Brady Murphy - Chief Executive Officer Elijio Serrano - Chief Financial Officer Jacek Mucha - Vice President of Finance, Treasurer

Good morning and welcome to the TETRA Technologies, First Quarter 2020 Results Conference Call. The speakers for today's call are Brady M. Murphy, Chief Executive Officer; Elijio Serrano, Chief Financial Officer; and Jacek Mucha, Vice President of Finance and Treasurer. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note, this event is being recorded. I will now turn the conference over to Mr. Mucha. Please go ahead.

Thank you, Brandon. Today's conference call may contain certain statements that are or may be deemed to be forward-looking statements. 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 net debt, free cash flow, adjusted EBITDA, adjusted EBITDA margin, adjusted profit before tax or adjusted earnings per share, backlog liquidity, coverage ratio or other non-GAAP financial measures. Please refer to this morning'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. I will now turn this over to Brady.

Thank you, Jacek, and good morning everyone. Welcome to the TETRA Technologies, First Quarter 2020 Results Conference Call. I will summarize some highlights for the quarter and discuss how the current market conditions amid the COVID-19 pandemic and subsequent impact on oil prices are impacting our businesses. Then I will turn it over to Elijio for some balance sheet and liquidity details, which in turn will be followed by your questions. As it relates to the COVID-19 pandemic, I'm very pleased with the way our management team and employees have responded to this crisis. Every employee has taken this very seriously in implementing the safe practices that have been provided by the Centers for Disease Control and Prevention and the Occupational Safety and Health Administration. During this extraordinary time we have implemented many actions to keep our employees and their family safe, all while delivering on our customers’ requirements at the highest levels of service quality. We continue to monitor the changes in the guidelines and will adjust our action plans accordingly. In the meantime, I want to thank all of the employees for their contribution to a safe working environment and delivering an excellent quarter during these unprecedented times. Turning to our results for the quarter, the first quarter of 2020 was a very strong quarter and start to the year for TETRA by choosing the highest first quarter adjusted EBITDA in five years. Despite U.S. land rig activity in the first quarter that was roughly 25% below first quarter of last year, our adjusted EBITDA improved 32% on a year-over-year basis to nearly $48 million and a 9% lower revenue. This speaks to the successful strategies that we have been implementing, as well as the management team and great employee base that we have at TETRA. The year-on-year…

Thank you, Brady. In the first quarter TETRA-Only generated free cash flow from continued operations of $4.7 million, up from $1 million in the fourth quarter of 2019 and up nearly $40 million from the same period of 2019. While some of this cash generation was due to collections of receivables that slipped from the fourth quarter of 2019, a significant portion are from our strong first quarter operating results, and our focus on working capital management. This cash generation was also above our most recent guidance. As a reminder, typically the first quarter of each year consumes cash due to the timing of large annual payments, yet despite this historical seasonality, we're able to achieve strong cash generation as we move into what we expect to be a challenging balance for the year. During the quarter we also generated $22 million of consolidated cash provided by operations, a $17 million improvement sequentially. TETRA Only liquidity at the end of the first quarter improved approximately $13 million from the same period a year ago, positioned the company well to manage into this downturn. TETRA Only liquidity is defined as unrestricted cash-on-hand, plus availability under our revolving credit facility. Year one of a downturn is typically met with cash generation as we monetize working capital, particularly from collecting receivables and draining inventory. We don't expect this to be any different and believe that our liquidity could increase over the next one to two quarters. For TETRA Only, first quarter capital expenditures were $5.6 million. In 2020 we expect TETRA Only capital expenditures to be between $10 million and $15 million, down from our prior guidance of between $20 million and $30 million as we adjust our capital spending to the current market conditions. TETRA Only net debt at the end of…

Thank you. [Operator Instructions] Our first question comes from Stephen Gengaro with Stifel. Please go ahead.

Thank you. Good morning gentlemen.

Good morning.

