ROC

As a reminder this conference is being recorded. I would now like to turn the conference over to Rory Rumore with CORE IR Investor Relations.

Thank you and good afternoon, everyone. We thank you for joining ROC's first quarter 2026 financial results call. Presenting on today's call are Scott Swann, ROC's CEO, and Cody Barnes, ROC's CFO. Brendan Klare, ROC's Co-founder and Chairman of the Board of Directors, will also be available during the question-and-answer portion of the call. Before we begin, I remind everyone that today's call may contain certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include remarks about management's future expectations, beliefs, estimates, plans, and prospects. Such statements are subject to a variety of risks, uncertainties, and other factors that could cause actual results to differ materially from those indicated or implied by such statements.

Such risks and other factors are set forth in our quarterly report on Form 10-Q filed with the Securities and Exchange Commission. We do not undertake any duty to update such forward-looking statements. During today's call, we may discuss certain non-GAAP measures which we believe are useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with U.S. GAAP. It's now my pleasure to turn the call over to ROC's CEO, Scott Swann.

Thank you, Rory. Good afternoon, and thank you for joining us for ROC's first quarter 2026 earnings call, our first as a public company. Before Cody reviews our financial results, I want to spend a few minutes introducing ROC, explaining how we think about the market opportunity in front of us, and framing the strategy we are executing as a newly public company. ROC is U.S.-built, owned, and operated Vision AI company focused on identity, security, and digital forensics. At its core, our technology helps customers transform visual data into operational intelligence. We help verify identity, detect threats, analyze evidence, and support faster, more informed decisions in mission-critical environments. Said another way, ROC's technology is analyzing and extracting meaning from raw pixels and visual data. That includes biometrics, video analytics, object detection, and digital evidence.

These capabilities support military, law enforcement, national security, financial technology, public safety, and commercial security customers tasked with protecting people, infrastructure, and sensitive systems. We operate in markets where accuracy, speed, trust, and control of the technology stack are critical. Our customers are not buying experimental or proof-of-concept AI. They're deploying operational technology in environments where performance matters and where failure is not acceptable. The simplest way to understand ROC is this: We combine biometrics, video analytics, object detection, and digital evidence into a unified Vision AI platform. Instead of offering a single point solution, our platform is designed to support multiple identity and intelligence use cases utilizing the same layer underlying technology architecture. That matters because the market is moving toward convergence. Identity, video, physical security, digital evidence, and mission intelligence are no longer separate categories.

Customers increasingly need systems that work together, share intelligence, and scale across agencies, facilities, and operating environments. ROC was built for that environment. A major part of our differentiation is that our technology is developed here in the United States. In national security, public safety, and identity infrastructure, that is not just a branding point. It is a strategic requirement. Much of the global identity and biometric technology market has historically been served by large foreign incumbents. ROC was founded to provide a domestic alternative with accuracy, efficiency, security, and scalability required for the most demanding applications, and our solutions have been built by the people who have lived the mission. Our team was forged in real-world crisis, from September 11th to the Boston Marathon bombing to Iraq and Afghanistan, and covert operations with operators, scientists, and engineers from the military and FBI.

People who carried the mission and now build the tools to win it. Our platform serves four major mission areas: national security, public safety, digital identity, and physical security. Within those markets, we commercialize a portfolio of products built on the same underlying technology foundation. ROC SDK is the foundation of our platform. It allows customers and partners to integrate our biometric and recognition technology directly into their own applications. ROC Watch is our video intelligence platform. Cameras are everywhere, but most camera systems remain passive. ROC Watch turns video into actionable intelligence through real-time analytics, visitor management, threat detection, and post-event investigation capabilities. ROC Watch is one of the largest contributors to our product revenue, and in the first quarter, ROC Watch revenue increased 77% year-over-year. Driving this growth were two expanded programs within the Department of War, demonstrating our land and expand business model.

In addition, we secured a new ROC Watch contract with the U.S. University, signaling early traction from the growing demand in the early security market. ROC ABIS is our automated biometric identification system. This is a national-scale biometric identity platform designed for large-scale matching and verification. We believe ABIS represents one of the most important long-term opportunities for ROC because these systems can become deeply embedded infrastructure for government and public safety customers. In the first quarter, ROC ABIS revenue increased 255% year-over-year from a small base reflecting early commercialization and deployment activity. In March, we launched the first ROC ABIS forensics capability pilot with a state and local law enforcement customer. ROC Evidence is our digital investigations platform. It is designed to help customers manage, analyze, and act on evidence in real-world investigative environments.

We believe ROC Evidence can become an important part of our public safety and digital forensics strategy as customers look for more efficient ways to handle growing volumes of digital information. In fact, in April, we deployed our first ROC Evidence program for the United States Drug Enforcement Administration to support the agency's digital and evidence management procedure. ROC Enroll supports identity onboarding and verification, turning a simple image capture into a secure biometric identity workflow. Finally, ROC Access is our entry into the intelligent physical access control. Our first hardware device, ROC Access Face1, combines biometric identity verification with embedded security intelligence at the point of entry. In March, ROC Access Face1 was recognized by the ISC West, which we believe reinforces the market relevance of bringing ROC's Vision AI capabilities into access control. Importantly, these products are not disconnected offerings.

They're built to operate on the same underlying platform, and the platform structure is central to how we believe ROC can scale. Our financial model is moving toward a product-led, programmatic, recurring revenue profile. R&D contracts will remain an important part of our business, particularly because they help fund innovation and deepen our relationships with government customers. Over time, our objective is to materially increase the contribution from productized software, platform deployments, and longer duration customer programs. That shift is important because it enables the broad scalability of the business. In the first quarter, product revenue represented the majority of total revenue.

Within product revenue, ROC Watch grew 77% year-over-year, and ROC ABIS grew 255% year-over-year, demonstrating continued adoption in the two product areas we believe will become meaningfully long-term growth drivers and where we expect to emerge as dominant market leaders. At the same time, our 79% gross margin reflects the software-driven economics of our platform and the operating leverage we believe will follow as product deployment scale. The way we build our product-driven revenue base is straightforward. We land, we expand, and then we count, compound. We often begin with a pilot, an initial deployment, or a specific customer use case. As those deployments prove their value, they can expand into broader programs across additional locations, agencies, workflows, or product modules.

Over time, the goal is for ROC identity and intelligence technology to become the embedded operating infrastructure for our customers. It is not a one-time tool, but a system they rely on every day. That is how pilots become programs. Programs can become systems of record, and systems of record can create long-duration, more predictable revenue opportunities. This is also why contract durability matters. Across our product portfolio, certain opportunities support multiyear contract structures, including three-to-five year and five-to-10 year contractual programs, depending on the product, customer, and deployment model. We believe that creates a foundation for improved visibility, recurring or repeatable revenue, and stronger long-term operating leverage as the business scales. Our capital allocation strategy is closely aligned with that model. We are investing to scale what is already working: engineering, product development, customer success, deployment capacity, business development, and compute infrastructure.

The objective is to shorten time to deployment, accelerate time to long-duration recurring revenue, support larger programs, and preserve the margin discipline that is central to our model. When investors think about ROC, we want them to understand the model clearly. Mission-critical technology, software-level gross margins, product-led expansion, longer duration program opportunities, and a platform designed to compound over time. The first quarter began a transition period for ROC. We completed our IPO, commenced trading on the NASDAQ, strengthened our balance sheet, and continued advancing our product and commercial growth strategy. At the same time, our reported revenue was impacted by lower R&D contract activity and public sector procurement timing, including the lingering effects from the late 2025 federal funding lapse resulting from U.S. government shutdown.

We believe the resolution of the government shutdown and the approval of DHS appropriations in April were important positive developments for the broader federal procurement environment. Earlier this year, many agencies were operating under continuing resolution dynamics and broader budget uncertainty, which slows procurement, new program starts, and award execution. Since appropriations were finalized, we have seen what we would describe as a healthier and more normalized federal budget environment across several areas relevant to ROC. Importantly, we are now operating within typical federal fiscal year window, where agencies are actively working to obligate fiscal year 2026 funding prior to September 30th year-end. Historically, that environment accelerates procurement activity, evaluations, pilot transitions, and contract execution timelines, and particularly in mission-critical areas tied to national security, public safety, identity modernization, and AI-enabled operational capabilities where ROC operates.

From a demand standpoint, we continue to see strong interest across our core markets, including biometrics, digital evidence, real-time video and analytics, border and access control applications, and broader Vision AI platform opportunities. We believe the strategic relevance of trusted and sovereign AI solutions is continuing to gain traction within sensitive government environments where performance, transparency, and operational trust matter. We also continue to monitor developments on Capitol Hill and broader national security funding priorities. Overall, we view the current funding backdrop as constructive for our industry's customer engagement, pipeline activity, and demand momentum through the balance of 2026. Crucially, we do not view the long-term demand any differently. We continue to see strong demand for our trusted American-built Vision AI across government, public safety, digital identity, and commercial security markets.

Our focus now is execution, converting product adoption into larger deployments, expanding active programs, and judiciously deploying capital to support scale across the enterprise. With that overview, I'll turn the call over to Cody Barnes, our Chief Financial Officer, to review the first quarter financial results.

Thank you, Scott, and good afternoon, everyone. I will now provide a brief overview of our financial results for the first quarter ended March 31, 2026. Total revenue for the first quarter of 2026 was $2.5 million, compared to $3.2 million in the first quarter of 2025, a decrease of approximately $0.6 million or 20%. Product revenue was $2.3 million compared to $2.4 million in the prior year quarter, a decrease of $0.1 million or 5%. The decrease in product revenue primarily reflected lower revenue from ROC SDK and ROC Enroll, partially offset by growth in ROC Watch and ROC ABIS. ROC Watch revenue in the first quarter increased 77% year-over-year, reflecting continued customer adoption and expansion of active deployments.

ROC ABIS revenue in the same period increased 255% year-over-year, reflecting early commercialization and customer deployment activity. R&D contract revenue was $0.2 million compared to $0.7 million in the first quarter of 2025, a decrease of $0.5 million or 69%. The decrease was primarily attributed to the completion of a significant prior year R&D program, with new R&D contract activity in the current quarter occurring at a smaller scale. As Scott Swann mentioned, the pace of new contract awards and customer order placement during the quarter was affected by the lingering effects of the U.S. Federal government funding lapse that occurred from October 1st, 2025 to November 12th, 2025.

Although the funding lapse ended prior to the start of the first quarter, it constrained federal procurement and contracting activity through late 2025, which delayed certain customer purchasing decisions, contract awards, and program authorizations that we believe would have otherwise advanced during the quarter. Gross profit was $2 million in the first quarter of 2026 compared to $2.5 million in the first quarter of 2025. Gross margin was 79%, consistent with the prior year period. We believe this reflects the strength of our software-driven revenue model and the efficiency of our Vision AI platform. Operating expenses were $5 million in the first quarter of 2026 compared to $3.5 million in the first quarter of 2025. Selling general administrative expenses were $2.9 million compared to $2 million in the prior year period.

The increase was primarily driven by higher personnel-related costs across product development, business development and operations, and incremental public company costs. Research and development expenses were $2.1 million compared to $1.6 million in the first quarter of 2025. The increase reflects continued investment in product development and platform enhancement. Net loss for the first quarter of 2026 was $3 million, compared to a net loss of $0.7 million in the first quarter of 2025. Basic and diluted net loss per share was $0.18, compared to $0.05 in the prior year period. As of March 31st, 2026, we had $16.6 million in cash. Net proceeds from our IPO and the partial exercise of the underwriter's overallotment option totaled $21.5 million.

We believe our balance sheet provides the flexibility to continue investing in product development, deployment capacity, customer acquisition, and the infrastructure required to support larger, longer duration programs. With that, I'll turn the call back to Scott.

Thank you, Cody. In closing, with a strengthened balance sheet, we continued investing in the people, the products, and the infrastructure needed to support ROC's next phase of growth. During the quarter, we saw continued momentum in key areas of our product portfolio, particularly ROC Watch and ROC ABIS. While R&D contract revenue was lower in the first quarter, the underlying demand environment for trusted identity, security, and intelligence technology remained strong. Our strategy is straightforward: deploy our mission-critical Vision AI in markets where performance, trust, and control of the technology stack matter. Focus on providing American-built technology in areas that are central to national security, public safety, digital identity, and physical security. Implement a land and expand model designed to convert initial deployments into broader programs with durable recurring revenue. Invest with discipline to support high margin, long duration revenue opportunities over time.

We believe this is the right model for ROC. It is a product-led, it is platform-driven, and is focused on turning customer adoption into durable programs that compound revenue over time. ROC's opportunity is not simply to sell software modules. Our opportunity is to become part of the operating infrastructure that customers rely on to verify identity, detect threats, analyze evidence, and make decisions. This is the long-term value proposition of ROC. We believe we have the technology, the team, the customer base, and balance sheet to execute against that opportunity. We appreciate the support of our shareholders, customers, partners, and employees as we continue building ROC as a public company, and we look forward to providing updates on our developments in due course. Thank you for joining us today.

I'd like to now hand the call to the operator to begin the question-and-answer sessions with our covering analysts.

Thank you. We will now begin the question-and-answer session. The first question today comes from Yi Fu Lee StoneX. Please go ahead.

Thank you for taking my question. Congrats on the strong growth on the ROC Watch and ABIS product despite navigating through a challenging partial government shutdown while balancing obviously the IPO as a public company. Scott, I just wanna start with you first on the macro environment. Obviously, we're navigating through, you know, ongoing geopolitical conflict, higher oil prices, interest rate that doesn't seem to go anywhere. You know, as of April 30th, the longest partial government shutdown impacting, you know, the Department of Homeland Security has officially ended. Just wanna get your sense on, like Scott, like the market, you know, after the government shutdown has ended. You know, has the public sector been stabilized? What are you seeing, now that we're in midway through the second quarter, in terms of, you know, things turning?

Yes, thank you.

Yes.

Yeah, we're very optimistic about the current signals that we are seeing. As you alluded, not only was there a government shutdown, but there was also no official budget passed in 2025. Now we are on a routine fiscal year, where there is, you know, budgets that are seem to be very healthy within the federal government. They will, you know, need to obligate funds, much of those funds before September 30th of this year.

While we see internally, some lumpiness in the awards here at ROC, we do feel very optimistic about the communications and the growth of our pipeline for being able to be well-positioned to support the federal government and public sector throughout 2026.

Is it fair to say like, Scott, like I know like, you know, like after the, you know, reopening, I guess, right? That, you know, like you need to build momentum pipeline, right? contract doesn't get signed the next day, right? Obviously, right? Is it fair to say because the federal government budget, as we all know, we cover software, like in September 30th, that in terms of the timing perspective, does it make more sense that you would expect the flush to come in the third quarter in just a sec? I'm just trying to manage the expectations.

I think that's very observant. I think we can likely see much more activity in Q2, with probably more of a surge in Q3. As you allude to, it takes time for the government money to move. You know, as a new budget was finally released, you know, that has to work itself from treasury to the department level, down to the specific agencies that actually execute against that money. That process takes time. Then there's the interaction with the vendor to actually get the contracts or funding on existing contracts, in some cases, moved. All that takes time, the government doesn't move, you know, incredibly fast.

I think you're very observant to recognize that it will probably for 2026 for most federal contractors, there'll be more late awards than you would see in other years.

You would envision the budget is, if not the same as last year, even more healthier. Is that correct, Scott, to make that assumption or?

Yeah. That information is all public information, and from our observations, it looks as if that the federal agencies are well-funded this year, even more so than last year.

Yeah.

Let's move on to.

