Good morning, and welcome to TETRA Technologies Second Quarter 2022 Results Conference Call. The speakers for today's call are Brady Murphy, Chief Executive Officer; and Elijio Serrano, Chief Financial Officer. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Mr. Serrano. Please go ahead, sir.

Thank you, Joe. Good morning, and thank you for joining TETRA's Second 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 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 EBITDA gross margins, adjusted free cash flow, net debt, net leverage ratio, liquidity or other non-GAAP financial numbers. Please refer to yesterday's press release or to our public website for reconciliations of non-GAAP financial numbers to the nearest GAAP number. These reconciliations are not a substitute for financial information prepared in accordance with GAAP and as 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 would also encourage you to refer to our 10-Q that will be filed later today. I will now turn the call over to Brady.

Thanks, Elijio, and good morning, everyone. Welcome to TETRA's Second Quarter 2022 Earnings Call. I'll summarize some highlights for the second quarter, provide an update on our exploratory well fluid sample results and discuss the current outlook before turning it back to Elijio to discuss cash flow, the balance sheet and liquidity. For the second quarter, financial results were in line with our expectations, while some key milestones on our low carbon energy opportunities well exceeded our expectations. Our Water & Flowback business continues to grow faster than the active rig and frac crew count, while expanding margins for the fifth straight quarter. On a per active frac crew basis, our Q2 annualized revenue of 33% above that of 2018, which was the peak of the North America shale market. While our European chemical business was impacted by a supply chain disruption due to the Russia/Ukraine conflict, the overall segment still achieved 24% adjusted EBITDA margins as the offshore and deepwater markets continue to show signs of a multiyear growth cycle, supported by a forecasted 5-year high in subsea tree orders in 2022. The brine fluid test results from our territory well are very encouraging, with both lithium and bromine concentrations above the values used by an independent study for the exploration target report values that we announced last year. Our pure flow deliveries to Eos as a key part of their electrolyte for long-duration energy storage have doubled each of the past 2 quarters and are expected to continue at that pace into the following quarters as they continue to ramp up to meet their growing backlog. Overall, our second quarter revenue grew 8% from the first quarter of 2022 and 38% from the second quarter of 2021. Adjusted EBITDA of $18.7 million decreased $1.8 million sequentially and was…

Thank you, Brady. Second quarter adjusted earnings per share was $0.05 compared to $0.06 in the first quarter and also compared to a $0.02 loss in the second quarter of last year. The second quarter of this year included a $4.9 million charge of nonrecurring items for the first quarter included a benefit of $164,000 of nonrecurring credits net of expenses. Adjusted EBITDA for the second quarter was $18.7 million compared to $20.5 million in the first quarter and is up 44% from the $13 million in the second quarter of last year. The second quarter included mark-to-market losses of $700,000 from our equity holdings in CSI Compressco and Standard Lithium, partially offset by a non-realized valuation gain on our convertible loan investment in CarbonFree. This compares to a first quarter $1.1 million mark-to-market gain of our equity holdings at CSI Compressco and Standard Lithium. These items represent an unfavorable swing of $1.8 million from the first to the second quarter of this year. If you compare the first quarter to the second quarter, focused on our EBITDA performance without the impact of these mark-to-market gains in the first quarter and mark-to-market losses in the second quarter, both quarters were adjusted EBITDA of $19.4 million. The second quarter adjusted EBITDA is flat on this basis with the first quarter and is consistent with what Brady and I communicated as our expectations on the first quarter earnings conference call. And keep in mind that the first quarter included several significant offshore fluid shipments that moved up in the second quarter, and the second quarter also included a negative impact of $1.3 million at our Northern Europe industrial chemical operations as a result of the supplier declaring force majeure that Brady mentioned. In late April, we received 400,000 shares in Standard Lithium…

Thanks, Elijio. We'll open it up for questions now.

[Operator Instructions] Our first question will come from Martin Malloy with Johnson Rice.

