Q2 2023 TETRA Technologies Inc Earnings Call

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.

Thanks, Rocco good morning, everyone and welcome to <unk> second quarter 2023 earnings call.

Our historically strong second quarter results demonstrates the 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 initiatives I will provide an overview of our second quarter highlights before turning the call over to <unk> to provide an overview of our financials.

And then we will open the call for questions.

According to Spears <unk> associates Global E&P spending is still 55% below the peak year in 2014, yet in the second quarter, we delivered the highest quarterly revenue excluding discontinued operations in the company's history.

While doing so we achieved the highest adjusted EBITDA in almost eight years without the benefit in the quarter Ocs Neptune activity.

Although both segments posted impressive year on year revenue growth completion fluids, <unk> products led with 31% growth year on year and 42%.

Growth sequentially.

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 second quarter as the North Sea jobs, we were planning for the second quarter have been delayed one of these jobs is now scheduled for load out to the rig this week as.

As a larger percentage of the North America, Sheryl tier one acreage has drilled and completed we remain.

Our with our beliefs, even more conviction that we're still in the early stages of a longer term offshore and deepwater up cycle.

<unk> business model with sales to over 20 countries year to date as a full service fluids provider, including reclamation services as well as our fluids product sales provider to the major service companies gives us great flexibility and our ability to grow with increasing international activity.

Equipped with an extensive portfolio of high value completion fluids, and our firm and our family of environmentally friendly solutions et cetera 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.

As the largest producer in northern Europe , we have invested to expand manufacturing capacity in the region, while continuing to explore new opportunities.

Example of this is a second order from a customer who is utilizing our high purity casting flawed in the lithium production process. We're following their progress closely and look forward to future developments.

For water <unk> Flowback services, we previously announced that for 2023, our focus will be on margin enhancement over growth and in the second quarter. 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 with more and more emphasis on moving in treating produced water differentiated offerings offerings service quality and reliability are driving customer decisions.

Demand for our fleet of Petro Sandstorms remained strong as we continue to make enhancements to further automate the equipment and drive further efficiencies.

While we have seen while we have seen some signs of softness in certain U S. Land segments pricing has remained relatively stable for our differentiated offerings.

With regards to our produced water treatment for beneficial reuse. We continued to advance the engineering work required to achieve our goal of a commercial designed 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 the 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 smack over Brian evaluation and potential development plans for lithium and bromine production, we achieved some very important milestones during the quarter.

We recently entered into a memorandum of understanding with Salt works LLC related to.

The newly proposed Brian unit in the smack over formation and southwest Arkansas.

Proved by the oil and the Arkansas oil and gas Commission the $61 38 acre unit is 48% larger than our original proposed unit.

And as with a partner that brings tremendous wealth of experience and financial strength.

Insult works have agreed to collaborate in key areas, including upstream design development to optimize long term, Brian production technology development for lithium extraction and associated engineering studies required to develop the proposed Brian unit, we will communicate further developments as we achieve certain milestones.

Also during the second quarter, we completed the drilling of our second test well and our newly proposed unit with sampling tests underway to update the prior test results noted in the inferred resources study for bromine and lithium.

Contracted hardgrove and associates to execute a front end engineering and design study our feed for lithium production facility.

The implant design will be optimized for share of the production wells injection wells and pipelines consistent with previously completed feed for the bromine plant, which was completed during the first quarter of 2023.

With that I'll turn it over to Leo to provide some additional commentary and then we'll open it up for some questions. Thank you Brady.

<unk> lithium product segment, adjusted EBITDA of $31 $8 million increased 80% year over year.

77% sequentially.

Adjusted EBITDA margin improved from 26, 1% in the first quarter to 32, 4% in the second quarter.

We have historically only been above 30% adjusted EBITDA margins for this segment, we have had large tetra CS Neptune projects.

We believe pushing our EBITDA margins above 30% without the benefit of CS Neptune speaks.

Speaks to the strength of our integrated business model.

In 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.

And there were approximately 50% more active deepwater rigs operating globally.

The exceptional fall through was driven by higher production volumes and improved supply chain in an industrial business as well.

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 underpinning underpinned by rising floater utilization rates in many regions.

Deepwater revenue for the quarter with approximately 28, 8% of the total segment as compared to approximately 23% a year ago.

Indicating indicating growth of more than 60% year over year.

In the third quarter, we will see the seasonal drop off of the industrial chemicals business with 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 <unk> 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 investment.

Adjusted EBITDA improved by 43% year on year and by 10% quarter over quarter.

