Q1 2021 Tetra Technologies Inc Earnings Call
And welcome to Tetra technologies first quarter 2021 results conference call Speaker.
The speakers for today's call are Brady M Murphy, Chief Executive Officer, and <unk> Serrano Chief Financial Officer.
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After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on you touched on.
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Please note this event is being recorded.
I will now turn the conference over to Mr. Serrano. Please go ahead.
Thank you Chad and good morning.
Thank you for joining tetra as the first quarter 2021 with all the Paul.
To remind you that this conference call may contain statements that are or may be deemed to be forward looking.
These statements are based on certain assumptions and analysis made by Tetra and on.
Based on the number of factors.
These statements are subject to a number of risks and uncertainties many of which are beyond the control of the company.
You are cautioned that such statements are not guarantees of future performance and that actual results may differ materially from those projected in the forward looking statements.
In addition in the course of they call we may refer to EBITDA adjusted EBITDA adjusted gross margins.
Free cash flow net debt liquidity or other non-GAAP financial measures.
Please refer to today's press release or our public website for reconciliations of non-GAAP financial measures to the nearest GAAP measure.
This reconciliations are not a suitable 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 out earlier this morning, and it's supposed to do our website.
Now I'll turn it over to Brady.
Thank you Leo and good morning, everyone welcome to Tetra technologies first quarter 2021 earnings call on.
The summarize the highlights for the quarter and the current outlook and then turn it over to Alicia Spud information on cash flow the balance sheet and the impact of potentially being included in the Russell 2000.
The first quarter of Ah represents a full year of COVID-19, pandemic and it's dramatic impact on the oilfield services market.
The old inventories declining in price of stabilizing at pre pandemic levels notwithstanding the February winter storm. It would appear of the worst of the activity downturn is behind us and a market recovery is underway for Tetra I'm pleased with what we've accomplished over this incredibly challenging period, including achieving critical milestones during the quarter to further position the company.
For recovering oil and gas market as well as accelerating our low carbon energy opportunities.
While the North America completions activity declined at a record pace last year, our differentiated offerings in our water and flowback segment allowed us to maintain adjusted EBITDA positive for every quarter since the pandemic started while our industrial chemicals and international business held up exceptionally well, allowing us to improve our tetra only adjusted EBITDA margins in 'twenty two.
20 over the prior year.
Moving forward, we see the first quarter as the bottom of our international and offshore completion activity and with the exception of of the period. During the February storm U S market activity as well off the bottom for mid last year, our March double digit adjusted EBITDA margins for water and flowback of North of 25 per cent adjusted EBITDA margins for our completion fluids segment.
It gives us good confidence and a strong second quarter and into the rest of the year.
Focusing on the first quarter, which you've several key milestones, including successfully executing the deconsolidation of CSI, Compressco, where we generated over $30 million of cash while retaining of 11% interest.
We reduced our term loan from 220 million to $184 million, we achieved eight straight quarters of positive adjusted free cash flow and despite the historical February winter storm. We once again maintained positive adjusted EBITDA brought our water our water and flowback site.
In addition of those operational achievements, we continue to advance several of our low carbon initiatives that are currently advancing faster than what we had anticipated just 90 days ago.
Adjusted EBITDA for the first quarter was $9 million, we estimated the impact of the historical winter storms during February negatively impacted adjusted EBITDA by approximately $3 1 million.
Adjusted EBITDA in the first quarter included $4 million of gains on the higher equity values of our holdings of the CSI Compressco and standard lithium we generated $5 for millions of adjusted free cash free cash flow from continuing operations in what is normally a challenging quarter for cash flow generation due to the first quarter payments that are traditionally made early in the year and the ramp up in inventory.
For our European chemicals second quarter peak season.
We ended the first quarter of liquidity of $81 million, despite paying down our term loan to $184 million.
Despite the softness in our international and offshore business is completion fluids and products first quarter revenue increased 5% sequentially driven by increased industrial chemical sales as a result of the winter weather conditions.
An improving U S land oil and gas demand.
Adjusted EBITDA decreased $3 4 million due to the mix of higher U S land oil and gas sales and lower sales for higher margin offshore International markets. The segment was also negatively impacted by $800000 from the winter storms as ours chemical supply chain was disrupted and many plants on operations were shut down.
The EBITDA margins for the first quarter were 23, 7% the eighth straight quarter above 20% EBITDA margins.
We exited the first quarter with adjusted EBITDA margins above 25 per cent and expect this to continue into the second quarter.
The second quarter will also see the benefit of our seasonally high in northern Europe industrial business that has historically seen revenue increase by approximately $15 million compared to the first quarter.
