TETRA Technologies Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 1, 2023

There are 6 speakers on the call.

Operator

After today's presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Rigel Gonzalez, Manager of Corporate Finance and Investor Relations, please go ahead.

Speaker 1

Thank you, Chris. Good morning and thank you for joining TETRA's Q2 2023 results The speakers for today's call are Brady Murphy, Chief Executive Officer and Elijio Serrano, Chief Financial Officer. I would like to remind you that this conference call May contain statements that are or may be deemed to be forward looking, including projections, financial guidance, profitability and estimated earnings. These statements are based on certain assumptions and analysis made by TETRA and are based on several factors. These statements are subject to several risks And uncertainties, many of which are beyond the control of the company.

Speaker 1

You are cautioned that such statements are not guarantees of future performance and that actual results may differ materially from those projected in Free cash flow, net debt, net leverage ratio, liquidity, returns on net capital employed or other non GAAP financial measures. Please refer to yesterday's press release or to our public website for reconciliations of non GAAP financial measures to the nearest GAAP measures. These reconciliations are not a substitute for financial information prepared in accordance with GAAP and should be considered within the context of our complete financial results for the period. In addition to our press release announcement that went yesterday, we encourage you to also refer to our 10 Q that we also filed yesterday. I will now turn it over to Brady.

Speaker 2

Thanks, Rego. Good morning, everyone, and welcome to TETRA's Q2 2023 earnings call. Our historically strong second quarter results demonstrates Strength of our management team and our broader employees' ability to execute on our base business while also making meaningful progress on our longer term strategic growth I'll provide an overview of our Q2 highlights before turning the call over to Lihio to provide an overview of our financials and then we'll open the call for questions. According to Spears and Associates, global E and P spending is still 55% below the peak year in 2014. Yet in the Q2, we delivered the highest quarterly revenue excluding discontinued operations in the company's history.

Speaker 2

While doing so, we achieved the highest adjusted EBITDA in almost 8 years without the benefit in the quarter of CS Neptune activity. Although both segments posted impressive year on year revenue growth, completion fluids and products led with 31% growth year on year and 42% Growth sequentially. The recent capacity investments we made in our key offshore and deepwater markets in Brazil, Gulf of Mexico and North Sea have already contributed In a meaningful way, while offshore activity continues to grow at an encouraging pace. Our strong Q2 results were achieved without the benefit Of a TETRA CS Neptune job in the 2nd quarter as the North Sea jobs we were planning for the 2nd quarter have been delayed. 1 of these jobs is now scheduled for load out to the rig this week.

Speaker 2

As a larger percentage of the North America Shale Tier 1 acreage is drilled and completed, We remain with our beliefs even more conviction that we're still in the early stages of a longer term offshore and deepwater upcycle. Tetra's business model will sales to over 20 countries year to date as a full service fluids provider, including reclamation services, As well as the fluids product sales provider to the major service companies gives us great flexibility in our ability to grow with increasing international activity. Equipped with an extensive portfolio of high value completion fluids and a family of environmentally friendly solutions, TETRA is well positioned for this longer term growth cycle. In addition, our industrial calcium chloride business achieved its strongest quarter in history With year over year growth of 20% as we entered the Northern Europe seasonal peak with our improved supply chain driving favorable manufacturing variances And higher production volumes. As the largest producer in Northern Europe, we have invested to expand manufacturing capacity in the region, continuing to explore new opportunities.

Speaker 2

An example of this is the second order from a customer who is utilizing our high purity calcium chloride In the lithium production process, we're following their progress closely and look forward to future developments. For Water and Flowback Services, we previously announced that for 2023, our focus would be on margin enhancement over growth. And in the Q2, we achieved the bottom end of our year end 2023 adjusted EBITDA margin target well ahead of schedule. Although revenue was flat quarter on quarter, our margins improved sequentially by 170 basis points to 18.4%. Our continued focus on innovation and automation is driving margin expansion within our water and flowback services.

Speaker 2

With more and more emphasis Moving and treating produced water, differentiated offerings, service quality and reliability are driving customer decisions. Demand for our fleet of TETRA sandstorms remains strong as we continue to make enhancements to further automate the equipment and drive further efficiencies. While we have seen some signs of softness in certain U. S. Land segments, pricing has remained relatively stable for our differentiated offerings.

