Tetra Technologies, Inc.

Good morning and welcome to Tetra Technology fourth quarter and full year 2020 results conference call. All the speakers for today's call are Mr. Brady M. Murphy, Chief Executive Officer, and Mr. Elegio Serrano, Chief Financial Officer. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there'll be an opportunity to ask questions. To ask a question, you may press star then one on your touchstone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Mr. Serrano.

Please go ahead. Thank you, Kate. Good morning, and thank you for joining Tetra's fourth quarter and 2020 results call. I'd 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 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 the call, we may refer to EBITDA, gross margins, adjusted EBITDA, adjusted EBITDA gross margins, adjusted free cash flow, leverage ratio, or other non-GAAP financial measures. Please refer to yesterday's press release or to our public website for reconciliation 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 out yesterday, and as posted on our website, will be filing our 10-K in the coming days. With that, let me turn it over to Brady.

Thank you, Elegio. Good morning, everyone, and welcome to the Tetra Technologies fourth quarter and full year 2020 earnings call. I will summarize some highlights for the quarter and current outlook and then turn it over to Aligio to provide information on our financial reporting without CSI Compresco operating in SG&A costs, cash flow, and the balance sheet. Let me start again by thanking all the Tetra employees and the management team for delivering another strong quarter and a very good year relative to the very challenging energy services market this past year. For the year 2020, despite the energy macro environment, we delivered positive adjusted EBITDA and free cash flow in every quarter. The fourth quarter adjusted free cash flow from continuing operations of $16 million is the seventh consecutive quarter that we have delivered positive free cash flow with a total of $73 million generated over those seven quarters. This was accomplished through exceptional cost management by reducing total costs as measured by adjusted EBITDA more than our revenue decline of 33%. and increasing our adjusted EBITDA margin for the year over last year by 150 basis points. This was accomplished with a macro backdrop of a year-on-year U.S. onshore rig count decline of 55 percent and an active frack crew declines of 56 percent. While delivering these results, we were also able to successfully execute our key strategies, including the deconsolidation of CSI Compresco, positioning the company for a recovering oil and gas market and meaningful participation in low-carbon energy markets. Our focus on innovation and differentiated offerings in each of our business segments, along with our vertically integrated chemicals and completion fluids model, has proven again to be resilient in the most challenging of downturns. The value of our balanced revenue and cash contribution from U.S. on conventionals, global offshore, including deep water, international, and industrial chemicals markets has been highlighted in a year like 2020. but just as importantly, positions us to participate in all segments as the market recovers. Revenue for the fourth quarter was up slightly sequentially, with strong revenue growth in the U.S., offset somewhat by lower international activity. Fourth quarter adjusted EBITDA before discontinued operations was $11 million, which was an improvement of 49% sequentially, with the adjusted EBITDA margins improving 460 basis points. Tetra generated $16 million of adjusted free cash flow from continuing operations in the quarter and ended the quarter with $67 million of cash and liquidity of $92 million. For the full year 2020, we generated $60 million of cash from continued operations and improvement of $81 million from last year. Water and flow back saw sequential revenue growth of 46% in the fourth quarter compared to the modest 7% quarter-on-quarter frack crew increase. Our strategies on produced water and treatment, sand management, automation, and integrated water management are on track and clearly contributed to our ability to stay adjusted EBITDA positive in every quarter of 2020 and deliver a 12% adjusted EBITDA margin in the fourth quarter on a frack crew count that was still a third of the 2018 peak. Adjusted EBITDA of $3.7 million increased $3.6 million sequentially. We added 14 new customers in the Permian in the fourth quarter and two new produced water recycling contracts with a leading EMP operator in the Permian Basin, which will increase our water recycling capacity by another 100,000 barrels of water per day. We are currently partnered with six leading EMP companies in the Permian Basin to provide full cycle produced water recycling solutions. Based on our tracking of working frack crews, We believe that we are currently the oilfield service market leader for water transfer and water treatment in the Permian Basin. In the fourth quarter, we averaged 26 integrated water management projects with 18 different customers. And as we start 2021, we were above that run rate. Our BlueLynx automated control system is a key enabler for these integrated projects to deliver the efficiency and financial benefits of automation. We continue to deploy our Tetra Sandstorm Advanced Cyclone Technology to new customers and regions. As we mentioned in last evening's press release, Tetra has secured our