Q2 2020 Tetra Technologies Inc Earnings Call
Good day and welcome to the Tetra technologies incorporated second quarter 20.
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Good morning, and thank you for joining our trust second quarter 2020 results call I would like to remind you that this conference call may contain statements statements that are maybe deemed to be forward. Looking these statements are based on certain assumptions and analysis made by Petrobras and are under an are based on a number of factors. These statements are subject to a number of <unk>.
The uncertainties many of which are beyond the control of the company. You are cautioned that such statements are not guarantees of future performance and the actual results may differ materially from those projected in the forward looking statement. In addition in the course of the call. We may refer to EBITDA growth margins adjusted EBITDA adjusted EBITDA gross margin.
Adjusted free cash flow distributable cash flow distribution coverage ratio leverage ratio or other non-GAAP financial measures. Please refer to this mornings press release, our to our public website for reconciliations of non-GAAP financial measures to the nearest GAAP measures. These reconciliations are not a substitute for financial income.
Makes it prepared in accordance with GAAP and should be considered within the context up a complete financial results for the period.
In addition to our press release announcement that went out earlier this morning, and its posted on our website our form 10-Q with plans to be five with FCC on or before Wednesday August that 2020 with that I'll now turn it over to Brady.
Thank you also good morning, everyone and thank you for joining Tetra second quarter 2020 earnings call I'll give a recap of our second quarter performance and market environment, and then turn it over to leave he'll provide information on the balance sheet cash flow.
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First I want to recognize the exceptional dedication and performance from our employs a management team for a job well done and one of the most challenging quarters, our industry has ever seen due to cope with 19.
We're thankful that the new employees that have been directly impacted by the virus have recovered.
Our recovering well and that we have not had any situations, where we could not service or deliver our customers' requirements.
Gordon our very proud of what our employs a management team are accomplishing and this extraordinary environment.
Turning to our results for the second quarter, we were able to deliver.
Strong financial results, despite the historical decline and drilling and completion activity.
The U.S. land rig activity down 64% to the lowest level on record international rig activity down, 26% and that active frac crews dropping at a record pace. Our second quarter revenue was only down 14% from the first quarter.
When oil prices dropped in early March when you were gonna have to move quickly and decisively to reduce cost accelerate some of our strategies and get ahead of our customers activity declines we took on desire, but necessary actions through staff reductions furloughs and adjustments the salaries and benefits, while also reducing third party costs and so.
Curing concessions from our suppliers.
In parallel to field staff and cost reductions, we also made deep cuts and our corporate overhead cost structure. This a streamlined our decision making and much of this cost will not return when the market does recover.
Early in the quarter, we made the decision to close our Midland compression fab plant and idle or chemical processing plant at all to Rado, Arkansas two of our longstanding plants.
While doing so we also et cetera celebrated our focus on technology and automation, which greatly contributed to our financial results.
The combination of aggressive cost management accelerating our focus on automation and technology and pulling on our diverse business mix, including strong high end offshore completion fluids business and industrial chemicals business and a strong customer base reach of our business segments. All led to an improvement 500 basis points and our adjusted EBITDA margins compared to a year.
Go.
[noise] Tetra only generated 31 million or free cash flow in the quarter, which was 26 million higher than the first quarter and the first half the year, we've been able to generate over 35 million free cash flow improvement 68 million compared to the first half of last year.
We've improved our liquidity and ended the quarter were 50 million of cash at the tetra level and liquidity at almost $90 million.
At the Big business segment level, our completion fluids and product business continues to perform at an acceptable conceptual level exceeding by a wide margin or 20% adjusted EBITDA target for the fifth consecutive quarter.
With adjusted EBITDA margins of 25.7%, we improved our year on year adjusted EBITDA margins for this business by 320 basis points.
For the quarter, we benefited from our industrial chemicals business, which outperformed the second quarter of last year in both revenue and EBITDA margins and so little impact from the covert 19 pandemic.
The industrial chemicals markets continues to perform well during this downturn as it made up approximately half of the second quarter revenue for this business segment.
Aided by our seasonal European business, which recorded our highest EBITDA on five years.
Over a four year, we expect about 40% of the segment revenue to come from our industrials business.
As previously mentioned, we idled or plant and Eldorado, Arkansas and shifted production to our other lower costs facilities.
Dropped down and transition of production and associated customer demand to other plants has been completed.
