Yahoo Finance TETRA Technologies, Inc. (NYSE:TTI) Q1 2024 Earnings Call Transcript
TETRA Technologies, Inc. (NYSE:TTI) Q1 2024 Earnings Call Transcript May 1, 2024
TETRA Technologies, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, and welcome to TETRA Technologies' First Quarter 2024 Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note that this event is being recorded. I will now turn the conference over to Julian Higuera [ph]. Please go ahead.
Unidentified Company Representative: Thank you, Constantini. Good morning and thank you for joining TETRA's first quarter 2024 results call. The speakers for today's call are Brady Murphy, Chief Executive Officer; and Elijio Serrano, Chief Financial Officer. I would like to remind you that this conference call may contain statements that are or may be deemed to be forward looking, including projections, financial guidance, profitability and estimated earnings. 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 forward-looking statements.
In addition, in the course of the call, we may refer to EBITDA, adjusted EBITDA, adjusted EBITDA gross margins, free cash flow, net debt, net leverage ratio, liquidity, returns on net capital employed 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 GAAP and should be considered within the context of a complete financial results for the period. In addition to our press release announcement, we encourage you to refer to our 10-K that we also filed yesterday. I will now turn it over to Brady.
Brady Murphy: Thanks, Julian. Good morning, everyone and welcome to TETRA's first quarter 2024 earnings call. I'll summarize some highlights for the first quarter and provide an update on our strategic initiatives before turning the call over to Elijio to discuss first quarter financials and provide an update on our balance sheet and second quarter outlook. Overall, first quarter results were in line with our expectations with strong Completion Fluids & Products results, offsetting an anticipated weaker start to the year in our Water & Flowback segment. Year-over-year, our revenue grew 3% and adjusted EBITDA grew 11% while US land rig count was down 18% in the first quarter of 2024 versus the first quarter of 2023. Adjusted EBITDA was $22.8 million with strong Completion Fluids & Products adjusted EBITDA margins at 28.1%, driven by 15 offshore deepwater operations that we serviced during the quarter.
The outlook for offshore and deepwater continues to point to a longer duration upcycle and TETRA's well-prepared to benefit through our recent strategic capacity investments in Brazil, Gulf of Mexico and the North Sea. For the Water & Flowback segment, the year-end 2023 customer activity slowdown, which impacted our Water Services business in the fourth quarter had a carryover effect to the first quarter for our Flowback Services, which operationally lags one quarter behind our Water Services. At the same time our higher margin Sandstorm services were slower in the first quarter. We did experience some Water Services ramp-up costs as activity levels rebounded. Looking to the second quarter both Water Services and Flowback including Sandstorm will be operating at a more normalized activity levels with margins expected to recover to the mid-teens.
Before discussing more details on each of the segments, I'd like to highlight the progress that we've made with regards to our strategic initiatives. 2024 will be a key year for us to complete milestones that will allow us to quantify the financial benefits of each initiative. On the energy storage side, we remain in close contact with Eos are very encouraged with the progress they're making on automating their first production line. We fully expect Eos to be up and running their Z3 zinc bromine battery automation line in the second half of this year, which is expected to result material sales of electrolyte from TETRA. In the coming weeks, we're hopeful to have our first commercial desalination for beneficial reuse contract in place that should be operational by the first part of 2025.
This is planned to be a 24,000 barrel a day South Texas facility. We're also in discussions for a one-year commercial pilot project in the New Mexico area of the Delaware Basin using TETRA's proprietary pretreatment technology and our solution for higher total dissolved solids. We're in the process of tying the legal terms and conditions together for these two projects, which has delayed our first project slightly but we're optimistic to close on both of these opportunities in the near-term. The demand for beneficial reuse projects continues to build, as this solution is the ultimate answer to overpressure disposal wells in areas like the Permian Basin that need usable water sources. There is a very informative article in this weekend's version of The Wall Street Journal that highlighted the challenges of continuing to dispose, so much produced water.