Adjusted EBITDA margins improved 100 basis point 170 basis points from 16, 7% in the first quarter.

This year to 18, 4% in the second quarter of this year, marking the highest margin since the fourth quarter of 2018 as.

As the team continues to drive operational efficiencies and focus on margin expansion.

In the second quarter, we commenced our third early production facility in Argentina.

We also secured a contract to expand one of the three early production facility that we have in Argentina with an extended contract term with a customer pre funding the capital expenditures required for this expansion.

This approach points to our focus on managing capital investments in working capital.

We were also awarded a contract for production testing in the Middle East.

For the.

For the fourth quarter, we for the third quarter, we anticipate modest sequential growth in international and flat to slightly down revenue in United States.

Cash flow from operating activities was $28 $4 million in the second quarter compared to cash flow from operating activities of $17 $9 million in the second quarter of last year and compared to $9 million in the first quarter of this year.

Adjusted free cash flow from continuing operations was $17 $7 million of funding capital expenditures of $10 $3 million net of proceeds.

The high conversion of net income to cash flow from operating activities and to adjusted free cash flow.

While achieving our revenue increase sequentially at 20% reflects the quality of the incremental revenue and the company's focus on managing working capital.

Working capital at the end of the first quarter with $107 million.

Working capital only consumed $5 million of cash in the second quarter compared to a use of cash of $5 2 million in the first quarter of 2003 2023.

Days sales outstanding improved by approximately five days during the quarter.

As of June 2000.

<unk>, our trailing 12 months return on capital employed or <unk>.

On non-GAAP measure was 18, 2% materially above our average cost of capital.

At the end of the second quarter unrestricted cash was $28 million in availability under our credit facility was $71 million.

Quiddity at the end of the second quarter was $99 million and improved to $102 million 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 4 million.

And our investment in carbon free. It's currently currently valued at approximately $6 3 million.

Combined this investments totaled almost 60 $16 million.

During the second quarter, we booked a favorable $4 $7 million adjustment to earnings to reflect charges and cost previously incurred and passed on to salt work consistent with the Mou that we recently signed.

We agreed to share with fault works our previous work in findings in Arkansas for the first and second test well.

The bromine feed study and the reservoir analysis.

<unk> agreed to pay up to 51% of those costs up to a certain amount we.

We expect to collect for an amendment in the third quarter, and we will continue to pass onto them up to 51% of cost related to the Arkansas.

Investment up to a certain limit.

When reporting GAAP net income this $4 $7 million benefit is reflected in our results.

However, when reporting adjusted EBITDA of $36 million in the second quarter, we did not reflect this favorable benefit in our adjusted results.

Our adjusted results do not include the benefit of the $4 $7 million of income from Salt work.

Free cash flow and cash flow from operations in the second order also did not reflect this benefit and will be reflected in that third quarter free cash flow and cash flow from operations. When we collect this cash in.

In the coming quarter.

I'll turn this back over to beta for closing comments before opening it up to questions. Okay. Thank you <unk>. So in closing, we're very pleased with our second quarter 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.

The strategic opportunities and projects so with that we'll open it up for questions.

We will now begin the question and answer session. As a reminder 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.

I'd like to withdraw your question. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

Today's first question comes from Martin Malloy with Johnson Rice. Please proceed.

Thank you congratulations on the strong quarter.

Thank you Mark could you maybe take a.

Take some time to talk about.

The salt work.

Mou and what that might mean for the timetable.

To getting to the point where.

Production facility for lithium might be.

<unk>.

Assuming that the results from the second well come back positive.

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.

<unk> for the 6100 acres.

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.

Okay.

Mardi is I would add is as it relates to the timing.

Once our unit is moves forward and as Lisa said, we established more definitive agreements with Salt works.

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 hold together between now and ended the year or by the first quarter of next year.

And once we get a final investment decision made by our board in the Salt Works Board. Then we expect two years from that period of time, we will be in first production for for bromine and lithium that's that's our expectation.

Okay.

And then my follow up question I wanted to ask about Neptune projects in the Gulf of Mexico could you give us an update in terms of line of sight on any potential projects there.

Yes. So we continue to have good success with with Neptune, We did have some delays in the second quarter.

For some wells that we had planned they were pushed to the right as I've mentioned in my comments, we're actually loading out of Neptune job for the North Sea for.

Later this week and then we expect some of the other jobs to materialize.

And the Norway sector of the North sea as well as the UK sector later in the year for the Gulf of Mexico. As we've mentioned before these are these are much bigger longer term plan the 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 fourth quarter of this year, but we still believe next year is more likely for some of the Gulf of Mexico projects to start start materializing.