The revenue from this segment will not be impacted by this closure of we've transitioned all of our product to other plants at better margins.
On the oil and gas side increased offshore revenues in the Gulf of Mexico helped offset the decrease in activity some of our domestic one shore business during the quarter, our international completions fluid business was awarded a large sale for major national oil company in the Middle East a market that is increasingly relying on higher density higher value fluids.
CS Neptune pipeline continues to progress with opportunities. We've previously mentioned still ahead of us.
We have line of sight to several projects that have the possibility of materializing before year end, but clearly the current market environment may delay these projects as customers reassess their plants.
The water and flowback services second quarter revenue decreased 57% sequentially, mainly due to the unprecedented decline and us completion activity with active frac fleets down approximately 80% from Q1.
The actions that we implemented to align the business with this historical decline in activity has proven to be effective as we ended the quarter were positive adjusted EBITDA of $400000. Despite incurring 700000 of bad debt expense without the bad that we would have been over million dollars of adjusted EBITDA.
[noise] or integrated projects decreased.
On the 23.
And 23 and 15 different customers at the end of the first quarter to 16 integrated projects with 14 different customers at the end of the second and.
And we believe this demonstrates our market share gains, while introducing our integrated water management offerings and latest technology to new customers or automation solution. Bluelinx is now deployed on all of our integrated projects. Our latest descending flowback technology Sandstorm continues to maintain high levels of utilization and we continue to have more inquires for this.
But from our customers, while we see some increasing the number of Frac crews coming back in Q3, the timing is still uncertain and the increase is coming from such a low base number that we expect Q3 to be relatively flat with Q2.
We will line, we'll continue to line this business with market activity, but continuing to be aggressive with cutting costs.
To increase adoption of our technology and automation and delivering best in class service. Our objective is to keep this segment EBITDA positive throughout this cycle and be well positioned when the recovery comes.
Moving onto our compression business revenue increased sequentially, 7%, the 96 million driven by an increase of equipment sales as we completed a significant amount of new equipment deliveries from our backlog second quarter. Adjusted EBITDA of 26.4 million was up 400000 from the first quarter compression services costs were reduced by 20% from the.
First quarter compared to a 14% sequential decline in compression services revenue and and a decline in the utilization from 86.5% to 82.1%.
Due to the Swift actions by our management team to aggressively reduced cost compression services margins increased 300 basis points from the first quarter to 54.9%, which was the highest gross margins and see us I Compresscos history.
Approximately 15% of our total domestic horsepowers on standby during the quarter ASC as customer shut in production given the low commodity prices.
We already have our remaining units that are on standby, our with our two largest customers both super majors, which are the balance sheet to maintain shut in production till crude prices improve one of those two customers has brought back our standby units into operation effective August 1st which will have a meaningful impact on reducing our units on standby going forward.
Aftermarket services revenue declined 12% from the first quarter.
Gross margins improved 500 basis points sequentially due to reduce costs and favorable mix.
Those are fabrication operations in July and sold the real estate and buildings in June and July for $17 million a gross proceeds.
As we move into the third quarter, the macro environment remains fluid as the impact of covert 19 to the economy and demand and supply dynamics for crude oil continues to be on predictable, although OPEC plus actions and declining us production have moved supply and demand imbalance quite quickly. It is difficult to predict how long will take the work off the inventory overhang.
We don't expect activity to increase in the U.S. or international and material way for the rest of this year the outlook beyond this year will largely depend on the outcome of fighting to covert 19 virus and its impact on global economies, we've been proactive and implementing cost reductions across the company and remain committed to revising our cost structure as required based on the market look outlook.
Overall, we've had a strong quarter image generate 31 million and free cash flow improve our year over adjusted EBITDA margins in a challenging our year over year adjusted EBITDA margins in a challenging environment, our strategies technologies and industry diversity continue to position the company to navigate this crisis I'm come through and a stronger position than ever.
During these continued difficult times, our strategy is to stay aligned with our core customers continue to showcase our differentiated technology more effectively utilize our equipment and personnel explored or industrials chemicals business improve our margins and work with customers the credit worthy balance sheet with that I'll turn it over to lead you to provide some financial comments on cash flow and the balance sheet.
And then we'll open it up for questions. Thank you Brady.
Good morning, everybody in the second quarter, we incurred $18.1 million of nonrecurring charges.
I'll switch 15.7 million horse plus the high Compressco.
