TETRA Technologies (TTI) Q1 2021 Earnings Call Transcript

TETRA Technologies (TTI 0.45%)
Q1 2021 Earnings Call
May 04, 2021, 10:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to TETRA Technologies first-quarter 2021 results conference call. Speakers for today's call are Brady M. Murphy, chief executive officer; and Elijio Serrano, chief financial officer. [Operator instructions] Please note this event is being recorded.

I will now turn the conference over to Mr. Serrano. Please go ahead.

Elijio Serrano -- Chief Financial Officer

Thank you, Chad, and good morning. Thank you for joining TETRA's first-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 analyses 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, adjusted EBITDA, adjusted gross margin, adjusted free cash flow, net debt, liquidity or other non-GAAP financial measures. Please refer to today's press release or our public website for reconciliation of non-GAAP financial measures to the nearest GAAP measure.

This reconciliations are not a suitable substitute for financial information prepared in accordance with GAAP and should be considered within the context of our complete financial results for the period. In addition to our press release announcement that went out earlier this morning and is posted to our website. I now turn it over to Brady.

Brady Murphy -- President and Chief Executive Officer

Thank you, Elijio, and good morning, everyone. And welcome to TETRA Technologies' first-quarter 2021 earnings call. I'll summarize the highlights for the quarter and the current outlook and then turn it over to Elijio to provide information on cash flow, the balance sheet, and the impact of potentially being included in the Russell 2000. The first quarter represents a full year of COVID-19 pandemic and its dramatic impact on the oilfield services market.

With all inventories declining and prices stabilizing at pre-pandemic levels, notwithstanding the February winter storm, it would appear the worst of the activity downturn is behind us and a market recovery is under way. For TETRA, I'm pleased with what we've accomplished over this incredibly challenging period, including achieving critical milestones during the quarter to further position the company for recovering oil and gas market as well as accelerating our low carbon energy opportunities. While the North America completions activity declined at a record pace last year, our differentiated offerings in our Water & Flowback segment allowed us to maintain adjusted EBITDA positive for every quarter since the pandemic started, while our industrial chemicals and international business held up exceptionally well, allowing us to improve our TETRA-only adjusted EBITDA margins in 2020 over the prior year. Going forward, we see the first quarter as the bottom of our international and offshore completion activity and with the exception of the period during the February storm, U.S.

market activity is well off the bottom from mid last year. Our March double-digit adjusted EBITDA margins for water and flowback is north of 25% adjusted EBITDA margins for our completion fluids segment gives us good confidence in a strong second quarter and into the rest of the year. Focusing on the first quarter, we achieved several key milestones, including successfully executing the deconsolidation of CSI Compressco, where we generated over $30 million of cash while retaining an 11% interest. We reduced our term loan from $220 million to $184 million.

We achieved eight straight quarters of positive adjusted free cash flow and despite this historical February winter storm, we once again maintained positive adjusted EBITDA for our water and flowback segment. In addition to those operational achievements, we continue to advance several of our low carbon initiatives that are currently advancing faster than what we had anticipated just 90 days ago. Adjusted EBITDA for the first quarter was $9 million, we estimated the impact of the historical winter storms during February negatively impacted adjusted EBITDA by approximately $3.1 million. Adjusted EBITDA in the first quarter included $4 million of gains on the higher equity values of our holdings in CSI Compressco and Standard Lithium.

We generated $5.4 million of adjusted free cash flow from continuing operations and it was normally a challenging quarter for cash flow generation due to the first quarter payments that are traditionally made early in the year and a ramp-up in inventory for our European chemicals second-quarter peak season. We ended the first quarter with liquidity of $81 million, despite paying down our term loan to $184 million. Despite the softness in our international and offshore business, completion fluids and products' first-quarter revenue increased 5% sequentially, driven by increased industrial chemical sales as a result of the winter weather conditions and improving U.S. land oil and gas demand.

