevertheless, when I think about the quarter, given how quickly the rigs came out and given your growth is in international, where if you're trying to increase penetration, gain market share, that shouldn't necessarily be a positive contributor to margins. So if you can just walk us through how you kept your margins at this level in 2Q, when I would have expected there were numerous pressures.

Yes. Thank you, Steve, as we kind of talked about earlier this year as well, we saw the activity declines coming, and we kind of considered that factor in our numbers. And then we know, as a result, we're going to face the pricing pressure that's going to be inevitable. But I think throughout the first half of the year, even into the second quarter, those were just sort of muted and kind of deferred a little bit longer than we initially thought, but they didn't go away, obviously. So we see those still impacting our Q3, Q4 numbers, mainly from a pricing standpoint. We think we felt most of the activity declines. I think I mentioned we might see additional activity, but it will be a slower pace than we saw in the first half of the year.

Okay. Did we see the full impact of the cost cuts in Q2? Or are we going to see more of the benefit in Q3, Q4?

We'll see more of the benefit in Q3 and Q4. They really were just getting implemented in Q2 when we were first talking there. So yes, we'll see the full benefit more accrue to Q3 and Q4.

I mean, given that you're still a fairly new public company, I'm sure as you've gone back and reviewed the costs, how many of these costs that you're taking out now could be viewed as permanent? You're looking at costs that just now a couple of years being public, didn't need to be there? Or how much of this is going to be temporary given the slowdown in activity?

Yes. I mean most of the reductions we look at is part of our what we refer to as a scalability factor of our business. And so it's really activity weighted. So we look at across every division, every product line, every location and just make sure those units are rightsized for their current activity levels. A lot of the other costs are, like you said, the cost of being public and some of that's ongoing. But we obviously -- we continue to manage some of that cost as well from a third-party standpoint versus what we do internally. We continue to look at all that as well. But a lot of it's activity-driven cost reductions that we're seeing right now.

Okay. Fair enough. Could you talk a little bit about what gets you to the low end versus the high end of the guidance range for this year?

Well, I think it's -- the activity factor that we talked about already occurring, obviously, combined with the pricing pressure. I think we're doing a good job of kind of trying to hold our position in the market. And -- but when that comes with a little bit of pricing pressure, that's obviously the most EBITDA impactful that we'll see in the second half of the year.

Fair. And if you could kind of give the biggest highlights from the sequential international revenue growth this quarter because I mean, you closed Titan, what at the very beginning of January. Was this pure organic growth and what's driving it?

Steve, this is Wayne. We're seeing some good positive momentum from that acquisition. And then we're also the post-acquisition of Superior with the Drill-N-Ream assets in the Middle East, getting a lot of organization established and I'd say, relaunched into that market. We're making steady traction. So those gains are offsetting some of the reductions in other areas, but it's definitely positive momentum in that Eastern Hemisphere business unit. And then we're really maintaining our competitiveness in the Western Hemisphere. We've gone through a lot of RFQs with different clients. And we're the incumbent in most of the cases, and we've done a good job of negotiating faithfully with our clients and delivering value to our customers. And I think we've won more than we've lost in this cycle. So we kind of actually gained a little business here and there. But with the pricing offset, it becomes neutralized a little bit. But we are going to hold our market position. That will -- that is one of our initiatives that we're focused on, and our team members are doing a great job with that.

How much more challenging is it to grow in the Eastern Hemisphere in this kind of environment? And what's your thoughts on that over the next 6, 12, 18 months?

I think that we have some really good opportunities to gain traction with many of our technologies. We've expanded the deep casing product offerings to Asia. And now we're going on projects in Africa. So as a result of us acquiring them, we've enabled them to have more horsepower and resources to chase things in concert with our other product lines and getting the leverage and benefits of mutual sales teams and so on and so on. So it's -- there's -- we feel like that's our real opportunity to see some growth by having a significant and meaningful footprint in the Eastern Hemisphere going forward.

Our next question comes from John Daniel with Daniel Energy Partners.

I guess the first question just relates to the pricing pressures. Is that being prompted by customer RFPs? Or is that competition dropping price proactively to try to get into the door?

That's a great one, John. Quite frankly, I mean, I think when you see the commodity prices reduce and all of the major operators we work with, they have significant programs. That's where we've aligned our business. You're well familiar with who they are and what the names of those people are, those operators are, which is the bulk of our business. I think we faithfully work with our clients in good communication to recognize that they are going to want to reduce cost, and that process is always in motion with them when they see a reduction in oil price and activity. That's their opportunity to lower their costs as well. So we have to provide them value, and we have to negotiate with them. So in many cases, it's them signaling to us, hey, look, we're going to need to take a look at this for the next few months, and we go in there and negotiate with them. And it's not really just a competitor walking in and just lobbying missiles at us. I'm sure that's some of the cases, but most of what we do is ongoing communication with our clients to make certain that we remain the incumbent and provide them value.

Okay. And then the second question and last one is just -- it's more of a reminder to me is, can you remind me on the exposure to Western Canada and gassy markets in the U.S. Haynesville, Marcellus, kind of where you are and what that opportunity set might be for you over the next year or 2?

Sure, sure. We have a solid presence with our pipe rentals in the Haynesville, and we also have a pretty good business in the Northeast, which has surprisingly been stable for us for quite a while. And Canada is our second biggest distribution center. But for Midland, we have a very solid and strong business in Canada and with a number of loyal customers that have delivered results with us year-over-year. So I think we're in pretty good shape in both of those places. We're not heavily weighted in any particular area, but we have a solid participation in those gas markets. So we'll take advantage of that.

Our next question comes from Poe Fratt with Alliance Global Partners.

If you could talk about margins as you progressed through the third quarter, we're halfway through the third quarter. Have you seen margin erosion yet? Or is it something that we're likely to see more in the fourth quarter and looking into early 2026?

Yes, I'll take that one. Thank you for the question. Yes, I think we kind of alluded to that and mentioned that in our notes on the call that Q1, Q2 was basically on plan, kind of ahead of our forecast slightly, but we did see some activity decline there. And then we expect the pricing and pressure to continue into Q3 and Q4. So we're mindful of that compression, and we're taking that into account in our forecast as well.

I guess maybe try to ask a question a little differently. Are you on plan through the middle of the quarter?

Yes. We're not in a position to give guidance on Q3 at this point.

Okay. And then I think you talked about the M&A environment. Could you just put some more color on that? Are you seeing more opportunities, less opportunities, where the opportunities might lie right now?

Poe, this is Wayne. I'll answer that one. We're still in process of having meaningful dialogue with our -- with a number of potential targets. Clearly, in this cycle, the difference between buyers and sellers always becomes a little bit more strained. But it's all relative in the marketplace. So we're going to actively pursue potential good bolt-on and synergistic candidates, and we're going to keep that dialogue going and try to find good value along the way even through this cycle, and that we'll keep you posted as those things materialize.

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

All right. Thank you. Well, thanks, everyone, for your interest in our call today. We continue to remain competitive and work through the challenges in this cycle, and we feel like we have a quality opportunity out there to continue to deliver shareholder value. So thank you for your interest. Have a great day.