I'm sorry, just to add, I mean, they're further focused on our priorities that we're developing for national security, and U.S. nascency and the reauthorization of the SBIR program, you know, which had been stopped, is pretty important signal for us as well.

Okay. Thanks, guys. Let's move on to the pipeline. Obviously, like ROC Watch up 77% and ABIS up 2.55x. It's looking strong there, and obviously you have your first deployment on ROC Evidence as well as the launch of ROC Access. Just want to get your sense, Scott, Cody, Brendan, and team, on the pipeline. What are you seeing in your pipeline right now that you're working on? Like, what are like the near-term opportunities will, you know, you intend to let's just say convert? 'Cause, 'cause we all understand this is your year of IPO. You're still laying the foundation. Chances are there's gonna be, you know, greater momentum next year.

What are the low-hanging fruits, let's just say, that you feel, you know, more confident that you could get in the near term? Can you comment on those?

Yes, I can. You know, in 2025, at the end of 2025, we were at market with one product, which was ROC Watch, and so we landed some of our early wins in that space. This year we're still in a land phase, but we are starting to expand with that particular product to really achieve, you know, what we hope to be some of that longer duration ARR type contracts. We come to market this year with three additional products. Our goal for this year is to establish the beachhead contracts and players in that space. We will be in that land phase for our other product e-elements. As we mentioned, we do have some early ROC ABIS wins.

We had our first ROC Evidence customer in April of this year, and we're looking for expansion into those particular areas and to larger contracts. I would think our goal is to have, you know, beachhead customers across our entire product portfolio within the Vision AI platform in 2026.

Scott, I know like during the IPO process when we do our due diligence, ABIS is the product where if you land, you're gonna win big. These could be seven, even eight-figure contracts. We weren't expecting like, you know, you guys already make great headway into this product. Can you know, elaborate, you know, how did you pull forward like the adoption of ABIS? You just launched it, and it's already gaining like great traction there.

That's right. We achieved a lot of our development of the Vision AI platform prior to going public. As we have been able to start applying that capital, we've been able to scale the business and more complete those particular products and go to market. We have been working on our pipeline opportunities for some amount of time, even pre-IPO. You know, a lot of our opportunities are tied to the government's natural process for recompeting contracts. A majority of the federal contracts right now, especially in the ABIS market, are in some stage of market research or already starting recompete efforts. We have our targets in mind within the federal space, especially of the areas where we are trying to win business in 2026.

Across the rest of the sectors and the other products, we also have very specific targets in mind that we will be working toward in 2026.

Is it fair to say, like Scott, like most of your portfolio is government-heavy? On the commercial side, I remember you mentioned like telecom as well as fintech are certain engagements you're working on. Maybe give us a little bit more color if you can on those as well.

Yes. Late in 2025, we hired our channel manager within the commercial security market, we have had some early wins in that space. As we mentioned, we won the innovation award for biometrics at the ISC West with our ROC Access Face1. We are well into further business development in those particular spaces. In the commercial market, expanding several of the channel partners have been established, now we are looking to grow that channel in those spaces. In the telecom space, we have seen some uptick in volumes with one of our large customers for the telecom SIM card registration process. We will continue to monitor that market to understand how that might impact our growth in 2026.

Okay. Is there any, like, timing on that, on the telecom? Like, would it be a second half, fourth quarter, third quarter?

There's no key timing that we're eyeing there. You know, we see sustained growth in that side, but it's not the area that we'd consider most optimistic, you know, relative to ROC Watch, ABIS and ROC Evidence. You know, ROC SDK always has exposure there. You know, if you look at the latent effects of the government shutdown, you know, what that hit the most was ROC SDK and R&D contracts. You see, you know, our ROC SDK has always been spotty, and transactional in nature, really outside of the telecoms, and the fintech use cases that we support there. That, that has fit a nice pattern, you know, continued incremental growth.

Got it. Gary Lac. I just wanna, you know, get some color, like, you know, obviously he's a veteran, may have worked with you guys at IDEMIA previously.

Yes.

Can you comment on, like, maybe his priorities first 100 days? It sounds like you guys wanna, I guess, institutionalize a sales and marketing function. You know, how will he play a, you know, instrumental role in this?

Yes. Gary Lac has a tremendous amount of experience within the entire identity ecosystem, but specifically in the AFIS, ABIS market. He has worked at many of the larger foreign providers in this particular space. Gary is also technical in nature. I think an area of particular importance is the go-to-market strategies that Gary will assist us with. His ability to bridge between our engineers and our marketing team to ensure that we have the right go-to-market messaging, the right components to really represent the products that we're building, I think will go quite a way. Very specific strategy in the AFIS, ABIS space to assist us in how that go-to-market will really come to fruition in 2026 and beyond.

Got it. Scott, I understand, you know, you previously worked at IDEMIA, and obviously the recent headline, obviously, you know, a travel management software company, Amadeus, acquisition. Have you seen any change of control disruption that you may think that ROC can take advantage of because of M&A disruptions in the market?

Yeah. We view this as optimistic. You know, our focus is on our strategy, given that particular acquisition, I think it only strengthens our strategy with respect to trying to create the domestic capability to be able to provide identity technologies to the rest of the world as American growing capabilities. I think in that particular space, you know, acquisition tends to have a slowness in research, a slowness in really being able to get a lot accomplished. I think that particular, you know, activity, it probably won't be complete until summer of next year. There's a window here of opportunity for ROC to really, you know, accelerate our go-to-market focus on the strategy that we've always laid out here for us.

We still remain, to our knowledge, really the only U.S. provider of these identity technologies across the capabilities that we're trying to serve with this Vision AI platform.

Thanks for that, Scott. I just want to squeeze in one technology question for Brendan before I move on to Cody on the financial side. Hey, Brendan, you know, like, obviously, AI Labs has, you know, I would say, like, command a lot of the mind shares lately. How would you for the newer investors on the call, like, how would you characterize the defensibility of ROC's platform against the likes of, you know, the LLM providers in terms of technology moves?

Yeah, absolutely. You know, what we build is different architecturally from a machine learning perspective than large language models. They're much, much more efficient and precise at the computer vision tasks that our customers need us to perform, where, you know, massive scale identity databases or 100,000s of cameras, you know, looking for weapons. The, we see just, you know, the cost of compute, the cost of memory, all these things continue to run higher just because LLMs are very inefficient. They're also not that precise in general as well. You know, this is our core pedigree. There is areas that we use LLMs currently.

They're part of our strategy, we don't see anything changing anywhere in the foreseeable future in terms of how we build our algorithms. We see this as a strength too, you know, relative to legacy competitors of ours out there. You know, we're much further down, you know, sort of the deep tech, you know, compute stack. And then we're pulling in some of these nascent capabilities as well, we're not following what we see as maybe pitfalls for solutions to certain problems on the resource-intense nature of large language models.

That makes sense. Thanks for that, Brendan. Cody, just to wrap it up on the financial side, obviously we've seen some headwinds on the government contract, but the shutdown has reverted. It's been back in government's back in business. Was wondering if you could give us some, like, you know, like, soft guardrails in terms of, like, you know, what do you expect, your expectation for 2026, now that, you know, the government's back in business? Final question is obviously with the capital raise, I think you still have $16.6 million on your balance sheet. Your thoughts on the capital allocation. I know Scott mentioned about, you know, hiring talents as well as investing in the infrastructure. Just want to get your take, that's it for me. Thank you, guys.

Yeah, thanks for that question. You know, I think, you know, Scott, I think spoke to it really, really well. There's just gonna be some inherent lumpiness, especially driven by some of the more legacy, you know, SDK component business and the government R&D contracts. Overall, we're encouraged as we look forward to the subsequent quarters, from our perspective, and I think again, Scott and Brendan spoke really, really well about this. We don't see any sort of structural changes in the opportunity funnel. Overall, you know, we're encouraged, you know, as the government dynamics play out. You know, we are encouraged to see some more activity, you know, pick up in Q2 and throughout later this year.

From an overall capital allocation perspective, I think overall we transformed our balance sheet with the IPO. We're very well capitalized. We're focused in deploying capital into really four primary areas, engineering R&D, business development and sales, deployment infrastructure and algorithm compute capability. Our investment is focused on scaling what is working. We'll continue to pay attention to how the opportunity funnel converts over multiple quarters, and we're encouraged on the direction.

Thank you for that, team. Just a reminder for the, you know, general public, we are hosting the management team of ROC tomorrow. If you wanna get connected with the team, I'm happy to facilitate. Thank you guys, congrats on the IPO.

Thank you.

Thank you.

This concludes our question-and-answer session as well as our conference. Thank you for attending today's presentation. You may now disconnect.

Greetings, and welcome to the Drilling Tools International Third Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Ken Dennard. Thank you. You may begin.

Thank you, operator, and good morning, everyone. We appreciate you joining us for Drilling Tools International's 2025 Third 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 third quarter results and 2025 outlook before opening the call for your questions. There will 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 replay -- a recorded replay, which will be available until November 14. Please note that any information reported on this call speaks only as of today, November 7, 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 the 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 those risks, uncertainties and contingencies. 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 information purposes, and they should not be considered in isolation from other directly comparable GAAP measures. A discussion of why we believe these non-GAAP measures are useful to investors, certain limitations of using these measures and reconciliations to the most directly comparable GAAP measures can be found in the earnings release and our filings on 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 2025 outlook. I'll then come back and provide a few additional thoughts before we open it up for questions. We are pleased to report that our 2025 third quarter results came in better than we anticipated. Proactive communications with customers and our ability to flex pricing options in response to commodity price swings have successfully stimulated higher activity levels during the quarter, offsetting the impact of any previously negotiated pricing concessions. We also demonstrated strong financial discipline during the quarter by simultaneously reducing debt, building cash reserves and returning capital to shareholders through buybacks. Specifically, we paid down $5.6 million in debt, increased our cash position by $3.2 million and bought back an additional $550,000 of common shares. DTI has benefited from solid progress on our strategic initiatives, particularly the integration of our recent acquisitions in the Eastern Hemisphere. During the third quarter, we saw a significant increase in utilization of the DNR tool fleet in the Middle East and throughout the Eastern Hemisphere. This increase and DNR tools deployed contributed to our Eastern Hemisphere growth and Middle East expansion during the quarter. Year-over-year, our Eastern Hemisphere operations grew revenue by 41% and contributed approximately 15% of our total revenue in the third quarter. 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. Looking forward, commodity prices continue to flex as geopolitical uncertainty has enhanced volatility in oil and gas markets. However, average rig counts and activity levels appear to have stabilized during the quarter. In as much, our teams continue to skillfully manage their current fluctuations in commodity prices and rig counts delivering resilient financial results while navigating this evolving energy landscape. Again, while the rig count appears to be stabilizing, we still expect uncertainty to continue causing disruptions through both pricing pressure and utilization. To combat these disruptions, we implemented a cost-cutting program in the first half of 2025 to reduce expenses by an annual $6 million in order to align our spending with the activity levels of our customers. However, we have experienced an increase in customer activity that has directly offset price discounts, particularly in our DTR product line as well as new contract wins with customers. Therefore, we are pleased to report that we no longer anticipate needing the full $6 million of cost cuts to maintain adjusted free cash flow and achieve other outlook ranges. Our pricing strategies that we have implemented are yielding positive results on activity levels, and we currently believe $4 million of cost cuts will prove sufficient for 2025. Please note, however, that we still have contingency plans to adjust the organization while maintaining operational flexibility to quickly respond to any market events in the future. David will now take you through some third quarter and 9-month metrics as well as our 2025 outlook. David?

Thanks, Wayne. In yesterday's earnings release, we provided detailed third quarter and 9-month financial tables. So I'll use this time to offer further insight into specific financial metrics. Looking at our third quarter results, we generated total consolidated revenue of $38.8 million. Third quarter tool rental revenue was $31.9 million, and product sales revenue totaled $7 million. Net loss attributable to common stockholders for the third quarter was $903,000 or a loss of $0.03 per share. And adjusted net income was $751,000 or adjusted diluted EPS of $0.02 per share. Third quarter adjusted EBITDA was $9.1 million and adjusted free cash flow was $5.6 million. Additionally, our capital expenditures in the third quarter were $3.5 million. If activity stays level, we expect CapEx to be relatively flat for the fourth quarter. Looking at maintenance CapEx for the third quarter, it was approximately 10% of total revenue. 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. As I say each quarter, we will continue to review all CapEx spending with an eye on activity levels while demonstrating our ability to generate adjusted free cash flow. 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. I am pleased to announce that during the third quarter, we paid down $5.6 million in debt, increased our cash position by $3.2 million and bought back an additional $550,000 of common shares at an average of $2.09 per share. As of September 30, 2025, we had approximately $4.4 million of cash and cash equivalents and net debt of $46.9 million compared to $1.1 million in cash and cash equivalents and net debt of $55.8 million at the end of the second quarter. We will continue to prioritize financial strength through a disciplined capital allocation strategy by utilizing all of the tools at our disposal when opportunity presents itself. Looking at our geographic segment mix, we continue to benefit from our diversified geographic footprint and customer base with 15% of our total revenue coming from our Eastern Hemisphere segment. We continue to expect 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 declines in North America by contributing to our overall positive trajectory throughout the first 9 months of the year. Before I turn to our outlook discussion, let me recap the results of our first 9 months. Nine-month revenue totaled $121.1 million, adjusted EBITDA was $29.2 million, capital expenditures were $16.1 million and adjusted free cash flow during the first 9 months of 2025 was $13.1 million. Our team continues to execute well across multiple fronts from operational efficiency to customer satisfaction to strategic initiatives. As we disclosed in yesterday's earnings release, and as Wayne mentioned earlier, we are maintaining our 2025 full year guidance ranges, albeit leaning at or slightly above the midpoints of these ranges based on our past 3 quarters' positive results. 2025 revenue is expected to be in the range of $145 million to $165 million. Adjusted EBITDA is expected to be within the range of $32 million to $42 million. 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. 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 are also providing valuable synergies that will benefit our long-term growth trajectory. That concludes my financial review and outlook section. Let me turn it back over to Wayne to provide some summary comments.

Thank you, David. We are continuing to make substantial headway on our synergy program called OneDTI. Our OneDTI program has been onboarding all our operating divisions onto the same systems and processes and integrating the acquired business units to our Compass platform to manage assets and customer transactions. As I mentioned on our last call, we 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 expect to have integrated all Eastern Hemisphere operations into one centralized accounting platform by the end of December, going live in January of 2026. This is a major milestone for the growth potential of the company as it streamlines workflows, maximizes accountability and importantly will accelerate the integration of future acquisitions into the DTI platform much more quickly. And of course, we continue to be actively looking at M&A opportunities. So before we open up the lines for questions, I would like to highlight the following. We remain upbeat about our prospects for the remainder of 2025 and into 2026. While the activity declines to date have not been quite as severe as we initially anticipated 7 months ago, we have demonstrated that we can quickly adapt to a rapidly evolving market, preserve our financial strength and deliver meaningful shareholder value. 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 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've 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. We 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 2026 and beyond. In closing, I'm encouraged by the momentum we are building across the organization, and it's exciting to see how we have adapted and pushed ahead in a dynamic environment. We are seeing the benefits of our investments beginning to materialize, and our personnel continues to execute well in a rapidly changing global marketplace. 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] Your first question comes from Steve Ferazani with Sidoti & Company.

Appreciate the color on the call this morning.

Sure.

I want to break it down a little bit into U.S. versus Eastern Hemisphere. Obviously, 3Q, maybe the rig count didn't decline as much as a lot of people had anticipated. Nevertheless, it was still down about 5%. Can you talk about how you've -- how utilization has been for you? I mean when I look at your product sales, which is primarily drill pipe recovery, it held up very well. It was actually up sequentially in Q3. So you can talk about how the U.S. is holding up for you for your business and what we're still seeing maybe a moderating decline, but still a decline in 3Q?