Adjusted EBITDA decreased $3.4 million due to the mix of higher U.S. land oil and gas sales and lower sales for higher-margin offshore international markets. This segment was also negatively impacted by $800,000 from the winter storms as our chemical supply chain was disrupted and many plants and operations were shut down. Adjusted EBITDA margins for the first quarter were 23.7%, the eighth straight quarter above 20% EBITDA margins.

We exited the first quarter with adjusted EBITDA margins above 25% and expect this to continue into the second quarter. The second quarter will also see the benefit of our seasonally high Northern Europe industrial business that has historically seen revenue increase by approximately $15 million compared to the first quarter. We also expect stronger international and Gulf of Mexico deepwater activity from a combination of projects that were pushed from the first to the second quarter and overall higher activity levels. At an industry conference in February, we presented a paper jointly with ExxonMobil, highlighting the success of our CS Neptune product for multiple projects that we completed for them over the recent years.

We appreciate ExxonMobil working with us to jointly present this paper, allowing both of us to highlight the benefits of environmentally friendly, zinc-free solution to complete difficult deepwater high-pressure wells. The depressed oil prices in 2020 as a result of COVID pushed many of our targeted CS Neptune projects later into this year and 2022. But our list of opportunities remains very encouraging and we continue to work with our customers to finalize their drilling plans and confirm that the well pressures will require CS Neptune. For water and flowback services, first-quarter revenue and adjusted EBITDA were down from the fourth quarter mainly due to the negative impacts of the weather -- the winter storm.

We estimate that the storms negatively impacted adjusted EBITDA by approximately $2.3 million. Nevertheless, our flexible cost structure allow us to remain adjusted EBITDA positive despite the disruption to our operations. Our BlueLinx automated control system continues to be a key enabler for our integrated water management projects and has allowed us to continue to gain market share. As activity rebounds and the need for additional field staff increases, the value of our automation will become even more important to control labor costs.

The number of integrated projects in the quarter increased from 35 in the fourth quarter of 2020 to a record-high 47 projects with 22 different customers. Our customers realize the value of integrated projects with automation being a key component to improve efficiencies, reduce safety exposures, address environmental concerns, and to reduce the number of service providers they're managing. Utilization of our proprietary SandStorm technology remains high. We started taking delivery of more units in April and are deploying these units earning a quick cash payback.

We secured a second project in Argentina for a fully automated sand recovery system using the SandStorm technology. This is an addition to the one we communicated in the fourth-quarter earnings call. Our team has also been focused on pushing across price increases and we are seeing success in this area with a better oil price environment and increasing levels of activity in addition to our ability to consistently perform at the highest levels of efficiency and service quality in the industry, I'm pleased that our customers are recognizing that and working with us to increase prices. March was a strong improvement from February for this segment, we achieved double-digit adjusted EBITDA margins in March and expect to be above that for the second quarter given the stronger activity levels, and from better pricing we are securing on top of continued deployment of our SandStorm technology.

With respect to our low carbon energy initiatives, we are focused on three key areas, all of which are moving ahead of schedule from what we previously anticipated. Yesterday, we issued a press announcement entering in an MOU with CarbonFree to jointly advance a very innovative and commercially attractive carbon capture and utilization technology. CarbonFree's patented SkyCycle technology uses calcium chloride as a key part of the conversion of CO2 to a precipitated calcium carbonate. Precipitated calcium carbonate or PCC is a large, well-established global market and a valuable use for CO2 waste streams.

We are pleased to partner with CarbonFree and utilize our nearly 40 years of calcium chloride chemistry technical expertise and global footprint. We believe there are many cost and commercial advantages to this technology and a source of considerable growth for TETRA. We also have leases that cover over 30,000 acres in Arkansas with estimated bromine resources of 3.9 million tons and inferred lithium resources of 890,000 tons. The underground sales value of these resources at today's market prices for bromine and lithium carbonate is over $18 billion and since both minerals play an important role in the world's electrification and energy storage, demand outlook is very promising.