The first question I have was about the calcium chloride preview in the lithium extraction process. Could you maybe talk about the potential here? And is that a localized use of the calcium chloride? Or is it expected to be more widespread potentially?

Yes, it's actually an international lithium provider, not here in the U.S. And so -- it's the first application that we have seen working with this provider to use calcium chloride in their process. And we're very encouraged by the results and what we think the applicability of this solution will be on a more broad scale. But this is not for a provider here in the U.S.

Marty, they've given us an order, As Brady mentioned, for 6 months, they're about to ramp up production of lithium in their facility.

Okay. And then just on the Finland calcium chloride production plant and the raw materials for that, can you maybe talk about the supplier outlook? Is there opportunity to add another supplier that might be able to provide the key raw material? And on the demand side for the output from that plant, has it essentially just been deferred? Any help you could give us on the situation there would be appreciated.

Sure. Yes, I appreciate that. Obviously, it's a pretty fluid situation. And the Ukraine/Russia conflict came up fairly suddenly and caught us all a little bit off guard as you can imagine. We're fortunate that, yes, there are other supplies. This is a commodity. But as you're probably aware, global commodities, even in today's environment, are pretty tight. So it's just not an immediate replacement. We were encouraged with the production volumes that they are now projected for the third quarter, but it's still not to the full levels that we need. We think ultimately, this will get solved, but we don't have perfect visibility right now into exactly when we can anticipate that. The demand for our products is still extremely high, which has helped us in terms of getting price increases, which we clearly need given the European inflation for both logistics as well as energy. But we've been very successful on that front. So there's no issue -- no concerns on the demand side. This is really just being able to replace that supply chain material and get up and running as quickly as we can.

Our next question will come from Stephen Gengaro with Stifel.

So I was curious if you could help us out here. So when we're looking at the fluids business, we're thinking about the normal -- I mean, normally from the second quarter to the third quarter, you lose some of the European business, and then there's some other pluses and minuses. But just given the noise that we saw in the second quarter, I think some of the continued maybe lingering impacts of the supplier issues. Can you give us some sense for how you're thinking about the third quarter? And I think if I did the math right, your EBITDA margins, excluding some of the noise, were like 25.5% in that business. I'm curious what your commentary is on that going forward.

Good question, Steve. So historically, we've seen about a $14 million to $15 million increase Q1 to Q2 coming from our calcium chloride sales in Northern Europe. And then that comparable drop off Q2 to Q3. Last year, it dropped from $64.6 million down to $48.7 million or about $16 million. This year, second quarter was at $75 million. We're expecting a comparable dropoff, partially offset by some of the activity that we've mentioned, such as calcium chloride sales into the market for production of lithium. Also some of our increased sales that we expect that be occurring with PureFlow, in addition with an uptick in deepwater activity. So $14 million to $15 million dropoff Q3 to Q2 comparable to last year.

Great. And is the -- if you took out the noise in the quarter, I think margins were about 25.7% in fluids. How should we think about that progression?

So the second quarter without the mark-to-market gain or losses that we had turned out to be $24.8 million and the -- I'm sorry, 24.8%. And the second quarter should be around those numbers.

Okay. And then just one final one. When we think about the Water & Flowback business, I mean, you talked about some share gains. It sounds like your revenue opportunity there continues to increase against the backdrop where there's just not a lot of frac spreads going to work in the second half of the year. Do you think you'll just sort of outpace the rise in frac activity in the back half of this year and then also in 2023? I guess should we use that as kind of as a benchmark and then expect that you can outpace that growth based on some share gains?

Absolutely, Stephen. I mean, if you just look at historically the gains that we have made on a frac crew basis, we think those gains are sustainable, continue to maintain those gains. We've also continued to gain share in the recycling space. Our sandStorms, as I've mentioned, our largest -- actually, our largest award to date with a super major in the Delaware Basin and the Eagle Ford that we've not seen any benefit of yet. We'll see that in the second half of the year on pretty -- as you said, pretty flat frac crew activity. Argentina is just getting kicked off for us. We've not seen any real benefit of that. We'll see that in the second half of the year. So yes, we definitely will outpace the frac activity, certainly for the second half of this year and we would anticipate into next year as well.

