Q1 2020 Earnings Call
Technologies first quarter 2020 results conference call.
Speakers for today's call, our Brady Murphy, Chief Executive Officer, Wakeel, Serrano, Chief Financial Officer, and Jasek, New <unk>, Vice President Finance and Treasurer.
<unk> be in listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero.
After today's presentation there'll be an opportunity to ask questions to ask a question May Press Star then one on your Touchtone phone to withdraw your question. Please press Star then too. Please note. This if that is being recorded.
Now I'll turn the conference over to Mr. Me. Please go ahead.
Thank you Brenda today's conference call may contain certain statements that are or maybe deemed to be forward looking statements.
They are based on certain assumptions houses made by Petrobras.
Based on a number of factors. These statements are subject to a number of risks and uncertainties many of which are beyond the control of the company.
Caution that such statements are not guarantees of future performance and actual results may differ materially from those projected forward looking statement.
In addition in the course of the call well neighbor pardon that that free cash flow adjusted EBITDA adjusted EBITDA margin adjusted profit before tax or adjusted earnings per share backlog liquidity coverage ratio or other non-GAAP financial measures. Please refer to that that's really well to our public.
Slide four reconciliation of non-GAAP financial matters to the nearest GAAP measures. These reconciliations on not adopted it for financial information prepared in accordance with gap and should be considered within the context of our complete financial results for the period.
I will now turn it over to Brady.
Thank you also can good morning, everyone welcome to the Tetra technologies first quarter 2020 results conference call.
Some highlights for the quarter and discuss how the current market conditions amid the covert 19 pandemic in subsequent.
Impact on oil prices are impacting our businesses then I'll turn it over to really go for some balance sheet and liquidity details, which in turn will be followed by your questions.
As it relates to cope with 19 pandemic I'm very pleased the way our management team and employees have responded to this crisis.
Every employee is taken this very seriously and implementing the safe practices that have been provided by the centers for disease control and prevention and the occupational safety and Health administration.
During this extraordinary time, we have implemented many actions to keep our employees and their families safe all while delivering on our customers' requirements at the highest levels of service quality.
Continued tomorrow the changes in the guidelines and we'll just or action plans accordingly in the meantime, I want to thank all the employees for their contribution.
It was safe working environment and delivering an excellent quarter during these unprecedented times.
Turning to our results for the quarter. The first quarter of 2020 was very strong quarter and start to the year for tetra by achieving the highest first quarter adjusted EBITDA in five years.
Despite U.S. land rig activity in the first quarter that was roughly 25% below first quarter of last year, our adjusted EBITDA improved 32% or a year over year basis to nearly $48 million, 9% lower revenue.
The speaks to the successful strategies that we have been implementing as well as the management team and great employee base that we have a touch or the you're on your free cash flow improvement of nearly 40 million was also very important for us as we head into a very different an unprecedented market environment.
I'm extremely proud of our results and what our employees have accomplished.
In addition to the year on your cash flow and EBITDA improvements the highlight of the quarter was our completion fluids and products business.
Formats, which was which by all accounts had a very strong quarter.
With adjusted EBITDA margin of 28.7%, we have achieved or exceeded our goal of adjusted EBITDA margins for our based completion fluids business of greater than 20% for the fourth consecutive quarter.
In the past few quarters, we have announced major awards and many of the key deepwater markets, including eight Asia Pac, Brazil, West Africa, and Gulf of Mexico.
In the first quarter, 35% of our completion fluids and product revenue came from customers deepwater completion projects as we continue to build market share in high value deepwater completion markets around the world.
We also continue to grow the CS Neptune pipeline projects in both eastern Hemisphere, and Gulf of Mexico, and given what we know today. Several these projects should occur before year end.
We're very pleased that Tetra CS Neptune was awarded for the year 2020, the prestigious N C. Special Meritas Award for engineering innovation for drilling fluids and stimulation in in the drilling fluids and stimulation category.
Another 40% of our completion fluids in products revenue for the year is expected to be from industrial market, which is comprised of agricultural food manufacturing, a flame retardant products and seasonal weather products amongst others.
This market is holding up very well in the current environment in the fourth quarter and the first quarter, we renewed a four year contract if one of our largest industrial products customers in United States.
Our northern European Industrial chemicals business is on track in the second quarter to contribute between 10, and 15 million of incremental revenue and up 10 million.
Cash from operation activities above its normal quarterly run rate.
As mentioned previously we have negotiated long term local supply raw materials for chemical processing plant in Louisiana in West, Virginia and in the first quarter, we expanded that supply with additional agreements. This has increased our available capacity well into the future. What is also let us to the difficult decision to close our higher cost mechanical evaporate.