Speaker 2

With regards to our produced water treatment for beneficial reuse, we continue to advance the engineering work required to achieve Our goal of a commercial design by year end. The customer interest level driven by more and more challenges with produced water disposal options Continues at a very high level and with our ongoing customer engagements, we believe we're in a very good position to capitalize on this future market. For the overall segment, we will continue to execute on the initiatives we started this year, keeping us on track to achieve our margin enhancement goals, while also achieving double digit growth for our overall segment in 2023. Moving on to our efforts with our Arkansas Smackover brine evaluation and potential development plans for lithium and bromine production. We achieved some very important milestones during the quarter.

Speaker 2

We recently entered into a memorandum of understanding Saltworks LLC related to a newly proposed brine unit in the Smackover formation in Southwest Arkansas. If approved by the Arkansas Oil and Gas Commission, this 6,138 Acre Unit is 48% larger than our original proposed unit And it is with a partner that brings tremendous wealth of experience and financial strength. We at SaltWorks have agreed to collaborate in key areas Upstream design and development to optimize long term brine production, technology development for lithium extraction and associated engineering studies required to develop The proposed brine unit. We will communicate further developments as we achieve certain milestones. Also during the Q2, we completed the drilling of our 2nd test well in our newly proposed unit with sampling tests underway to update the prior test results noted In the inferred resources study for bromine and lithium.

Speaker 2

We've contracted Hargrove and Associates to execute a front end engineering and design study Feed for lithium production facility. The lithium plant design will be optimized to share the production wells, injection wells and pipelines consistent with previously Completed feed for the bromine plant, which was completed during the Q1 of 2023. With that, I'll turn it over to Elijio to I'll provide some additional commentary and then we'll open it up for some questions.

Speaker 3

Thank you, Brady. Completion Fluids and Products segment adjusted EBITDA $31,800,000 increased 80% year over year and 77% sequentially. Adjusted EBITDA margins improved from 26.1 percent in the first quarter to 32.4% in the second quarter. We have historically only been above 30% adjusted EBITDA margins for this segment when we have had large TETRA CS Neptune projects. We believe pushing our EBITDA margins above 30% without the benefit of CS Neptune speaks The strength of our integrated business model and an exceptionally strong performance from our supply chain organization sourcing key raw materials at attractive prices In addition to our commercial team driving price increases, both revenue and adjusted EBITDA for the segment were the highest since 2015 When there were approximately 50% more active deepwater rigs operating globally.

Speaker 3

The exceptional fall through was driven by higher production volumes And improved supply chain in an industrial business as well as high margin completion fluids projects, including several large projects in the Gulf of Mexico and in Europe. We remain encouraged by the growth in deepwater projects underpinned by rising flow utilization rates in many regions. Deepwater revenue for the quarter was approximately 28% of the total segment as compared approximately to 23% a year ago, indicating growth of more than 60% year over year. In the Q3, we will see the seasonal drop off of the industrial chemicals business, But the Completion Fluids business is expected to post another strong quarter as we ramp up deliveries for several large projects in Brazil and the Gulf of Mexico. Shifting to our Water and Flowback Services segment, revenue improved 17% year on year, while remaining relatively flat sequentially, Consistent with our focus on margin enhancements instead of growth via incremental capital investments.

Speaker 3

Adjusted EBITDA improved by 43 percent year on year and by 10% quarter over quarter. Adjusted EBITDA margins improved 1 170 basis points from 16.7 percent in the Q1 of this year to 18.4 In the Q2 of this year, marking the highest margin since the Q4 of 2018 as the team continues to drive operational efficiencies and focus on margin expansion. In the Q2, we commenced our 3rd early production facility in Argentina. We also secured a contract to expand 1 of the 3 Early production facilities that we have in Argentina with an extended contract term with a customer prefunding the capital expenditures required for this expansion. This approach points to our focus on managing capital investments and working capital.

Speaker 3

We're also awarded a contract Production testing in the Middle East. For the Q4, we for the Q3, we modest sequential growth in international and flat to slightly down revenue in the United States. Cash flow from operating activities $28,400,000 in the Q2 compared to cash flow from operating activities of $17,900,000 in the Q2 of last year and compared to $9,000,000 in the Q1 of this year. Adjusted free cash flow from continuing operations was $17,700,000 at funding capital expenditures $10,300,000 net of proceeds. The high conversion of net income to cash flow from operating activities and to adjusted free cash flow, While achieving a revenue increase sequentially of 20% reflects the quality of the incremental revenue and the company's focus on managing working capital.

