Good morning, and welcome to TETRA Technologies Fourth 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 this event is being recorded. I would now like to turn the conference over to Mr. Serrano. Please go ahead sir.

Thank you, [indiscernible].Good morning, and thank you for joining TETRA's Fourth 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 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 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 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 encourage you to refer to our 10-K that will be filed yesterday. Brady I will turn it over to you.

Thanks, Elijio, and good morning, everyone. Welcome to TETRA's fourth quarter 2022 earnings call. I'll summarize some highlights for the fourth quarter, comment on the current outlook as well as provided an update on our strategic initiatives before turning it back to Elijio to discuss cash flow, working capital and the balance sheet, liquidity and add some color to the SK 1300 section 19 economic analysis that we issued last night. We closed out a strong year in 2022 with a strong fourth quarter growing revenue sequentially 9% over the third quarter and 42% for the full year over 2021. Adjusted EBITDA of $20.3 million increased from $18.6 million in the third quarter and for the full year excluding market-to-market gains in 2021. Our adjusted EBITDA for 2022 more than doubled, increasing by 112% over 2021 with almost a 30% follow through on incremental EBITDA to incremental revenue. Despite some headwinds during the fourth quarter, that we mentioned that our last quarterly call, including the postponement of pure flow orders, and the need to purchase additional bromine at spot market prices, we more than overcame these challenges by capturing multiple high margin completion fluid sales in an increasingly and strengthening offshore market. For the combined markets of the Gulf of Mexico and our international offshore businesses we increase quarterly sequential revenue by 20% and more than 50% year-on-year. The completion of our first UK Neptune job along with continued improvements to the disrupted supply chain for our European chemicals business contributed to our successful Q4 results were scheduled for another North Sea Neptune job in the second quarter this time in Norway. We continue to believe we're entering a multiyear growth cycle for the offshore markets and the increases in floater day rates, contract durations and subsea tree orders are…

Thank you Brady. Cash from operating activities was the use of $7 million in the fourth quarter while adjusted free cash flow from continuing operations with the use of $14 million in the quarter. Accounts receivable increased by $24 million from the end of the third quarter to the end of the fourth quarter, reflecting the strong ramp up in activity by the end of the quarter, driven by some large fluid sales in December that Brady previously mentioned. Working capital at the end of the year with $101 million and compares to $87.5 million at the end of the third quarter. Working capital consumed $18.8 billion of cash in the fourth quarter as compared to a use of cash of $8.6 million in the third quarter. Capital expenditures were $7.2 million and compared to $12 million in the third quarter. Total year capital expenditures were $38 million and reflect the investments made with quick payback investments such as [indiscernible] Sandstorm filtration technology and to strengthen our long term position in international and offshore markets to the investment in early production facilities in Argentina and increase capacity for our short completion fluids business. The payback on this on the sandstorms in the early production facilities was very evident if our quarterly EBITDA margins increase materially in the second half of the year, compared to the first half of 2022. In 2023, we expect to achieve strong revenue growth on lower CapEx investments while monetized much of the accounts receivable that was built at the end of the year. These combinations will result in significant free cash flow generation in 2023. Capital expenditures in 2023 is expected to be below where we expended in 2022. At the end of the fourth quarter, unrestricted cash was $14 million and availability under our…

Thank you, Elijio. To recap 2022 Not only did our base business perform very well, but we've also made significant investments in our business to expand our earnings base in the coming years. Over the last several quarters, we've nearly doubled our fleet of TETRA Sandstorm advanced cyclone technology which remained at a very high utilization. We've also invested in international markets the deployment of EPS as well as our completion of fluids business expansion. And we have invested to boost our capacity in the Gulf of Mexico to support increasing deepwater activity. While increased offshore activities already contributing very meaningful to our earnings. Significant upside remains with deepwater projects due CS Neptune offering. As Elijio mentioned, we expect to achieve strong growth and '23 over 2022. That coupled with our focus on margin expansion and cash generation to drive meaningful cash flow generation in 2023. We're excited and committed to fully evaluating the Arkansas brine resource, and we'll continue to communicate updates as appropriate. With that, we'll open up to questions.