And chemicals operations and Eldorado, Arkansas.
Operations, there are expected to wind down before the end the second quarter.
[noise] bordering flowback services business held up relatively well in the fourth quarter were flat sequential revenue, but with adjusted EBITDA margins, improving by 200 basis points to 11.8% from the fourth quarter and adjusted EBITDA, improving 21% to $6.8 million.
As this business is heavily levered to the U.S. onshore completions activity the market, which will be impacted the most in today's environment. We expect activity dropped dramatically in the second quarter as completion activity declines.
We're taking all the necessary steps to one that business with expected activity levels.
In addition to companywide cost reduction actions, which I will touch Paul later, we expect to exit the second quarter with 35% fewer employees and our U.S. land operations for this segment versus where we were as at March 31st of this year.
Despite the decline in the market, we have been successful deploying our sandstorm San separation technology, which finished at the end of March with the highest utilization since we introduced the and the second half of last year.
While our capital expenditures will be reduced until market conditions improve this is one of the areas. We're willing to invest and that's then given the rapid customer adoption and market short share gains at good returns.
We also continue to make great progress with our integrated project strategy and ended the quarter with 30 integrated projects for 17 different customers, providing those services and all the major U.S. basins.
<unk>, including Appalachian Basin, which is much less affected by the decline of current crude oil prices.
Well, we know the next several quarters will be extremely challenging for this business. We believe the combination of aggressive cost cutting increased adoption of our automation products and services and delivering on our new technologies that should help us maneuver through this downturn.
Moving on for compression business, which performed relatively well in the first quarter. Despite much lower sequential equipment sales and aftermarket activity first quarter. Adjusted EBITDA was 26 million despite lower sequential adjusted EBITDA or profitability increase does come as seen by our first quarter adjusted EBITDA margins that were 240 basis points higher at 28.
0.8% versus 26.4% in the fourth quarter of last year.
However in March.
Especially near the end of the month, we started seeing weakness in the market that some customers returned equipment, while cutting their drilling and production plant in response to the downturn in the industry. This is also accelerated into May and April our utilization at the end of March was 86.5% down 350 basis points from the end of 2019.
As we move onto the second quarter, we expect our compression business to be challenged by customers shutting in production to align with much lower product demand and lack of available storage the production shut ins or a new development from prior downturns and are having a rapid impact on our business today, we've heard from at least 10 publicly traded operators, who announced plans to.
For the U.S. shale production.
By the end of May we expect up to 20% of our fleet to be in fact, it less flush shut ins in some form or fashion.
Furthermore, historically only 2% of our fleet has been on standby rates at any point, we now expect over 10% of our domestic fleet will be on standby rates by the end of May.
Given the lack of new equipment orders over the past several months and poor near to midterm outlook for demand of new compression equipment.
We decided to shut down or fabrication operations in Midland, Texas. The closure of that facility is anticipated to happen. The early third quarter of 2020, as we finalize fabrication of the remaining current backlog.
As we exit the fabrication business. We've also look to sell our prime 38 acre Midland facility and real estate.
Looking forward things have changed dramatically in the energy markets and continue to change very rapidly. The U.S. land rig count is now below 400 or down 50% since beginning of the year and by all accounts fracking completion activity is declining just as rapidly most of all <unk> not all MP operators have revised our 2020 budgets in the last six weeks.
And we now project upward or capital spending for the U.S. land be down 40% to 50% from 2019 levels.
We have responded accordingly with across the board company cost reductions, which includes salary reductions headcount reductions across the organization a 20% reduction in board of directors cash retainers reduction of all discretionary expenditures and suspension of the comp employer world One k. matching program as well as negotiated reductions will expire.
Managers with many of our suppliers.
In addition, we have reduced our tetra only capital expenditures to between 10 million and 59 for the year well the vast majority already committed in the first half.
We'll continue to adjust the cost structure to match the current market conditions.
So in summary, we had a very strong first quarter and challenging environment, but with over $100 million of adjusted EBITDA in the past two quarters, and a 40 million improvement in touch or only cash flow year on year in the first quarter, we've positioned the company very well to navigate this crisis the diversity of your diversity of our business with a large component.
Deepwater offshore and industrial markets and our vertical integration that provides us a cost advantage will help us move through what.
We'll be a very difficult period for the service industry in the U.S. land markets. When this market eventually rebounds, that's where we'll be very well positioned to be even stronger.
With that I'll turn it over to Alico to provide some financial comments on cash flow and balance sheet and then we'll open up for questions. Thank you Brady.
In the first quarter Tetra only generated free cash flow from continuing operations a $4.7 million.