Speaker 3

Working capital at the end of the Q1 was $107,000,000 Working capital only consumed $500,000 of cash in the 2nd quarter compared to use of cash of $5,200,000 in the 1st quarter 2023. Day sales outstanding improved by approximately 5 days during the quarter. As of June 23, our trailing 12 months return on capital employed or RONSI, a non GAAP measure was 18.2%, Materially above our average cost of capital. At the end of the second quarter, unrestricted cash was $28,000,000 and availability Under our credit facility was $71,000,000 Liquidity at the end of the second quarter was $99,000,000 And improved to $102,000,000 as of the end of the day yesterday. In addition to Friday's closing price In addition, based on Friday's closing price, our holdings in Standard Lithium and CSI Compressco combined for a total market value of approximately $9,400,000 And our investment in carbon free is currently valued at approximately $6,300,000 Combined this investment totaled almost $16,000,000 During the Q2, we booked a favorable $4,700,000 adjustment to earnings to reflect charges in Costs previously incurred and passed on to SaltWorks consistent with the MOU that we recently signed.

Speaker 3

We agreed to share with SaltWorks previous work and findings in Arkansas for the first and second test well, the bromine feed study and the reservoir analysis. WellWork agreed to pay up to 51% of those costs up to a certain amount. We expect to collect $4,700,000 in the 3rd quarter and we'll continue to pass on to them Up to 51% of costs related to the Arkansas investment up to a certain limit. When reporting GAAP net income, This $4,700,000 benefit is reflected in our results. However, when reporting adjusted EBITDA of $36,000,000 in the 2nd quarter, We did not reflect this favorable benefit in our adjusted results.

Speaker 3

Our adjusted results do not include the benefit of This benefit and will be reflected in the Q3 free cash flow and cash flow from operations when we collect this cash in the coming quarter. I'll turn this back over to Brady for closing comments before opening it up to questions.

Speaker 2

Okay. Thank you, Elijio. So in closing, We're very pleased with our Q2 results as well as the near to longer term outlook for both of our business segments as well as the major milestones we continue to achieve with our longer term strategic opportunities and projects. So with that, we'll open it up for some questions.

Operator

We will now begin the question and answer session.

Speaker 2

Thank you, Marty.

Speaker 4

Could you maybe take some time to talk about the salt work MOU and what that might mean for the timetable to getting to the point where a production Facility for lithium might be FID ed, assuming that the results from the second well come back positive?

Speaker 3

Good question, Marty. The MOU is that it's a memorandum of understanding, outlining some areas that we Want to work together collaboratively and it also includes some limited binding agreements. One of those binding agreements for example is the sharing of cost And the sharing of data for the work that we have done to date. Once we get our approval for our Arkansas unit For the 6,100 Acres that Brady mentioned, then we will work with our partner to try to convert that MOU Into a more definitive agreement. So at this point, we've got understanding with Some key items to convert into a final term and we filed as part of our 10 Q a redacted copy of the MOU That I would encourage you to take a look at it as attached to our 10 Q.

Speaker 2

And Marty, I would add as it relates to the timing, Once our unit moves forward and as Leo said, we established more definitive agreements with SaltWorks. We're continuing to move forward with the evaluation of our unit with the FEED study that we've kicked off in lithium. We would hope to have those things pulled together between now and the end of the year or by Q1 of next year. And once we get a final investment decision made by our Board and the SaltWorks Board, then we expect 2 years from that period of time, we will be in 1st production for bromine and lithium. That's our expectation.

Speaker 4

Okay. And then my follow-up question, I want to ask about Neptune projects in the Gulf of Mexico. Could you give us an update in terms of Line aside on any potential projects there?

Speaker 2

Yes. So we continue to have good success With Neptune, we did have some delays in the Q2 for some wells that we had planned. They were pushed to the right. As I mentioned in my comments, we're actually loading out a Neptune job for the North Sea for later this week. And then we expect some of the other jobs to materialize in the Norway sector of the North Sea as well as the UK sector later in the year.

Speaker 2

For the Gulf of Mexico, as we've mentioned before, these are much bigger longer term planned projects. We have line of sight of several Of those projects working very closely with the customers, if we're fortunate, we may get a well in the Q4 of this year, But we still believe next year is more likely for some of the Gulf of Mexico projects to start materializing.

Speaker 4

Great. Thank you. I'll turn it back.

Operator

The next question comes from Stephen Gengaro with Stifel. Please proceed.

Speaker 5

Thanks and good morning everybody.

Speaker 2

Good morning.

Speaker 5

I think the first thing I wanted to ask about, The quarter was obviously very good, right? And you had the normal seasonality from Europe, but it was very strong. And what I wanted to try to understand a little bit was, A, how the margins were impacted by the European Chemicals business Because the EBITDA margins were obviously excellent. And then B, as we think about the Q3 and when I sort of just think about The normal kind of progression we've seen historically, it feels like a high 20s EBITDA number is kind of in the ballpark. I was curious if you could comment on that at all.

