Drilling Tools International Corp Q1 FY2025 earnings call

• Revenue grew 16% year-over-year and nearly 8% sequentially in the first quarter, with adjusted EBITDA growing nearly 18% year-over-year and flat sequentially.
• Implemented a two-phase strategy: proactively negotiating with suppliers and customers for stability and profitability, and implementing a multi-level internal cost reduction program with an estimated $6 million in annual cost reductions starting in Q2.
• Conducted a goodwill impairment assessment, recording a non-cash charge related to certain reporting units, which is non-cash and doesn't impact day-to-day operations.
• New Western and Eastern Hemisphere segment reporting structure started, with the Eastern Hemisphere expected to grow its revenue contribution throughout the year.
• Highlighted five points: tariff impact anxiety, competitive initiatives, adjusting operations to demand, confidence in complex wellbore solutions, and belief in best-in-class offerings and global footprint delivering results.

Total consolidated revenue for the first quarter was $42.9 million. Tool rental revenue was approximately $34.5 million, accounting for a significant portion, and product sales revenue was $8.3 million. The Western Hemisphere segment, including Directional Tool Rentals, Wellbore Optimization Tools, Premium Tools, and bit repair, remains steady. The Eastern Hemisphere, consisting mainly of Deep Casing Tools, European Drilling Projects, and Titan Tools, saw choppiness in Q1 2025 compared to Q1 2024. Tool rental revenue in the Eastern Hemisphere increased significantly due to acquisitions, while product sales declined for Deep Casing Tools but are expected to pick up as customer-owned inventory is depleted. The Eastern Hemisphere accounted for 11% of total revenue in Q1 2025, with expectations of growth throughout the year.

• Full year 2025 revenue expected to be in the range of $145 million to $165 million.
• Adjusted EBITDA expected to be within $32 million to $42 million.
• Gross capital expenditures expected to be between $18 million and $23 million.
• 2025 adjusted free cash flow expected to range between $14 million to $19 million.
• Initiated $6 million annual cost reductions in Q2 to address potential disruptions.

• Industry headwinds including tariffs, potential recession lowering hydrocarbon demand, OPEC+ production increase, and volatility in commodity prices and rig counts.
• Uncertainty in the marketplace due to various challenges impacting order flow.

Q: 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?

A: Thanks, Steve. 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.

Q: 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?

A: 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.

Q: 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?

A: 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.

Q: Could you comment on your CapEx program for this year on the growth side and the things that you’re spending money on and which regions you’re ultimately trying to growth with that growth CapEx?

A: 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.