From $1 million into fourth quarter of 2019.
And up nearly $40 million from the same period up 2019.
Well some of this cash generation with you to collections of receivables that slipped from the fourth quarter of 2019.
A significant portion but from our strong first quarter operating result.
And our focus on working capital management.
This cash generation with also above our most recent guidance.
It's a reminder, typically the first quarter of each year consumes cash do they tightening up large annual payments.
Despite this historical seasonality.
We're able to achieve strong cash generation as we move into what we expect to be a challenging balance of the year.
During the quarter, we also generated $22 million a consolidated cash provided by operations.
A 17 million dollar improvement sequentially.
Tetra only liquidity at the end of the first quarter improve approximately $13 million from the same period a year ago.
But they seem to the company well to managing to this downturn.
Tetra only liquidity is defined as unrestricted cash on hand, this availability under our revolving credit facility.
You're one of a downturn is typically met with cash generation, if we monetize working capital.
Particularly if have collected in inventory from collecting receivables and draining inventory.
We don't expect this to be any dependent believe their liquidity could increase over the next one to two quarters.
For Tetra only first quarter capital expenditures were $5.6 billion.
In 2020, we expect Tetra only capital expenditures to be between 10 and $15 million.
Down from our prior guidance of between 20 and $30 million.
As we adjust our capital spending to their current market conditions.
That's the only net debt at the end of March with $185 million.
With cash on hand up $22 million.
Our 220 million dollar term loan is not due until August 2025.
And our 100 million dollar asset base revolver.
Which has a current borrowing base of approximately $60 million.
That's not mature until September 2023.
The only significant maintenance covenant, we have to comply with the one time interest coverage ratio on the term loan.
At the end of March our interest coverage ratio with 3.9 times.
This is the covenant of onetime.
Annual interest expense on this term loan is approximately $16 million to $17 million for the coming here.
We believe we have the yet we believe we have adequately liquidity to manage this downturn.
And that's before like again remind everybody that tetra CS I compresscos debt are distinct and separate with no cross default.
No cross collateral.
No cause guarantees on the dead between Tetra and CSI Compressco.
I will now make a few comments I'll see if that compressco.
On April 17th we commenced an offer to certain eligible whole drastic change any and all of their outstanding seven in a quarter percent senior unsecured notes you in 2022.
For newly issued 7.5% senior secured personally notes due 2025.
And seven in the quarter percent senior secured second lien nodes you 2027.
On May 1st we issued a press release extending disbursed that line from April 30 to May 14th.
The second deadline originally committed of meat communicated of May 14 remains unchanged.
Any question from our bondholders related to this process will be directed to our bank of America contact that is managing this process for us.
[noise] foresee us I compressco in order to respond to this downturn into a lower customer demand.
We are lowering our capital expenditures to be between $20 million and $35 million where 2020.
With maintenance capital expenditures were used to between 20 million and $22 million.
And investments in technology to improve operating efficiencies.
It used to be between 3 million and $5 million.
40 effect Compressco growth capital Libi between 5 million, an 8 billion as we wind down from customer commitments.
And then the second half the year, we expect total Catholics, then expenditures for see if I compressco to be approximately $6 million per quarter.
It into the first quarter CSR Compresscos leverage ratio was five times.
Given the outlook for a decline in earnings we expect the Nick net leverage ratio to increase in the upcoming quarters.
At the end of March Yes, I can petsko total gross debt outstanding was $649 million.
Oh, please $350 million are secured notes that mature into your 2025.
And $296 million, our unsecured notes that mature in August 2022.
The and interest for the secured in the unsecured bonds do not contain any maintenance covenants.
See if I can presque also had a $50 million asset base revolver with their current borrowing base of about $25 million before letters of credit.
Which the Midland was outstanding at the end of the first quarter.
The revolver expires in the year 2023.
Cash on hand at March 31st 2020, plus he has I compressco with $7.4 million.
Yes, yes, I compressco came out at a pretty previous downturn.
From 2014 through 2017, we change its capital structure to eliminate maintenance covenants.
In order to give us more flexibility and navigate through downturns.
Yesterday CSR Compressco hosted its first.
Earnings first quarter earnings conference call.
Provided significant significant amount of detailed on what the compression sector is expected to face with this downturn.
I encourage you to listen to that earnings call. If you haven't done so already.
In the last downturn Tetra remain free cash flow positive in each of the downturn years.
Oh this downturn is historic and caused by a global pandemic.
In a steep drop in demand for crude in addition to oversupply with inventory capacity quickly filling up.
We believe we got the playbook to manage our business during difficult times.