I would encourage you to read that article. By the end of June, we hope to publish our Arkansas Bromine Definitive Feasibility Report, which will include updated financials taking into account the shared CapEx investment and OpEx sharing with our planned Lithium Joint Venture, ExxonMobil. Because of the sharing with the Lithium Project, we expect the bromine economics to reflect material improvement from what we previously published. And with financing in place for bromine, we expect Board approval to move forward with this project. We're targeting the first half of 2026 to be operational with our bromine plant, which will give us the needed capacity to meet our growing deepwater Completion Fluids demand and the significant Eos electrolyte requirement.
Finally on the lithium side, we continue advancing the FEED study as well as finalizing the negotiations for the joint venture -- joint development agreements and operating the Evergreen Brine Unit. We continue to work with ExxonMobil on many fronts to advance our project. Before the end of this year, we expect to have our joint venture in place and the Evergreen Lithium FEED and financial evaluation completed. Individually these initiatives represent a material benefit to the company that we will quantify, as we complete key milestones throughout the year. Collectively they are transformational for the company. Now turning to the segments; our Completion Fluids & Products segment first quarter 2024 revenue of $77 million increased 7% sequentially, driven by stronger activity in the Gulf of Mexico and the Middle East.
Adjusted EBITDA of $22.6 million increased 20% sequentially, representing EBITDA fall-through of nearly 79%. Adjusted EBITDA margins of 29.3%, compared to the 26% in the fourth quarter of 2023. Adjusted EBITDA margins improved by 330 basis points sequentially, when excluding unrealized gains and losses from both periods, driven by solid performance in our Industrial Chemicals business and growth in our offshore Completion Fluids operations particularly in the Gulf of Mexico. As a reminder, we estimate that 70% of the deepwater wells completed in the Gulf of Mexico, used bromine-based Completion Fluids. So the deepwater activity increase that we're seeing globally is resulting in higher demand for our high-value bromine-based Completion Fluids which includes TETRA CS Neptune.
Regarding CS Neptune, our outlook continues to improve, as in addition to another job for a super major in the North Sea that is confirmed in June, discussions with two different super majors, for two different projects in the Gulf of Mexico continue to evolve for projects that are scheduled for the fourth quarter of 2024 or early 2025. The level of discussions with operators in the Gulf of Mexico for CS Neptune projects has been the highest in several years, as many of the anticipated projects in our pipeline are moving forward. Shifting to our Water & Flowback Services segment; revenues of $74 million decreased by 5% year-on-year, while adjusted EBITDA of $7.1 million fell by $5.8 million year-on-year. Although, Water Services revenue rebounded from the fourth quarter slowdown, the non-recurring EPS sale and lower Flowback activity in the first quarter, resulted in revenue lower by $6.9 million or 9% quarter-over-quarter.
Combination of water project start-up costs and lower activity for higher margin SandStorm activity resulted in lower adjusted EBITDA margins of 9.6%. Despite a slow start to the year, we're very encouraged about the outlook for the rest of the year, as we expect Water & Flowback Services margins to rebound to the mid-teens. We also remain encouraged in the resiliency of activity and continue to expect single-digit revenue growth for our overall segment, in 2024. As operators continue to transfer and utilize more-and-more produced water in their frac operations, through treatment and recycling, the risk profile of produced water management and water spills increases and the value of automation and technology increases. Overtime we're confident these customer trends will work in our favor.
Additionally, while TETRA does not have significant exposure to gas markets, we believe the softness in those markets will be balanced by our continued market share gains, in produced water services led by water recycling and sand management with TETRA SandStorm. Our strategic priority for 2024 is to continue driving margin expansion with operational efficiencies and automation that will allow us to maximize returns on capital and generate meaningful cash flow. Now I'll turn it over to Elijio, to provide some additional commentary on our results. Then we'll open it up for questions.
Elijio Serrano: Thank you, Brady. First quarter adjusted free cash flow from continuing operations was a use of cash of $29.6 million. And this included the impact of $4 million of capital investments for our Arkansas bromine and lithium projects. And that also included an accounts receivable increase of almost $21 million sequentially due to the timing of revenue as sales increased progressively through the quarter. Also the inventory drawdown resulting from the stronger deepwater activity was offset by our build of calcium chloride inventory for the seasonal peak in Northern Europe. We expect working capital to come down materially in the coming quarters, as we monetize the calcium chloride inventory in Northern Europe. We remain of the opinion that free cash flow from the base business in 2024 will be in excess of $40 million.
