TETRA Technologies, Inc.
Q2 2021 Earnings Call Transcript

Published: 3 Aug 2021

[Operator:]

Good morning, and welcome to TETRA Technologies Second Quarter 2021 Results Conference Call. The speakers for today's call are Brady Murphy, Chief Executive Officer; and Elijio Serrano, Chief Financial Officer. All participants will be in listen-only mode. After today's presentation there will be an opportunity to ask questions. Please note, this event is being recorded. I will now turn the conference over to Mr. Serrano. Please go ahead.

[Elijio Serrano:]

Thank you, Kate. Good morning. And thank you for joining TETRA second quarter 2021 results call. I would like 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 are based on a number of factors. These statements are subject to a number of risk 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 the actual results may differ materially from those projected in the forward-looking statements.

[Brady Murphy:]

Thanks, Elijio. And good morning, everyone. And welcome to TETRA Technologies second quarter 2021 earnings call. As you may have seen from our recent press announcements, we've had a very busy few months. And so I will summarize some highlights for the quarter, as well as some additional color on our recent announcements before turning it back over to Elijio to provide some information on cash flow, the balance sheet and liquidity. For the second quarter financials, we grew revenue by 32% sequentially, with an adjusted EBITDA of $13 million, up 44% sequentially. The year-on-year Water & Flowback grew 53%, while completion - and while Completion Fluids were down 9% year-on-year, we finished the quarter with the month of June being the highest revenue and EBITDA for our Completion Fluids since February of 2020, as we saw a material increase in new activity in the latter part of the quarter. Our strategic equity investments in CSI Compressco and Standard Lithium continued to contribute as their equity values continue to increase. Year-to-date this has added $5.6 million of EBITDA with $1.6 million coming in the second quarter. While inflation pressures, particularly labor, fuel and materials impacted our Water and Flowback business in the second quarter. Ahead of our ability to get broad pricing increases in place, we have line of sight to much improve margins for the third quarter, supported by two recycling projects, to new recycling projects, a fully deployed Sandstorm project in Argentina, and pricing agreements for key customers that started in July. So while the second quarter results were much improved over the first quarter, it is the more recent uptick in our customer activity in June and July, as well as the significant number of positive news in our recent announcements that has us optimistic for our future outlook.

[Elijio Serrano:]