We also expect stronger international and Gulf of Mexico deepwater activity from a combination of projects that were pushed from the first the second quarter and overall higher activity levels.
At an industry conference in February we presented a paper jointly with Exxonmobil highlighting the success of our CS Neptune product for multiple projects that we completed for them over the recent years. We appreciate the exxonmobil working with US the jointly present this paper, allowing both of US the highlight the benefits of of environmentally friendly zinc free solution to complete difficult.
Deep water high pressure wells the.
For the depressed oil prices in 2020 as a result of COVID-19 push many of our targeted CS Neptune projects later into this year in 2022.
But our list of opportunities remains very encouraging and we continue to work with our customers to finalize their drilling plans and confirm that the wall pressures for Rcs Neptune.
For water on Flowback services first quarter revenue and adjusted EBITDA were down from the fourth quarter, mainly due to the negative impacts of the weather the winter storm.
We estimate that the storms negatively impacted adjusted EBITDA by approximately $2 3 million.
Nevertheless, sorry of flexible cost structure allowed us to main main remain adjusted EBITDA positive despite the disruption to our operations.
Our bluelinx automated control system continues to be a key enabler for our integrated water management projects and allows us. The NSA has allowed us to continue to gain market share as the activity rebounds, and the need for additional field staff increases the value of our automation will become even more important to control labor costs.
The number of integrated projects in the quarter increased from 35 in the fourth quarter of 2022 of record high of 47 projects with 22 different customers.
Our customers realize the value of integrated projects with automation being a key component to improve efficiencies reduce safety exposures address environmental concerns and to reduce the number of service providers. They are managing.
Utilization of our proprietary Sandstorm technology remains high we started taking delivery of more units in April and are deploying these units, earning of quick cash payback, we secured a second project in Argentina for a fully automated sand recovery system using the sandstorm technology. This is in addition to the one we communicated in the fourth quarter.
The earnings call.
Our team has also been focused on pushing across price increases and we are seeing success in this area with a better oil price environment and increasing levels of activity. In addition to our ability to consistently perform at the highest levels of efficiency and service quality in the industry I am pleased that our customers are recognizing that and working with us.
The increased prices.
March was the strong improvement from February for this segment, we achieved double digit adjusted EBITDA margins of March and expect to be above that for the second quarter, given the stronger activity levels on for better pricing, we're securing secured on top of continued deployment of our sandstorm technology.
With respect to our low carbon energy initiatives, we're focused on three key areas all of which are moving ahead of schedule from what we previously anticipated.
Yesterday, we issued a press announcement entering an mou with carbon free the jointly advance of very innovative and commercially attractive for carbon capture and utilization of technology.
<unk> patented sky cycle technology uses calcium chloride as the key part of the conversion of <unk> two of precipitated calcium carbonate.
Precipitated calcium carbonate or PCC is a large well established global market and the valuable use for cotwo streams.
We were pleased to partner with carbon free and utilize our nearly 40 years of calcium chloride chemistry technical expertise and global footprint.
We believe there are many cost and commercial advantages to the this technology and the source of considerable growth for tetra.
We also have leases that cover over 30000 acres in Arkansas with estimated bromine resources of $3 9 million tons in the third lithium resources of 890000 tonnes. The underground sales value of these resources of today's market prices for bromine and lithium carbonate is over $18 billion and since <unk>.
Minerals play an important role on the world's electrification and energy storage demand outlook is very promising.
The majority of our lithium resources are through our relationship with standard of lithium which continues to advance. The solution is one of the few U S sources of high quality lithium carbonate.
System with our contractual arrangement, we received an additional 400000 shares of standard of lithium in April.
In the first quarter, we also made great progress qualifying our pure flow for <unk>.
Brand name for our high purity of zinc bromide with multiple energy storage companies that use Inc. Bromide as the key part of the electrolyte and Theyre battery technology. We're.
We're currently in commercial discussions with these companies and expect first revenue for this new application in 2021, well ahead of our prior estimates.
Of this technologies commercialized this will create a completely new market for us and demands for our zinc bromine can be very meaningful as we intend with carbon free for carbon capture we're looking to work with these energy storage technology companies and to use our deep chemistry expertise in a more collaborative way.
So in addition to of water and flowback businesses now showing signs of instead of recovery along with our strong position we have in the offshore completion fluids market with the CS Neptune upside and the predictably consistent performance of our industrial chemicals business, all of which consistently generate positive EBITDA.
And free cash flow, we are in advanced stages with three significant areas to capitalize on low carbon energy opportunities that can be transformational for tetra as.
