Stephen Ferazani

Stephen Ferazani asked for Drilling Tools International's initial assessment of the potential impact of recent Middle East developments on its operations and strategic positioning, acknowledging the early stage and uncertainty of the situation.

Answer

Wayne Prejean, CEO, stated that Eastern Hemisphere revenue, which includes the Middle East, constitutes about 14% of total revenue. He noted that while the full impact is unknown, operations are currently continuing with minimal disruption, personnel are safe, and tools are being moved. He highlighted the company's use of its COVID-era crisis management playbook to navigate the situation effectively.

Stephen Ferazani asked about the drivers behind the strong EBITDA margin and adjusted free cash flow in the fourth quarter, the company's strategy for capital allocation given low leverage, opportunities in the Eastern Hemisphere and APAC, and the implications of the Middle East conflict on operations and guidance.

Answer

CFO David Johnson attributed the strong Q4 EBITDA margin to a combination of less typical seasonal softness, benefits from earlier cost reductions, and a favorable product mix, particularly from lost-in-hole DBR sales. He also highlighted the consistent generation of durable free cash flow, noting that CapEx is typically front-loaded. CEO Wayne Prejean discussed the healthy M&A pipeline, stating that funds would be allocated to debt service, M&A, and buybacks, with a focus on accretive opportunities. He detailed growth opportunities in Africa, the Middle East, and Asia-Pac, driven by new technologies like drilling reamers and ClearPath products. Prejean also noted that the company models U.S. revenue per rig as steady-state with upside from new technologies. Regarding the Middle East conflict, he stated that operations have experienced minimal disruption thus far, with personnel safe and accounted for, and the company is prepared to adapt to dynamic market shifts.

Stephen Ferazani from Sidoti questioned the drivers behind the confident double-digit revenue growth guidance for the Aftermarket Services (AMS) segment and asked for justification of the higher maintenance and 'other' CapEx guidance for 2025.

Answer

President and CEO Brad Childers attributed AMS confidence to high overall market utilization, which drives demand for maintenance services, and a more profitable mix of services over parts. He explained higher maintenance CapEx is due to the timing of major overhauls for more and larger units. CFO Doug Aron added that some AMS work was postponed from Q4 2024 to early 2025 and confirmed 'other' CapEx is primarily for new vehicles.

Stephen Ferazani of Sidoti & Company asked about the status of the company's credit agreement refinancing, the sufficiency of recent covenant relief, the timing of new rail agreements relative to market conditions, Q1 operational expectations, and the potential for suspending the quarterly distribution.

Answer

EVP & CFO Adam Altsuler stated that the company is proactively engaged with its lenders and is not in a 'wait-and-see' mode, highlighting the planned sale of the Casper terminal for liquidity. EVP & CCO Brad Sanders and Chairman & CEO Daniel Borgen explained that new agreements are typically reactive to market-driven price differentials and that the DRUbit program's progress is independent of these cycles. Borgen also confirmed Q1 operations are expected to be similar to Q4 and that the distribution is evaluated quarterly by the Board based on multiple factors.