Thank you, Brady. In the second quarter, we incurred $4.7 million of non-recurring charges. This charges include $2.7 million of non-cash stock warrant fair value adjustment expense, $714,000 of non-cash stock appreciation right expenses, $627,000 of expenses related to long term compensation, and $688,000 of restructuring and other expenses. The second quarter also included a $1.6 million gain on mark-to-market adjustments to the common units that we own in CSI Compressco, and to the 1.6 million shares that we own in Standard Lithium. We will continue to see mark-to-market adjustments for the equity we own of these two publicly traded entities. The market value of this investments, as of the close of the market yesterday was $17.8 million. We do not have any restrictions that might prohibit us from monetizing this holdings in CSI Compressco or Standard Lithium. From the beginning of the year to the end of June, the value of this equity holdings have increased by $5.6 million, or 51%. As you evaluate our balance sheet, liquidity and cash position, one must recognize that we have almost $18 million of marketable securities available to us to monetize at the appropriate time. In July, the value of this investments increased another $1.8 million, does now reflected in the numbers I just mentioned. Given this are marketable, we're including this mark-to-market adjustments in our adjusted EBITDA. Second quarter adjusted free cash flow from continuing operations was a use of cash of $4.5 million and compares to $5.4 million of adjusted free cash flow that we generated from continuing operations in the first quarter. Despite the rapid read up in revenue this year, we are free cash flow positive on a year-to-date basis. We saw a build up in working capital in the second quarter, mainly accounts receivable toward the end of the quarter. To give you some perspective, revenue in the month of June was 25% higher than the month of April. We have reduced our term loan by $36.3 million from $220 million as of September 30, 2020, to $184 million as of June 30, 2021, and have reduced it by another $8.2 million in July. This reduction of $44.5 million in the recent months will save us approximately $3.2 million of cash interest expense per year on an annualized basis. In July, we amended our ABL, extending the maturity by over two years to May 2025 and increased our availability on our ABL by approximately $9.4 million. In the next month, we expect to further increase the availability as part of the amendment pendings and post-closing requirements. With this amendment, we do not have any maturities until May 2025. Other than potential payments on a term loan based on excess free cash flow. Total debt outstanding was $171.8 million at the end of June before the $8.2 million pay down in July, while net debt was $121.4 million. Again all this is excluding the value of our investment and CSI Compressco and Standard Lithium. Liquidity at the end of the second quarter was $82 million. And we defined liquidity as unrestricted cash available, plus borrowing under the revolving credit facility. And again, this is before the ABL amendment that increased our borrowing base by $9.4 million. And before the $8.2 million further paid down, I just mentioned. Into the second quarter, we had unrestricted cash of $50.3 million available under our credit facility was 31.7. Brady mentioned earlier, that we're making an investment to increase capacity in our Kokkola facility. We do not expect this CapEx to be significant. And our calcium chloride production operations in Northern Europe consistently produced predictable steady cash streams to TETRA. Also last week we received a $547,000 payment from Spartan for the sale of our controlling interest in CSI Compressco earlier this year. This payment was scheduled on a six month anniversary of the transaction. We have an additional payment due to TETRA in 2022 of $3.1 million of Spartan, upon the obtainment of CSI Compressco achieving a trailing 12 month EBITDA of $107 million and after the refinancing of the notes due in 2002. And also Brady mentioned earlier, that we had agreed to make a $5 million investment in CarbonFree. We expect this payment to be made before the end of the third quarter of this year. This provides us an opportunity to participate in the equity upside as they commercialize their SkyCycle carbon capture technology. In addition to providing TETRA an opportunity to potentially sell significant volumes of calcium chloride jointly developed that with CarbonFree. And finally consistent with what we have been communicating on June 25, we were added that to the Russell 3000. And we have seen a positive impact to our stock price. We welcome all our new stockholders, many of which were previously stockholders, including the passive index base holders who have taken positions in TETRA. I encourage you to read our press release that we issued yesterday, and the 10-Q that we filed last night, for all the supporting details and additional financial and operational metrics. Kate, with that, we'll open it up for questions.

[Operator:]

The first question is from Stephen Gengaro of Stifel. Please go ahead.

[Stephen Gengaro:]

Thanks, and good morning, gentlemen.

[Brady Murphy:]

Morning.

[Stephen Gengaro:]

I have a few things if you don't mind. And what I would like to start with you. You talked about the expectations on both I guess, Fluids and on Water & Flowback for the second half of the year. And I think particularly on the Water & Flowback margin front, you expect a pretty good step up. But can you give us a sense? Maybe with - maybe with ranges around it, on the kinds of revenue and margin expansion you expect in the third and fourth quarters? I know you don't want to give precise guidance. But it just seems like there's a lot of moving pieces here that impacted the second quarter and should have positive impacts on the third. And can you help with some parameters around those two segments?

[Brady Murphy:]

Yeah. Sure, Stephen. And we do have some pretty good line of sight of the third quarter. What we see from Water & Flowback is again, double-digit growth for our Water & Flowback business in the third quarter over the second quarter. And we also feel potentially doubling or close to doubling the EBITDA margins from where we ended Q2, and what we see in Q3. Again, a lot of moving parts associated with that, that we have spoken about. But we feel fairly confident in that range for the third quarter. I'll hold off on the fourth quarter for now. But we think we'll continue to make progress as we go through the year. On the Completion Fluid side, you know, we talked about the two - the two awards that we've had. For the Gulf of Mexico award, we will definitely see material impact, in our positive impact for us in Q3 and Q4, for the rest of this year, and throughout the three year period. The Brazil award will most likely not see an impact until Q1 of next year. But I can tell you that the Gulf of Mexico award, plus the increase in activity that we see for our Completion Fluids business, and you combined will overcome you know the reduction that we'll see in our seasonality from Europe, as we go through the rest of the year. If that helps.

[Stephen Gengaro:]

Yeah, that does help. And speaking to that season, was the second quarter a normal sort of European chemicals quarter? Or was there anything, because the margins look pretty good?

[Brady Murphy:]

Yeah, we've done a lot to improve our profitability and margins in that business. Stephen, and so it was pretty much a normal quarter for our Q2, European business.