And Marty, the other thing that I would add as a result of those items is that last year, we generated EBITDA of $14.9 million for the entire year from Water & Flowback. And the second quarter, if you annualize it, we're already at a $10 million per year EBITDA -- in a $40 million per year EBITDA run rate based on $10 million in the second quarter. And we've indicated that we've got the EPFs coming online in Argentina that will show the exit rate this year being quite a bit higher than the $40 million run rate EBITDA that we're at right now.

Our next question will come from Tim Moore with EF Hutton.

Congratulations on the level of adjusted EBITDA in the quarter, and it was nice to see the free cash flow. My first question is I just wanted to clarify timing. It sounds like the inferred resources report to be completed maybe by late September. And my understanding from your comments earlier was that the preliminary economic assessment for bromine could still be finished by the end of the year, but then there might be a PEA for lithium carbonate equivalent that might -- is that maybe sometime early next year?

Yes. So the cadence that we feel is highly probable is we'd like -- we think the inferred resource or the final resource report will be certainly completed before the end of the third quarter, hopefully, mid -- early mid-September type time frame. The PEA, as we've mentioned, for bromine, we're doing first because there's really no technology risk associated with that. And we have a great team assembled with our PEA provider to fast track that. We still believe that will be completed before the end of the year. The lithium, as you know, is a little bit more complicated. We have a great direct lithium extraction partner -- technology partner that we are working with. We're very encouraged with the results that we are getting. But we still got to prove out certain aspects of that. So we don't want to delay our bromine investment. So we're trying to do lithium at the same time. So we will do them sequentially. And based on the pace that we're going, if we continue to make the progress that we are, we fully expect to launch the PEA early in next year for the lithium following the bromine.

Great. That's terrific. Just switching gears. For the integrated water management in your automation with BlueLinx control systems, can you kind of give us a sense of that remaining opportunity for penetration? Is it fifth inning now? I mean, given it's such a good quick payback and staff reductions of up to maybe 40% in field safety improvement. I saw the project went up to 62%. But I'm just trying to get my head wrapped around how far along are you in that? Is it still kind of a runway?

That's a great question. We rolled this out in the end of 2018, 2019. So we are a couple of years into this now. I think we still have quite a bit of growth with the integrated work just because of the efficiency gains that the operators benefit from. As you can imagine, right now, labor is a real issue in this market. And so customers are coming where we can run jobs with far fewer people. So we still believe we've got some pretty significant room to grow that model. I would estimate we're still only at the less than 20% market share of that type of model that's available to us.

And you referenced a couple of data points that we have in our press release, and that was focused on the automated drill up technology, which is new and above and beyond what we're doing with the automation and BlueLinx. What we have done today with this automated drill-out technology is drill out the plugs, reduce personnel and introduce a new technology to do so. So this is a new technology above and beyond what we've been doing with BlueLinx and what we've been doing with the SandStorm. So this is another in the series of efficiencies that we're bringing to the market.

Yes, great. That was nice to see for the Appalachian. Just maybe on the Water & Flowback topic. Can you elaborate besides that good technology you just mentioned in the press release, just maybe any other opportunities as you look out to 2023? Is there opportunity for converting produced water to surface discharge quality, which seems like it could be a huge market if the EPA and some state water regulatory agencies move towards that?

Right. Well, absolutely, that's been a focus of ours as part of the next evolution of our recycling capabilities. We have some things we think we'll be able to announce on that in the coming weeks as it relates to beneficial reuse. We're staying very closely connected to the regulatory agencies as they're moving forward to be able to enable that market. And we like the pace that that's moving out as well. So yes, there's no question that is the next step. The seismicity events are causing some real headache for our customers, especially in the Permian Basin for disposal. And so no question, that's the next step in the process. And as I said, more to come on that, we think, in the coming weeks.