The majority of our lithium resources are through our relationship with Standard Lithium, which continues to advance its solution as one of the key U.S. sources of high-quality lithium carbonate. Consistent with our contractual arrangement, we received an additional 400,000 shares of Standard Lithium in April. In the first quarter, we also made great progress, qualifying our PureFlow, the brand name for our high-purity zinc bromide with multiple energy storage companies that use zinc bromide as a key part of their electrolyte in their battery technology.

We are currently in commercial discussions with these companies and expect first revenue for this new application in 2021 well ahead of our prior estimates. As these technologies commercialize, this will create a completely new market for us, and demands for our zinc bromide can be very meaningful. As we intend with CarbonFree for carbon capture, we are looking to work with these energy storage technology companies and to use our deep chemistry expertise in a more collaborative way. So in addition to our Water & Flowback businesses now showing signs of a steady recovery, along with a strong position we have in the offshore Completion Fluids market with the CS Neptune upside and the predictably consistent performance of our industrial chemicals business, all of which consistently generate positive EBITDA and free cash flow, we're in advanced stages with 3 significant areas to capitalize on low carbon energy opportunities that can be transformational for TETRA.

As we have all these opportunities, we were very open with our investor base on the progress of each. In the meantime, we will continue to execute and deliver free cash flow from our two segments and continue to delever. And I'll turn it over to Elijio for some additional color, then we'll open up for questions.

Elijio Serrano -- Chief Financial Officer

Thank you, Brady. I'll make a couple of statements first on the presentation of our financial statements then talk about some balance sheet items. As mentioned on the last earnings call on February 25, with the sale of the general partnership and the incentive distribution rights, and the 11 million common units of CSI Compressco on January 29, our balance sheet now completely excludes CSI Compressco. The income statement reflects the result of CSI Compressco as discontinued operations for the January 2021 and prior period.

The cash flow statement for the first quarter includes the 29 days in January that we were still the general partner. When we report adjusted free cash flow for TETRA, we've excluded the first 29 days of January for CSI Compressco from our free cash flow. Income from discontinued operations include $121 million gain on the CSI Compressco deconsolidation transaction. The vast majority of this is a non-cash gain as the transaction resulted in the recapture of our carrying basis in CSI Compressco, given that we received over $150 million of distributions from Compressco and CSI Compressco, since we took them public in 2011.

As those distributions were received over the past 10 years that we were the general partner, the carrying value of our investment in CSI Compressco was reduced and therefore the transaction resulted in a recapture of the carrying value. The transaction did not result in a taxable gain to TETRA. Into March 2021, TETRA continues to have a tax loss carryforward that will allow us to offset future U.S. pre-tax income by approximately $380 million.

And as the economy recovers and we go back to generating taxable income in the United States, we do not expect to be paying U.S. Federal income taxes for a while. Then with respect to our results in the first quarter, we incurred $6.6 million of non-recurring charges. These charges included $2.9 million related to a cumulative adjustment for long-term compensation that was the result of the significant increase that we saw in our stock price in the first quarter, also includes $2.4 million of transaction and other expenses, mainly related to the CSI Compressco deconsolidation, $0.5 million of stock appreciation right expense, $300,000 of restructuring costs and $300,000 of stock warrant fair value adjustment expense.

Those were the unusual items in the quarter. Our first quarter companywide SG&A cost adjusted for unusual items was down 2% sequentially, compared to the 2% increase in revenue and was 23% lower than a year ago. Our first-quarter results also included a $4 million gain on the mark-to-market adjustments to the 11% ownership that we have on CSI Compressco and to the 1% ownership or 1.2 million shares that we own of Standard Lithium. We will continue to see mark-to-market adjustments for the equity we own of these two publicly traded entities.

We reduced net debt from $133 million at the end of 2020 to $117 million at the end of the first quarter. Nothing currently remains outstanding on our ABL revolver. First-quarter adjusted free cash flow from continuing operations was $5.4 million, almost $1 million above the first quarter of the year ago. We achieved this first-quarter free cash flow despite paying the CSI Compressco transaction expenses and the typical first of the year payments for insurance, property taxes, year-end bonuses, and so on.