$2.3 million were for capital.
These charges included noncash charges of $9 million to write all filed compression assets and related inventory.
$4.8 million of expenses on the recently completed bond exchange Rcs I Compressco.
And $4.3 million, mainly for severance and other costs associated with Rightsizing the organization.
I'm going to spend a couple of minutes on.
Balance sheet and capital structure now.
Brady mentioned that we generated $31 million of free cash flow and at Tetra only basis.
This was achieved despite the incurrence of severance and restructuring related costs.
Also in the fourth where many operators are struggling financially, we're able to collect significant amount of receivables to materially improve working capital.
Our water management and flowback segment incurred approximately $700000 a bad debt expense in the second quarter that we did not normalize for.
That's the only adjusted EBITDA.
Without any of the impact of CSR Compressco was $9 million from the second quarter.
That's the only capital expenditures in the second quarter with $2.2 million.
Ticked all the interest expense runs about $4 million per quarter.
Tetra only cash taxes went about $1 billion per quarter.
So even in the worst quarter in recent history.
On a standalone basis was able to generate enough EBITDA.
Cover capital expenditures interest expense.
Cash taxes and remain cash flow positive.
In this period.
We expect kept the only capital expenditures to be between 10 million and $50 million for the full year.
Just unchanged from prior guidance.
We will continue to monitor and adjust our capital spending based on current market conditions.
We expect the second half of capital expenditures to be minimal.
I will be primarily for maintenance capital accelerate into did introduction of new technologies.
Just a sandstone.
Topped all liquidity at the end of the second quarter improve approximately $29 million from the end of the first quarter.
Positioning the company to managed well into this downturn.
Technology liquidity is the finest unrestricted cash on hand, plus availability on our revolving credit facility.
We believe our cost structure and ample liquidity provided very long long runway to sustain any potential prolong downturn.
Kept the only net debt at the end of June with $156 million with cash on hand, the $50 million. This is an improvement.
$156 million, Dan to $156 million versus $185 million at the end of the first quarter.
Our $221 billion term loan is not due until August 2025.
And 100 million dollar asset base revolver half a current borrowing base pocs approximately $40 million.
Well not mature until September of 2023.
The only significant maintenance covenant, we have to comply with.
It's all at one time interest coverage, we saw that term loan.
Well at the end of June our interest coverage ratio was 3.9 times.
Annual interest expense on this term loan approximately $16 million per year.
We believe we have ample liquidity to models through this downturn.
Almost always I'd like to again remind everyone that Catherine CSI compresscos debt are distinct and separate.
There are no cross defaults no cost guarantees on the Ted on the dead between Tetra and CSI Compressco.
I'll cover now a couple of minutes Lcs I compresscos balance sheet.
During the quarter CSR compressco generated $4.8 million of cash from operating activities.
In the first off of the year CSR Compressco generated $18 million of cash from operating activities.
$10.6 million, a free cash flow.
Yes, I Compressco ended the quarter was $6.8 million of cash up from 2.4 at the beginning the year.
The outstanding balance on the deal. We Moreover, core CSR Compressco was only $1.5 million.
Distributable cash flow was $8.4 billion in the second quarter foresee effect on profitable.
In the first off of the year distributable cash flow is $17.1 million.
On an annualized basis, DCF would be $34 million or approximately 71 cents per unit.
This compares to the unit price at the close of business yesterday foresee us up Compressco of a dollar fight.
This is not about yield.
On June 11, see if I Compressco announced a successful exchangeable unsecured bonds for secure bump.
$215 million of unsecured bonds with an August plenty plenty to maturity.
Changeable bonds with maturities of 2025 and plenty plenty six.
As part of the process $9 million of debt was eliminated.
There are more towards near term maturities are now only $81 million due August 2022.
And all the other balance are doing 2025 or 2026.
After this exchange and given the current market condition Sci Fi Compresscos mandatory castle out cash flows on an annualized basis are approximately $75 million.
Including approximately $20 million cash interest expense expense.
$20 million, a maintenance capital expenditures on $5 million for cash taxes on lease payment.
This compares to our second quarter adjusted EBITDA of $26 million.
We are comfortable that CSR compressco is nicely prepared to manage through this downturn and a reduction in spending by the industry.
Our strategy to address the $81 million Avago maturities is to accumulate.
$10 million to $25 million in cash between now in August of next year.
Two we pay a portion of the $81 million and to refinance the balance.