I guess two things. One, I'll start with the fluids which is obviously a very strong performance in the first quarter. You gave some details on 35% being sort of deep water leverage and 40% non-oil and gas industrials, and you've also talked about some contract awards recently; they are secured for deep for work. When we think about the fluids revenue line going forward and if we think about this in an environment where U.S. CapEx, land CapEx is probably down and we could – lets says 50% for the year and the second quarter looks to be really weak, how should fluids perform relative to that backdrop?

So, remember Stephen that the second quarter has the seasonality peak in Northern Europe that historically has increased somewhere between $10 million and $15 million. We expect that the second quarter will drop off a bit, but that it'll hold up because of that seasonality. Then from Q3 and Q4 it really then will depend whether our operators react and start pulling back activity on the offshore side of it, but given some of the wins that Brady mentioned, some of the market share that we're gaining, I think that that drop off will be significantly less than what everybody else is expecting on the onshore business.

Yes, typically Stephen these cycles, you know the offshore and international markets you know hold up much better than the very rapid U.S. activity and we fully expect that to play out in this downturn. There have been some shifting around of some activity in the second half of the year, but so far nothing significant that you know would materially impact our forecast for our fluids business for the rest of this year.

Okay, great, thank you. And then my second question, when you look at – and I know you talk about the debt structure and how it stands right now, and I know you walked through a lot of parameters around what's going on with the CCLP business and you had a lot of detail in yesterday’s conference call. If there is a problem at CCLP from a query perspective, what mechanically happened? Like what's the impact? I understand that you’re not on the hook for the debt levels etcetera, but what would it look like if something like that were to take place from the test version viewpoint?

A couple of data points Stephen, and that's a good question. So yesterday we announced that CSI Compressco reported Q1 EBITDA of $28 million and that’s still annualizing to over $100 million, but we clearly have lower quarters coming ahead. In the last downturn, CSI Compressco bottomed out at $86 million of EBITDA, and if you look at our interest expense on the bonds for CSI Compressco, about $48 million, and then maintenance capital expenditures of somewhere around $20 million, and then a couple of million dollars for cash taxes and so on. You're going to see a cash minimum requirement on an annual basis somewhere in the $65 million to $70 million range for CSI Compressco or call it $17 million a quarter. Our objective is to keep the profitability above the EBITDA, above $17 million and right now we've got a cushion of $11 million between the Q1 EBITDA and those minimum cash requirements. And then also recognize that we have demonstrated that when necessary and if appropriate, we are not shy about taking cost out of the system. We also mentioned that we are shutting down our Midland fabrication facility and putting up our real estate for sale. It’s a 30 acre facility, prime real estate in Midland, and if we're successful with that, we should generate some cash. So while I think CSI Compressco has some challenges ahead of them with all the shut-in that are occurring, I think that we've got this under control in terms of aggressively managing the cost to keep it cash flow positive.

Great! Thank you for… [Cross Talk]

And just to add to your impact to TERTA, so if things go very difficult and they get into a liquidity crunch, TETRA’s exposure is essentially around 34%, 35% ownership of the LP units of CSI Compressco and the GP ownership; that's the extent of our exposure to CSI Compressco and TETRA.

Great! Thank you.

Our next question comes from Praveen Narra with Raymond James. Please go ahead.

Great! Good morning guys.

Good morning.

I guess on the – I want to follow-up on the completion fluids revenue breakdown, the information you provided for 1Q that Stephen was referencing. Would there be a way you guys could provide that information for the whole of 2019, just to give us a sense of what a full year might look like, knowing the U.S. land portions begin to decline faster?

So historically Stephen when you take into – Praveen sorry, when you take into account the spike in Q2 earnings, it'll be right around 40% of the segment as industrial sales and it'll vary up or down depending whether we pick-ups some big Neptune projects that increase the denominator. But the numerator comes out to about 40%, give or take a couple of percentage points on an annual basis for all industrial chemicals across the globe.