As a result of last year's streak -- strong free cash flow of $59 million and this year's first-quarter free cash flow plus the proceeds we received in the CSI Compressco transactions, we have reduced our term loan from $220 million at September 30, 2020, to $184 million at the end of March 2021. The $36 million reduction in the term loan will save us $2.6 million of interest expense on an annual basis. And as a reminder, our term loan does not mature until the year 2025. We expect second-quarter profitability to be up sequentially for all our segments, driven by increased oil prices driving the activity in the United States and international markets.

The seasonality of our Northern Europe industrial chemicals business, where we typically see about a $15 million, 1-5, sequential increase in revenue and the price increases we are getting in addition to continued deployment of our SandStorm technology. We remain focused on streamlining the organization and generating free cash flow to further reduce outstanding debt. Last item I'll mention is the Russell 2000. I previously mentioned that the decline in our share price last year resulted in TETRA being dropped from the Russell 2000.

When we were dropped in the Russell 2000, we saw lot of passive index-based funds exit their position in TETRA, putting even further downward pressure on our stock last year. The Russell 2000 has reconstituted every June. We believe that the cut-off to be part of the Russell 2000 this year will be somewhere between 265 and $270 million. Our market cap as of the close of business yesterday was $315 million.

This Friday is the first listing of the companies that might be part of the Russell 2000, which has been updated every Friday in June. The final listing is on June 25. If TETRA is added back to the Russell 2000, there is a possibility that we will be seeing passive index-based funds adding TETRA back to their portfolio as many mimic their holdings to match the Russell 2000. If that is to occur, there is a potential to see strong demand for TETRA shares in May and into June, hopefully having a high -- a nice impact to our share price.

I encourage you to visit the Russell 2000 website for updates. I also encourage you to read our news press release that we issued today for all the supporting details and additional financial and operational metrics. Additionally, we will file our 10-Q with the SEC before the end of the day today. Chad, with that, we will now open it up to questions.

Questions & Answers:

Operator

Thank you. [Operator instructions] And the first question will come from Stephen Gengaro with Stifel. Please go ahead.

Stephen Gengaro -- Stifel Financial Corp. -- Analyst

Thanks. Good morning, gentlemen.

Elijio Serrano -- Chief Financial Officer

Good morning.

Brady Murphy -- President and Chief Executive Officer

Good morning.A couple of things, if you don't mind. Well, I'll start with, I guess, probably pretty straightforward. When you look at the components that you guys talked about in the second quarter as far as margin expansion and the European calcium chloride business, it would seem to suggest that a 2Q EBITDA number that's in the mid-to-high teens is a reasonable target, is that in the ballpark of what you guys are thinking about?

Elijio Serrano -- Chief Financial Officer

Yes, Stephen. We like beating consensus, we like exceeding expectations. So I would encourage you not to get too far ahead of us and I think that if you're in the mid-teens -- mid-double-digit teens, that might be more appropriate and that's what the expectation that May and June doesn't throw any curveballs at us, because we've had a good March, we've had a good April and we're very encouraged with what's happening right now. Our European business is very predictable and rarely doesn't deviate from projections.

So it's really only a matter of whether the offshore markets continue to perform like we think they will.

Stephen Gengaro -- Stifel Financial Corp. -- Analyst

Thanks. And just as a follow-up to that, and then I had one other, probably just a follow-up to that. The ownership of Standard Lithium and CCLP, will that show up in the EBITDA line and not the revenue line each quarter, like is that the way it will materialize on the income statement?

Elijio Serrano -- Chief Financial Officer

That is correct. Because at this point, we're not receiving any incremental shares from what the 400,000 that we received in the month of April for Standard Lithium. So we're up to 1.2 million, 1.6 million shares. Anything that increases or decreases the share price will do a mark-to-market adjustment that only reflects in income and EBITDA, and then our 11% ownership of CSI Compressco will also be mark-to-market without any impact to revenue.

So both of them are going to be mark-to-market adjustment, and also as a reminder, from Standard Lithium, we're receiving about $1 million a year of cash for the agreement that we have in place with them.