first project outside the United States, in Argentina, for a fully automated sand recovery project. Based on customer demand, high utilization of these assets, and market share gains for our highly effective sand filtration technology, we are investing additional capital to increase our fleet by approximately 40% in 2021. Completion fluids and products adjusted EBITDA margins of 32.6% for the quarter included a benefit from our standard lithium agreement. Completion fluids and products fourth quarter adjusted EBITDA margin of 32.6% increased 580 basis points sequentially and was a record high for this segment without the benefit of a Tetra CS Neptune project. The fourth quarter adjusted EBITDA margin was also 740 basis points better than a year ago excluding the benefits of CSNeptin. Revenue for the fourth quarter decreased 15% sequentially, primarily due to a large international completion fluid sale in the third quarter that did not repeat in the fourth quarter. With WTI crude oil prices averaging $36 between the start of the global pandemic in March of 2020 through the end of December 31st, 2020, Offshore rig count activity has declined throughout the year and ended down about 37% from the start of the year. Deepwater projects, including those where we are engaged with customers for CS Neptune, were delayed and pushed from their original planned dates. We believe that the offshore market will bottom in the first half of 2021 and start a meaningful recovery in the second half of 2021 and into 2022. Through discussions with our customers, this includes several of the CS Neptune projects which are now getting replanned. We're optimistic several CS Neptune wells will be scheduled and executed this year. Our industrial chemicals business continues to perform well and made up approximately 40% of the revenue for this segment. And for 2021, we expect this business to remain strong, as we're expecting strong seasonal sales in the U.S., East Coast, and Europe. Revenue of our calcium chloride Europe business in 2020 was a record high for us, demonstrating the value of this business and even the most challenging of economic uncertainty. The recent Arctic-like weather conditions that we experienced in the southwestern part of the U.S. resulted in a period of fracking and depletion activity being significantly curtailed. This impact may be somewhat offset from the cold weather, which will benefit our industrial chemicals business. We're working on quantifying the impact of these two, but have not yet fully quantified the net impact of the quarter. On January 19th, we issued a press release highlighting strategic initiatives for low-carbon energy solutions and appointed a senior executive to focus on these opportunities. We mentioned the 3.9 million tons of estimated bromine reserves resources, I'm sorry, and 890,000 tons of inferred lithium resources for which we have partnered with Standard Lithium to recover and sell lithium from our Arkansas leases. In 2020, our P&L saw the benefit of 3.1 million from this agreement, And until the lithium is extracted from our leases, we're receiving cash and equity compensation from Standard Lithium. On the energy storage side, we're currently engaged with three different companies who are in a process of qualifying our high-purity zinc bromide for application of battery energy storage. A Wood Mackenzie September 2020 report states that energy storage is still a nascent market, a relatively new investment class with underlying risks. but also projects the energy storage market to grow at a 10-year, 31% compound annual growth rate over the next decade and grow from 25 gigawatt hours deployed storage in 2020 to over 700 gigawatt hours by 2030, representing a $60 billion market by the year 2030. Zinc bromide flow batteries show great promise for meeting the portion of this market that requires slow charge and discharge between 4 and 12 hours, such as wind and solar farms, compared to lithium-ion batteries, which have 4 to 6 typical discharge times. Given the specifications of our high-purity zinc bromide and our technical exchanges with flow battery OEMs, we are highly confident we will qualify our product and advance to commercial arrangements. And finally, we mentioned a recent advancement in carbon capture technology that uses calcium chloride We are currently in discussions to put in place a memorandum of understanding with a company that owns patents around this solution. These are very exciting opportunities for Tetra, and we will continue to keep you updated as they evolve. Since January 5th, we've announced both the beginning and the results of numerous strategic actions initiated by management and our board aimed at, one, simplifying Tetra and our business lines, two, increasing operating efficiencies, three, reducing costs at all levels, and four, shoring up our balance sheet. We've made meaningful progress on all of these areas. The successful execution of our key strategies in 2020 has strengthened each of our business segments and positioned the company to capitalize on a recovering oil and gas market and continue to grow and strengthen our industrial chemicals business. Furthermore, we remain committed to the important ESG initiatives that I mentioned earlier, including the use of our products and technology in battery storage applications, carbon capture, and our partnership with Standard Lithium. With that, I'll turn it over to Elijo to provide some additional color, and we'll open it up for questions.