So thank you, Steve. This is Wayne. We've been working on a number of initiatives to mitigate this slow creep of rig count decline, but it was certainly a lot less of a decline than we tried to anticipate early on with all indications where it was going to be more sphere. We've participated in a number of RFQs and tenders in the North American market throughout the last few months, and we were able to win some business and maintain some of the business we had with existing clients. So that enabled us to maintain a very reasonable level of activity despite seeing a rig count decline. Now rig count decline means some jobs are not going to be available for the suppliers. So there seems to be a mix that occurs when that happens. And we were more successful, we believe, in maintaining or aggregating some of that business over that period of time. And I think that sells itself well because what we're able to do is our best-in-class products and service and the things that we do usually are successful when quality and service matter. And what happens in these down cycles, these operators focus specifically on who or what service suppliers and product suppliers are giving the best quality and service because they need that to translate into performance and results in their wellbores and less in those events. So our market-leading position and tools and the things we provide to all of these clients, that leading indicator for us prevail throughout this little -- the cycle that we're experiencing. So we're pretty proud of that. And our other product lines have held up pretty well. So overall, I think we feel like it's a win-win. We've outperformed the down cycle.

Yes, no doubt, no doubt. We've seen the primary portion of the rig count decline was coming in the Permian, but we've seen some pockets of strength and/or stable drilling in other markets. Talk about your positioning because I know you have operations in every major U.S. basin. How that's helpful? And are you seeing an uptick in some of the markets outside of the Permian?

So we're well positioned in every market out there and appropriately positioned for scale, size and capabilities, particularly in the Northeast, where our activity in Haynesville is where gas activity is holding strong, and you're seeing some light at the end of the tunnel. And as your -- you remember in some of our discussions, we were able to move tools around to service those markets fairly easily because of the type of business we have. So we've made sure that we've supplied those customers in those areas where the activity creates -- is created. And we keep those supply chains running smoothly.

In terms of -- I know your guidance, you mentioned the seasonal slowdown through earnings season. We're hearing a lot of folks saying that it's not going to be as pronounced this year. What are you hearing from customers? I mean we're into early November. What are you seeing and hearing from customers so far as far as the normal seasonal slowdown in December?

You mean in Q4?

Yes.

Well, it seems to -- it doesn't feel like it's accelerating. It feels like we're still a month away from someone having budget exhaustion and thinking they're going to drop a number of rigs, but we're not seeing an acceleration of that happening as of today. That doesn't mean it couldn't -- we couldn't see a more accelerated decline. But it feels like it's just flat to slightly down the rest of the year than some optimism going into next year, depending on which operator you talk to.

That's fair. On the international side, I think you pointed out Middle East, Saudi strength. Can you provide a little bit more color on where you're seeing the stronger versus weaker areas versus your expectations 6 months ago or 12 months ago?

Sure. I'll tell you, I spent the last week in the Middle East and there's definitely some optimism, and there are some detailed announcements where Saudi is picking up a few rigs from land and offshore. And ADNOC, I think, in UAE is also going to maintain an activity that's solid. The interesting thing is there's so much talk about the unconventional gas becoming more prevalent in both of those major operating areas being Saudi and UAE. So again, because of our experience and the types of tools and services we provide, we will be more and more successful in supplying those markets because we have all the experience here, and we've transferred a lot of the tools and technology and people that we have aligned there. We're ready to -- we're kind of ready to go in the unconventional uptick that's going to happen in those markets. So we're pretty -- feel pretty positive about that.

Excellent. If I get one more in. You talked about the rental tools model and how you can generate cash flow in a down market, and you've proved it through the first 9 months. Your net leverage is basically flat from the beginning of the year. Your net debt is basically flat from the beginning of the year. And you've been able to buy back stock. I mean your net leverage is still very reasonable. Does that make you think you might get more aggressive on stock repurchase? Or how are you thinking about that given a very healthy balance sheet after going through several months of this slowdown or several years, you could say?

Well, we continue to try to look at the 3 or 4 tools that are at our discretion to use for our free cash flow. And debt reduction is probably the primary one that we'll use. So it's kind of baked into -- remember, our stock buyback program is baked into some limitations on volume. So as that ebbs and flows, we'll take advantage of that. And we believe our stock is undervalued. And we'll use a portion of those proceeds to do that with those limitations. So I think it's more debt pay down, some stock buybacks and some selective CapEx purchases were needed, where we think the opportunities arise. And then as usual, we've got our -- we're laser-focused on M&A opportunities going forward.

Next question is Sean Mitchell with Daniel Energy Partners.

Wayne, I know you were recently in the Middle East. Obviously, that drove a lot of your -- the Eastern Hemisphere drove a lot of the growth. Can you talk a little bit about lessons learned from your acquisitions in the Middle East and maybe the opportunity set going forward? I know you said you're looking hard, but is there specific countries or regions that you're really going to be focused on? And then maybe even the opportunity set on the M&A front in the U.S.?

Yes, no problem. So historically, you could count on the international rig count, the international activity being NOC-driven, more longer-term different operating metrics there, driven by those NOCs for longer-term objectives. And so the rig count is usually stable. But we had a little outlier event when Saudi dropped a bunch of rigs here last year and kind of surprised. I think there was not a -- it was every surprised soul in the market was watching that with wonder. And -- but I think it was temporary, and I think the market is becoming more in balance, and we're hearing good -- we're good -- we're hearing some positive indications that they're going to pick up some rigs next year and reimplement some drilling programs that they had recently idled. So that's good news. But the remaining part of the international market was relatively flat. I mean with -- but for a few ebb and flows that naturally occur. We're seeing -- the enthusiasm around that show at ADIPEC is it's really an international oil show. It's amazing how many people throughout the world attend that show. And it's not just specifically focused on the Middle East. So there's a lot of enthusiasm around what's happening in the Eastern Hemisphere. And we're glad that we're strategically positioned to be a part of it. To answer your question about our acquisitions, the lessons learned is make sure we stay focused on executing on those. And -- but for the Saudi downturn of -- recent downturn activity, but hopefully pick up in the future, that would be the outlier on some of our acquisition execution expectations.

I would like to turn the floor over to Wayne Prejean for closing remarks.

All right. Thank you, everyone, for your interest in listening. We continue to be focused on executing on our international expansion. And we've got a lot of resources focused on making that happen. We have a solid team here, a well-old machine here in North America that continues to be a market leader and perform well in a challenging market environment, but we see optimism on the horizon as well, and we'll continue to deliver solid financial results throughout this continuous cycle that we're experiencing. We have optimism for 2026. So thank you for your interest, and we look forward to the next call.

This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.

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.

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

Greetings. And welcome to the Drilling Tools International First Quarter 2025 Earnings Conference Call. At this time, all participants are on a listen-only mode. A question-and-answer session will follow the formal presentation. [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’s 2025 first 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 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, and there’s also a telephonic recorded replay available until May 21st. 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, May 14, 2025, and therefore you are advised that any time-sensitive information may no longer be accurate as the time of any replay listing 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 its 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. 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. And now 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. 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 2024 fourth quarter results. 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+’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. We are proactively negotiating with our suppliers and our customers to ensure stability and profitability. We are implementing a multi-level internal cost reduction program. Phase 1, implemented in Q2, will result in an estimated $6 million 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 right-sizing the business when demand for our products and services changes. The anticipated rig count drop in the U.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. 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. 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 million 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?

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 2025, 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&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 $42.9 million, comprised of tool rental revenue of approximately $34.5 million and product sales revenue of $8.3 million. We reported total operating expenses of $39.6 million and operating income was $3.3 million. The first quarter adjusted EBITDA was $10.8 million and adjusted free cash flow was $5.7 million. At the end of the first quarter, we had approximately $2.8 million in cash and cash equivalents and net debt of $52.1 million. During the quarter, as part of our recent segment reorganization, we conducted a comprehensive goodwill impairment assessment. 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 non-cash 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 $1.9 million 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 non-cash in nature and does not impact liquidity, free cash flow or adjusted EBITDA. Adjusted net income, which excludes this non-cash 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 Q1 2024 to Q1 2025. With the addition of the European Drilling Projects and Titan Tools, our tool rental revenue is up significantly over Q1 2024. 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 the second half of 2024, 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 MechLOK Drill Pipe Swivels, the Rubblizer P&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. 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 $5.7 million. We maintained our planned CapEx spend in the first quarter to support the momentum we have been experiencing from our organic RotoSteer 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. Although up slightly in Q1, this portion of our capital investment has trended lower in the past several quarters due to the decline in rig count and our customers’ focus on drilling efficiencies translating into fewer lost and whole 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 2025, we saw the positive effects of our acquisitions and organic growth in the RotoSteer 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. 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. As Wayne mentioned, we have proactively initiated cost reduction measures in Q2 that will result in approximately $6 million 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. With that in mind, we now expect full year 2025 revenue to be in the range of $145 million to $165 million. We 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. Finally, we expect our 2025 adjusted free cash flow to range between $14 million to $19 million. That concludes my financial review and outlook section. Let me turn it back over to Wayne to provide some summary comments.

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. 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. 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?

Thank you. [Operator Instructions] Our first question comes from Steve Ferazani with Sidoti & Company. Please proceed with your question.

Good morning, Wayne. Good morning, David. Appreciate the detail on the call. Also, the detail around guidance, which is always challenging. I imagine exceptionally challenging, given the aftermath of Liberation Day. I want to ask about first just on, obviously, the second half should be more challenging, particularly in the U.S. short cycle. But you’re not moving free cash flow much. Looks like you’re taking about $6 million out of your growth CapEx. Talk a little bit about the fact that you can maintain pretty good free cash flow in this environment?

Thanks, Steve.

You want me to take that one?

Yeah. Sure.

Yeah. Thanks, Steve. Yeah. Part of that, I think, is two-pronged, obviously, focusing on the cost reductions to 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.

Right. It sounded like you’re still expecting sequential Eastern Hemisphere growth this year. 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?

Yeah. 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 sale -- 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. In addition to that, our DNR product line is starting to gain some traction in that Middle East market. After the acquisition, we 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. 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. We’ve kind of baked all that in. So…

Okay.

…that’s kind of the impact.

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

Right. We have some emerging products that are gaining ground. Our -- one of the products that we acquired in Deep Casing was the MechLOK Swivel and the Rubblizer product…

Right.

… one for installing complex casing strings in horizontal wells, that which is the swivel. And then the Rubblizer is more of a plug-in abandonment technology that couples well with a lot of applications. And those were in their infancy at the time of acquisition, so they were not a material part of the acquisition value.

Okay.

They are kind of in addition to and we -- as we call it in Louisiana, line you up a little bit extra for nothing. 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, so.

Got it. Got it. That’s helpful. And you noted you haven’t seen the tangible impact in North America yet. I mean, we are hearing -- I mean, we’re seeing rig count come down, but it seems like it’s the smaller operators. We know the guides we’re seeing for CapEx is down a bit. I’m assuming the guidance changes primarily second half. In terms of cadence to the guidance, does 2Q look similar to 1Q based on what you know right now, obviously, with six weeks to go?

David, what you -- how do you think we answer that one?

I mean, yeah, I think, we’re looking at the rest of the year in totality and it’s hard to…

Yeah.

… predict the combination of activity and pricing and so forth, but…

Yeah.

… on a blended basis, we’ve got that kind of spread out over the year.

Okay.

We have -- Steve, we’ve anticipated some softness in the U.S. 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…

Yeah.

… as well in the rest of the year. And 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. What’s kind of interesting about the U.S. market, and I think what has most of the company’s OFSs and everything perplexed, is the lack of a swift downturn. It’s more of just a slow leak and that’s what’s happened…

Yeah.

… over the last year. Now we have some additional leakage, excuse the expression, but that’s kind of leakage. It’s a slow burn. We -- 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.

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?

Yeah. I think that’s very accurate, Steve. Obviously, depending on the capital spend and where we 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 all happens in the downturn. We’ve also obviously, as you saw, kind of considered the share buyback as part of our use of cash as well, that opportunity. So, we’ll kind of look, excuse me, look at that as time progresses.

Great. Okay. Thanks, Wayne. Thanks, David.

Thank you, Steve.

Thanks.

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

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? 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?

That’s a great question, Josh, because as you well know, the economics in these different basins are -- will drive the behavior of the operators and the rig count will result thereof, those economics. So, the resiliency of each area is going to be challenged here in the next few months if oil prices keep dropping. 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, there’s a lot of narratives and information out there on which ones have the strength to sustain lower oil prices. But there -- so 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. 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 an interesting next few months.

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

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 be -- we will continue to sustain our existing rental fleet, our legacy fleet, which 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 MechLOK, our RotoSteer product line, which is gaining steady traction in the U.S. 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. 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 the drilling program. So, that’s where most of our CapEx focus.

Thanks. I’ll turn it back.

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

Thank you. I would 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.

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

Greetings. Welcome to Drilling Tools International 2024 Year End and Fourth Quarter Earnings 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, as a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jacqueline. Thank you. You may begin.

Thank you, operator, and good morning, everyone. We appreciate you joining us for Drilling Tools International 2024 year-end and fourth quarter earnings 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 year-end fourth quarter results and 2025 outlook, opening the call for your questions. There will be a replay of today's call. It will be available by webcast on the company's website at drillingtools.com. There will also be a telephonic recorded replay available until March 21st. Please note that any information reported on this call speaks only as of today, March 14th, 2025, and therefore, you are advised that any time-sensitive information may no longer be accurate as of the time of any replay listening or transcript reading. Also, comments on this call will contain forward-looking statements within the meaning of the United States Federal Securities laws. These forward-looking statements reflect the current views of DTI's management. However, various risks, uncertainties, and contingencies could cause actual results, performance, or achievements to differ materially from those expressed in the statements made by management. We encourage the listener or reader to read its 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. Comments today will also include certain non-GAAP financial measures, including but not limited to adjusted EBITDA and adjusted free cash flow. We provide these non-GAAP results for informational purposes, and they should not be considered in isolation from the most directly comparable GAAP measures. A discussion of why we believe these non-GAAP measures are useful to investors, certain limitations of using these measures, and reconciliations to the most directly comparable GAAP measures can be found in our 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, Jacqueline, and good morning, everyone. I will provide some opening remarks before handing the call over to David to review the numbers. I'll then provide a few final thoughts before we open it up for questions. Let's get started. As you saw in our pre-release last month, and in our detailed earnings release yesterday, we are proud of our strong finish in a tough industry environment. Despite the industry-wide headwinds that persisted in Q4, including rig count softness in US land, US Gulf, and Middle Eastern markets, we generated 2024 revenue growth at the high end of our guidance, and our adjusted EBITDA was near the midpoint of our guidance. For adjusted net income, we finished the year above the high end of our guidance, and we more than doubled our prior year adjusted free cash flow. Tool rental revenues were $117.9 million and product sales $36.5 million for a full year 2024 consolidated revenue of $154.4 million. Adjusted net income for 2024 was $10.1 million, and adjusted diluted EPS for 2024 was $0.31 per share. We generated 2024 adjusted EBITDA of $40.1 million and adjusted free cash flow of $17.2 million. As of December 31st, 2024, we had approximately $6.2 million in cash and cash equivalents and net debt of $47.6 million. In a moment, David will take you through the year-end and fourth quarter financials in more detail and discuss our 2025 outlook. We have now been a public company for seven quarters, and our mission remains as clear today as when we began. We continuously demonstrate to our customers we are the premier drilling tools rental solutions provider for servicing the wellbore construction and casing installation market segments. We believe our expertise, experience, and market-leading position enable us to continue our growth initiatives through expansion and consolidation. We've been extremely active in the M&A market to generate the scale needed to achieve our mission. As part of this process, throughout 2024, we acquired three companies: Deep Casing Tools, Superior Drilling Products, and European Drilling Projects. In the first quarter of 2025, we closed on our fourth acquisition, Titan Tool Services. These acquisitions, which I've detailed in prior calls, demonstrate our focus on international expansion and technology ownership. Our integration approach is to adopt best practices from all parties and implement a common accounting system that migrates all Eastern Hemisphere operations to our Compass asset management platform to minimize replication and maximize accountability. These systems conversions will be completed in the first half of 2025. We believe collating the best-in-class systems and processes from DTI and our newly acquired businesses will foster an organization and structure that generates excellent results and efficiencies for our customers, our employees, and our shareholders. We look forward to reporting on our progress in future conference calls. Over the past several years, our customers have consolidated to gain scale, and so must DTI. We continue to believe there are meaningful consolidation opportunities that exist in our sector. We have a solid M&A process and robust 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. We have a proven team and process to achieve these integration synergies. We believe our best-in-class performance-driven, technologically differentiated offerings combined with our expanding global geographic footprint will deliver solid growth as energy markets recover. Looking at the longer term, energy demand trends remain robust. 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, DTI is well-positioned for these industry trends. Before I turn the call over to David, I wanted to commend our employees for their unwavering commitment to safety. In 2024, DTI achieved a remarkable marking a significant 6.5% improvement year over year. This achievement is particularly noteworthy given the challenges faced in our industry. Our employees' proactive approach to safety combined with effective safety protocols and training programs has been instrumental in driving this improvement. We are proud of this accomplishment and look forward to continuing our efforts to ensure a safe and healthy workplace for everyone. With that, I'll turn it over to our CFO, David Johnson, for a review of our financial results and outlook.