That's terrific. And I'm looking forward to that. It could be the highlight of my summer. And I know there's concern by some investors, the big question out there is what oil price level will be good enough for you? Towards the end of this year and most of next year to achieve maybe double-digit sales growth next year, I mean your revenues were very strong in 2018, 2019, $560 million, oil prices was $57 to $65 back then. Are investors just to hung up on $100 oil? I mean it seems like you could do really well when it's averaged above $60. Is there any thoughts on that for capital spending by customers?

Yes, I mean, obviously, it's before we get into the budget cycle for our customers. But if you look at the returns that the customers are able to make right now in the shale plays with the efficiencies, like companies like us have brought to the market. Now we still have to overcome some inflation. I think that's still a big issue in our industry. But I firmly believe $70, $75 for oil would support continued double-digit growth, both on a frac crew count and certainly for our business with the projections that we have.

Great. That's very helpful. And my last question is just switching to low carbon. How has the pilot plant been for SkyCycle and CarbonFree going? It seems like there would be an uptick in interest by large emitters given the inflation [indiscernible]?

Yes. So we continue to stay very engaged with CarbonFree. Clearly, they're on the front end because they're negotiating with their end users multiple projects. We're obviously engaged with them on those projects, assessing what the logistics cost, the plant costs, et cetera, would be for our component of that. So it's difficult for us to project when they will announce their first plant because they're on the lead -- taking lead for that side of it, and we're supporting them partnership -- partnering with them in that capacity. But now very -- still much very engaged and still a very exciting opportunity for us.

Our next question will come from Samantha Hoh with Evercore ISI.

Maybe just to stay on this CarbonFree topic. I'm just kind of curious -- and especially with Eos and all of that product ramping up. Is there like any sort of way you can quantify how much you think these new low-carbon services and products will contribute to fluids this year versus the growth from last year? Any way you can kind of peg a number to that?

Right. So the real contributions this year are coming from PureFlow sales to Eos. And we've mentioned in the past that we believe that Eos has a very sound strategy of increasing production and we keep shipping product to them. And in fact, Brady and I were in West Memphis last week, and there were quite a few tons of PureFlow ready to go to Eos that are being shipped in the third quarter. Brady mentioned earlier that the volumes in the second quarter were materially higher than the first quarter, and the third quarter continues to be high. That's going to be the majority of our revenue this year. Some have speculated that the revenue is somewhere between $8 million and $10 million. We have not pushed back on that number, and that's strictly PureFlow. In addition now to PureFlow, we mentioned this morning that we're now starting to ship calcium chloride for the production of lithium in a country overseas. So those 2 are going to be the main impact from this year. And I think that those numbers can increase materially in the coming year.

Okay. Is there -- I guess the other thing that I wanted to talk about more was just the recycling work in your Water & Flowback segment. It seems like you've called out recycling a lot over past recent years, like one of your fastest-growing products. And I was just wondering if you could sort of rank within the segment which products are -- or which service lines are the biggest contributors? And just like where -- if you need to spend any more CapEx actually? Because I think I also heard that you're adding SandStorm, but do you need more steel for the recycling business.

Right. So no question about it, the 2 fastest-growing segments for our Water & Flowback business are SandStorms and recycling. And we are continuing to add capital as we gain more market share with sandstorms and as well with recycling. I will say both of those technologies today are less than 2-year paybacks for our capital investment. But yes, those 2 require being fed some capital, and we will continue to do so as long as we can get those types of returns.

Okay. Well, what about CS Neptune? I think I heard that you're doing a -- you're completing a project right now or in the third quarter. What is the -- what are you anticipating, I guess, over the next year, especially as some of the project at FID in the North Sea?