[Stephen Gengaro:]

Great, thank you. The other thing I was curious about and I know we spoke a little bit about this when we were together recently. But when you think about what you announced in the release last night. And when I think about the timing of some of the low carbon initiatives and how they sort of unfold on the income statement over the next, you know, several quarters, to couple years. Can you give us any guidance on how we should think about the three main components of the low carbon niches?

[Brady Murphy:]

Sure. And we'll speak to them in general terms. We're not prepared to give you a specific guidance on revenue or EBITDA at this point. We hope to be able to do that shortly. But in general terms, we'll walk through that. I think it's important to note that the Standard Lithium agreement, you know, we're seeing meaningful benefit to that today. And we'll continue to see. We've accumulated a 1.6 million shares at yesterday's close price, that's an $11 million value to TETRA. Over the next three years, we had the potential to acquire another 1.8 million shares. If we just take that closed price yesterday, that's another $12.5 million of value, plus the million - $1.2 million in cash we get for the next three years. That's another $3.6. So if I - if I add up what we've already accumulated and what we see over the next three years, assuming it takes Standard Lithium that amount of time to get ready for production. We're talking about up to $28 million of potential value to TETRA before they start producing lithium. And then, of course, when they start producing lithium, those numbers escalate meaningfully. On the PureFlow side, that's advanced, as we've mentioned now on two calls, much quicker than we've anticipated it would. We believe talking to the energy storage companies, based on their demands that we will see a meaningful and material orders start to come in Q1 of 2022. And again, that could be very material to us for our business in 2022, and carried into 2023 with additional ramp. It's at that point that we will really need to have secured additional bromine supply, which is why we've announced these strategic opportunities, both with our own leases, mineral leases in Arkansas, as well as the agreement with Anson. As we get to that 2023 period, we will clearly need that additional bromine supply. Our plant capacity still has capacity to build, you know, well above that. But the actual bromine itself is where we will need the additional capacity. And then as we look at CarbonFree, they've demonstrated the pilot plan to the specifications. They've selected Fluor as their contractor. We expect them to be signing their first plant construction project between now and the end of the year, with potential startup operations by the end of next year, or the first quarter of 2023. And again, if as that rollout plan, looking forward if they're successful, as we fully expect they will, because of the unique solution that they offer, you know, within the next two to three years after that our calcium chloride production and sales could double. So again, material types of opportunities for us as these low carbon energy projects play out.

[Elijio Serrano:]

And Stephen, I had a couple of data points that I think are relevant. Number one, we have communicated previously that globally we produce until about $100 million of revenue from calcium chloride. So that will give you some context to Brady's earlier comment. And then also, one of the things in talking to investors that I think is still not fully understood and appreciated is, in Arkansas, we've got leased acreage, of which not all of it is under the Standard Lithium agreement. And the press release that we issued yesterday morning indicated that we've got between 85,000 and 286,000 tons of lithium carbonate equivalent outside the Standard Lithium agreement of which TETRA owns a 100% of those rights that we could mine and sell into the future. And at 12,500 a ton that's significant value that I think is not understood or yet fully appreciated.

[Stephen Gengaro:]

Okay, great. No, that's very helpful. I'll get back in line. Thank you.

[Brady Murphy:]

Thanks, Stephen.

[Operator:]

The next question is from Samantha Hoh of Evercore ISI. Please go ahead.

[Samantha Hoh:]

Hey, guys. Thanks for providing the EBITDA margin guidance on the Water and Flowback segment. Brady, maybe asked another way, I was wondering what the impact you know, from moving some of your assets from - on the Sandstorm side to Argentina was to 2Q if you have that handy, maybe just impact to revenue and EBITDA margin?

[Brady Murphy:]

But the main impact Samantha was obviously for the equipment was in transit, and then clearing customs and getting set up with the customers is that we probably lost about two months of revenue for a significant number of units, and then we backfill those units. We believe that for the month - for the quarter, the third quarter, we'll have all of those units back in full production.

[Samantha Hoh:]

Okay, great. And then just maybe a little bit more on the things bromine order. So you got your first order in the books, what was the mechanics in terms of getting that fulfilled? Do you have that, you know, some inventory of that available that you can actually just start delivering on that or is there some sort of production time lag before we see that hit revenue?