We further expect that the free cash flow from the base business will fulfill our cash capital requirements for Arkansas this year and that we will not need to draw on our revolver nor our delayed draw feature from our term loan in 2024. This is consistent with our plans of self-funding as much as possible our capital requirements for the bromine project. We have no intentions of issuing equity to fund our Arkansas investments. Liquidity as of the end of this week was approximately $202 million, inclusive of the $75 million delayed drop features that are available to TETRA for the bromine project. In addition to the loaded liquidity, we are also holding slightly over $13 million of marketable securities. This includes our holdings in Standard Lithium and Kodiak Gas Services, which recently acquired CSI Compressco.
The acquisition of CSI Compressco by Kodiak was very favorable to TETRA. Kodiak have a market cap of $2.5 billion, with good global trading volumes that would allow us to quickly monetize our shareholdings without having to spread this over many weeks or putting pressure on the Kodiak share price, as would have been the case with CSI Compressco. The mark-to-market gains that we are recognizing can quickly be converted into cash given the trading volumes these two entities are seeing. Therefore, we believe that reported mark-to-market gains are very appropriate as monetizing those are completely and easily within our control. In January, we refinanced extended and expanded our term loan at more attractive interest rates in our prior term loan, further strengthening our balance sheet and providing us with the flexibility to execute on our growth initiatives.
This includes the $75 million delayed draw feature for the bromine project that we don't anticipate utilizing until 2025. The maturity of our term loan is now January 2030. At the end of the first quarter, our net leverage ratio was 1.5 times. Let me close out by summarizing what I believe to be the key items everyone should focus on from our first quarter results. First, Completion Fluids & Products segments performed very well; adjusted EBITDA margins of 29.3% without the mark-to-market losses. We are going into the second quarter when we see a seasonal peak from our calcium chloride business. This will be the catalyst to getting TETRA second quarter adjusted EBITDA above $30 million. Brady talked about the increase in visibility of CS Neptune projects, especially in the Gulf of Mexico.
This visibility and level of discussion is the best that we've seen in a long time. Second, we fully expect free cash flow this year to be, like I said earlier, above $40 million, consistent with our prior message. The first quarter was a use of free cash flow activity spike towards the end of the quarter that then allow us to invoice and collect before the quarter end. As a data point, March revenue was 15% higher than January revenue. We remain confident that between our borrowing capacity and free cash flow, we can fund our bromine project requirements and have no plans to issue any equity-linked security. And as previously mentioned that we have around $30 million of very marketable securities, completely at our discretion as to when we monetize those.
I'll remind everyone that the last time we did this we raised $18 million by selling our prior holdings in Standard Lithium. I'm not concerned about our free cash flow generation from our base business to cover our investments in Arkansas this year. Third, the Water & Flowback services adjusted EBITDA margins we fully expect a rebound to the mid-teens in the second quarter. The cost that we had in the first quarter have been addressed. Those are under control. And lastly, all the expected work with deals for the zinc bromide electrolyte remains as expected, for higher volumes in the fourth quarter. Our work on the bromine project with updated economics to reflect sharing of CapEx with ExxonMobil continues as expected, and our negotiations and discussions on the JV with ExxonMobil also remain as expected.
Nothing in the quarter changed the tone or direction of our initiatives and instead give us further clarity and confidence on executing on those. With that, let me turn it back to Brady for closing comments.
Brady Murphy: Okay. Thanks, Elijio. So in closing, we're off to a good start with our Completion Fluids & Chemicals business with a great outlook for the rest of the year and an anticipated slower start for our Water & Flowback segment, but we do anticipate a strong second quarter for both segments. The outlook remains strong for the markets in which we operate. We have a solid balance sheet close to $200 million of liquidity. We anticipate further growth in 2024 and expect to continue to generate strong free cash flow from our base business to fund our strategic growth investments. The combination of these plus advances with our produced water beneficial reuse solution our Arkansas research position and strategic partnerships provides us the opportunity to continue to drive long-term shareholder value. With that, we'll now open it up for questions.
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