Thank you, Brady. The results we reported yesterday are all within the range of our pre-announcement of January 29th, and more specifically at the midpoint of our pre-announced results. With the announced sale of the GP and IDRs and 11 million limited partner units of CSI Compresco, also that we announced on January 29th, The financial results of CSI Compresco will be reported as follows. The 2020 and prior year's income statement will reflect CSI Compresco as discontinued operations. Revenue income before taxes adjusted EBITDA will be TETRA only without CSI Compresco. All our historical results in CSI Compresco will be reflected as discontinued operations. Given that we were still the general partner of CSI Compresco at the end of the year, The balance sheet at the end of 2020 and prior years will reflect all of CSI Compresco assets as assets held for sale, and all the liabilities of CSI Compresco will be reported as liabilities held for sale. This will allow everyone to look at Tetra's balance sheet and quickly exclude the impact of CSI Compresco by excluding assets and liabilities for those items held for sale. The cash flow statement for 2020 and prior years will include the impact of CSI Compresco in each of the various line items. In the press release we issued yesterday, we continue to show Tetra only free cash flow, excluding the impact of CSI Compresco. And as previously mentioned, this is because Tetra was still the general partner of CSI Compresco at the end of 2020. When we report first quarter 2021 results and the future quarters, the income statement will be TETRA only and CSI Compresco results and prior periods will continue to be reported as discontinued operations. The balance sheet will completely exclude CSI Compresco given that we will not be the general partner as of the end of March 31st, 2021. The cash flow statement for the first quarter of 2021 will include the days in January that we were still the general partner of CSI Compresco. And noting that we continue to own 5.2 million common units of CSI Compresco, our future results will include a mark-to-market valuation adjustment for the units we own. The price that the CSI Compresco units were trading at when we sold the general partnership was $1.25. Any increase or decrease from that unit price will be reflected as income or loss in the other income or lost item of the income statement. So far this quarter, Given the CCLP unit price has increased materially, the gain to date of the $5.2 million that we own in CSI Compresco is $4 million, reflected at unit price of 203 as of the close-up market yesterday. We will evaluate Tetra's position on how long and at what price we might monetize this $10.6 million asset. In the fourth quarter, we incurred $3.4 million of non-recurring charges. of which 2.1 million were cash-related. During the year and into the fourth quarter, we remain very focused on optimizing our cost structure. We implemented a series of temporary and permanent cost reduction actions by reducing salaries across the board, suspending 401 match, and implementing a furlough program. We also implemented several significant permanent cost reductions that we intend to keep into a recovery. This included streamlining the management structure by eliminating several executive and senior management positions, shutting down locations that were not earning returns of capital acceptable to us, such as our El Dorado facility, entering into long-term supply agreements to lock in multi-year favorable pricing, especially in our chemicals business, and as Brady mentioned, aggressively implementing technologies that reduce staff costs at the well site and automating and digitizing our well site operations including remote monitoring. As a result of these actions, we reduced company-wide cash costs as they impact EBITDA from $497 million to $329 million, or by 34% when revenue declined 33% year-over-year. Our adjusted EBITDA margins actually improved in the down year by 150 basis points. Decremental margins were only 8.4%. In other words, for every dollar decline in revenue, we reduce cash cost by 91.6 cents. This demonstrates how flexible of a cost model we have that allow us to rapidly scale back our cost structure in a down year. With respect to SG&A cost, year on year, we reduce company-wide SG&A cost adjusted for unusual items by $26 million, or 28% relative to the 32% decline in revenue. Our fourth quarter corporate G&A costs were $5.9 million, down 45% from the fourth quarter of last year, and compared to the fourth quarter revenue being down 44% from a year ago. On an annualized basis, fourth quarter corporate G&A was reduced by almost $20 million compared to a year ago. Corporate G&A in the fourth quarter was 7.9% of revenue. To generate liquidity, we aggressively managed our working capital, sold underperforming assets, and minimized capital expenditures. As a result, we generated $59 million of tetra-only free cash flow. And of this, 33 million was from working capital. Also, we sold underutilized or non-core assets such that the proceeds from the sale of assets were $2 million more than all the capital expenditures that we made in 2020. This included the previously announced sale to Spartan Energy Partners of $14.2 million of compressors that Tetra previously owned. 2020 total year free cash flow without the benefit of monetizing working capital was $26 million. In addition to having a flexible cost model, we have demonstrated that we can keep monetizing assets as necessary, aggressively manage working capital, and keep capital expenditures at a minimum such that in a difficult year we can generate positive pre-cash flow even without the benefit of working capital. As a result of the positive EBITDA, monetization of working capital, and selling underperforming and non-core assets, we reduced total debt from $189 million at the end of 2019 to $133 million at the end of 2020. And following receipt of the proceeds from the sale of CSI Compresco, we have further reduced net debt to $120 million. Our term loan has been reduced from $220 million to $202 million at the end of the year, and we expect to further pay down the term loan with cash on hand before the end of the first quarter, further reducing our interest expense. We believe that the business model that will be successful will be a company that has a diverse revenue stream, can introduce technologies to be a differentiator in good and bad cycles, can flex its cost structure down very rapidly during flexible times, can leverage its infrastructure and support costs in an up cycle, and can generate free cash flow in all cycles, even without the benefit of monetizing working capital. We believe we have that business model and have demonstrated in the difficult year that we can do all of those. And on top of that, we have demonstrated the ability to generate cash from our ESG initiatives and are in the early stages of this growth opportunity. And with the deconsolidation of CSI Compresco, we believe we have a simpler, better understood model for the investment community. The recent movement in the share price following our communication on January 4, in addition to the announcement of the completion of this transaction on top of the pre-announcement of January 29, certainly indicates that. Since the end of 2020, and since our communications to the public markets of our fourth quarter results and strategic moves, in addition to highlighting our opportunities in the clean energy market, our equity value has increased by $220 million from $110 million to $330 million. We further believe that the increase in equity value that we have seen since the beginning of the year positions us to be included in the RUSLE 2000 in June that will create a significant amount of activity in our trading volumes as the passive index funds that mimic the Russell 2000 begin buying shares in Tetra. We'll remain focused on streamlining the organization and generating free cash flow to further reduce outstanding debt. I encourage you to read our press release that we issued yesterday for all the supporting details and additional financial and operational metrics. Additionally, Tetra will file the 10-K in the coming days with the SEC. With that, we'll open it up for questions, Kate.