And we'll again execute on the actions necessary to remain free cash flow positive during periods of reduced activity levels.
We are off to a strong start with our cash generation in the first quarter this year.
And are prepared to take the actions necessary to navigate through this downturn.
Our diverse business model, which includes industrial chemical sales.
International onshore and offshore activity.
Vertical integration and chemicals.
Impropriety proprietary CS Neptune technology has is well positioned to tackle any market conditions and challenges.
I encourage you to read our press our news release from this morning.
And see if that Compresscos news release from yesterday.
All in supporting detailed and additional financial and operational metrics.
Brandon with that I had an open it up for acuity.
Thank you we will now begin the question answer session to ask a question you May Press Star then one on your Touchtone phone.
You are using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then too.
This time, we will pause momentarily to assemble our roster.
Our first question comes from Stephen Gengaro with Stifel. Please go ahead.
Thank you good morning gentleman.
Good morning.
I guess I guess two things.
Worn out I'll start with the fluids. What's your is obviously a very strong performance in the first quarter.
You gave some details on.
35% being sort of deepwater leveraging 40% non oil and gas industrials annex you've also talked about some contract awards recently that youve secured for deepwater work.
When we speak about the fluids revenue line going forward and if we think about this an environment, where you asked capex land Capex is probably down.
We could.
Let's say, 50% for the year and the second quarter looks to be really weak.
How should fluids performed relative to that backdrop.
So.
Remember, Steve and that the second quarter has the seasonality peak.
And northern Europe that.
Historically has increased somewhere between 10 and $15 million.
We expect that the a second quarter.
Will drop off a bit.
But that it will hold up because of that seasonality them from Q3 in Q4. It really then will depend whether our operators, we act and start pulling back activity on the offshore side of it.
But given some of the winter Brady mentioned some of the market share that we're gaining.
I think that the drop off will be significantly less than what everybody else is expecting on the onshore business.
Yeah typically Stephen in these cycles, you know the offshore in international markets, you know hold up much better than the that's very rapid you know U.S. activity and we fully expect that to play out in a in this downturn.
I have been some shifting around of some activity in the second half of the year been but so far nothing significant that you know would materially impact our forecast for our fluids business for the rest of this year.
Okay, great. Thank you and then my second question.
We will you look at.
And I know you talk about the debt structure and how it stands right now.
He and I know you walk through a lot of parameters around what's going on with.
You see CLP business, you had a lot of detail on yesterday's comps call.
Yes.
If there's a problem.
Okay from a liquidity perspective.
[noise], what mechanically happened like what's the impact.
I understand that you're not on the hopper.
The debt levels et cetera, but what were to look like if if something like that war to take place.
From a test first viewpoint.
Couple of data points, Stephen and that's a good question. So yesterday, we announced that he has had compressco.
Reported Q1 EBITDA of $28 million.
And that's still annualizing to over $100 million, but we clearly have.
Lower quarters coming ahead.
In the last downturn.
Yes, I compressco bottomed out at $86 million that EBITDA.
And if you look at our interest expense on the bonds foresee effect compressco about $48 million.
And then maintenance capital expenditures.
Oh somewhere around $20 million.
And then a couple of million dollars for cash taxes, and so on [noise].
You're going to see a cash minimum requirement when an annual basis somewhere in that 65 to 70 million dollar range.
Foresee us I compressco or call it $70 million a quarter.
Our objective is to keep the profitability above the EBIT dollars above $17 million in right now we've got a cushion of 11 million.
Hi dollars between the Q1, EBITDA and those minimum cash requirement and then also recognize that we have demonstrated that when necessary and as appropriate we're not shy about taking cost out of the system.
We also mentioned that we're shutting down our Midland fabrication facility.
And put it up our real estate for sale is at 38 acre facility Prime real estate in Midland.
And if we're successful with that we should generate some cash.
Well I think CSR Compressco had some challenges ahead of them with that all the shut ins that are occurring.
I think that we've got this under control in terms of aggressively managing the cost to keep it cash flow positive.
And I agree. Thank you very good [laughter] and just to add to your impact the tetra. So if things go very difficult.
And they get into a liquidity crunch.
Actress exposure is essentially our 34, 35% ownership of the LP unit to see if that Compressco and the GP ownership. That's the extent of our exposure to see if I could bus one tetra.
Great. Thank you.
[noise]. Our next question comes from Randy Nora with Raymond James. Please go ahead.
Thanks, Good morning, guys or I guess on the.
Wonderful upon the completion fluids revenue breaks down the information provided for <unk> for one Steve when you're referencing what it would there be where are you guys could provide that information for.
