Tetra Technologies, Inc.

Good morning and welcome to Tetra Technologies' third quarter 2022 results conference call. The speakers for today's call are Brady Murphy, Chief Executive Officer, and Eligio 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 a zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touchtone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded. I will now turn the conference over to Mr. Serrano. Please go ahead.

Thank you, Marlise. Good morning and thank you for joining Tetra's third quarter 2022 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 several factors. These statements are subject to several 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 statements. In addition, in the course of the call, we may refer to EBITDA, adjusted EBITDA, adjusted EBITDA growth margins, free cash flow, net debt, net leverage ratio, liquidity, or 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 CAP 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, we encourage you to also refer to our thank you that we filed yesterday. I'll now turn it over to Brady.

Thanks, Alicia, and good morning, everyone. Welcome to Tetra's third quarter 2022 earnings call. I'll summarize some highlights for the third quarter, a current outlook, as well as provide an update on our low-carbon initiatives before turning it back to Lidio to discuss cash flow, the balance sheet, income taxes, and liquidity. In the third quarter, we achieved some strong financial results, but also some very key milestones with regards to the strategic direction of the company, which we communicated 21 months ago following the sale of our controlling interest in CSI Compresco. and when we introduced our strategy to leverage our core strengths around aqueous chemistry to the evolving but rapidly growing low-carbon energy technologies. Starting with our financial results, our total 30% revenue in adjusted EBITDA were $135 million and $18.6 million, respectively. Adjusting for our seasonal decrease in our northern European industrial chemicals operation, revenue in EBITDA increased approximately 7.5%, and 12% from the second quarter, respectively. Adjusted EBITDA excluding unrealized losses on investments of a half a million dollars was 19.1 million for the quarter. Our results were led by our energy services business, which grew revenue 15% and EBITDA 33% quarter on quarter. A compelling data point on how well we have executed on our water and flow back multi-year strategy is that our annualized third quarter revenue for this segment equals the full year revenue in 2018. when the average frac group count was 441, or 35% above the third quarter of 2022. This segment also increased adjusted EBITDA margins from 15.1% in the second quarter to 17.4% in the third quarter. Both segments, water and flow back services and completion fluids and products, increased their EBITDA margins from the second quarter. With regards to our strategy, we executed exclusive technology agreements for recycling produced water from oil and gas wells for the purpose of beneficial reuse. These are also key enabling technologies for the extraction of lithium from our Arkansas brine leases, as well as the extraction of key minerals from operators' produced water, a rapidly increasing interest from our customers. We are currently a produced water beneficial reuse pilot project for one of the largest North American shale operators, with many other opportunities in discussion. An additional key strategic milestone for the quarter was a positive inferred resource report, which solidified the previously announced bromine and lithium brine resource estimates in our Arkansas brine leases. Our bromine inferred resource estimate was 5.25 million tons for our approximately 40,000 gross acres of brine leases, and within 5% of the midpoint of the previously announced exploration target, while the lithium inferred resource estimate was 234,000 tons of lithium carbonate equivalent, or LCE, which was 26% above the expiration target midpoint for our approximately 5,000 gross acres that are not covered by an option granted to Standard Lithium. Now turning to the segments, water and flow back services revenue of 76 million improved 29 million, or 62% year-on-year, and 9.9 million, or 15% quarter-on-quarter. Adjusted EBITDA of 13.2 million improved by 8 million, or 158% year-on-year, and 3.2 million, or 33%, quarter-on-quarter. This marks the highest adjusted EBITDA since the fourth quarter of 2018. Our water and flow-back business continues to grow significantly faster than the active rig count and frac crew count, while expanding margins for the sixth consecutive quarter. Our significant market penetration is due to three things. First is the introduction of our BlueLynx automation which reduces manpower by up to 40% on an integrated water management job. In today's market, when labor is tight and with growing operator concerns on safety from short-service employees, this is an invaluable benefit. Second is the introduction of differentiated technology, including our patented Sandstorm, which has proven to be a game-changer for operator flow-back sand management. And third is our focus on produced water, including treatment and recycling. With increasing seismicity events, operators are moving rapidly to increase their recycling and explore alternatives to disposal. The month of September is the first month ever that our Permian operations managed and transferred only produced water with no freshwater operations. Contributing to our strong quarter was our early production facilities being online for the full quarter in Argentina, which are longer-term projects with stable, predictable revenues, margins, and cash flows. As mentioned in our previous call, we received an award for an additional early production facility, which is on track to commence operations in the first half of 2023. Our fleet of Sandstorm's advanced cyclone equipment remains at high utilization with continued market penetration and improved pricing. Our early production facilities in Argentina include our Sandstorm