Stephen Gengaro -- Stifel Financial Corp. -- Analyst

And so, basically, the March stock price, the difference between the March and the June market cap allocated based on your percentage ownership, is the change -- is the impact you'll see on EBITDA?

Elijio Serrano -- Chief Financial Officer

Yes. That is correct. Again, in addition to recognizing that we're getting about $1 million of cash from Standard Lithium on an annual basis that will also positively impact EBITDA, and then when we receive more shares from Standard Lithium such as what we did in the month of April, which is 400,000 shares, we will report those as income and EBITDA also.

Stephen Gengaro -- Stifel Financial Corp. -- Analyst

Got it. And then, one final one from me is just the balance sheet, you've been successful generating cash, reducing debt levels, has there been a discussion about refinancing the debt on the balance sheet, given where rates are and that your business arguably is having better and better visibility going forward?

Elijio Serrano -- Chief Financial Officer

Very good question, Stephen. We've been paying down debt with excess cash. We're constantly testing the debt markets to see if we can find more cost effective, less restrictive term loan that might be out there and so far, our testing of the market has not indicated that there is cheaper capital available to us. But that is something that we are doing on a consistent basis to try to find the most cost-effective capital for us to reduce interest expense.

Stephen Gengaro -- Stifel Financial Corp. -- Analyst

Great. Thank you.

Operator

[Operator instructions] The next question will come from Samantha Hoh with Evercore ISI. Please go ahead.

Elijio Serrano -- Chief Financial Officer

Samantha, we might have you on mute.

Samantha Hoh -- Evercore ISI -- Analyst

Sorry about that. Thank you, Elijio. Congrats on the quarter. And I was just wondering if you could maybe help us think about the year, what your expectations are for completions, in terms of the mix of revenue coming from the different businesses that you have in completions.

Brady Murphy -- President and Chief Executive Officer

Sure, Samantha. Good morning. As we indicated during our comments, we see Q1 as the low point for the year in our completion fluids. As you're well aware, the North America activity came down very rapidly last year, but the international activity continued to come down through most of the year but that has flattened and we see drilling activity rebounding slightly and our opportunities on the completion fluids side improving both on the offshore markets in the Gulf of Mexico as well as internationally improving for the rest of the year.

So that side of the business we're optimistic through the rest of the year, and then, of course, our industrial chemicals business will see a European peak in Q2. But we're also continuing to gain some pretty good market share with our industrial chemicals business and that's without the impact of some of these other future low carbon opportunities that we're discussing. Do you want to add anything to that, Elijio?

Elijio Serrano -- Chief Financial Officer

And I think it's important that the SandStorm technology that we're deploying and the traction that we're gaining in South America is very encouraging. We've assigned some capital to take advantage of that given the quick payback that we're seeing. So in addition to activity, I think that we're also seeing market share gains benefit our top and bottom line.

Samantha Hoh -- Evercore ISI -- Analyst

OK. With the integrated projects that you're working on, the water projects, that's quite a nice step up, are you seeing incremental demand in some of the other basins outside of the Permian, maybe just if you could kind of quantify where that sequential ramp came from?

Brady Murphy -- President and Chief Executive Officer

Yes. Well, definitely in the Permian, Samantha, we have a very strong market share position for really the water transfer, the treatment recycling, and gaining more market share on the flowback side. So that is a good percentage of the integrated work that we're doing, but we're also taking on integrated projects in South Texas now, in Mid-Con, and certainly in Appalachia. And we're working to penetrate the rest of the basins with the model that we have.

Samantha Hoh -- Evercore ISI -- Analyst

OK. And then, just I was curious about the MOU that you guys announced last night, I think I read somewhere that the company, the partner, is actually working on this initial pilot plant, I was curious if you could speak to that development, if maybe just how far along this potential project is? Is there something that you could see contributing within the next year?

Brady Murphy -- President and Chief Executive Officer

Well, absolutely. They are virtually finished with the construction of the pilot plant. Again, they've proven and tested each of the segments of their plant configuration. We actually had myself and our team visited with them at the Southwest Research Institute a few weeks ago, and I actually saw the plant in its final stages of construction, where it should be operational anytime now.