As we of all of these opportunities will be very open with our investor base on the progress of each in the meantime, we will continue to execute and deliver free cash flow from our two segments and continue to Delever and I'll turn it over to Leo for months.
The additional color then on we will open up for questions. Thank you Brady make a couple of statements first on the presentation of our financial statements and talk about some of our on balance sheet items.
As mentioned on the last earnings call on February 25th with the sale of the general partnership and the incentive distribution rights.
And the 11 million common units of CSI Compressco on January 29, our balance sheet now completely excludes CSI compressco.
The income statement reflects the result of CSI compressco as discontinued operations for.
For the January 2021, and prior periods.
The cash flow statement for the first quarter includes the 2009 days in January that we will still the general partner.
When we reported adjusted free cash flow for Tecogen, we've excluded the first 2009 days of January for CSI Compressco from our free cash flow.
Income from discontinued operations include the $121 million gain.
On the CSI Compressco deconsolidation deconsolidation transaction.
The vast majority of debt is a noncash gain.
The transaction resulted in the recapture of our carrying basis and CSI compressco given that we received over $150 million of distributions.
From Compressco on CSI Compressco since we took them public in 2011.
As those distributions were received over the past 10 years that we were the general partner.
The carrying value of our investment in CSI Compressco was reduced and therefore the transaction resulted in a recapture of the carrying value.
The transaction did not result in a taxable gain to tetra.
At the end of March 2021, Tetra continues to have a tax loss carryforward net.
Will allow us to offset future U S pre tax income by approximately $380 million.
And as the economy recovers and we go back to generate taxable income in the United States, We do not expect to be paying U S. Federal income taxes for a while.
Then with respect to our results in the first quarter, we incurred $6 $6 million of nonrecurring charges.
These charges included $2 $9 million related to the accumulative adjustment for long term compensation that was the result of the significant increase that we saw in our stock price in the first quarter.
Also includes $2 per million dollars of transaction and other expenses mainly related to the CSI Compressco deconsolidation.
Half of million dollars on stock appreciation of REIT expense.
$300000 of restructuring costs and $300000 of stock.
Current fair value adjustment expense, both for the unusual items in the quarter.
Our first quarter of companywide SG&A cost of adjusted for unusual items was down 2% sequentially.
Compared to the 2% increase in revenue.
And was 23% lower than a year ago.
Our first quarter results also included a $4 million gain on the mark to market adjustments to the 11%.
Ownership that we have on CSI compressco.
And to the 1% ownership or one 2 million shares that we own of standard lithium.
We will continue to see mark to market adjustments for the equity we own. The these two publicly traded entities.
We reduced net debt from $133 million at the end of 2020.
The $117 million of at the end of the first quarter net.
Nothing currently remains outstanding on our ABL revolver.
First quarter adjusted free cash flow from continuing operations were $5 4 million almost $1 million above the first quarter of a year ago.
We achieved this first quarter free cash flow despite paying the CSI compressco transaction expenses and the typical first of the year payments for insurance property taxes year end bonuses and so on.
As a result of last year streak of strong free cash flow of $59 million.
And this year's first quarter free cash flow plus the proceeds we received from the CSI Compressco of transaction, we have reduced our term loan from $220 million at September 32000, $20 million to $184 million at the end of March.
2021 day.
The $36 million reduction in the turnaround will save of $2 $6 million of interest expense on an annual basis.
And as a reminder of our term loan does not mature until the year 2025.
We expect second quarter profitability to be up sequentially for all of our segment.
All of them by increased oil prices driving the activity in the United States on International International markets. The.
Seasonality of our northern Europe, industrial chemicals business, where we typically see about a 15, one 5 million sequential increase in revenue.
And the price increases we are getting in addition to continued the deployment of our sandstorm technology.
We remain focused on streamlining the organization and generating free cash flow to further reduce outstanding debt.
Last item I'll mention is the Russell 2000.
I previously mentioned that the decline in our share price last June we felt it in tetra being dropped from the Russell 2000.
When we were dropped in the Russell 2000, we saw lot of passive index based funds exit their position in tetra.
Put in even further downward pressure on our stock last year.
The Russell 2000 is reconstituted every June.
We believe that the cutoff to be part of the Russell 2000, the issue will be somewhere between 265% and $270 million.
Our market cap as of the <unk>.
Most of the business yesterday with $315 million.
This Friday is the first lifting of the companies that might be part of the Russell 2000, which has been updated every Friday in June the.
The final lifting is on June 25.
If tetra is added back for the Russell 2000 notes of possibility that we will see be seen passive index based upon adding tetra back to their portfolio at.