Great. Thank you I'll turn it back.

As a reminder, if you do have a question. Please press Star then one.

The next question comes from Steven.

Jane <unk> with Stifel. Please proceed.

Okay.

Thanks, and good morning, everybody.

Good morning.

I think the third.

Firstly.

I wanted to ask about.

The quarter was obviously very good and you had the normal seasonality.

From Europe .

It was very strong.

I wanted to try to understand a little bit was a how where margins were impacted by the new European chemicals business.

EBITDA margins were obviously excellent and then b as we as we speak.

Think about the third quarter.

Just think about the normal the normal kind of progression we've seen historically.

It feels like a high Twenty's EBITDA numbers is kind of in the ballpark.

I was curious if you could comment on that at all sure. Thanks.

Thanks, Steve and I'll handle the first part of that and then escalate here to comment on the on the third quarter, but the margins were very very strong in the quarter I would say really its but it was across the board we.

We did have very good margins out of our European.

Calcium chloride business.

We're 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 we had quite a few deepwater wells in the quarter.

Although they are not Neptune jobs. They are still very 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 for the margin impact.

I'll ask <unk> to comment on the third quarter, Yes. Good question Marty on the third quarter of historic.

Stephen sorry, historically, we've seen about a 40% to $50 million sequential increase in revenue. So let me give you some third quarter cutlery and what I will do with all bench market through the first quarter, which.

It doesn't have the seasonality in Europe .

We believe that revenue in the third quarter is going to be somewhere between 5% and 8% higher than the first quarter of this year.

And again, a reminder, that the second quarter is impacted by the seasonality for northern Europe .

We think that third quarter, adjusted EBITDA will be somewhere between 30% to 40% above.

Above that $26 million from the first quarter of this year.

And I think this demonstrates the continued growth in the offshore markets.

Margin expansion with the onshore business.

We continue to benefit from.

And the third quarter numbers that I called out are contingent on several significant deepwater projects that we are expecting in the third quarter I mentioned, some in the Gulf of Mexico and Brazil.

And the expectation right now is that none of those slip from September into October or the fourth quarter.

To be able for us to deliver the numbers that I mentioned.

Okay.

Great.

That's helpful color. Thank you and then just just so that I understand.

You made brief comments on the water.

<unk>.

It feels like there is some headwinds in U S land. So so the numbers you just provided I think would be in the backdrop of kind of a flattish water business.

Yes.

For Q3, I think you can think about our revenue is fairly 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.

So I would really think about for Q3 fairly flattish in the water and flowback settlement, but again as Leo mentioned our margin expansion progress is continues and we would expect to be slightly higher on the margin side with that flattish revenue and even I'll add that historically we've grown.

By adding capacity and adding capital.

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.

Okay, great. Thanks, and just one more for me.

<unk>.

The results were seeing are obviously.

Sure.

Really good without I think without any pure fall in the second quarter, yet and I know I know <unk> has been has been working towards this CRE loan.

Z three line coming on stream should we be or maybe a better question is are you thinking about.

But pure flow impact.

Really ramping in 2004, we got a good way to think about the impact of pure flow on the fluids business.

Sooner or later than January one.

Yes look we've continued to stay very close contact with.

Not only for the pure flow, but also in discussions with them to provide their food electrolyte.

Which is a great opportunity for us, but as you know they're transitioning to their new <unk> technology.

I think until they have their automation equipment up and running.

Volumes will probably be pretty pretty slow, but once they have their automation equipment up and running our expectations. The orders will really accelerate and I don't want to speak for them, but we think thats, probably more likely in 2000 2024 than before.

Before the end of the year.

And just to differentiate them I are you differentiated between gesture flow in the full electric how does that look.

I'm not sure I understand exactly the difference on the <unk>.

Revenue difference for you guys yes.

Yes, so the.

Electrolyte is made up of quite a quite a few different.

Chemical composition are pure flow the zinc bromide as you 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 other chemistry complex chemistry.

Involved in the full electric.

And we are working with actually several of our customers not just just iOS.

To understand the composition of that and to be able to manufacture that and thats.

Another step change in central revenue for us out of that out of that product line.

Excellent. Thanks.

Thank you for the color.

Yes.

At this time, we're 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.

Well. Thank you very much as Ive stated before were 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 potential for the company. So thank you for joining us.

I appreciate it.

That's all.

Okay.

The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.

Okay.

[music].

Okay.