[Brady Murphy:]

Right. Thanks, Samantha. So, the first order was significant, because firstly, it confirms the technical qualification of our PureFlow for their energy storage systems and it also sets you know, a benchmark, commercial terms for delivery, you know, which we're pleased with. Obviously at this point is a bit of a smaller order to get things started into both of our systems. But it sets where we think we will be as the - as they ramp up their larger order quantity, starting in, what we believe at this point will be the first quarter of next year.

[Elijio Serrano:]

And Samantha just to make sure that it's understood and appreciated, today we produce and sell significant volumes of zinc bromide into the oil and gas sector. The benefit that we have is that we apply our patented process to take that zinc bromide and convert it into PureFlow to meet some of the immediate opportunities.

[Samantha Hoh:]

Do you have to change the chemistry for the different customers?

[Brady Murphy:]

No, we don't expect the chemistry will change there. There is a change in the purity level, as Elijio highlighted between what we supplied to the oil and gas market, and what we supplied to the energy storage, the energy storage specifications for purity are significantly higher than what's required for oil and gas.

[Samantha Hoh:]

Right, for the CarbonFree investment, how does that change the discussion around the MLU? Do you guys still think that you'll have terms finalized by the end of the year?

[Brady Murphy:]

Yeah, we do. That the collaboration with CarbonFree is excellent. The MOU set some kind of guidelines and parameters that we would work towards, some general concepts of what we want to work towards. And I would say the collaboration at this point, in working with CarbonFree, understanding their specifications, understanding their volumes, you know, on the TETRA side, making sure we can source the volumes of calcium chloride that are going to be provided in various places around the world, to our specifications, to their specifications, is all working very well. So we would fully expect the way things are progressing to have a definitive agreement in place, certainly before the end of the year.

[Samantha Hoh:]

And then maybe just to stay on the new energy topic, for the Standard Lithium piece, or even actually, on the Arkansas reserves. What's the next step in terms of, you know, your assessment of this business that you have and you would take to actually develop them yourself?

[Brady Murphy:]

Right, right. So you'll notice it was the exploration target estimates that were provided, the next step for us based on these results, is we will go ahead and move to an inferred resource effort with the geological company that we have deployed. That's going to require some sampling of some of the fluids in the wells in our leases. So be a little bit of time involved with that, but not extensive. And then they will execute the inferred resource report for both the bromine in our leases, as well as the lithium in the leases that we have outside of the Standard Lithium agreement. Now recall that, within the Standard Lithium agreement for the acreage that they have, they've already completed a inferred resource report, which is the 890,000 tons of lithium, a step substantial amount of lithium. And they're moving into the, you know, economic feasibility study, which we expect to have in the third quarter. So they're a little bit ahead of us, at least in terms of progressing down that development path, but we're excited to see them moving, you know, sooner rather than certainly the agreement would expire.

[Samantha Hoh:]

Okay, great. And maybe just one final one. On the calcium chloride plant expansion in Finland, I know you said that it was a very small capital investment. Can we assume that your CapEx stay at about this run rate, you have to include that? And then no, would you have that incremental capacity available in time for next summer?

[Elijio Serrano:]

Right. And so the CapEx will not be significant, it will be spread between this year and next year. And we expect to have it fully operational by about this time next year, to be able to participate in the peak season, the subsequent year. So it's not going to be – not going to move the needle on the CapEx.

[Samantha Hoh:]

And we'll see it really more in 2023 numbers. Thank you so much, guys.

[Brady Murphy:]

Thank you, Samantha.

[Operator:]

The next question is a follow up from Stephen Gengaro of Stifel. Please go ahead.

[Stephen Gengaro:]

Thanks. It's two more if you don't mind. The one is, I know Elijio you referenced a bit. But how should we think about free cash generation in the back half of the year and, and going forward just kind of based on the different moving pieces. And I know that working capital has been a bit of a drain, year-to-date, I think, I know receivables are up. But how do we think about that?

[Elijio Serrano:]

So, Stephen, as Brady mentioned, with the awards in the offshore side, and some of the opportunities that we've got in terms of pricing on the onshore side, we expect EBITDA to continue to ramp up during the year. And then, depending on the rate of growth, if activity continues to spike all the way until the end of the year, in December, and December remain strong, we might not have an opportunity to monetize all that AR, before we close December. If it pulls back - pulls back modestly in December, as has occurred in prior years, it'll allow us to monetize some of that AR. So some of it will depend on the speed or the ramp up, and the timing at the end of the year, to determine the magnitude of how much of that AR we can monetize. We have demonstrated that we can invoice timely collect, quickly, we've got a very strong customer base out there that doesn't present concerns from an AR site. So it really depends on the speed of the uptake and activity.