Thanks, Wayne, and thank you everyone for joining us today. In yesterday's earnings release, we provided detailed year-end fourth quarter financial tables. So I'll use this time to offer further insight into specific financial metrics. Wayne gave an overview of full-year results in his opening comments. So I will provide some color on our fourth quarter results. We generated consolidated revenue of $39.8 million with tool rental revenue of approximately $31.5 million and product sales revenue of $8.3 million. While we saw continued rig count softness and some fourth quarter budget in 2024, revenue was nearly flat sequentially. Fourth quarter revenue also increased over last year's fourth quarter by 13% despite a 4% global rig count decline over the same period. We believe this is a true testament to the resiliency of our business model and diversified geographic footprint. Total operating expenses were $38 million and income from operations was $1.8 million. Net loss for the fourth quarter was $1.3 million, and adjusted net income was $600,000. Diluted EPS for the fourth quarter was a loss of $0.04 per share and adjusted diluted EPS was a profit of $0.02 per diluted share. Fourth quarter adjusted EBITDA was $9.1 million and adjusted free cash flow was $5.9 million. While we made decisions throughout the year to delay or defer CapEx, we maintained our CapEx spend to support the momentum we are seeing from our organic RotoStream product growth story. As a result, adjusted free cash flow was slightly below our expectations in the fourth quarter, but important to note that adjusted free cash flow was still more than double the prior year. Consolidated gross profit was mostly flat compared to the prior quarter and increased 9.5% over Q4 2023 with the increase over the prior year coming mainly from the effect of acquisitions. Gross profit margin was down just slightly from the prior quarter and which was down over Q4 2023. While we are seeing top-line growth, pricing pressure, lower tool recovery revenue, and a change in the overall product mix related to acquisitions is impacting our gross profit margins as expected. However, despite the lower gross margin, the product sale additive mix is accretive to adjusted free cash flow since it does not require CapEx. Our SG&A expense increased in the fourth quarter due to the full impact of recent acquisitions. For 2024, our SG&A expenses reflect the first full year of public company costs plus the acquisitions that were not reflected in the prior year. Looking at maintenance CapEx for the fourth quarter, it was approximately 8.5% of total revenue. This portion of our capital investment trended lower in 2024 due to the decline in rig count and our customers' focus on drilling efficiencies translating into fewer lost and hold 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 the trend. To summarize, the full year of 2024 we saw the effect of acquisitions and the organic growth in the Roto Jear product line we more than offset some of the decline in our Directional Tool Rental's product line revenue and tool recovery revenue. Both directional tool rentals and tool recovery revenue were impacted by the activity decline many of our customers faced in 2024. Pricing pressure, product mix, and fully burdened public company costs have impacted our overall margins. However, we will be able to improve the overall margin as we continue to build scale and manage cost. Now moving on to our outlook, we expect 2025 revenue to be in the range of $163 to $183 million. We expect adjusted EBITDA to be within the range of $40 to $50 million. Gross capital expenditures are expected to be between $23 and $29 million and finally, we expect our adjusted free cash flow to range between $17 to $21 million for the full year 2025. As we discussed last quarter and coinciding with the closing of the acquisition of Titan Tools Services in January, we have realigned DTI's operations to support our strategic initiatives to expand our global operations and reach new markets particularly in the Eastern Hemisphere. As a result, effective January 1, 2025, the company will be reporting results in two segments, Eastern Hemisphere and Western Hemisphere. This realignment of our reportable segments corresponds with changes to our operating model, management structure, and organizational responsibilities. As of December 31st, 2024, this realignment has not yet been reflected within the company's financial statements. Therefore, beginning with the first quarter, our 10-Qs for 2025 will reflect the new reporting segments, and corresponding information for prior periods will be retrospectively revised to reflect this change in our reporting segments. This new reporting structure reflects our commitment to enhancing transparency, and aligning our operations with our global growth objectives. We believe this change will enable us to better manage our business, and allocate resources more effectively across different regions. That concludes my financial review and outlook section. Let me turn it back over to Wayne to provide some summary comments before taking your questions.

Before we open up the lines for questions, I want to officially welcome Titan's talented team to the DTI family. As we continue to integrate Deep Casing, STP, EDP, and Titan, we have greatly expanded our geographical footprint. Enhanced our technological capabilities, and positioned DTI as a leader in the evolving energy landscape. We believe we will be able to provide our customers with access to an even wider array of products and services with the addition of these quality organizations. I would like to point out that we remain competitive and profitable despite soft market conditions, and we continue to be resourceful and innovative while combating pricing pressures. We constantly evaluate customer activity levels and adjust our operations to align with the demand. And we believe we will be well-positioned to come out stronger when the market recovers with the best personnel processes, products, and performance, all focused on best practices. And finally, as I have said before, we believe additional thoughtful consolidation opportunities exist in oilfield services that will supplement our organic growth initiatives. We believe acquiring high-quality companies at attractive multiples positions DTI to successfully participate in the next three to five-year expected growth cycle. We are very pleased with the execution of our acquisition growth strategy, especially in light of the headwinds our industry has experienced. Our acquired technologies are gaining traction due to their unique value and differentiated technological advantages. Some examples are our Deep Casing group deployed our MEK lock swivel for installing extended reach completion tools and it is making steady progress on locations across the globe. Our Revelizer tool is also gaining traction in the wellbore abandonment segment. Our proprietary stabilizer and reamer technology acquired from ED Projects is also growing rapidly and making a contribution in both hemispheric on land, and offshore markets. 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. 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 crucial in driving our success and is integral to our future growth. With that, we will now take your questions. Operator?

Thank you. If you would like to ask a question, please press star one on your telephone keypad. A confirmation to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment while we poll for questions.

Morning, guys. Thanks for the time.

Good morning, Jeff. First, I want to start on the M&A market. Obviously, super busy last, you know, nine, twelve months for you guys. Can you talk about kinda current trends or themes in the M&A market broadly and guess curious your overall level of optimism about guess, the number of opportunities as well as the transactability of those, for lack of a better term. Thanks.

Sure. Sure. We we Joel will have a this is Wayne. Thanks, Jeff, for the question. We still have a steady pipeline of opportunities that are out there, and we continue to look at deals on a, you know, strategic level of how they fit into our organization, we've we, you know, you can see there's been some deals done in the industry over the last year, not only ours, but a few others. And I think that develops deal metrics and how the expectations between the buyers and the sellers are starting to come together. And I I think that's productive for all of us. So I I feel like we still have, you know, quite a few opportunities on the horizon. And, hopefully, be acting on those this year.

Okay. Great. Thank you. And for my follow-up, somewhat related on the balance sheet side of things. I think you guys ended the year maybe a little over one times leverage on a trailing basis. How important is delevering this year when we look at that adjusted free cash flow guide? You know, is is the first use of that to to pay down debts? And how do you think about you know, potentially using some of that free cash or further using your balance sheet for M&A opportunities.

I'll let David take that one. Dave?

Yeah. Jeff, thanks for the question. Yeah. We need to kinda look at the balance sheet and how we ended the year. The the net debt number of approximately I think it was $47 million or so was basically, the the full use of that was related to the cash portion of the acquisitions. So that kinda tells us, obviously, that was planned, number one. And number two, we basically used all of our, you know, all the CapEx was funded out of our free cash flow. So we can see that trend continuing. We'll be able to support our our CapEx needs, you know, for for twenty five as well as have that free cash flow to pay off debt or do further M&A kind of again, pull those levers as we need to based on the opportunities that come up in twenty five.

Okay. So I I guess to to rephrase the the answer, essentially, we should think about, you know, potential use of the balance sheet is is still in the cards for you guys in the context of M&A. Like, you guys feel good with with the balance sheet position that you're in. There's not an imminent urgency to you know, attack the debt side of things at at the detriment of M&A.

No. Absolutely. I think we're we're well positioned on the balance sheet. We still have availability under the know, credit facility, but we are obviously mindful and keeping an eye on our overall. And we'll do the, you know, the right strategic decisions there depending on the M&A opportunities. But focus on, you know, aggressive pay down of debt with our free cash flow.

And, David, further that, Jeff, we're very mindful of keeping an eye on the activity trends of the industry. You know, we're assuming flat to we have some, you know, baked in potential downward activity you know, bets placed into our forecast. But, you know, if we saw the industry changing, we we would pivot we have the means and the wherewithal and the cash flow to to accelerate any kind of delevering that that might be required. So

Understood. I'll turn it back. Thank you, guys.

Our next question is from Steve Ferazani with Sidoti and Company. Please proceed.

Morning, Wayne David. For taking the questions this morning. I know it's was a very, very active twenty twenty four. I'm sure it's gonna be an active twenty twenty five as well. I did wanna ask about the the the mix in four Q on the tool rentals, I was surprised at the sequential growth given that US land, as you noted, was was sequentially drilling was flat to maybe even down a little bit. So I'm curious if that was just international growth or if you gained any share on the rentals. And then product sales, the sequential decline, how much of that is typical seasonality or is there something else in play?

I think I think the answer to the first question with the product sales. We did, you know, the the the reduction in Saudi activity did affect our decasing product sales flow into that market. As well as, you know, softness in PEMEX. We have pivoted, you know, a lot of those efforts, you know, to other parts of the world and they're gaining traction steadily. But there's no we're not immune to that Saudi decline, I can assure you. As far as our tool rental activity, I think we've just you know, had a little surge of you know, your general activity. You know, we have gains and losses and they'll ebb and flow of the business. And deploying a new tool, some of the newer technologies that we have are getting more traction at higher pricing. So that's that's helping neutralize some of the other, you know, activity fluctuations. So I guess that would be the the general answer to that question about tool rentals changing.

Great. Thanks. And then on the the your your CapEx being high, you expect your guide is for higher in twenty twenty five and obviously after very low CapEx in the second half of twenty four. Is twenty five a catch up after a very low CapEx in the second half of twenty four? Are there any specific growth initiatives you wanna highlight behind the higher CapEx, which is not high, but higher. Target. I I understand. David, you wanna I'll stay by I'll I'll take that question. Yeah. Basically, you know, we're seeing the the change in twenty five related primarily to the the growth in the Eastern Hemisphere following these acquisitions. Know, with with some of the new technology that we've acquired. The CapEx to support that Eastern Hemisphere growth is really what we're seeing the difference you know, from twenty four to twenty five.

Mhmm. And supporting our rotor steer, which is continuing to grow off of you know, as well. So which is some of our newer technologies we're funding you know, as as and we're kinda neutral to negative not negative, but neutral on all of our supporting all of our other products, but no catch up is like I mean, I think I think the the source of your question is, are trying to catch up because we were behind The answer is we're we're we're still in the neutral zone on those, but we're investing some of the new things that we're supporting to grow in other areas and other product lines.

Fantastic. If I could just get one more in. Can you talk a little bit of I mean, you obviously pointed out we know Saudi and PEMEX specifically or or are areas for weakness in the first half of twenty five is most expect and and and obviously start impacting in twenty four. Any particular successes you wanna point to anything going better than expected with some of these acquisitions integration getting easier as you're getting more experience with it? If you can just sort of walk through your your view of of the international picture as twenty four went and how you're thinking about twenty five?

Yeah. So I think we're starting to the first the first part of that question is synergies. You know, we paint a significant amount of cost savings to the the the the SDPI transaction, and we're really excited about that. And now, you know, our launch in the Middle East, notwithstanding the Saudi decline, is starting to gain traction. And, you know, it's it's slow evolutionary process here to, you know, re you know, organize the group, get things moving faster and faster. We're in dozens of countries and and locations around the world, and so we've got a lot of diversification in traction gaining. You know, we're it's disappointing the softness in Saudi. That that one's, you know, you know, kind of little more impactful. But we we see our indications or that will heal itself over a short period of time. They can't stay low forever. But, you know, short term, that is that is slowed down our momentum. But the synergies are really taking place with the reduction in public cost, the reduction in repair cost, the reduction in royalties. All those those are ongoing sustainable synergies that will get savings from for years to come. And add more value. Then some of the new acquisitions, EDP and Titan, are just gaining, you know, getting off the ground because they were later in the year or early this year. So we're really excited about the technology we acquired from EMEA Projects. We're starting to gain traction in so many parts of the world. And with major customers around every operating environment. Offshore, land, you name it, North Sea, you know, Europe land, Middle East, getting constant orders. So it's picking up steam, and I think those premium products will help offset some of the, you know, the less than stellar activity issues that are ongoing in different parts of the world. So Right. Right.

Thanks, Wayne. Thanks, David.

Our next question is from Sean Mitchell with Daniels Energy Partners. Please proceed.

Good morning, guys, and thanks for taking my question. Wayne, maybe I hate to stay on the M&A theme, but just as you think about M&A opportunities, over the course of the next year or two, you you guys are gonna be reporting Eastern Hemisphere, Western Hemisphere. Can you give us some color around you think more M&A opportunities in the Eastern Hemisphere or Western or is it too early to tell? I mean, I know you're not breaking that out today on your financials, but just kinda thinking about the M&A market.

Well, we we do have targets in both places. So we are working actively working on opportunities. I wanna be careful not to say we're actually working on deals because we don't have any deal. We're just working on opportunities. But to be clear, we do believe that there are significant opportunities in these in the industry, which we're we're And there are some where we consider accretive bolt on really tuck ins that work for us here to strengthen our our North America business. And and we have willing, you know, sellers and and, you know, who people who see the the benefit our platform and wanna join our the the culture of our team, and they see the opportunity. So it should be on both sides of the of the water. So and we'll we'll just evaluate those as they come, you know. It's kinda like you know, we gotta hit a shot and, you know, in the fairway, then we gotta get it on the green next. So we're we're just gonna keep moving through each deal as they present themselves and seize those opportunities.