We will now begin the question and answer session. To ask a question, you may press star then one on your touchstone phone. If you're using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question is from Stephen Gangaro from Stiefel.

Thanks. Thank you. Good morning, gentlemen. Good morning. So a few questions. The first being, as we think about the progression into the first quarter, what are the moving pieces that we should be kind of contemplating in the two segments after the I know there's probably a little seasonality in some of the areas, but how do we think about the progression into the first quarter?

So I'll take it from the different segments, Stephen. From our chemicals business, it's in strong activity. Weather has supported us in terms of the extreme weather, has supported us in terms of the seasonality portion of that business, but even our industrial business is picking up and looking very strong. And then, as you know, as we head into Q2, we have our seasonal peak in Europe. So that piece looks very good. Clearly, we had some very good momentum in January on our water and flow back in North America before the freeze. Like everyone else, we were impacted by a dramatic increase reduction in activity, frac and completion activity for a week or so. We're still trying to assess that, but we are seeing a pretty significant bounce back in terms of customers calling us back out to work and resuming activity. So difficult to quantify all those pieces yet, but we expect, you know, going into the second quarter, certainly into March and into the second quarter, North America activity continuing to rebound. International, as you saw, was down a little bit for us in the fourth quarter, pretty consistent with the international activity that's been declining. We think that's going to stabilize and bottom in the first half of the year. And then all indications that we are getting will be a pretty strong recovery the second half of the year, and certainly in the 2022 from the international and deepwater side of the business. which obviously, you know, supports our completion fluids activity.

Great. Thank you. And then when we think about next year, and I know it's hard to pinpoint the entire year, but I think you did a little under 50 million in tetra-only EBITDA in 2020, and we were thinking in terms of something like 60 in 2021, and I was just curious on two things. Like, one, does that seem reasonable? And two, under that scenario, What would free cash flow look like?

So Stephen, given how much uncertainty in the market there is, we aren't given total year guidance. But I think a couple of items that Brady mentioned. I think that $60 oil, and if it holds, is clearly opening up the deep water and accelerating some of the offshore projects that have not materialized when the oil prices were averaging 40%. We think that there's good opportunities for those to materialize in the second half of the year and have a good impact. We also believe that our industrial business will continue to perform well in the market, create opportunities. And we also believe that the frack crew counts that have rebounding in recent activity from our customers to keep adding to those frack crew counts will create meaningful upside. We expect capital expenditures to be slightly higher in 2021 than in 2020. We expect interest expense to be lower as we keep paying down the debt. So I think that there's an opportunity here that a free cash flow will again be very strong in 2021.

All right, thank you. And just one final, and I missed this because I joined a little late, but I think Brady mentioned a couple of Neptune jobs on the prepared remarks that But I don't know if you were talking about bidding on them or where that stands for 21.