The whole 2019, just to give us a sense of what a full year might look like knowing that the U.S. land portions like you're getting declined faster.
So historically, Steven when you take into all right I mean, sorry, when you take into account the spike in Q2 earnings it'll be right around 40% of the segment.
Yes industrial sales.
And it will vary up or down depending whether we pickups and big Neptune projects that increased the denominator.
But the numerator is comes out to about 40% give or take a couple of percentage points on an annual basis for all industrial chemicals.
Across the globe.
Okay, and how about the deepwater completion side.
The deepwater can be a little lumpier.
Moving now clearly we have a well established business in the Gulf of Mexico, and key deepwater markets, but as you can imagine the.
Deepwater wells when we deliver a high in a completion fluid can be a bit lumpy and we did have some some good sales in the first quarter, but we're still expecting too.
Through those awards that we we've talked about deliver a solid the rest of the your performance on our fluids business improving remember that we've got two significant competitive advantages on the deepwater fluids. One of them is a long term bromine supply agreement that we've got out of with West Memphis.
And that has helped us for many years now.
And then in recent years with the introduction of yes.
Neptune that also has represented a significant advantage that we've been able to take care.
To leverage both in the downturn and in the us stronger recovery market.
Right, that's certainly helping wanting to so when we think about to go forward I guess it difficult part is determining what the trajectory is.
Based on one Q. So can you help us with the deepwater completions trajectory just.
Even if it's just to say how strong one Q was and what we should expect for for the go forward.
So let me provide little bit of color and also recognize it into fourth quarter.
We had Neptune project that push our margins in our revenue to higher levels.
The international.
Was the strongest into first quarter that we saw versus all of last year.
And I went through a lot of the projects that Brady mentioned that we picked up in.
Asia in Middle East in the Gulf of Mexico.
Very strong international performance and we also had a big sale in Latin America.
On the domestic site. If you work to have backed off the revenue that occurred in the Gulf of Mexico for Neptune.
We also had.
One of our best quarters in the Gulf of Mexico.
Relative to last year.
Going forward, it's hard to predict but we do have some wins that great dimension, we picked up if they all continue on schedule like customers have communicated to us.
We have the potential to match some of that Gulf of Mexico, and some of those international performances in Q1.
In either Q3 or Q4.
Okay, so very well under it very much.
Yes, the their performance in Q1 with very very strong on the offshore site.
Great. Thank you very much guys.
Thanks prevent.
As a reminder, if you would like to ask a question. Please press Star then one.
[noise]. Our next question, it's a follow up from Stephen Gengaro from Stifel. Please go ahead.
Hi, Thanks, I guess two more if you don't mind gentlemen, the first is.
If we look at your historical Sorta decremental margins are incremental margins in a water flow back business and obviously understanding that you're in for a oh.
Probably a very tough second quarter, and I know you're doing a lot cost cutting side.
Am I am I.
Is it reasonable to assume a second quarter.
Decrementals could be pretty severe and then they then they normalize a bit as sort of cost cutting catches up with.
Where the revenue stream lies is at a reasonable way to think about it.
Good assumption, Steven and historically, that's what has happened and that the.
The cuts and the slowed down by customers are very rapid.
And then we implement cost reduction actions bring equipment back to the shop.
And we see that first quarter get hit harder and then cost reduction actions kick in.
So if it follows historical patterns.
Your statement is correct. However, let me.
Interject that.
We have implemented a lot of technologies, we've implemented the bluelinx system.
Has brought automation and reduced staffing and many of our water treatment and water handling operations.
We've introduced a sandstorm technology that is less dependent on people.
We've also implemented quite a few fluids treatment operations and facilities that are less dependent on people. So this go around we've got a lot more technology that has less dependence on people that I think will help us in this cycle.
Great. Thank you and then.
The on the on the adjusted EBITDA line that the corporate eliminations line dropped off from kind of it 10 to 11 million run rate to like six and a half million in the first quarter is that a good run rate going forward, given what you've done across I.
So we mentioned when.
We announced at the NYSE had issued a notice to as they were taking cost actions.
But we're still targeting.
Our corporate G. a name.
To come down to the 67 million dollar range in the coming quarters.
Uh-huh that'll benefit us in Q1, we did reverse out some items, such as accrual or long term incentive or annual incentive plans.
But for Tetra only expect expect at the corporate DNA will drop down into the 67 million dollar range as we continue.
Taking cost out of the system.
Okay. Thank you.
This concludes our question answer session I'd like turn the conference back over to Mr. Murphy for any closing remarks.
Thank you Brandon.
Thank all of you for appreciate your interest in Tetra technologies and thank you for taking the time to join US. This morning. This concludes our call.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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