Fair enough. Maybe one more for me. I'll sneak one in. Given your exposure in the international markets, kinda how are you guys thinking about tariffs? And where do you see the risk So do you want me to take that one away? Yeah. Sure. Sure. So yeah. Sean, obviously, a very fluid and dynamic topic. But we have been kinda working with our our US trade council here You know, the the short two short answers are we believe a diversified supplier base and a diversified manufacturing base are are some of the best mitigating strategies, and I think we have both of those.

Got it. So that's a good box that we can check. The other thing, obviously, we're we're, you know, sort of contemplating is that the the Canadian, US, Canada, US affects our business the most. You know, we believe right now that's you know, the the the long term you know, you know, sooner than later because think the desire, you know, of both countries is to kinda create a free trade zone. So we don't think those tariffs right now and our council kinda believe the same, but they've that they won't be long term in nature. So we just need to address the any short term implications, you know, while they do last. And we can do that currently under the know, everything we do falls under the USMCA agreement or the know, Mexico Canada agreement there. So the way we move tools around and can you know, divert raw material to different locations as needed and do repairs, we have all that kinda working in our favor right now.

Got it. For taking my questions, guys.

Alright. Thanks, Sean.

This now concludes our question and answer session. I would like to turn the floor over to management for closing comments.

Okay. Thank you, everyone. Appreciate your interest in Drilling Tools International and participating in the call. We we are executing well throughout this this challenging cycle. I think we've demonstrated our resilience and viability through this continued challenge in the marketplace and we're you know, we're we have some bright things that we're working on and and and continuing to grow our business. Wanna invite everyone to we'll be participating at the Rolf and Piper conferences next week and hope to see you all there. So you for your interest. Have a great day.

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

Greetings, and welcome to the Drilling Tools International Third Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, Ken Dennard. Thank you, sir. Please go ahead.

Thank you, operator, and good morning, everyone. We appreciate you joining us for Drilling Tools International's 2024 third 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 third quarter results and the updated outlook, before opening the call for your questions. There will be a replay of today's call that will be available by webcast on the company's website at drillingtools.com, and there will also be a telephonic recorded replay available until November 21. Please note that any information reported on this call speaks only as of today, November 14, 2024, and therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay listening or transcript reading. Also, comments on this call will contain forward-looking statements within the meaning of the United States federal securities laws. These forward-looking statements reflect the current views of DTI's management. However, various risks 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 included, but not limited to, adjusted EBITDA and adjusted free cash flow. We provide these non-GAAP results for informational purposes, and they should not be considered in isolation from the most directly comparable GAAP measures. A discussion of why we believe these non-GAAP measures are useful to investors, certain limitations of using these measures and reconciliations to the most directly comparable GAAP measures can be found in our earnings release and in the 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, hand the call to David to go through the numbers, and return with closing comments before we open it up for questions. Let's get started. As you saw yesterday, we released our third quarter results after market. We continue to experience headwinds in the third quarter, including rig count softness in U.S. land, U.S. Gulf of Mexico and Middle Eastern markets. However, we are pleased to have sequentially grown our revenue, adjusted net income, adjusted diluted EPS, adjusted EBITDA and our adjusted free cash flow, from our 2024 second quarter results. Our total revenue came in at $40.1 million. Adjusted EBITDA was $11.1 million in the quarter, and adjusted free cash flow was $7.8 million, which is more adjusted free cash flow than we produced for the entire year of 2023. In a moment, David will take you through the financials in more detail, and provide our revised outlook. As we have been saying since going public last year, our goal is to become the premier drilling tools rental solution provider, for servicing the wellbore construction and casing installation market segments. In order to accomplish this goal, we need scale. To that end, we have been extremely active in the M&A market, acquiring three companies in 2024, and announcing a fourth, which is expected to close in the first quarter of 2025. Our first two acquisitions this year, were Deep Casing and Superior Drilling Products, which we are currently integrating and operating. We have spoken about these in detail on past calls. Our latest two deals announced subsequent to the end of the third quarter, include the acquisition of European Drilling Projects, or EDP for short, which we closed on October 3. We followed that with an announcement on October 31 that we signed a definitive agreement to acquire Titan Tool Services Limited, a U.K. based downhole tool rental company. Let's start with EDP, which is a global provider of next-generation stabilizers, specialty reamers and wellbore optimization technology for the drilling industry. They bring additional cutting-edge drilling tool solutions to DTI's technology portfolio, complementing our directional tool rentals division, along with our wellbore optimization technologies such as the Drill-n-ream. We're excited to offer these unique solutions to our customers, addressing many known wellbore construction issues faced with extended reach horizontal and directional drilling. By securing EDP's innovative technology, intellectual property and key personnel, we can offer premium value-added tools in a market segment typically characterized by commoditization. EDP's Eastern Hemisphere footprint and established market penetration further complements our global expansion strategies. Moving to Titan, their strong presence in the North Sea, Europe and Africa markets will allow us to better serve our international customers beginning in 2025. By combining our expertise in downhole drilling tools with Titan's commitment to service and support, we'll be able to offer a more comprehensive suite of solutions, to the oil and gas and geothermal drilling industries worldwide. Together, all our acquisitions demonstrate our focus on international expansion and technology ownership. This is a good segue for me to provide an update on our international operations and integration processes where we have coalesced around a strategy we call One DTI. Integrating multiple businesses and operating groups is never simple. I recently spent two weeks in the Middle East region with our new team members reviewing DTI's path to market, by product line and geography. We have established a new leadership team for our Eastern Hemisphere business unit, and sales efforts. This will facilitate the appropriate focus on structure, and accountability in this important region. While I was in the Middle East, DTI exhibited at the annual ADIPEC convention in Abu Dhabi, with great success and engagement, giving us optimism for international growth in future periods. The goal for our One DTI strategy is to firmly establish structure and accountability for our team to maximize synergies, further enhance cost savings, foster better alignment across our global organization, and focus our teams on common goals and objectives. Our approach is to adopt best practices from all parties, and we are immediately adopting a common accounting system and migrating Eastern Hemisphere operations, to our Compass Asset Management platform to minimize replication and maximize accountability. These systems will be implemented in the first half of 2025. We believe collating the best-in-class systems and processes from DTI, and our newly acquired businesses will have an organization, and structure that generates excellent results for our customers, our employees and our shareholders. We look forward to reporting on our One DTI progress in next quarter's conference call. We continue to believe there are meaningful consolidation opportunities that exist in our sector. As our customers consolidate, so must the OFS space. We have a solid M&A process, and robust 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. We have a proven team and process, to achieve these integration strategies. While our sequential growth this quarter was not as much as we had anticipated, we believe our best-in-class performance-driven technologically differentiated offerings, combined with our expanded global geographic footprint, will deliver solid growth in the coming years as energy markets recover. As we discussed in our last call, we implemented a cost reduction program for an annualized savings of $2.4 million that may be subject to additional adjustments, given the softer market conditions. We continue to appropriately calibrate our operations to adjust for activity levels. And as One DTI, we will continue to look for ways to boost our operational efficiencies, and pursue our growth initiatives in other markets where those opportunities are available. Looking longer term, energy demand trends remain robust. 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. With that, I'll turn it over to our CFO, David Johnson, for a review of our financial results and outlook. David?

Thanks, Wayne, and thank you, everyone, for joining us today. In yesterday's earnings release, we provided detailed financial tables, so I'll use this time to offer further insight into specific financial metrics for the third quarter. As Wayne mentioned, we saw continued rig count softness during the third quarter that impacted near-term synergy realization. But we're able to sequentially increase revenue, adjusted net income, adjusted diluted EPS, adjusted EBITDA, and adjusted free cash flow from the second quarter of 2024. DTI generated total consolidated revenue of $40.1 million in the third quarter of 2024. Third quarter tool rental revenue was $28.1 million, and product sales revenue totaled $12 million. Operating expenses were $35.8 million and income from operations was $4.3 million. Adjusted net income for the third quarter was $4.6 million, which represents an adjusted diluted EPS of $0.14 per share. Third quarter adjusted EBITDA was $11.1 million. And adjusted free cash flow was $7.8 million in the third quarter, which is more than the adjusted free cash flow we generated in all of 2023. As of September 30, 2024, we had approximately $12 million of cash, and net debt of $32.1 million. Maintenance CapEx for the third quarter of 2024, was approximately 8% of total consolidated revenue. This portion of our capital investment has trended lower this year, due to the decline in rig count and our customers' focus on drilling efficiencies, translating into fewer lost in hole and damaged beyond repair events. As a reminder, our maintenance capital is funded by tool recovery revenue, which keeps our rental tool fleet relevant and sustainable regardless of the trend. Now moving on to our outlook. We are revising our 2024 ranges, which include a sequential slowdown due to anticipated holiday breaks, budget exhaustion and capital discipline being employed by our customers in the fourth quarter. We now expect 2024 revenue to be in the range of $145 million to $155 million. We expect adjusted EBITDA to be within the range of $38 million to $43 million. Gross capital expenditures are expected to be between $20 million and $22 million. Adjusted net income for the full year is expected to be between $7.7 million and $9.8 million. And finally, since the majority of our CapEx was incurred in the first half of this year, and we have curtailed or deferred other planned CapEx, we expect our adjusted free cash flow to range between $18 million to $21 million for 2024, which remains more than double our adjusted free cash flow reported in 2023. We conservatively estimate that our Eastern Hemisphere revenue mix will grow from approximately 1% of total revenue in 2023 to 10%, or more when we report full year '24 results. Previously, the company did not disclose its operating results in segments. Starting in the fourth quarter with a footnote disclosure, we will be transitioning from one to two reporting segments, Eastern Hemisphere and Western Hemisphere. And this will be reflected in the company's annual report on Form 10-K for the year ending December 31, 2024. The new reporting structure aligns perfectly with our One DTI strategy, and reflects our commitment to enhancing transparency and aligning our operations with our global growth objectives, as Wayne discussed earlier. We believe this change will enable us to better manage our business, and allocate resources more effectively across different regions. That concludes my financial review and outlook section. Let me now turn it back over to Wayne, to provide some summary comments before taking your questions.

Thank you, David. Before we open up the line for questions, I want to welcome EDP's talented team to the DTI organization, and we look forward to the Titan team joining us in the first quarter of 2025. As we continue to integrate Deep Casing, SGP, EDP and will soon add Titan, we have greatly and purposefully expanded our geographical footprint, enhanced our technological capabilities and position DTI, as a leader in the evolving energy landscape. We believe One DTI will be able to provide our customers, with access to an even wider array of products and services, with the addition of these quality organizations. In conclusion, I would like to reemphasize that: first, we are competitive and profitable despite the soft market conditions, and we continue to be resourceful and innovative while combating pricing pressures. Second, we continue to evaluate our cost reduction program to adjust to market conditions. As we implement our One DTI strategy, we will take additional measures to adjust to lower near-term demand, and we believe we will be well positioned to come out stronger when the market recovers with the best personnel, processes, products and performance, all aligned on best practices. Third, we are very pleased with the execution of our acquisition growth strategy, especially in light of the headwinds our industry has experienced. We believe acquiring high-quality companies at attractive multiples positions DTI to successfully participate in the next three to five-year expected growth cycle. This elevated demand should further strengthen the need for our technology, our solutions, our products and our services globally. And finally, there is no finish line. We believe additional thoughtful consolidation opportunities exist in oilfield services that will supplement our organic growth initiatives. I would again like to express my sincerest gratitude, to every member of the DTI team for their continuous dedication to working in a safe, inspired and productive manner. 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?

Thank you. [Operator Instructions] Our first question comes from the line of Jeff Grampp with Alliance Global Partners. Please proceed with your question.

Good morning, guys. Was curious to start first on the tool rental side of things. Revenue was pretty flat sequentially, but gross margins improved pretty noticeably. So I just wanted to dive into that a bit more. I know we were expecting some benefit from the Superior Drilling merger, and some of those cost synergies. So I just wanted to confirm if it was largely that. Any other factors going on and kind of expectations to continue that kind of level going forward? Thanks.

Jeff, happy - this is David. Happy to take that question. Yes, I think you kind of hit on it. A lot of that is due to the vertical integration of our Superior Drilling Products benefiting the Drill-N-Ream product rental. So a lot of those costs flowed through and improved the margins on that side of the business, from that acquisition. I think we also had a little bit better utilization on some of our pipe, and that's a pretty accretive margins when we get that utilization that benefited our margin as well.

Great. Appreciate that. And maybe sticking on the Superior Drilling side of things. Can you guys just touch on how that integration process is going? And then also some of the revenue upside synergies that you guys have talked about as well. I know particularly the Middle East was an area you guys were excited about for the potential for the Drill-N-Ream?

Yes, Jeff, this is Wayne. We've completed our integration with them in the Western Hemisphere, and have each team focused on their respective responsibilities, and that's going well in the Eastern Hemisphere, as I've mentioned in the call, spent a lot of time there in the last few weeks, along with meeting with various team members trying to organize the multitude of Deep Casing and EV projects and the SEP team to get us all focused on one execution model, and that's in motion and going well and the rental activity is starting to get traction. We should see some of that come to fruition in the Q4, and hopefully early in 2025, as we build momentum there with the acquisition of EDP, and the integration with SDP. So that's moving definitely in the right direction. And the Middle East market is albeit I'm not going to say soft, but not overly vibrant like it was before with a few rigs being idled, but it is still a very vibrant market, very big opportunity for us.

Great. Thanks, Wayne. If I could sneak one more in on the M&A side of things. The updated slide presentation still referenced a handful of targets that you guys are working on. So I was just hoping you could share maybe kind of a flavor in terms of size, geographic focus, anything along those lines. And then just broadly wondering, you guys have obviously had a very active 2024 in terms of deals. I know some of them have been a little smaller, but just the overall comfort level to continue to be active on the M&A side of things?

So the opportunity landscape consists of everything from tuck-ins to transformational mergers that are out there that we're looking into doing some work on, and we're going to continue to feed the pipeline of opportunities for M&A and find and pick what we think are the best types of deals that make sense for our strategy. So they're up there, they're still out there, and we think the valuations are definitely range bound within the market. And I think the arbitrage between buyers and sellers is narrowing, because people understand the way the industry is trending, and that this type of cooperation between buyers and sellers and mergers and consolidations makes sense more now than ever. So I think, we'll continue to pursue those opportunities, and they're out there for us.

Okay. Great. Best of luck. I appreciate the time. Thank you guys.

Thank you. Our next question comes from the line of Steve Ferazani with Sidoti & Company. Please proceed with your question.

Good morning, Wayne. David, appreciate the detail on the call. I want to start by - let me follow up on the M&A topic. The two acquisitions you made recently, EDP, I understand the fit there with the focus on premium tools in international markets. Titan Tools seemed a little bit different, beyond just getting you more international exposure. Can you help us understand how Titan Tools fits the M&A strategy?

Yes, Steve, Titan is also a nice tuck-in with our directional tool rentals platform, where we're basically renting tools across the BHA support segment. In addition, they also have hole openers and other product lines that they bring, and add to our portfolio. What I particularly like about them is their presence in Europe and many, many projects that initiate for West Africa and places like that, usually originate from the Aberdeen area. There's a lot of technology incubators there. So they bring a nice geographic addition to what we already do. And we were already partnered with them, somewhat as they were our distributor for many of our products in that area. So this is a nice bolt-on for us and a good cultural group that aligns well with us, with a couple of facilities that help us launch more and more of our other products. So blended all together, it gives us better infrastructure, better spread and better portfolio offering.

Great. That's helpful. The adjustment to guidance is not a surprise. I think you're at the latter end of earnings season, we've heard budget exhaustion fairly repeatedly through the season. I want to get your sense, have you started to see the slowdown yet? I know frac spreads are down in the last couple of weeks, but rig counts held up. Or is that more what customers are saying? And if I could add to that question; last year, we saw that happen, but then there was a very slow start to 2024 before it ramped up. Would you expect a similar trend?