Thank you. We will now begin the question and answer session. [Operator Instructions] Our first question comes from Martin Malloy with Johnson Rice. Please go ahead.

Good morning.

Good morning.

Good morning. I want to ask good morning. I want to ask about the offshore completion fluids market and certainly seems like there's a inflection point here and activity going on. Could you maybe talk about the pipeline and the visibility as you talk with customers and maybe in particular on the Neptune product?

Yes. Martin So as we mentioned, we covered our first UK Neptune job. We've previously performed Neptune job both in the Gulf of Mexico and in Norway. We have another Norway project that we plan to be executing in the second quarter. And really, our objective has been to get more repetitive projects in our business, as opposed to the lumpiness that we've seen in the past, and I think we're getting some traction with that, certainly in the North Sea. And I think we expect to have more repetitive jobs in the North Sea business. The Gulf of Mexico, obviously, these are much larger projects, those four pipelines, where we're very engaged with our customers on those projects. We may see some projects come forward in before the end of this year. But it's more likely that we won't see a meaningful uptick in our Neptune opportunities until we get into the '24 and beyond.

Great, thank you. And my second question, want to ask about your flow. And your ability to ramp up assuming that your customers are able to increase capacity and throughput and get the government funding that they're looking for. Can you maybe talk about your ability to ramp pure flow and any additional CapEx would be required?

Yes. Our ability to ramp up production of PureFlow through our West Memphis facility we need very little to no capital at our West Memphis production facility. We have plenty of capacity at that plant. The issue really for [careful] longer term is the ramp up and energy storage, if our customers are successful, as you noted in ramping up the demand levels were pretty dramatically exceed our current supply agreement for bromine, which is one of the reasons why we're looking so carefully at our Arkansas project and the timing of that Arkansas project as it relates to the success, potential success of our Pureflow customers because if they are successful based on the demand opportunities that are there, it will have a meaningful impact to the bromine market.

Great, thank you. I'll turn it back.

The next question comes from Stephen Gengaro with Stifel. Please go ahead.

Thanks. Good morning, everybody. Morning. Two things for me. And pardon if you hear background noise because I'm in a lobby of a hotel. So I'm sorry about that. When we think about the quarter was obviously very good on the top line. And I was as I started to think about the progression going forward. Was there anything in the quarter that I should be kind of contemplating as I think about sequential performance in the first quarter of 2023? And maybe in addition to that, how should we think about the water and flowback business if we given sort of a plateauing in North American activity right now?

Yes. Yes Steven I will cover the water flow back first. I'd mentioned we've had significant growth in this business for us, quite frankly, the pace of growth that we achieved in 2022 well exceeded the market. And when you grow like that, you typically take on some costs, and it's difficult to be as efficient as you would like to be with your business. And that caught up a little bit with us in the fourth quarter, some of it was a mix issue where we dropped slightly on our margins, but we fully see a rebound to back to increasing margins as we go forward in Q1 and beyond for the full year. I think from a margin expectation, we would build on the second half of the margins for our water and flow business, the activity that you saw. So we feel pretty good about that, as well as getting additional contribution from international, particularly Argentina, as we get full years of growth and margins from the two EPS that we have deployed as well as a third one that is due to come online in at the end of the second quarter start of the third quarter. So we fully expect to grow in 2023 based off the investments that we made in 2022 contributions from international but also get back to expanding our origins as we have them. Probably the completion fluid side of the business in Q1. But then when the market can remain strong, there's always a little bit more lumpiness in larger projects that come and go and the completion fluid side, but we feel extremely well positioned to take advantage of this market as we go through the full year of 2023. And there's nothing exceptional about the Q1 relative to our Q4 that I would note. We do plan to ramp up in our typical second quarter with our TCE European chemicals business. That business has recovered very nicely, not back to 100% yet due to the supply chain disruption that we had. But we are well on our way to getting back to that just in time for our second quarter ramp.