As many may make their holdings to met the Russell 2000.
If that has to occur there.
Theres the potential to see strong demand for tetra shares in May and into June hopefully, having a high a nice impact to our share price.
I encourage you to visit the Russell 2000 on website for updates.
Also encourage you to read our news press release that we issued today for all of the supporting details in a digital financial and operational metrics.
Additionally, we will file our 10-Q.
With the SEC before the end of the day to day.
With that we will not open debt to ask questions.
Thank you.
We will now begin the question and 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 two.
At this time, we will pause momentarily to assemble our roster.
Yes.
And the first question will come from Stephen <unk> with Stifel. Please go ahead.
Thanks, Good morning, gentlemen.
Hi, good morning.
A couple of things.
If you don't mind.
Well I'll start with I guess, probably pretty straightforward when you look at.
The components that you guys talked about in the in the second quarter as far as margin expansion in the European calcium chloride business.
Uh huh.
Would seem to suggest that.
<unk> Q.
EBITDA number that's in the mid to high teens as is.
Is a reasonable target.
Is that in the ballpark of what you guys are thinking about.
Yes Stephen.
Wed like beating consensus we like exceeding expectations I would encourage you not to get too far ahead of us and I think that if you're in the net.
<unk> mid.
Mid double digit teen that might be more appropriate and thats on the expectation that may and June <unk> current vaulted us because we've had a good March we've had a good April and we're very encouraged with what's happening right now our European business is very predictable and rarely does it deviate from protection. So it's really only on.
Matter of whether the offshore markets.
Continued to perform like we think they will.
Thanks.
Just as a follow up to that and then I have one of the robustness of follow up to that the.
The ownership of standard lithium and Cc LP will that show up.
In the EBITDA line and not the revenue line each quarter.
Is that the way it will it will materialize on the income statement.
That is correct because at this point.
We're not receiving.
And the incremental shares from the 400000 that we received in the month of April for standard lithium. So we're up to 121 6 million shares anything that increases or decreases of the share price will do a mark to market adjustment that only reflects in income and EBITDA and then in our 11% of our share ownership of.
CSI Compressco will also be mark to market without any impact to revenue for both of them are going to be.
Two market adjustment and also as a reminder from standard of lithium we're receiving about $1 million of year of cash for the agreement that we have in place for them.
And so basically the March stock price.
The difference between the March and the.
June.
Market cap allocated based on your percentage of ownership is the change is the impact you'll see on EBITDA.
Yes that is correct well again again in addition to recognizing that we're getting about $1 million of <unk>.
Cash from standard at the <unk> on an annual basis that will also positively impact EBITDA.
And then when we receive more share some standard lithium such as what we did in the month of April which is 400000 shares we will record those as the income and EBITDA also got it. Thanks and then the one final one for me is just the balance sheet, you're you've been successful generating cash.
<unk> debt levels.
Has there been a discussion about refinancing the debt on the balance sheet, given where rates are.
Your business arguably is having better and better visibility going forward.
Very good question Steven.
We've been paying down debt with excess cash we're constantly testing the debt markets to see if we can find more cost effective.
And less restrictive.
Term loan that might be out there.
And so far our testing of the market has not indicated that there is cheaper capital available to us but that is something that we are doing on a consistent basis to try to find the most cost effective capital for us to reduce interest expense.
Great. Thank you.
Okay.
Once again, if you would like to ask a question. Please press Star then one.
The next question will come from Samantha Hoh with Evercore ISI. Please go ahead.
Okay.
Samantha.
We might have you on mute sorry.
Sorry about that thank you Leah.
Congrats on the.
I was just wondering if you could maybe help us think about the year, what your expectations on ours for completions.
And in terms of the mix of revenue coming from the gift for any.
The business that you haven't completions.
Sure. So my ethic of good morning.
As we indicated.
During our comments, we see Q1 as the the low point for the year.
In our completion fluids as Youre well aware of the the North America activity came down very rapidly last year, but the international activity continued to come down through most of most of the year on but that has flattened and we see drilling activity.
Bounding slightly and our opportunities on the completion fluids side, improving both on the offshore markets.
In the Gulf of Mexico, as well as internationally improving for the rest of the year so that the.
That side of the business, we're optimistic through the rest of the year and then of course, our industrial chemicals business will see a European peak in Q2, but we're also continuing to gain some pretty good market share with our industrial chemicals business and that's without the impact of some of these other future.
Low carbon opportunities that the that we're discussing.
Do you want to add I think the lithium.
It is important that the sandstorm technology that we're deploying and the traction that we're gaining in South America is very encouraging we buy.