So we kind of joke among ourselves, and said this is the most organized downturn and stable downturn we've ever been a part of. But the reality is it's just been an adjustment of activity based on our customers' production needs. To answer your question, we see it flat we feel a flattish market. I think the rig count is going to ebb and flow. We might see some more softness before we see some uptick. But I think our customer base has made a commitment, particularly the oil and gas companies in the U.S. and North America. And I think even in the international markets, many of them have said they've got a stated goal to achieve a certain production target. And whatever that takes, that's what they'll do. If they can do it with less rigs, they will. If they need more, they will. Its footage based, it's performance-based. And all of them are operating on capital discipline. And as we follow that theme, we operate under the same thematic approach to our business, right?

When we think about the amount of headwinds in U.S. land this year, and clearly, it got more challenging than probably what a lot of us were thinking at the beginning of the year. You're still guiding for almost in the range of $20 million in adjusted free cash flow. What's the message there from your business model and the rental tool model?

So, we feel like despite the ups and downs of the market, we can always choose to run a sustainable business. And the way we do that, is what I just mentioned is equivalent capital discipline to the market. We do make investments in our fleet to make it sustainable, and we are going to support our customers. But at the same time, we're mindful of making too many aspirational investments, where we don't feel the market is in a position to reward you for that risk. So I think, it's risk-based capital disciplined investment in strategic materials fleet, knowing what your customers have, and we can generate a very healthy free cash flow margin that I think is peer competitive in the marketplace.

Thanks, Wayne.

Thank you. Our next question comes from the line of Blake McLean with Daniel Energy Partners. Please proceed with your question.

Hi, good morning, guys.

Hi, Blake. Good morning.

Hi, one more on M&A. You talked a lot about it here. You guys have great insights. Last two deals, a bit more international event. Are there differences in terms of what the M&A market looks like in North America versus internationally? And what would you share about that kind of opportunity set, and how they differ and how the market sentiment might differ or anything like that?

So to be clear, you're wondering what's the difference between the M&A market, Western Hemisphere versus Eastern Hemisphere?

Yes, sir.

Yes. All right. Great. There are numerous opportunities in both markets. I mean the ones in the Eastern Hemisphere are a little bit less transparent. What I mean by that is they're spread across multiple countries, whereas in North America, you kind of have a more seamless type of business, and legality of how the business operates and functions with customer bases. So - but there are numerous foreign companies based, with most of their business in the Eastern Hemisphere that some of them U.S. owned, some of them not, that are opportunistic for us that fit the profile of what we want to accomplish. May have a few more challenges in making those acquisitions, because of the complexity of multiple countries, and contracts and all of the nuances that go along with operating in those markets. But they're definitely out there with sticking power and the ability to be good bolt-on accretive type deals for us. In the U.S. market, I think we kind of all know where the lane is. It's all about range down valuations, and how we get more economies of scale. We have to be more competitive. I mean, doing acquisitions, particularly in North America, just makes us more competitive. We've got to lower our cost and deliver more value for our clients. And I think that's where the benefit comes here. So does that answer your question?

Absolutely. Thank you for that color. On the international piece, you've got different reporting going forward. Any sort of targets or aspirations that you guys might share in terms of, what that revenue mix might look like over the next few years, what the growth rate might be? Anything like that you might share?

So one of the reasons we adjusted our segment reporting as such is to - so we expect that market to grow, I think we've already stated that it was 1% of our income in '23. It will be 10% in '24, and we expect it to grow more significantly in the future. So that's - we'll be able to measure that year-to-year. So that's one of the reasons we took that approach.

Understood. Okay, thank you guys very much for the time this morning.

Thank you. This concludes our question-and-answer session. I'll turn the floor back to management for closing comments.

All right. Thanks, everybody, for listening and attending and your interest in Drilling Tools International. We look forward to reporting in future quarters and measuring our progress. Have a great day.

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.

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. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ken Dennard. Sir, the floor is yours.

Thank you, operator. 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 Jameson Parker, VP of Corporate Development. Following my remarks, management will provide a high-level commentary of the benefits of the SDP acquisition, a review of the 2024 second quarter results, and updated outlook before we turn the call to you for your questions. There will be a replay of today's call. It'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 13. Please note that any information reported on this call speaks only as of today, August 6, 2024, and therefore you are advised that time-sensitive information may no longer be accurate as of the time of any replay listening or transcript reading. Also, comments on this call will contain forward-looking statements within the meaning of the United States federal securities laws. These forward-looking statements reflect the current views of DTI's management. However, various risks, 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 may also include certain non-GAAP financial measures, including not limited to, adjusted EBITDA and adjusted free cash flow. 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 the non-GAAP measures are useful to investors, certain limitations of - using these measures, and reconciliation 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. I will begin my remarks with a quick review of our Superior Drilling Products acquisition and synergies, observations on second quarter 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, Jameson Parker, available during Q&A for comments on our recent acquisitions. 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. 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 DNR tools and 45% margin capture on repair and maintenance of our global drilling remit assets. Superior is headquartered in Vernal, Utah. 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-N-Ream repair center. 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 DNR tools on the ground across the Middle East. 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. 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. 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 second quarter 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? 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. 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 second quarter. Our unique business model enables us to generate returns, despite a decline in North American land activity. As a result, we are maintaining our adjusted free cash flow guidance range from $20 million to $25 million for the full year. David will add more commentary to our updated outlook shortly. And 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 oil field service providers, became very focused in improving efficiency and producing more with less. 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. 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. 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 our 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. 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 notes 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. And yes, 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 plus percent adjusted EBITDA margins and mid to high teens adjusted free cash flow margins. 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. 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. 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 extorted 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. 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. 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. 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. We have established an M&A framework, and robust M&A pipeline that will allow us to selectively, and strategically consolidate numerous oil field 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?

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 second quarter. DTI generated total consolidated revenue of $37.5 million in the second quarter of 2024. Second quarter tool rental net revenue was $28.3 million, and product sales net revenue totaled $9.2 million. Second quarter operating expenses were $35.3 million, and income from operations was $2.2 million. Adjusted net income for the second quarter was $3 million, or adjusted diluted EPS of $0.10 per share. Second quarter adjusted EBITDA was $9 million, and adjusted free cash flow was negative $1.1 million, a $3.2 million improvement, compared to the second quarter of 2023. As of June 30, 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 second quarter. Rig count was down roughly 15% over the last 12 months. Despite this decline in rig count and activity, our revenues in the second quarter of 2024, were flat over the second quarter of 2023. Our acquisition of Deep Casing, our Tier 1 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. 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 June 30, 2024, maintenance CapEx was approximately 7% of total consolidated revenue. 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-in-hole, and 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 to $170 million. We expect adjusted EBITDA to be within the range of $41 million to $47 million. Gross capital expenditures are expected to be between 21 and 22 million. Adjusted net income for the full year is expected to be, between $9.9 million and $13.5 million. And 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 adjusted free cash flow to be between $20 million 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.

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. In conclusion, I would like to reemphasize that one, we are very pleased to have closed in 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 costs and improve our margins. 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. Four, our RotoSteer technology continues to make positive commercial traction, but at a slower pace than we anticipated late last year, when the market outlet 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. I am highly confident this product line will continuously grow. Stay tuned for updates as this exciting opportunity develops. And finally, we believe additional thoughtful consolidation opportunities exist in oilfield 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. I would again like to express my sincerest gratitude to every member of the DTI, Deep Casing, 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?

Thank you. [Operator Instructions] Thank you. Our first question comes from Jeff Grampp from Alliance Global Partners. Go ahead, Jeff. Your line is open.

Morning, everyone. One of the first start 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 signs of success on the revenue synergies upside, particularly in the Middle East and elsewhere internationally? Is that a 2024 event, where you guys could maybe see some green shoots of success, or is that more of a 2025 event we should stay tuned for?

Thanks, Jeff. This is Wayne Prejean. We expect to see, some green sprouts, starting to occur, you know, throughout the remainder of this year. We've been slowly having discussions on between our team and their team on how we might integrate post-closing, and now that that has happened, we're ready to implement some of those initiatives. And accelerate the efforts between our commercial team and their teams, and get things really ramping up in that market. Probably more of a 2025 event to see the true traction, so quarter-by-quarter we expect to make steady progress.

Great. Thank you. And 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, so five near-term priority targets, as you guys kind of call it. 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 can kind of ring-fence some of these opportunities in any broad strokes?

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

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

Okay. Great. If I could just tack a follow-up on that, Jameson, what's kind of, relative to the last call a few months ago? How would you guys kind of characterize, bid-ask spreads, seller sentiment, what is that overall market like today versus a few months ago?

Yes, I think I, in one of our kind of introductory calls spoke to, valuations being very range-bound still in oilfield 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. And some of these processes that we're doing are not, the broadly marketed deals. 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. So, I think that the acquisition landscape for consolidation remains robust for oilfield service. We need to do what our customer base is doing, and get larger and leaner.

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

Thanks.

Thank you. And our next question comes from Steve Ferazani from Sidoti. Go ahead, Steve.

Good morning, Wayne. Good morning. Everyone appreciates the detail on the call. I 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?

Historically, we only speak to the percent contribution by the product lines at year-end. I mean, 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. That's kind of where things are trending now.

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

Yes, we see they have some bid repair business opportunities in the Middle East that are starting to get traction, so we anticipate that contribution. And also, 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. So, we factored in an appropriate amount of what we believe is sticky activity, so that we feel like - we feel pretty good about our guidance. There's certainly potential for more opportunity in the future, so we'll just have to gauge that quarter-to-quarter as we integrate these two businesses.

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, and 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?

So, with 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, just kind of kicked away as a slow leak, if you will. And the industry's had to learn how to adjust to that slow burn rate of rig activity. And - as that's happened, operators have had a chance to, A, consolidate. B, what I spoke to in the press release was the rotation of different vendors trying, different ways to cut costs. And put compressive pricing on different service providers and so on. And that's affected us, because we've seen some of our core customers, get shuffled around from this operator to that operator, and we've had to shuffle as well. So, we've made those adjustments. As I spoke earlier, we have strategic moats built in. 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 a compression of the market by our customers, so yes.

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?

Yes, I think it's just a matter of time that our customers, 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, 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, use tools and things like that and stand-by rates and things like that, when you have extra - tools unutilized. So, our goal is to, modify our commercial terms and then, move our - utilization efforts back to where the activity supports, a better pricing model. And we think, we'll be in a competitive position, to offer better products and more relevant products for the future.

Perfect. Last one from me. I mean, the international outlook as we come out of the first half listening to, 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 strength in the Middle East. Can you touch on how that's, your strategy with SDPI Deep Casing? Can you give a little bit of picture on how that affects your international strategy, and how that will play into sort of this international potential multi-year up cycle?

So, Deep Casing, for example, has product lines that's very contributory and beneficial to many of your Middle East and international offshore players. So that we see that business, slowly growing and evolving and making a more significant contribution. Now that we have the SDP acquisition, we've joined forces with them. We're no longer serving two masters. We're now aligned and working together in unison. I think we can help, that platform rapidly expand and set up, repair centers in other locations, and expand that product line so the opportunities are there. And for - in addition to that, what Jameson didn't give you any real color on, because he's reserving his comments, but I'll add to it is one of the criteria for M&A strategies is to, place a high emphasis on what international impact and component these M&A deals can do for us. So, we pretty much, look at that as a higher value proposition than maybe just some tucking and bolt-ons in the North American market, which, many could be attractive, but we're focused and we're aiming more towards technology - and Middle East and international expansion as far, as when we make an M&A deal, that needs to make a significant contribution to our long-term strategy.

Fantastic. Thanks, Wayne.

And our next question comes from John Daniel from John Daniel Energy Partners. Go ahead.

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

With regard to our cost reduction?

Yes. So, is it regional, yes how are you approaching that?

So, one thing interesting about our business is we can scale our business, according to activity and that's very challenging, but, some of its labor-centric, some of its deferring certain, aspirational costs. So, we've made those appropriate adjustments in North America. We have a tenured management team in all of our facilities, which is unique, and they all understand, what is required of them, quarter-to-quarter, year-to-year, and how the industry ebbs and flows. So, we've made those variable - cost adjustments, but we are a public company now, so we've had to take on some public company burdens that we're all aware of. So, we've been mindful of managing that, escalation as we grow and build muscle to take on more and more M&A and larger, broader enterprises. So, but most of it's been the variable cost component in North America. Where we see the - lever of ebb and flow of activity, and if the activity raises, or rises to a level that, requires more support, we're prepared to make those increases if needed to support the business.

And then just a follow-up, unrelated, but the - the press release calls out the bit repair facility in the UAE. I'm just curious, when you have a facility like that, what's the opportunity for additional roofline there, and how quickly could you start taking other product services into a facility like that? You could just expand, it will be helpful?

Well. Okay. Yes, thanks. The facility that's set up now was centrally located in the UAE, and that serves our needs for now, but we're looking at how to put something possibly in Saudi. We could, the roofline that we currently have could add support for some of our other product lines in the Middle Eastern market. So it's expandable. There's the bit repair business can be expanded, the drilling repair business can be expanded, and we have some machining capability that's being loaded into there, to add more repair capability to support room fleets. So, we're going to go for a while.

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

Thank you, John.

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.

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

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.

Greetings and welcome to the Drilling Tools International 2024 First Quarter Earnings Conference Call. At this time, all participants are on the listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Ken Dennard. Thank you. Please go ahead.

Thank you, operator, and good morning, everyone. We appreciate you joining us for Drilling Tools International or more commonly referred to in the industry as DTI. We welcome you to DTI's conference call and webcast to review 2024 first quarter results. With me today are Wayne Prejean, Chief Executive Officer, and David Johnson, Chief Financial Officer. Following my remarks, management will provide a high-level commentary of its 2024 first quarter results and outlook before opening the call for your questions. There'll be a replay of today's call and it'll be available by webcast on the company's website at drillingtools.com and there'll also be a telephonic recorded replay until May 17. Please note that any information reported on this call speaks only as of today, May 10, 2024, and therefore you are advised that time-sensitive information may no longer be accurate as of the time of any replay listening or transcript reading. Also, comments on this call will contain forward-looking statements within the meaning of the United States federal securities laws. These forward-looking statements reflect the current views of DTI's management. However, various risks, uncertainties, and contingencies could cause actual results, performance, or achievements to differ materially from those expressed in the statements made by management. 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. 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 measures can be found in the earnings release and in our filings with the SEC. And now with that behind me, I'd like to turn the call over to Wayne Prejean, DTI's Chief Executive Officer. Wayne?