But yes, we're very excited about what that project offers. I think once the plant is up and running and they're fine-tuning some of the operating parameters of the plant, and I think CarbonFree from what we know of their plans will be in some pretty heavy commercial negotiations from that point forward to deploy their technology.

Samantha Hoh -- Evercore ISI -- Analyst

And what sort of emitters are they targeting, is it like cement, and what sort of industrial targets does that trend on the carbon side?

Brady Murphy -- President and Chief Executive Officer

Yes. No. Absolutely. Samantha, as part of that, any really flue gas, CO2 emitters is a perfect application.

If you look at their website, you will actually see a picture of their Southwest Research Institute pilot plant and it's got a flue gas cylinder in the picture. And you can actually -- when they're operating the plant, they're bringing the chemicals that they need, including calcium chloride from the top side and CO2 gas from the bottom, and then performing the precipitation right in the reactor.

Samantha Hoh -- Evercore ISI -- Analyst

OK. I'll take a look at it. Thanks, guys. Congratulations on that.

Brady Murphy -- President and Chief Executive Officer

Thank you.

Operator

And the next question is a follow-up from Stephen Gengaro with Stifel. Please go ahead.

Stephen Gengaro -- Stifel Financial Corp. -- Analyst

Thanks. So two other quick ones, gentlemen, just to make sure I'm on the same page here. So on the ownership position in Standard Lithium and CCLP, are your margin expectations, that you highlighted in the press release and on the call, are they exclusive of the impact of the changing stock prices in those two businesses?

Elijio Serrano -- Chief Financial Officer

Yes. Well, Stephen, I don't think we're smart enough to try to get share prices 90 days out, so we're assuming that they're flat versus where they were at March 31, and that to get to our earnings target and in our internal expectations for Q2 and the future quarters is that it's flat versus those numbers. Any upside is going to be a pleasant surprise to us.

Stephen Gengaro -- Stifel Financial Corp. -- Analyst

Great. That's what I assume, I just wanted to make sure. And then, the other just quick one is when we think about the impact of the several -- these new initiatives, do you -- how are you guys thinking about the impact of those from a timing perspective, are you thinking about them as positive contributors? I mean, obviously you're getting the Standard Lithium payment right now, but beyond that, are you thinking about them as sort of 2022-'23 events, so you think you'll start to see any impact from them in the short term? I'm just trying to get a sense for how to think about the timing of an impact.

Brady Murphy -- President and Chief Executive Officer

Yes, Stephen. So there's a couple of different categories, as you know, that we are pursuing, particularly on the low carbon side, on the zinc bromide electrolyte, as we mentioned in our call, we've been surprised that that's advancing much quicker than what we had previously anticipated the last call. We probably would have said 2022 earliest, where we would see revenue from that, we're now fairly optimistic that we will achieve revenue because of the demand that's coming on these energy storage companies this year. So we believe we'll see first revenue from that zinc bromide supply this year and gaining some pretty good momentum into 2022 if the demand for their energy storage technology continues at the pace that they're anticipating.

On the carbon capture with CarbonFree, obviously, they're going to be leading the charge in negotiating with their customer contracts and we will be working closely with them to execute on those, but we would anticipate potential revenue earliest late next year for the deployment of one of our first production carbons at our SkyCycle plants.

Stephen Gengaro -- Stifel Financial Corp. -- Analyst

Great. That's helpful color. Thank you, gentlemen.

Operator

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Mr. Murphy for any closing remarks.

Brady Murphy -- President and Chief Executive Officer

Thank you. We appreciate your interest in TETRA Technologies and thanks for taking the time to join us this morning. This will conclude our call.

Operator

[Operator signoff]

Duration: 32 minutes

Call participants:

Elijio Serrano -- Chief Financial Officer

Brady Murphy -- President and Chief Executive Officer

Stephen Gengaro -- Stifel Financial Corp. -- Analyst

Samantha Hoh -- Evercore ISI -- Analyst

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