Right. So we do have a job that's planned in the third quarter in the North Sea. That high confidence level will be executed actually in the coming weeks. But again, the cycle that we're in with deepwater, I will say, is still a longer-term horizon. We don't know if there'll be additional Neptune opportunities this year. Most of the projects that we're in discussions with customers, we think, will be really starting to kick off next year. Well, that's first half of next year or second half of next year, I think, still to be determined as we get into some of the more advanced discussions with these operators. You've probably seen the subsea tree orders really start to take off. And I think I anticipated the forecast that I saw now is going to be a 5-year high in terms of subsea tree. And really, that's the leading edge for deepwater activity. And unfortunately, on the completion side, we're at the tail end of that timing cycle. So there is a lag for us, but we clearly see it coming.

And given just that, we're really seeing the deepwater recovery expand geographically. What other markets do you think is very suitable for Neptune? Could we see some of those majors who are very sensitive to environmental risk perhaps look to use Neptune and West Africa, for example?

Right. So I think North Sea and Brazil are clearly very highly sensitive as it relates to using zinc -- banning zinc in most of their markets, which opens up more avenues for Neptune. But really, after that, it comes down to the pressures of the formations, Samantha, and both in the Gulf of Mexico. That's where we see the pressure resumes and some of these higher deepwater wells will be conducive to Neptune. Not so much West Africa yet, I would say, but we have seen spots in other markets. Asia Pacific, North Sea and Gulf of Mexico, I would say, would be the primary, over the next 12 to 18 months, opportunities for us with Neptune.

Our next question is a follow-up from Stephen Gengaro with Stifel.

So I have two other questions, if you don't mind. The first was one of the things with PureFlow is obviously, we're tracking and trying to watch what Eos is doing. And it feels like their revenue expectations, or revenue at least what the consensus has out there, has sort of plateaued after kind of having a downdraft since maybe 2021. But it seems like it's stabilized and there's a renewed level of confidence in their ability and their throughput, et cetera. Can you talk at all about your -- any insight you guys might have into the traction that they're getting on the production side? And is there any color you can add to the sort of the confidence that your PureFlow volumes are going to be ramping? That was a hard question because Eos is involved. But is there anything you can add around that to give confidence to the volume growth?

The only thing I can say, Steve, because I don't want to speak for Eos, but clearly, they're a key customer of ours. We have visited their plant facility and the work that they are putting in, the investment that they are putting in to ramp up production. It's real. From our lens, it's very encouraging because we see the demand that they're putting on for PureFlow. I can't comment to whether or not they'll achieve what the consensus projections are, but there's no question they're ramping up and they're making very good progress, in our opinion.

Great. That's helpful. And then you talked about maybe another public and maybe another private 2 other companies, at least you're in conversations with for maybe taking a similar product for battery storage application. Do you have any updates on that front?

We continue to be engaged with them. Steve, we thought maybe we would have something to announce by now. Unfortunately, they've not completed their deal yet, but we do expect it in the third quarter.

Okay. And then maybe just one final one. Do you have any thoughts you can add around the direct lithium extraction technologies being used in Arkansas? And any sort of traction and progress that's being made there that makes the reserves that Standard Lithium has and then obviously that you have viable? And any increase in confidence level there as we kind of move forward? Because I've heard there's a lot of potential, but there's still work to be done to prove up the technology.

Right. No, it's a great question and one that we are spending a lot of time with direct lithium extraction providers and researching the landscape. First of all, let me clarify, direct lithium extraction, there's two people that are commercial today using direct lithium extraction. It's not here in the U.S. And we have been engaged with those two companies. But even their application today is essentially on [indiscernible] brine pools using direct lithium tech. So the technology is working, but it's a little bit different application than what's using in Arkansas, and that's the same case for Standard Lithium. Where we will be pulling brine from a downhole well environment in a continuous basis and reinjecting it back into a downhole formation. There's actually nobody in the world today that we know off that is commercial with that application. But we do feel very confident adapting the DLE technology from the commercial providers will be applicable in the environment that I described that we will have in Arkansas. Okay. With that, I think we will conclude our second quarter earnings call. Thank you very much for your interest, and we'll end the call.

This will conclude our question-and-answer session. This will conclude the conference. Thank you for taking the event today. You may now disconnect your lines.