We believe that given our financial performance in the actions, we're taking into managed costs.
And to create liquidity that we will find partners where this refinancing.
In the second quarter Sci Fi Compressco initiated a series of actions to monetize assets.
These actions are expected to generate $26 million of cash flow from the sale of idle or underperforming assets.
We will continue to evaluate all the assets in Ts I Compressco sleep.
Those assets that may not generate the returns and the consistency of earnings will be targets for monetization to create additional liquidity.
Yes, I Compresscos net leverage ratio was 5.1 time into the second quarter.
Down from a high of seven times at the end of Q2 2018.
And also reminder, none of the outstanding bonds have any maintenance covenants foresee us I compressco.
Both tetra and CSI Compressco had sell it solid second quarter results.
CSR Compressco completed a bond exchange that pushed out a significant amount of near term maturities.
And it's in the process of generating significant incremental liquidity to begin to further improve the balance sheet.
We like where we are given the market environment.
I encourage you to lead our news release on this morning, CSR Compresscos news release from yesterday for all supporting details and additional financial and operational metrics.
And with that will not open the call for questions.
At this time will now begin the question answer session.
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Our first question today comes from.
That's on Gengaro Stifel.
Please proceed.
Thanks, Good morning, everybody.
Morning.
I guess, a couple of things, but can you start with if we think about the completion fluids and products business in the quarter.
Sure to how we should think about the.
The pass through the third and fourth quarters as far as you know what's going on with activity. The U.S. offset by the European business, which I think you mentioned had its best quarter since Twoq 15 second quarter and how that.
What kind of decremental margins, we should think about as well.
So a stephen good question.
Yes, you and everybody realized our second quarter is our peak seasonal activity our European business.
And those margins are not much different than the overall segment margins. So I think that the transition from Q2 Q3, and potentially Q4 will continue to leave us with EBITDA margins for this segment in the Twentyth we have.
Now with significant trend of consistent performance being in the mid twenties.
Brady mentioned that we have picked up a significant.
Asset.
Product sales to go into the Middle East and the second half of the year.
I think that will.
Benefit us in offset some of that declined to where see from the seasonal drop in Tc. So all the data points that we have tell us that our margins will continue to run into mid to low 20.
So we've not just at a little bit too that as you're probably aware.
Outside of the European seasonal peak that we see in Q2, most of our most of our oil and gas revenue comes from the offshore piece of the business and.
Not so much on the us not affected by the US land decline that business has actually held up very well from US. We we've talked before about some of the major awards that we had at the end of last year at the beginning of this year. We continue with that success with the major award and in the Middle East and so our outlook for our completion fluids business really.
As as not changed much.
In this environment.
Great and is that middle East truck show us third or fourth quarter event or do we not know yet.
They will go across both quarters.
Okay.
Thank you and then just as a follow up I mean, you know across the world servers World. We're seeing a lot of working capital liquidation and you guys get a really good job in second quarter Tetra only free cash flow. It was very strong Oh, we know how should we think about working capital in the second half.
For the year.
So let me emphasize one data point that I made in my script to make sure.
The investment community really absorption is talk like even without the monetizing all the working capital the EBITDA to Tetra only generated covered.
Interest expense maintenance capital expenditures of growth capital expenditures cash taxes.
A significant accomplishment.
Hi, this in the industry will not be able to.
Pounder chef that they accomplished and saying now you're right, we monetized a lot of receivables activity slowed down and didn't ramp up.
I would hope that Theres, a bounce in activity and we start to build receivables and then the opportunity to monetize incremental working capital is minimal if we stay flat from todays a run rate I think we remain slightly cash flow positive.
Only if we see a big ramp up like commercial and then gets a scenario, where we burn a little bit of working capital rebuilding that was helpful. If things further deterioration.
We will continue to monetize working capital, we think that we see a bottom in that bottoming out in this in the second quarter.
And given some of the wins that Brady mentioned that we've got a slightly positive momentum going into second half of the year to core the amount of cash coming from working capital will be minimal.
Great. Thank you.
Thanks.
Reminder.
Question. Please press Star then one.
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Alex on the conference back over to Brady Murphy for any closing remarks.
Okay. Thank you and it was we were we appreciate your interest in Tetra technologies and thank you for taking the time to join US. This morning. This will conclude our call.
The conference.
Thank you for team today's presentation you may now disconnect.