Thank you, Ken. And good morning, everyone. It has only been six weeks since our last call when we reported our 2023 fourth quarter and year-end. Not much has changed in that short span of time relative to our results, messaging, or outlook. Today, I will begin my remarks with a quick overview of our integration activities, make a few observations, and then hand off the call to David to go through the financials and our 2024 outlook. To begin, we have been extremely busy integrating Deep Casing Tools since we acquired them in mid-March. We have also been working diligently on pre-closed activities related to the SDP transaction, including the S4 filing and integration planning. Once we close on SDP, we believe the combination of these two acquisitions creates a step change for DTI by offering current and prospective customers proprietary products into expanding markets, both domestic and international. In addition to driving incremental revenue, we will also be eliminating duplicate costs and improving margins. We will provide more details on the positive financial impacts and potential synergies after we close on SDP. But as I have said before, both of these transactions are outstanding examples of how we are expanding DTI's growth opportunities, both domestically and internationally, with a particular focus on our presence in the Middle East. For those of you that have listened to our conference calls since becoming public, you'll note that I provided a longer form history of DTI during our first conference call in November, and then gave an overview of our company during our year-end call on March 28. If you haven't listened to or read the transcripts of our first two public calls, you can access those webcast replays on our website. Here's a quick overview for our new investors and those following the company since our last call. DTI is an industrial service company whose differentiated business model combines tools, technology, and equipment rental along with in-house manufacturing capabilities. We primarily serve the oil and gas upstream industry with downhole tools in the well bore construction process. Our tools also serve the emerging geothermal and carbon capture sectors. We operate from our headquarters in Houston, Texas and from 16 service and support and centers across North America and maintain seven international service and support centers across Europe and the Middle East. Many of our service locations have machining, inspection, and repair capabilities that enable us to efficiently service our equipment, which results in improved customer satisfaction, reliability, and efficient utilization of our assets. Our business model has historically relied mostly on rental, repair, and recovery revenues. Our customers count on us to maintain a relevant and sustainable fleet of equipment. The rental and repair income provides the basis for our rental model. The tool recovery revenue, also known as lost or damaged equipment charges, allows us to sustain our fleet, which enables us not only to remain relevant, but also generate positive, adjusted free cash flow throughout the energy industry cycles. Lastly, the recent Deep Casing Tools acquisition brings high margin product sale revenues with it, requires comparatively low capital expenditures to support, and allows our adjusted free cash flow margin profile to expand. We support the needs of blue chip customers like Aramco, Adnoc, Baker Hughes, BP Chevron, ConocoPhillips, EOG, Exxon, Oxy, SLB, and many other prominent firms in our industry. These customers prefer to rent downhole tools because it would not be efficient to own and maintain their own fleet due to the many assorted configurations, hole sizes, geographies, and engineering requirements. There are just too many variables in our dynamic industry that make it inefficient for customers to own all of their own tools. Bottom line, our customers rent tools from DTI because we provide high quality, service, and value along with our substantial fleet of tools to best serve their needs. Additionally, our E&P customers have continued their record pace of consolidation, so we occasionally find ourselves working for customers on both sides of the larger deals. We have generally aligned ourselves with the industry consolidators and have extensive business relationships in place to meet their growing rental tool and service demands. Plus, our sales and operations teams make certain to maintain the continuity of business relationships across the industry to mitigate changes in our customer base. We have an enviable revenue stream from multiple product lines and numerous geographic locations, covering every significant onshore and offshore oil and gas producing region in North America, Europe, and the Middle East. In a steady state environment, our business consistently delivers 30%-plus adjusted EBITDA margins and double-digit adjusted free cash flow margins. We are proud of the progress and track record that we built. In fact, the company has been EBITDA positive every single year during the last 10-years, including 2020 during the depths of COVID. Although, we prefer a market that is stable and upward, we view downturns as opportunities to strengthen our business, and we have done so in each cycle. In addition to our positive financial results throughout these industry cycles, our safety, quality, and reliability of performance continue to be the homework of DTI. As we stated on our last call, we believe that the North America rig count bottomed in the fourth quarter of 2023 and is expected to remain relatively flat throughout 2024. Longer term demand trends remain robust with projections from agencies such as the EIA expect all demand to continue to grow through 2050. 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 demands slated to come online in 2025 and 2026, and electricity demand rising rapidly. As an example, the expected growth of AI data centers. We detailed while going public last year that there are meaningful consolidation opportunities that exist in our sector. It is our stated goal that by making thoughtful acquisitions, we believe it is possible we can double or triple the size of the company in the near future. We have established an M&A framework and robust M&A pipeline that will allow us to selectively and strategically consolidate numerous oilfield service products and rental tool companies that meet the criteria for our growth plan. I hope this quick overview was helpful in providing basic background information for our current investors and our prospective investors. We have been extremely active in the M&A market since going public to position DTI for future growth, which is what we said we would do and believe we are poised to make additional agreement acquisitions in the future. With that, I'll turn it over to our CFO, David Johnson, for a review of our financial results and outlook. David?

Thanks, Wayne, and thank you everyone for joining us today. In yesterday's earnings release, we provided detailed financial tables. So today, I'll offer further insight into specific financial metrics for the first quarter. DTI generated total consolidated revenue of $37 million in the first quarter of 2024. First quarter tool rental net revenue was approximately $30 million and product sales net revenue totaled $7 million. First quarter operating expenses were $31.8 million and operating income was $5.1 million. Adjusted net income for the first quarter was $3.8 million. First quarter adjusted EBITDA was $10.9 million and adjusted free cash flow was $4.7 million. As of March 31, 2024, we had approximately $14 million of cash, net debt of $11 million, and an undrawn $80 million ABL credit facility. We saw a sequentially flat U.S. land rig count during the first quarter of 2024 and a 19% decline in rig count, compared to the first quarter a year ago. Despite this decline in rig count and activity, our revenues in the first quarter of 2024 are up 5% over the prior quarter and have declined by only 9%, compared to the same period of 2023. We attribute this outperformance to our Tier 1 customer base, our wide distribution service and support network, and new product offerings that have gained market traction. As I explained on our last call, I want to discuss our capital expenditures and the offsetting benefits of our tool recovery business model that obtains payment for lost or damaged tools. As a downhole rental tool company, our maintenance capital is funded by tool recovery revenue. The customer is responsible for all lost or damaged tools, while the tools are in their care, custody or control. This tool recovery component of our rental model helps keep our rental tool fleet relevant and sustainable. For the three month period ending March 31, 2024, maintenance CapEx was approximately 9% of total consolidated revenue. This portion of our capital investments is trending lower than it has over the past couple of years, and some of this has already been factored into our gross capital expenditure considerations. Now moving on to our outlook, we are reaffirming our 2024 outlook, which includes deep casing tools, estimated impact on full-year results, but does not include any contribution from the pending acquisition of superior drilling products. We will update 2024 guidance for SDP's impact once we close the transaction. We expect 2024 revenue to be in the range of $170 million to $185 million. We expect adjusted EBITDA to be within the range of $50 million to $58.5 million. Gross capital expenditures are expected to be between $30 million and $33 million. Adjusted net income for the full-year is expected to be between $15.6 million and $21.9 million. And finally, we expect adjusted free cash flow to more than double prior year adjusted free cash flow and be in the range of $20 million to $25.5 million for 2024. Please note, we have substituted adjusted net income for net income in the guidance grid, since we now have non-recurring acquisition and related one-time charges in 2024. This change will help normalize that portion of our guidance as we execute on our M&A strategy. That concludes my financial review and outlook section. Now let me turn it back over to Wayne to provide some summary comments before Q&A.

Thank you, David. Before opening up the line for Q&A, I am pleased to say that first quarter results came in as expected and we have reaffirmed our 2024 outlook. RotoSteer and [Drill-N-Ream] (ph) product revenue continues to grow and we continue to expand our scope of tools and services in existing product lines through technological advancements. We are furthering our customer penetration by growing rentals with our expanded capabilities, new tools and services. The Deep Casing integration is going well and we will have a full quarter of results to report to you in the second quarter. We are working as quickly as possible to get all filings and regulatory portions of the SDP deal administered and are still on track to close in the third quarter. We expect to continue our market leading strategy throughout 2024 and expand our customer base as we move into 2025. And we believe additional thoughtful consolidation opportunities exist in oil-filled services that will supplement our organic growth initiatives already in motion. To close, I would again like to express my sincerest gratitude to every member of the DTI team for their continuous dedication to safety, customer service, and the successful execution of our strategic initiatives. The commitment of our team members has been critical to driving our success, and I extend my heartfelt appreciation for their contributions. With that, we will now take your questions. Operator?

Thank you. The floor is now open for questions. [Operator Instructions] Today's first question is coming from Jeff Grampp of Alliance Global Partners. Please go ahead.

Good morning, guys.

Good morning.

Question on the guidance for revenue. It looks like kind of an implication is we should see some sequential increases in revenue going forward. Just hoping you could comment on kind of how you see the pace of progression throughout the rest of ‘24 and kind of the main drivers for the growth? Thanks.

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

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

Yes, great. We -- you know, the integration is going well. They have a really fine team. The Deep Casing Tools division now of DTI is integrating well. We are starting to work as a group on our Middle Eastern and international execution strategies, expanding to different markets and further taking advantage of what's already in motion in the Middle East and assisting them with more inventory and other support functions and removing some of their overhead and administrative burden, so they're now part of our team and that makes it easier for them to execute. We've had a number of team meetings and discussions on how to expand into the Western Hemisphere, which we can greatly assist them with that. So all of those things are in motion, and we hope to report some of those results here in the very, very near future.

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

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

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

Well, we're hoping for both. I think we're planning for some of that, but we also have to absorb some full-year PubCo cost.

Yes.

And so it does provide some free cashflow benefit, because it's a product sale platform and less of a rental time and return component. So we're happy about that. And we're kind of helping them deploy more and more inventory and more and more resources to get the product sale activity momentum in the direction that we want. They've done a really good job pre-closing and we had already planned post-closing on how to accelerate that and that's kind of what we're relying on. So, you know, the synergies between the two and -- should give us that upward momentum we see to kind of offset the current run rate, so…

Makes sense. Makes sense. Appreciate that. You talked about the fact that, again, this quarter, we didn't see the same kind of your revenue decline was far better than the decline of the rig count, which says you're outpacing activity. You noted that your significant business with Tier 1 operators, which certainly makes sense. It's helping. How does that help, and I would assume it does in terms of the significant consolidation we're getting among operators and how you think that's going to play out on your business moving forward?

Well, we think we're in a good position to mitigate all the changes and that's part of how we operate our business. Plan 1 and Plan 2, Plan A, Plan B. So things happen, you implement Plan B and then Plan C. So I think we've done a pretty good job of mitigating a linear decline relative to the general activity by implementing some new products, some new things in our offering that help us remain above the linear decline. I think we've done a good job of that and we'll continue to do that. Bigger operators want bigger rental partners. They want more substantial providers that have a substantial and significant fleet of equipment. So I think that plays into our hands.

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

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

Great. No, when we look at what you reported on Q1, the sales of the lost downhole tools almost completely replaced CapEx, and you ended up generating pretty good cash flow considering the working capital was a negative and your guidance is solid, so can you sort of walk through the mix and how you think that plays out through the year?

Yes, I mean, we've got basically our CapEx slate is on order, and as those come in, we'll see that affect the rest of the year. But we're supporting obviously our organic growth strategy, particularly with the roto shear product line and our CapEx spend. And we're, again, as you can see, as you kind of look at the chart in the investor presentation we're focused on the free cash flow component, so we're managing that growth, you know, a portion of our CapEx and our free cash flow component of our EBITDA to kind of show that we can generate that free cash flow component this year, compared to last year, because we spent some money investing in topline growth last year. So we're seeing that come to fruition in ‘24.

I mean in a normalized year where you wouldn't be making the investments in RotoSteer and understandable why you would given the demand, does the sale of the lost out downhole tools largely offset maintenance CapEx if you're in a pure maintenance CapEx year?

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

Great. Thanks, Wayne. Thanks, David.

Thank you.

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

Hey, guys. Thanks for including me. Wayne, I was hoping you could elaborate a little bit more on the international opportunity set, and if at all possible, maybe frame for us sort of what -- within your guidance what the expectation would be for year-over-year growth in international in ’24? And then what type of visibility you might have into ’25?

Great. Thanks, John. So as an example, our 2023 international revenue was less than 1% of our total. In ‘24, we expect that to be in a double-digit, you know, 10%, 11% range, or you know, at least double-digit. And that does not include the SDPI revenue that we anticipate, you know, closing and onboarding later in the year, hopefully sooner than later. So we see that percentage of our total growing in ‘25 and beyond in a more significant fashion. So we're allocating capital resources and acquisition strategies to execute on that, you know, component of our growth. Yes, so…

So here’s another one. Let's assume you've got a potential new client international that signs up. From the time you sign an agreement with them to start providing services, how long until the revenue actually shows up? What's a [Indiscernible] any color there would be appreciated?

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

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

It is, but you know...

Okay, I know you are not getting to one more guidance. I understand. I'm just trying to put you a big picture. Okay.

We've put a general guidance out there and we can give more clarity to that as we, you know, make the rest of these, close the rest of these deals. And we're bullish on international. So I think that's…

That’s what I'm asking.

We're going to stay focused on that, yes.

Okay, thanks, guys.

Thank you.

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

All right. Thank you. And thanks, everyone, for joining and listening in and showing your interest. We're pretty enthused about where we're at and how we're competing and where we're going. As you heard, we're bullish in international. We still and continue to have and will continue to have a solid balance sheet, healthy income stream, a solid customer base, a talented group of employees, and we're making strategic investments in capital allocation in the areas that we think will provide the best returns. And we continue to believe and we'll continue to focus on all those initiatives that we've laid out publicly. So thank you for your interest in DTI and we look forward to the next call.

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

Greetings and welcome to the Drilling Tools International 2023 and Fourth Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ken Denard. Thank you. You may begin.

Thank you, operator, and good morning, everyone. We appreciate you joining us for Drilling Tools International, or more commonly referred to the industry as DTI, we welcome you to DTI’s conference call and webcast to review full year 2023 results. With me today are Wayne Prejean, Chief Executive Officer; and David Johnson, Chief Financial Officer. Following my remarks, management will provide a high-level commentary on the operating and financial details for 2023 and then discuss its 2024 outlook before opening the call for your questions. There will be a replay of today's call that'll be available by webcast on the company's website, and that's drillingtools.com and there'll also be a telephonic recorded replay until April 4th. More information on how to access these replay features was included in yesterday's earnings release. Please note that any information reported on this call speaks only as of today, March 28th, 2024, and therefore you are advised that time sensitive information may no longer be accurate as of the time of any replay, listing 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 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 measures 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 in our filings with the SEC. And now with that behind me, I'd like to turn the call over to Wayne Prejean, DTI's, Chief Executive Officer. Wayne?

