Drilling Tools International Corp. (DTI) Earnings

Management highlights

- Overall Q2 2026 Performance * Generated total consolidated revenue of $38.1 million, adjusted EBITDA of $8.4 million, and adjusted free cash flow of $4.1 million, marking a notable improvement in cash flow compared to both Q1 2026 and Q2 2025. * Net loss attributable to stockholders was approximately $1.8 million (5 cents per share), and adjusted net loss was $575,000 (2 cents per diluted share). * Gross margin for the tool rental segment remained above 70%, a strong baseline that validates the underlying quality of the business. * Capital expenditures totaled $4.2 million, with maintenance CapEx equal to 12% of total revenue, primarily funded by tool recovery revenue. * Former sponsor HHEP completed its share distribution to limited partners in Q2, resulting in approximately 90% of outstanding DTI shares held in public float, establishing DTI as a fully independent public company with improved trading liquidity. - North America Activity * The quarter opened with a seasonal Canadian spring breakup that removed 50 rigs from the North American rig count in April, while U.S. operators held activity flat amid uncertainty from the initial Iran conflict. The North American rig count built steadily through the quarter, reaching 777 rigs in July, 10% above the Q2 average. * U.S. land bottom hole assembly rig additions are outpacing broader rig count growth, pointing to improved domestic utilization in coming months. * Canadian activity ran ahead of prior year levels for the full quarter, and July activations reached 193 rigs (the highest since February), signaling that post-breakup softness has largely abated. - Eastern Hemisphere Activity * Regional conflict in the Middle East created significant operational disruption, with intermittent activity and rig moves cutting into potential contributions. DTI's lean operations and specialized focus kept demand for its tools steady through volatility, with limited additional resources or headcount required. * DTI's proprietary ClearPath stabilizer technology is gaining strong traction in high-value offshore markets, and new awards are expected to drive a material increase in European contribution in H2 2026. * DTI is redeploying capital from mature markets to these higher-return international opportunities, which will meaningfully change H2 2026 results and create growth runway into 2027. - Commercial and Strategic Position * DTI has gained market share in recent months while holding firm on pricing, as operators increasingly recognize that DTI's reliable performance and specialized tools lower total well costs. * After several quarters of pricing compression, pricing pressure has stabilized. Most momentum arrived late in Q2, so its financial benefit was muted in Q2 results, but positions DTI well for the remainder of 2026.

Guidance

- Management reaffirmed the full-year 2026 guidance ranges originally provided: revenue of $155 to $170 million, adjusted EBITDA of $35 to $45 million, and adjusted free cash flow of $17 to $22 million. - The maintained guidance implies a materially stronger second half of 2026 compared to the first half, with substantial free cash flow generation in H2. - The guidance range incorporates the elevated capital expenditure plan for targeted investments in ClearPath stabilizer technology to support Norwegian offshore growth opportunities tied to long-term rental agreements; this investment is expected to push full-year 2026 adjusted free cash flow toward the lower end of the guided range. - Management expects sequential improvement throughout the third and fourth quarters of 2026, with growth momentum continuing over the next 12 to 18 months.

Segment performance

By business line: Tool rental revenue was $29.6 million, accounting for 77.7% of total consolidated revenue. Product sales revenue was $8.5 million, accounting for 22.3% of total consolidated revenue. By geographic segment: Eastern Hemisphere segment contributed 18% of total company revenue in Q2 2026. Western Hemisphere segment represents the majority of the company's total revenue.

Risks & headwinds

- Geopolitical volatility and ongoing conflict in the Middle East caused operational disruption, including intermittent activity, delayed project start-ups, and lower-than-expected contribution from the region in Q2 2026, accounting for roughly half of the global sequential rig count decline that impacted activity levels. - Macroeconomic uncertainty, volatile commodity prices, and customer caution negatively impacted activity levels in the first half of 2026. - The recovery in Canadian activity post-spring breakup was flatter than management initially anticipated, though softness has largely abated entering Q3. - Pricing pressure had compressed margins in parts of the rental business through the first half of 2026, though management notes this pressure has now stabilized.

Analyst Q&A

• Q: The midpoint of maintained guidance implies strong sequential and year-over-year H2 growth. What is driving this expected improvement, and is Canada's positive momentum sustainable into 2027?

  A: Canada's rebound is a bright spot, with activity already running above prior year levels. The provincial government is pro-oil and gas and prioritizing midstream takeaway capacity expansion, which supports operator activity growth; DTI will see how this trend holds through the upcoming peak winter drilling season. In the U.S., activity is rebounding with overall net rig additions, and higher commodity prices are supporting confidence for continued activity growth through H2. Internationally, DTI is gaining traction for its ClearPath technology in high-value offshore markets, and is growing activity across multiple Eastern Hemisphere markets, despite delays from conflict-driven disruptions in Saudi Arabia.

• Q: Why has the ClearPath stabilizer technology ramped up so successfully, and how does its success change DTI's approach to M&A?

  A: ClearPath evolved from a geometric design to a full systems approach for high-value drilling applications, and it took time to develop consistent performance data and build customer confidence in its value proposition. DTI maintains a pipeline of potential M&A opportunities across categories, including technology-driven and niche product-line targets as well as larger acquisition opportunities. The success of ClearPath, which came via acquisition, reinforces DTI's strategy of pursuing differentiated products and technologies that can scale on DTI's existing platform. DTI remains disciplined and will only pursue opportunities that strengthen its platform and create long-term shareholder value.

• Q: What is the outlook for 2026 capital expenditure given the increased investment in Eastern Hemisphere value-add equipment?

  A: DTI does not expect the typical large ramp-down in CapEx that usually occurs in H2, due to investment supporting ClearPath expansion. This elevated CapEx means DTI is likely to land at the higher end of full-year CapEx and the lower end of the guided adjusted free cash flow range, while revenue and EBITDA are still expected to land near the midpoint of the guided ranges. Most benefits from this H2 2026 investment will flow into 2027, supporting long-term growth.