Yeah, so my comment, Stephen, was that when price oil dropped so materially last year and stayed, I think, on average $36 from March through last year, a lot of the deepwater projects, and in particular the projects we've been working with customers on Neptune, were pushed, have been pushed out. We are in discussions with those customers now about the retiming and replanning of some of those projects. And my comment was that, you know, I'm fairly optimistic that we will execute a job or two of Neptune this year under the current discussions we're having.

Okay, great. Thank you.

Our next question is from Samantha Ho from Evercore at ISI.

Go ahead. Hey, guys. Thanks for taking my question. Maybe just to stay on the CS Neptune topic, just kind of curious for those projects that you're in discussions for, are they for the Gulf of Mexico, or are we starting to see some of those international projects come to fruition?

Yeah, our pipeline, Samantha, for Neptune is really split between the Gulf of Mexico and primarily the North Sea. There are a couple of other geographies that we're in discussions with, but when you look at really the pipeline, what we call pipeline of discussions and activities, it's more or less split between Gulf and North Sea, with a couple of one-offs outside of the North Sea, international.

So that sounds like potentially you could get a North Sea project in the latter half of the year?

We feel optimistic about that, but clearly there's some ground that has to be covered for that.

Okay, great. The other question that I wanted to spend some time on is just the growth capex that you're putting into the water segment. Really impressive how you guys have just taken such a strong market share there. Can you maybe walk us through how the CapEx is going to be spent over the quarter, the year? Is it going to be pretty evenly spent throughout the year where, you know, you have like a steady state of equipment being introduced? I'm curious how, you know, that expansion into Argentina works from a logistics standpoint. Like, I mean, if you're going all that way, it seems like you're probably going to be at a much larger scale there. And then just overall, I'm kind of curious how the equipment held up just during that extreme cold weather that you guys saw down in Texas.

Good question, Samantha. So let me make the first stab at it. With respect to capital expenditures, we've increased the bar in terms of what Brady and I will approve. If it doesn't have a direct customer behind it, and if it doesn't have a quick payback, cash on cash payback, we're not approving those items. The sandstorm has done incredibly well, and we've been generating paybacks that are difficult to say no to, and they are all with super majors that have very well-defined drilling programs. Fourth quarter did incredibly well. We've ordered more units, and those are coming and being delivered primarily in the first half of the year. Again, all focused on specific customers. And then it's interesting that as the economy has rebounded and the price of oil is better, we're starting to get, even this week, demands for more tetrasteel to keep adding, given the sensitivity that many of our customers have around ESG and spillage. So we're also taking opportunities to deploy more tetrasteel into the market. I would suggest that most of the CAPEX might be front-end loaded, but they're dedicated all to customers and projects with quick payback on those. Then with respect to the impact of the weather, it appears that the fracked crew count went from over 100 to almost zero in the Permian Basin. So let me back up. Total U.S. fracked crew count was over 100, of which a big part of it is in the Permian Basin, and it dropped almost to zero with the weather last week. And we're seeing it rebound almost to the pre- last week levels immediately. So we think that's going to be a very short-term week type, one week type impact on our water management flow back business.

And no damages to the equipment or anything that needs to be addressed or like weatherizing for future years or whatnot?

No, no damage to equipment. And we don't think that that changes our approach in terms of how we react to those type of cold weather conditions.

Okay. And if I can just sneak one more in, I'm curious in terms of all the discussions that you're having with other parties in your low carbon initiatives, do those conversations potentially include some sort of fee or, you know, so similar to what you have with standard lithium where you would get some sort of, payment just for that exclusivity with the partners even before you start actually producing?

I think, Samantha, we will probably take a different approach with the energy storage folks that we're in discussions with as well as the carbon capture company. I think instead of royalty-type arrangements that we've done with Standard Lithium, we're bringing some technology to the table ourselves. And I think potentially we could see more partnerships, even potentially JV-type arrangements down the road if things progress as we envision it. If not... you know, they represent, you know, large potential markets for us to supply products into. And so that's beneficial to us, but we think we bring some additional things to the table and the types of discussions we'll have could be a little bit more meaningful than just a product, part of the supply chain, a product provider.

That's really exciting, guys. Congrats on the quarter and good luck with everything.

Thank you.

This concludes our question and answer session. I would like to turn the conference back over to Mr. Murphy for closing remarks.

Okay. Well, thank you, everyone. We really appreciate your interest in Tetra Technologies, and thank you for taking the time to join us this morning. This concludes our call.