[Stephen Gengaro:]

Okay, thanks. And when you - when we think and I'm going back to the Fluids margins here, I know. But when we think about, you know, the prior quarters, when you'd have CS Neptune jobs, you obviously have these, you know, these sharp rises in margins for core. And I know the job that you referenced, that you completed in July wasn't of that magnitude. And I know the - I think the broader projects that you've announced in Brazil and the Gulf are a bit different. But will we see a meaningful jump in Fluids margins be sustained here over the next year plus because of these deepwater contracts?

[Brady Murphy:]

So I think for the quarter, we reported 27.7%, almost 28% EBITDA margins. Our guidance really Stephen at this point is to certainly maintain over our target of 25% EBITDA margin. We could see some spikes, where we're over our Q2 numbers of 27.7%. But we won't see until we deliver some of the Gulf of Mexico wells, which right now on the schedule looks like more 2022, you won't see that, you know, jumped to mid 30s, that we've seen in prior large Neptune type of the jobs.

[Stephen Gengaro:]

Okay. All right. So we're still thinking mid 20s plus-ish in the back half a year. And then it may be improvement from there based on the time.

[Brady Murphy:]

Right.

[Stephen Gengaro:]

But the Gulf, I thought the Gulf awards were going to start helping in the third quarter.

[Brady Murphy:]

I don't believe we committed any Neptune jobs for the year. We had visibility of a couple of projects, Stephen, but at this point, I would say first quarter of next year is most likely for the Gulf of Mexico, Neptune opportunities.

[Stephen Gengaro:]

Okay. But the Gulf deepwater project that you just awarded does help. It's just not as - it is not as eye opening about margin impact. It's not Neptune job.

[Brady Murphy:]

Yeah, I'm sorry. I will clarify. I was speaking about Neptune specific. Such a big impact on our margins we will definitely see, and we're already seeing the impact of the awards in the Gulf of Mexico on our Q3 and Q4 results, which will maintain our mid 20s type EBITDA numbers.

[Stephen Gengaro:]

Okay, okay. And then one more, and I'm not sure if you're willing to take a shot at this or not. But if you - just give or take you do $50 million plus-ish in EBITDA and adjusted EBITDA this year, that's kind of based on my model, but we're still working on that. But net-net, if you if you use that as a reference point, in 2024 could these new carbon initiatives match that, i.e., if everything else stayed the same could EBITDA double just based on? Or am I way off? Is that reasonable? Is that too low?

[Elijio Serrano:]

So Stephen, let me reiterate a couple of data points that I think Brady made that are important. He indicated that if the low carbon initiatives with CarbonFree take off and we can double our calcium chloride profitability, you can see that we've been generating consistently mid 20% type EBITDA margins in our Fluids business, and in the past, we've indicated that the calcium chloride business is in that ballpark. That's a significant step up. To the opportunity to gain value from the Standard Lithium agreement, then the opportunity to sell quite a bit of PureFlow into the data storage market there. So I think when you add up all those, collectively, there's a significant opportunity there for us.

[Brady Murphy:]

Yeah, I would agree with that. The PureFlow projections right now, itself will be pretty material by 2024. I think it'd be hard pressed to say we're actually getting any lithium royalties by 2024, although it's possible. But the main two components that will be - we think will be contributing pretty meaningfully will be CarbonFree and PureFlow by 2024. We have a model, you know, all the numbers yet from our forecasts. We're not prepared to lay those out yet, but I don't think you're too far off what's possible.

[Stephen Gengaro:]

Yeah, no. And I understand it's a long one. It does help. So, you've given a lot of good color around it. So that's very helpful.

[Brady Murphy:]

Okay. Thank you.

[Stephen Gengaro:]

All right. Thank you.

[Operator:]

There are no other questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Murphy for closing remarks.

[Brady Murphy:]

Thank you, Kate. We appreciate everyone's attention and interest in TETRA. And for now, we will close the call. Thank you.

[Operator:]

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