Speaker 2

Sure. Yes. Thanks, Steven. I'll handle the first part of that and then ask Elijio to comment on the 3rd Yes, the margins were very strong in the quarter. I would say really it's been it was across the board.

Speaker 2

We did have very good margins out of our European calcium chloride business. We're very pleased with the way the team has been managing the supply chain And the pricing for that business for us. But also remember we had quite a few deepwater wells in the quarter. Although they're not Neptune jobs, they're still very good margin jobs for us and pretty high volume. So I would say it's pretty even across The Board as it relates to the quarter for the margin impact.

Speaker 2

I'll ask Elijio to comment on the 3rd

Speaker 3

Yes, good question, Marty. On the Q3, Steve, I'm sorry. Historically, we've seen About a $14,000,000 to $50,000,000 sequential increase in revenue. So let me give you some 3rd quarter color and what I'll do is I'll benchmark it To the Q1, which doesn't have the seasonality in Europe, we believe that revenue in the Q3 is going to be somewhere between 5% 8% higher In the Q1 of this year. And again, a reminder is that the second quarter is impacted by the seasonality for Northern Europe.

Speaker 3

We think that Q3 adjusted EBITDA will be somewhere between 30% to 40% above the $20,600,000 from the first quarter of this year. And I think this demonstrates a continued growth in the offshore markets, margin expansion with the onshore business That we continue to benefit from. And the 3rd quarter numbers that I called out are contingent on several significant deepwater projects that we are Expecting in the Q3, I mentioned some in the Gulf of Mexico and Brazil. And the expectation right now is that none of those slipped from September into October or Q4 to be able for us to deliver the numbers that I mentioned.

Speaker 5

Great. That's helpful color. Thank you. And then just so that I understand, the you made brief comments on water Revenue, it feels like there's some headwinds in U. S.

Speaker 5

Land. So the numbers you just provided, I think, would be in the backdrop of kind of a flattish water business?

Speaker 2

Yes. For Q3, I think you can think about our revenue as fairly flat. There is some Obviously, activity has been impacted in some of the basins. So we're not immune to that. We will see some Decline in North America, but we're going to be offsetting that with our international business.

Speaker 2

So I would really think about For Q3, fairly flattish in the Water and Flowback segment. But again, as Elijio mentioned, our margin expansion progress continues And we would expect to be slightly higher on the margin side with that flattish revenue.

Speaker 3

And even I'll add that historically we've grown by And at this point, we're focused on returns on capital. We're focused on free cash flow And margin enhancement rather than growth through the addition of more CapEx.

Speaker 5

Okay, great. Thanks. And just One more for me. The results you've seen have obviously been really they've been really good without I think without any pure flow In the Q2 yet. And I know EOS has been working towards this DOE loan and I think it's their Z3 line coming on stream.

Speaker 5

Should we be or maybe a better question is, are you thinking about The PuraFlow impact really ramping in 2024, I mean, is that a good way to think about the impact Of PureFlow on the fluids business or you think it's sooner or later than January 1?

Speaker 2

Yes. Stephen, look, we continue to stay in very close contact With EOS, not only for the PureFlow, but also in discussions with them to provide their full electrolyte, Which is a great opportunity for us. But as you know, they're transitioning to their new Z3 technology. I think until they have their automation equipment up and running, the volumes will probably be pretty slow. But Once they have their automation equipment up and running, our expectations, the orders will really accelerate.

Speaker 2

And I don't want to speak for them, but we think that's probably more Likely in 2024 then before the end of the year.

Speaker 5

And just to differentiate, am I Are you differentiating between just PureFlow and the full electrolyte? And how does that

Speaker 4

what's that? I'm not sure

Speaker 5

I understand exactly The difference and the revenue difference for you guys?

Speaker 2

Yes. So the full electrolyte is made up of quite a few different Chemical composition, our PureFlow, the zinc bromide as you know has been the first Real part of the electrolyte that we penetrated the zinc bromide batteries with. However, there is quite a bit of other chemistry, complex chemistry Involved in the full electrolyte and we are working with actually several of our customers, not just EOS To understand the composition of that and to be able to manufacture that and that's that is another step change in potential revenue for us out of that product

Operator

At this time, we are showing no further questions in the queue. And this does conclude our question and answer session. I would now like to turn the conference back over to Mr. Murphy for any closing remarks.

Speaker 2

Well, thank you very much. As I stated before, we're extremely pleased With the quarterly results that we had, but also just as importantly, the progress that we make with our longer term strategies, which offer tremendous

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TETRA Technologies Q2 2023
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