Thank you. And then two other things. One pretty straightforward. Do you think the target for 100 million EBITDA in '23 is reasonable? That's not your target the streets target I mean that's in the ballpark? You think.

We're going to refrain from providing I'm sorry, we're going to refrain from providing full year guidance. We believe that there's still too many economic factors that move around it unpredictable, such as the recent drop in the price of gas that is out there. So we won't be commenting on full year guidance.

Okay, thanks Elijio and then one for -- when we think about your opportunities, and obviously, you have a couple of really exciting things going on right now. If we're sitting down in 24 months, and it's the beginning of 2025. Where would you see the company? Like what do you think are the biggest key drivers of earnings and how do you? What do you envision for TETRA two years down the road?

Yes. So I mean, I think we're very pleased with the current position of our two business segments. I think our water and flowback business even though frac activity may have plateaued some, we still have a considerable growth opportunities on the produced water side particularly with our desalination, and beneficial reuse and mineral extraction. I think that's a whole new market that no one is benefiting from today. And we actually think we have a really good leadership position in that space to the benefit from whether it's 24 months, whether it's 48 months that will be remaining to be determined, but the opportunities are there. And we feel good about our ability to lead in that effort. On our completion fluid side, as I said, I think we're the early stages of a really strong offshore market. I think our Neptune projects will be hitting with a higher cadence, certainly in that period of time. And I'm hopeful that our Arkansas project will be fully evaluated. And we will have met the criteria that we've listed to move forward with that project, which if we're successful with that, and that projects approved, will be somewhat game changing for the company.

Thank you. I'll get back in line.

Next question comes from Tim Moore with EF Hutton. Please go ahead.

Thanks. And it was nice to see the detailed preliminary economic assessment on the bromine project. My first question Elijio, how should we think about free cash flow generation possibility for this year that you could you won't have as much working capital drain or capital expenditures as the last Latin American projects. But maybe you could have a little bit more calcium chloride supply build up. Just kind of wondering is 30 million free cash flow in the realm of possibility given all the puts and takes?

So we expect EBITDA '23 to be above '24. We expect capital expenditures to be lower '23 versus '22. While we will be pleased to see a spike in yearend activity, like the end of 2020, like we saw at the end of '22. We don't think that's going to happen. So we think working capital will be neutral, worst case, positive best case. So we expect that we will be strongly free cash flow positive in 2023.

Yes. That's helpful. And you reported the volume potential for the bromine project compared to your long terms apply. It was nice to see that it was 45% to 50% more. Can you give us any rough set sense of maybe how much lower your cost of bromine could be after the project's done, I don't know, a year out after it's proficient and operating well, compared to your supply now. I mean, we talking like a 30% savings.

Yes Tim. We -- for competitive reasons, we're not giving the specifics on that. Hopefully, you can tell from the financial information that we included in our economic assessment what the profitability of the project could be if we're successful. But we're not giving specific details on bromine costs or purchase prices that pay.

Understood. I had to try. But I heard your comments earlier. [indiscernible] has mentioned, maybe I misunderstood that did you expect to spend 5 million more for kind of a second stage drilling and any sense of maybe what your exploration pre-development cost could be this year, and I believe they were 6.6 million last year.

So we're going to drill an exploration well, that's probably going to run into $2.5 million to $3 million range. But we have some other efforts that we plan to kick off this year, potentially a pre feasibility study, some additional engineering that is accounted for in our full budget for this year for our consultant. Our intention is really to ensure we get to an indicated resource report. We've got one well plan for that. And we're hopeful that that will be enough information to get us to an indicated resource report. But until we drill that well and get the results there could always be another well, we may have to get that to finally get there. But that's our expectations.

That's helpful. Thanks for that color. And I’m just curious on how's that new automated drill out technology going and when do you think maybe those sales could be material figure? Do they kick in more spring or summer?