Okay, and how about the deepwater completion side?

The deepwater can be a little lumpier Praveen. You know certainly we have a well-established business in the Gulf of Mexico and key deepwater markets, but as you can imagine, the deepwater wells when we deliver a high-end completion fluid can be a bit lumpy and we did have some good sales in the first quarter that we're still expecting through those awards that we talked about, you know deliver a solid rest of the year performance on our fluids business.

And Praveen, remember that we've got two significant competitive advantages on the deepwater fluids. One of them is a long term bromine supply agreement that we've got out of West Memphis and that has helped us for many years now. And then in the recent years with the introduction of CS Neptune, that also has represented a significant advantage that that we've been able to take to a leverage, both in the downturn and in the stronger recovery markets.

Yes, this is certainly helping in 1Q. So when we think about the go-forward, I guess the difficult part is determining what the trajectory is based off of 1Q. So can you help us with the deepwater completions trajectory, even if it's just to say how strong 1Q was and what we should expect for the go-forward?

So maybe I’ll provide a little bit of color and also recognize that in the fourth quarter we had a Neptune project that pushed our margins and our revenue to higher levels. The international was the strongest in the first quarter that we saw versus all of last year and I worked with a lot of the project that Brady mentioned that we picked up in Asia, in the Middle East, in the Gulf of Mexico, very strong international performance and we also had a big sale in Latin America. On the domestic side, if you were to have backed off the revenue that occurred in the Gulf of Mexico for Neptune, we also had one of our best quarters in the Gulf of Mexico relative to last year. Going forward it's hard to predict, but we do have some wins that Brady mentioned we have picked up. If they all continue on schedule like customers have communicated to us, we have the potential to match some of that Gulf of Mexico and some of those international performances in Q1, if not in Q3 or Q4. [Cross Talk] Yeah, the performance in Q1 was very, very strong on the offshore side.

Right. Thank you very much guys.

Thanks Praveen.

[Operator Instructions] Our next question is a follow-up from Stephen Gengaro from Stifel. Please go ahead.

Thanks. I guess two more if you don't mind gentlemen. The first is, if we look at your historical sort of detrimental margins or incremental margins in the water in throwback business and obviously understanding that you're in for a, probably a very tough second quarter, and I know you're doing a lot on the cost cutting side. Am I – is it reasonable to assume that second quarter detrimentals could be pretty severe and then they normalize a bit as sort of cost cutting catches up with the revenue stream wise? Is that a reasonable way to think about it?

Good assumption Stephen and historically that's what has happened, and that the cuts and the flow down by customers are very rapid, and then we implement cost reduction actions, bring equipment back to the shop and we see that first quarter get hit harder and then cost reduction actions kick in. So if it follows historical patterns, your statement is correct. However, let me interject that we have implemented a lot of technologies. We've implemented the blue link system that has brought automation and reduced staffing at many of our water treatment and water handling operations. We've introduced the SandStorm technology that is less dependent on people. We've also implemented quite a few fluids treatment operations and facilities that are less dependent on people. So this go round, we've got a lot more technology that has less dependence on people that I think will help us in this cycle.

Thank you. And then on the adjusted EBITDA line, the corporate and eliminations line dropped off from kind of a $10 million to $11 million run rate to like $6.5 million in the first quarter. Is that a good run rate going forward given what you've done across that?

So, we mentioned when we announced that the NYSE had issued a notice too as they were taking cost actions, but we're still targeting our corporate G&A to come down to the $6 million to $7 million range in the coming quarters that'll benefit us. In Q1 we did – we reversed out some items such as accruals for long term incentive or annual incentive plans, but for TETRA Only expect that the corporate G&A will drop down into the $6 million to $7 million range as we continue taking cost out of the system.

Okay, thank you.

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

Well, thank you Brandon. I thank all of you for – I appreciate your interest in TETRA Technologies and thank you for taking the time to join us this morning. This concludes our call.

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