technology. We will continue to opportunistically add to the fleet to meet this growing demand. Adjusted EBITDA margins on our completion fluids and product segment also improved sequentially, despite the product benefiting from the seasonal uplift of our Northern Europe industrial chemicals business. The improvement was led by international markets and higher shipments of tetrapure flow, which increased by 42% quarter on quarter. As a reminder, our pure flow fluid is a high-purity zinc bromide-based electrolyte, which is part of a rapidly growing long-duration energy storage technology. Completion fluids and products third quarter 2022 revenue of $59 million increased year on year by 22%, but decreased from the second quarter of 2022 by 21%. We remain very positive on the longer-term outlook for the offshore and deepwater markets, and our strong market position is validated by the 2022 Kimberlite Annual Completion Fluids and Wellbore Cleanup Tools Supplier Performance Report. The Kimberlite report indicated that Tetra holds the second-highest market share in in completion fluids in the Gulf of Mexico at 30%. Within the report, Kimberlite mentions Tetra Technologies continues to be as the top performing supplier in the Gulf of Mexico and receives the highest customer loyalty ratings as measured by the Net Promoter Score. This was further supported by a multi-year contract renewal for one of the most active deepwater supermajors in the Gulf of Mexico that was executed in the third quarter. As the offshore and deepwater markets continue to improve, Our pipeline of Tetra CS Neptune completion fluids opportunities continues to grow as well. We're currently executing a smaller Tetra CS Neptune completion fluid job in the UK and have a job confirmed and expected to be delivered in the first quarter of 2023. The disruption to our European supply chain that we mentioned in the second quarter is to improve and although not yet back to full production, we have growing confidence that we will be well prepared for the seasonal peak sales in the second quarter of next year. Now turning to our low carbon initiatives, I've mentioned during the third quarter, we also announced the completion of our maiden inferred bromine and lithium brine resource estimation report. The technical report reflects the bromine resource in our approximately 40,000 leased acres and the lithium resource in our approximately 5,000 leased acres, which is a subset of the 40,000 acres where Tetra holds the lithium mineral rights. We're currently well into an initial economic assessment for the bromine resource development and production, initially from the aforementioned 5,000 acres that we expect to complete by year-end. We are also finalizing a detailed reservoir model and are planning to drill another well on our 5,000 acres in the first quarter of 2023 that we'll use to further refine the reservoir characteristics as well as the estimated lithium and bromine volumes. Depending on the results of our detailed reservoir modeling, our current plan is to design and position this next well as our first of several production wells from this acreage. The initial economic assessment will essentially communicate a business plan and returns on our bromine assets. This will be the first time we will communicate to the market the expected uplift in revenue and margins of bringing this bromine resource to the market. As also noted in our inferred resource report, our research team has demonstrated successful pilot unit results for a direct lithium extraction process that we will continue to validate in the coming months. This will involve proving out each step in the process from the lithium-rich brine production from the wells of our smack-o releases through the DLE and purification process to a high-purity lithium chloride solution. We continue to believe that we are in a unique position with a U.S. resource rich in two key minerals, bromine and lithium, for the energy storage markets and the ability to produce both minerals from much of the same brine production wells and pipeline infrastructure. Looking forward to the fourth quarter, despite some improved and adjusted EBITDA margins in the third quarter, supply chain and inflation continue to be challenging issues, especially with certain chemicals and raw materials. In North America, key raw material prices are still inflated, and as we exhaust our yearly contractual supply of bromine, we are fulfilling demand with spot market bromine, which will impact our margins in the fourth quarter before resuming to our long-term contract supply volumes and pricing starting in the new year. As one of our primary customers of Pureflow Electrolyte, EOS announced yesterday they will be shifting some of their Plan Q4 deliveries into 2023 to allow their customers to take advantage of significant tax credits under the Inflation Reduction Act. Although this will impact our Plan Q4 deliveries to EOS, the long-term benefits under the Act will be significant to energy storage providers and to Tetra as a uniquely positioned U.S. provider, which also adds to the tax benefits. We expect each of these issues to become one-time events for the fourth quarter. Despite the short-term challenges, our management team employees have done an excellent job in helping us navigate the company in the right direction. As we look to the future, there's a lot to be excited about. We believe we are well positioned to continue generating positive momentum as our technology investments are paying off, giving us opportunities to grow and continue expanding margins into 2023. Our focus on low-carbon energy markets, which requires critical minerals and chemistry expertise, is creating significant growth opportunities for the company and are already contributing financial benefit with more to come. And finally, we continue to find new markets for our existing products, which collectively contribute to a broader earnings base and higher growth market opportunities. I'll turn it over to Alijo for some additional commentary, then we'll open it up for some questions.