Thanks Kane, and good morning, everyone. Welcome to our second earnings call as a public company. On our first call in November, I provided a long version history of DTI. Today, I will begin my remarks with a quick overview of the company, discuss our 2023 results, our flurry of activity since the year ended. Then hand off the call to David to go to the financials and our 2024 outlook. DTI is an industrial service company whose differentiated business model combines tools, technology, and equipment rental along with in-house manufacturing capabilities. We primarily serve the oil and gas upstream industry with downhole tools in the wellbore construction process. Our tools also serve the emerging geothermal and carbon capture sectors. We employ approximately 425 loyal and dedicated employees who believe in our values and share our vision for the future. The institutional knowledge of the tool rental business across our employee base and throughout our operations provides us with an infield competitive advantage relative to others in the industry. Our business model relies mostly on rental, repair, and recovery revenues. Our customers count on us to maintain a relevant and sustainable fleet of equipment. The rental and repair income provides the basis for our rental model. The tool recovery revenue, also known as lost or damaged equipment charges, allows us to sustain our fleet, which enables us to not only remain relevant, but also generate positive adjusted free cash flow throughout the energy industry cycles. Speaking of our customers, we support the needs of BlueChip firms like Baker Hughes, BP, Chevron, Conoco Phillips, EOG, Exxon Pioneer, Oxy, SLB, and many other prominent firms in our industry. These customers prefer to rent downhole tools because it would not be efficient to own and maintain their own fleet, due to the many assorted configurations, whole sizes, geographies, and engineering requirements. There are just too many variables in our dynamic industry that make it inefficient for customers to own their own tools. Our customers rent tools from DTI, because we provide high quality, service, and value along with our substantial fleet of tools to serve their needs. We operate from our headquarters in Houston, Texas, and from 16 service and support centers across North America and maintain eight international service and support centers across Europe and the Middle East. Many of our service locations have machining, inspection and repair capabilities that enable us to efficiently service our equipment, which results in improved customer satisfaction, reliability, and efficient utilization of our assets. We also have full manufacturing capabilities, which allows us to support our vast fleet of assets and control the cost and delivery of many of our rental tool items. We have an enviable revenue stream from multiple product lines and numerous geographic locations covering every significant onshore and offshore oil and gas producing region in North America, Europe, and the Middle East. In a steady state environment, our business consistently delivers 30% plus adjusted EBITDA margins and double digit adjusted free cash flow margins. We are proud of the progress and track record that we built. In fact, the company has been EBITDA positive every single year during the last 10 years, including 2020 during the depths of COVID. Although we prefer a market that is stable and upward, we view downturns as opportunities to strengthen our business, and we have done so in each cycle, including this current cycle. In addition to our positive financial results throughout these industry cycles, our safety, quality and reliability of performance continues to be the hallmark of DTI. I hope this quick recap was helpful in providing some context for the rest of the call. Turning now to the market outlook for our business in 2023, the expectation was that rig counts would be flat or tick up modestly throughout the year. Unfortunately, as we all experienced about a year ago, natural gas market softened, which resulted in rig count declines in many areas throughout 2023. While US rig activity declined approximately 20% from January 1st to December 31st, we continued executing on our strategic plan with revenue increasing over 17% from the previous year, significantly outperforming the market. Looking at 2024, management believes that the North American rig count bottomed in the fourth quarter of 2023 and is expected to remain flat throughout 2024. Longer term demand trends remain robust with projections from agencies such as the -- expecting oil demand to continue to grow through 2050 and gas demand to increase materially in the next few years. As in process LNG plants come on stream, it is well documented that the industry has under underinvested in recent years and to meet future demand, additional drilling completion, and production of oil and gas wells will be required. Worldwide DTIs base business and ongoing acquisitions to expand our capabilities makes us competitively positioned across the entire industry. As we have stated before, our customers have requested we expand to serve them on a more global scale. In response, we expanded our rental tool fleet to the North Sea Europe market, and we have made steady progress expanding into the Middle East with new technologies as well as many of our core products. As you know, ENP customers continued their record pace of consolidation with over $100 billion of total mergers and acquisitions announced in 2023 in the Permian Basin alone. Our alignment with our blue-chip customers has enabled us to be on the positive side of the recent wave of ENP consolidation. Our sales and operations teams make certain to maintain the continuity of business relationships across the industry to mitigate changes in our customer base. Now moving to the highly fragmented oil fuel services industry, we detailed while going public last year that there are meaningful consolidation opportunities that exist in our sector. It is our stated goal that by making thoughtful acquisitions, we believe it is possible till we can double or triple the size of the company in the near future. We have established an M&A framework and robust M&A pipeline that will allow us to selectively and strategically consolidate numerous oil field service, product and rental tool companies that meet the criteria for our growth plan. Having said that, earlier this month, we announced that we closed on the acquisition of deep casing tools and announced the signing of a definitive agreement for our pending acquisition of Superior Drilling products. Currently trading as SDPI on the New York American Stock Exchange, we will provide more details on the positive financial impacts and potential synergies from these acquisitions after we close on SDP, but both transactions are outstanding examples of how we are expanding DTI’s growth opportunities both domestically and internationally with a particular focus on our presence in the Middle East. We are confident that these and future acquisitions will drive innovation, expand our footprint and addressable market, enhance our product offerings, and as a result, increase shareholder value. We look forward to collaborating with the dedicated professionals from deep casing tools and superior drilling products, as well as providing their unique and differentiated products to our customers. On the balance sheet side of the business, we exited 2023 with no debt and an undrawn $60 million ABL credit facility, and as you probably saw earlier this month, that we improved our liquidity and further strengthened our balance sheet by amending and extending our credit facility that provides for an $80 million revolving line of credit up from 60 million and added a new term loan in a principal amount of $25 million, with both facilities maturing in March, 2029. We are very pleased to get this refinancing in place with less restrictive covenants to offer more financial flexibility and further support our growth strategy. As you can see, we have been extremely busy since going public, positioning the company for future growth, which is what we said we would do and believe we are poised to make additional accretive acquisitions in the future. With that, I'll turn it over to our CFO David Johnson for a review of our financial results. David.

Thanks Wayne and thank you everyone for joining us today. DTI generated total consolidated revenue of 152 million in 2023, an increase of 17.4% compared to 2022. 2023 tool rental net revenue was 119.2 million, an increase of 20.4% compared to the prior year, primarily due to a strong first half performance and maintaining a solid market share despite a declining rig count in the second half of ‘23. 2023 product sales net revenue totaled 32.8 million, an increase of 7.4% compared to 2022. The increase was driven by a strong first half as well as ongoing tool recovery revenue, which occurs as part of the rental tool lifecycle. 2023 operating expenses were 124.1 million compared to 104.3 million in 2022. The increase in operating expenses is primarily driven by personnel related expenses of 10.5 million, one-time transaction related stock expense of 1.7 million, as well as additional ongoing public company costs. These ongoing public company costs include an increase in accounting, legal, advertising and insurance expenses of approximately 2.6 million. 2023 net income was 14.7 million compared to net income of 21.1 million in the prior year. The lower result in ‘23 was impacted by the additional operating expenses previously mentioned, as well as one-time transaction related expense of approximately 6 million. We also had employee retention credit benefits of 4.3 million in 2022 that were not repeated in ‘23. 2023 adjusted EBITDA was 51 million, which was 24% higher compared to the prior year. 2023 adjusted free cash flow was 7.3 million compared to 16.5 million in 2022. The decrease was primarily due to approximately 19 million more in capital expenditure dollars spent in ‘23 compared to the prior year. This increased investment was made to meet customer demand for new products and future growth. While the fourth quarter of 2023 continued to see a rig count and activity decline, we were able to scale back on capital expenditures in order to meet our adjusted free cash flow target of 6 million to 8 million. Adjusted free cash flow is defined as adjusted EBITDA, less gross capital expenditures, and is a unique lever that we have at our disposal to generate returns in lieu of top line growth. We view this metric as a good measure of the overall performance of our business. As Wayne said earlier, DTI ended 2023 with strong financial flexibility, which included approximately 6 million of cash on hand and an undrawn 60 million ABL credit facility. Wayne also mentioned that we amended and extended our credit facility with P&C, which increased the ABL to 80 million and added the $25 million term loan, which now mature in March of 2029. Before moving on to guidance for 2024, I want to again take a moment to discuss our capital expenditures and the offsetting benefits of our tool recovery business model that obtains payment for lost or damaged tools. We regularly receive questions on this topic and appreciate that it is not well understood as a down hole rental tool company, our maintenance capital is funded by tool recovery revenue. The customer is responsible for all lost or damaged tools while the tools are in their care, custody, or control. This tool recovery component of our rental business model helps keep our rental tool fleet relevant and sustainable. For the 12-month period ended December 31st, 2023, maintenance CapEx was approximately 12.9% of total consolidated revenue. This portion of our capital investments has remained relatively consistent over the past couple of years. Now moving onto our outlook for 2024, we are excited about our market opportunities and expect to more than double our adjusted free cash flow in ‘24 as we prepare for increased market driven demand for our rental tools and services for the remainder of the decade. While our growth has historically been tied to recount, we have been positively impacted by the trend of longer laterals being drilled in multi-well pads. Additionally, the following full year ‘24 outlook includes the recent deep, casing tools, acquisitions estimated impact on ‘24 results, but does not include any contribution from the pending acquisition of superior Drilling products. We will update ‘24 guidance for SDPs impact once we close the transaction. For full year ‘24, we expect revenue to be in the range of 170 million to 185 million. We expect adjusted EBITDA to be within the range of 50 million to 58.5 million. Gross capital expenditures are expected to be between 30 million and 33 million. Net income for the full year is expected to be between 15 million and 21 million. And finally, we expect adjusted free cash flow to more than double prior year, adjusted free cash flow, and be in the range of 20 million to 25.5 million for 2024. That concludes my financial review and outlook section. Let me now turn it back over to Wayne to provide some summary comments before Q&A.

Thank you, David. So to recap a few key items before opening up the line for Q&A. We are a market leader in numerous categories and have an enviable facility footprint. We have an extensive rental model, broad distribution capabilities, and diverse customer base across multiple basins, which provides us with a significant competitive advantage and through cycle out performance, especially during volatile commodity price cycles, we have a proven track record of successfully executing and integrating acquisitions. And we are very excited to welcome deep casing tools and the Superior Drilling Tool products team into the DTI family this year. And we're not done yet. We believe additional consolidation opportunities exist in oil field services that will supplement our organic growth initiatives already in motion. So with our strong balance sheet, ample credit and equity available to make acquisitions, we believe we are well positioned to achieve our strategic portfolio objectives. And as I said on last quarter's call, at our current stock price, we believe we provide an attractive entry point versus our peers. And most importantly, I would like to express my gratitude to every member of the DTI team for their unwavering dedication to safety, customer service, and the successful execution of our strategic initiatives. The hard work and commitment of our team members has been instrumental in driving our success, and I extend my sincere appreciation for their contributions. With that, we'll now take your questions, operator.

[Operator Instructions] Our first question comes from the line of Jeff Grampp with Alliance Global Partners.

First one to start there, two deals in the last couple months, obviously, keeping you guys busy. Would you consider yourselves still in the market for further M&A or are we kind of in a digestion timeframe now to kind of integrate these, get superior across the finish line? Just kind of curious your current appetite in the M&A market.

Let me start with mentioning that our new investor presentation is live and updated on our website, for those of you might not be aware of that. So, a lot of questions about that are answered in there, but I'll take that one on. We have a long history with SDPI, so we're very familiar with their business model and we've been working with them closely. So we feel like getting that one closed is almost like a partnership integration. We feel pretty good about that one. But for all of the compliance and administrative minutia, which always goes along with these the deep casing acquisition that's completed was a nice bolt on with new technologies and new expansion with a great team over there. So we feel pretty good about that as well. And surely, rapid expansion, you know, and acquisitions can, you know, is always challenging, but we feel like we're in good shape to, you know, take those on and integrate those efficiently. We do have some other deals that we're exploring, and in the pipeline, as we've stated in our previous statements. So, you know, we're going to be thoughtful and, you know, careful and make sure that each, the timing and cadence of everything we do meets with our strategic goals.

Great. I appreciate that. For my follow up, I'm curious more on the organic growth CapEx guide and you have a slide there that kind of details that nicely. I'm just kind of curious if, and maybe taking a moment, Wayne, to kind of explain the contractual nature of what supports that growth CapEx, and maybe help me understand that a bit better. Like, are those supported by kind of firm customer commitments? And then just broadly, you know, oil continues to catch a bid here. What is the flexibility to move that, you know, upper, maybe even down with changing market dynamics?

So, good question. You know, for most of that CapEx represented there is going to be things that are new that help us build some organic growth and supporting some of our new product lines that are, you know, we think accretive over and above our current core business, you know, metrics. So, you know, we're holding serve and maintaining well in our core businesses, you know, with the market, you know, cycles. But we have some new things that we're implementing that we're investing in. So that'll, that's most of what that's for.

Our next question comes from the line of Steve Ferazani with Sidoti & Company.

Thanks, morning Wayne, David, appreciate all the detail on the call and thanks for taking my questions. I guess the number that really stood out for me was 4Q, your tool rental revenue was essentially flat. And when we think about the rig count a year ago, and I would imagine the pricing environment, it can't be fantastic right now. Can you just give us a little bit of color how you maintain sort of flat revenue in this environment?

Yeah. So sure we're, no one's immune to activity changes in pricing pressure, but we feel like we're in a pretty good competitive position because we have such a spread across all of our locations and business units and, you know, we have good alignment with our customers on, you know, not being subject to just hedging quarter to quarter. So we have a little longer runway in our pricing. So, you know, it lessens the blow of an activity change. And then if you add that with a few other new products that have come online and, you know, a few extras that have added to the mix, it's enabled us to stay flat, which is, we think, you know, probably a pretty good result considering, you know, the decline that we've seen.

Great. And if I could, my follow up question, I just want to follow up the previous speaker on the growth CapEx. Because it seems, and I think you detailed what you were spending it on for ‘24, but I'm trying to get a sense, given that we had a decline in the rig count, we're flat probably this year. That's how it looks. Is there spending in ‘24 ahead of, are you thinking and planning for a recovery in ‘25 given the LNG export capacity that's coming?

Well, thanks. We do have an emerging new product that we're investing in called Rotor Steer, that is a new product that's unique to the market that we're investing in. Also, some premium drill pipe that our customers are requesting. That's already in motion and working. And supporting those two initiatives as well as a few smaller ones those are the ones that's focused on --

But are you taking,

Go ahead.

But how are you thinking longer term a lot of people are expecting gas rate count to start recovering maybe late ‘24, early ‘25. How are you thinking about that and how does that sort of set your budgeting?

Growth CapEx is the lever we can raise and lower as we move through the cycles. And so, we just have to pick the timing appropriate with what is the relevant equipment and the relevant investment. So yes, that's kind of how we move the needle up or down, but we believe that the gas will pick up eventually. It's just, we just have to make sure we time those investments in the activity and when the opportunities present themselves and the intel from our customers.

Our next question comes from the line of John Daniel with Daniel Energy Partners.

Just want to dig into the M&A strategy for a second. As you noted a lot of opportunities are out there. I'm curious, do you see any distinction between expectations from maybe some companies say exposed primarily to gas markets versus those international offshore do is there opportunities to be opportunistic if you will, and just any color there?

Yes, sure. Always getting the expectations from sellers and buyers to align is challenging. But there are some technologies in some companies that we've observed that need a good home to incubate either a unique product or maybe to achieve scale that wasn't further available to them before on our distribution platform helps that. Valuations kind of remain range bound. The bid ass spread is narrow. So I think people are realizing how the industry is functioning today and the activity that's available to it. So we're hoping that those valuations become a little more attractive, so from our side.

And then when your margins relative to a number of your OFS peers are better, how do you preserve those sorts of strong margins with the M&A strategy? I mean, are most of the deals you look at with, are they -- would they be margin accretive, or how would you, just some thoughts on that.

We kind of have a decision tree and a criteria priority scale where we say, hey, it has to meet accretive value, it has to improve cash flow. It has to be a top tier customer type of product. It has to help us, international, offshore, things like that. But at the end of the day, it has to make a positive contribution to our strategic goals, our strength in our existing core business. Maybe a little moat building and opportunity to strengthen our existing distribution platform. Those are kind of some examples of how we look at acquisitions. We're not in the mode of just bolting on and smash co strategy where we just put everything together for the sake of scale or growth. There is a very thoughtful and I think an experienced approach to understanding the impact of each and every acquisition or each and every deal we look at.

The final one for me, I think if I heard you correctly, some of the growth CapEx is tied to perhaps an, a development of a new tool. Did I hear correctly?

That's correct, but it's commercially active and growing. We've got it baked into our guidance this year.

I was just trying to understand like as you bring new product to market sort of simplistically, how long does it take to scale up? Just any type of color on that?

Well, we spent ‘22 and ’23 getting it past this first two stages and now it's fully commercialized with its own asset team. And number, we're following a number of rigs and growing month by month. We've passed the incubation period and we're full-scale commercial process. And there'll be more and more guidance coming on that as we get through each quarter, but it's looking very positive. Well, any more questions?

There are no other questions in the queue at this time. I'd like to hand it back to management.

Alright, well, we appreciate everyone's participation on the call and interest in Drilling Tools International. Like I said before, please feel free to look at our investor presentation on drilling tools.com and we look forward to demonstrating our continued growth and success and improving shareholder value. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.