No.
We believe of tying some capital to take advantage of that given the quick payback that we're seeing so in addition to activity I think debt. We're also seeing market share gains benefit our top and bottom line.
Okay, and with the integrated projects that Youre working on the water projects.
On a nice step up.
Are you seeing incremental demand in some of.
The other basins outside of the Permian, maybe just if you could kind of quantify where that sequential ramp kimco.
Yes, well definitely in the Permian Samantha we have a very strong market share position for really the water transfer the.
Treatment recycling and gaining more market share on the flowback side. So that is of that is a good percentage.
The integrated work that we're doing but we're also taking on integrated projects in South Texas now.
In mid Con and.
And certainly in Appalachia.
And we're working to penetrate the rest of the basins with the with the model that we have.
Okay, and then just I was curious about the Mou that you guys announced last night.
Think I read somewhere at that.
The company is actually working on testing.
This initial pilot plant.
And I was curious if you could speak to that development is maybe just how far along.
Potential.
<unk> is.
I'm sure, it's something that you could see.
Could you be at least within the next year.
Oh, absolutely yeah, they're virtually finished with the construction of the pilot plant again.
They've proven and tested each of the segments of.
The plant configuration, we actually had myself on our team visited with them at the Southwest Research Institute.
A few weeks ago and actually solve the plant.
In its final stages of construction, where it should be operational anytime now.
But yes, we're very excited about what the what that project offers I think once once the plant is up and running and they are fine tuning.
Some of the operating parameters.
Of the plant.
I think carbon free from from what we know of their plans will be in some pretty heavy in the commercial negotiations from that point forward to deploy the technology.
Yes.
What's sort of the mid areas are they targeting is it like.
But you know when it sort of industrial packaged type of does that kind of the kind of thing.
Yeah, no absolutely some of that is part of that any of any really flue gas cotwo emitters is a perfect application of if you look at our website you will actually see.
A picture of the southwest.
The Research Institute pilot plant and it's got a.
A flue gas.
No cylinder in the picture.
And you can actually.
When the operating the plant or the bringing the chemicals that they need including calcium chloride from the top side and Seo to gas from the bottom and then performing the precipitation right in the what in the reactor.
Okay I'll take all of it thanks, guys congratulations on that.
Thank you.
And the next question is a follow up from Stephen <unk> with Stifel. Please go ahead.
I think so.
Two other quick ones gentlemen, just to make sure I'm on the same page here so on.
On the ownership position and share of lithium and C. C. C. L P.
Or are your margin expectations that you debt you highlighted in the in the.
Press release out on the call.
Are they exclusive of the impact of of.
The change in stock prices in those two businesses.
Yeah, Steven I don't think we're smart enough to try to guess.
Share price is 90 days out so we're assuming that they're flat versus where they were at March 31, and debt to get to our earnings targets and our internal expectations for Q2 into future quarters is that it's flat versus those numbers in the upside is going to be a pleasant surprise to us.
Great that's what I assume I just want to make sure and then the.
The other just quick one is when we when we think about the the.
The impact of the.
Several of these new initiatives.
Do you.
How are you guys thinking about the impact of those from a timing perspective are you thinking about them.
Positive contributors I mean, obviously, you're getting the standard of lithium payment right now, but beyond that of your thinking about them as sort of 2022 23 event. So you think you'll start to see any impact for them.
In the short term I'm, just trying to get a sense for how to think about the timing of an impact.
Yeah, Stephen So there's couple of different categories. As you know that we are pursuing particularly on the low carbon side.
On the on the zinc bromide fluctuate.
As we mentioned in our call we've been surprised.
That's advancing much quicker than what we had previously anticipated last call. We probably would have said 2022 earliest where we would see revenue from that we're now fairly optimistic that we will achieve revenue because of the demand thats coming on these energy storage companies.
This year.
So we believe we will see first revenue from that zinc bromide supply of this year and gaining some pretty good momentum into 2022, if the demand for there.
The energy storage technology continues at the pace that they are anticipating.
On the carbon capture with carbon free.
Obviously, they're going to be leading the charge of negotiating with their customer contracts.
And.
We will be working closely with them to execute on those.
But we would anticipate.
Potential revenue earliest late next year for the deployment of one of their first production.
The carbon of our sky cycle plants.
Great No. That's helpful color. Thank you gentlemen.
Okay.
Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Mr. Murphy for any closing remarks.
Yeah.
Thank you. We appreciate your interest in Tetra technologies and thanks for taking the time to join US. This morning. This will conclude our call.
Thank you. The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
[music].
Okay.