Yes. We actually have a lot of interest in that unit. We, at this point, because of the capital associated with a term, we're probably only going to do take or pay for long term contracts for that unit we are in discussions with several operators in that regard. But that's an area we're going to be ensuring we have long term commitments before we start putting additional capital into it. And we think we'll get there. But those are ongoing discussions.

That's helpful. And then just lastly, my last question is on the desalination and produce water. I'm always curious about this. I've got a two part question. Is there any update on the regulatory agencies review and possible approval timing and then it also sounds like you've learned a few things, doing that pilot. Just wondering if you can elaborate on that you refine the membrane sizes for pretreatment, or do any tiny tweaks that are showing better efficiency?

Right. So on the regulatory side, it's apparent that each operator of the produced water is going to have to get their own permits for the produced water projects. The project that we work on with our with our pilot project is in process. We've seen the requirements for the regulatory and we feel very confident that our technology will meet those requirements, but each operator is going to have to go through a permitting process before we can deploy a desalination unit to the project. As far as the pilot goes itself, the membrane technologies, whether it's the KMS, or the high [indiscernible] that we have negotiated agreements with performed extremely well, [indiscernible] in this case, the pretreatment also performed well, but we've got to do some field worthiness and kind of long term plant design upgrades to both primarily the pre-treatment. That's pretty critical to the process. And that's the stage that we're performing right now before we would be ready to take on a long term plan.

Good to know, thanks. That seems like that's progressing well. That's it for my questions.

Thanks, Tim.

Your next question comes from Samantha Hoh with Evercore ISI. Please go ahead.

Hey, guys, so most of my questions been answered, but I wanted to drill down a little bit more on this produce water initiative. So you mentioned that each operator needs their own permit for their own projects. I'm kind of wondering how you're thinking about that, in terms of as you do start to deploy this technology? Are you taking a similar model as like how you deploy the sandstorm technology where you're just going to lease it. Or do you need to partner up with large producer to have more scale, as you start to roll out that new initiative?

Yes. Samantha, good morning. So, each project, I think, is going to be very specific to that operator. I think you're going to see projects range from a 10,000 barrel a day, which will be a smallish project. But again, this is a 10, 15 year, 20 year potentially type of plan and up to potentially 100,000 barrels a day or more. And so and the capital costs associated with each of those are going to be very different. Whether the customers will fund the capital for the projects or we will fund them if they're smaller, we're going to take that on a case by case basis Samantha, based on how we see the opportunity and the operators that kind of partnership agreement.

Okay. And then you kind of mentioned that there's still a lot of uncertainty out there mostly with gas activity. I'm kind of wondering where your exposure is on the U.S. land side for gas isn't pretty easy just to like, move some of that sandstone fleet and hoses around to like an oily basin?

Yes. So we do have a good operation in the Marcellus. TETRA has been there a long time, with a strong Water business and a Flowback business. We have not seen any meaningful results or changes yet. But it's something we're going to keep an eye on. The good news is that our demand for all of our assets, whether it's water flowback or sandstorms are all very high in the Permian or South Texas, or mid Qcon where again, we have strong market positions. I'm not concerned at all about moving those assets if we need to, but so far, we haven't seen any material change that would warrant that type of movement. We don't have a big presence in the Haynesville. So less exposure on that, but we have plenty of other market outside of the Marcellus that if we do see something back, we'll be, we think we'll be in great shape.

Okay, and then if I could just squeeze one more in. I'm kind of curious on the deepwater completion fluid side, like you guys been, so kind to provide the breakout of fluid revenue mix. I was wondering if you had a similar type of pie chart, for example, for the margin trends like is it a similar type of profitability, depending on the three different like in markets that you guys apply to on the fluids business? And then how do you view like your market share amongst like the offshore like the deepwater rigs, for example? Can you provide any sort of, like share based on the data for us?

Yes. Samantha so for deepwater I think we gave an example in our press release yesterday our team estimates about 70% of the deepwater wells in the Gulf of Mexico as an example, require a bromine based completion fluid. And we have we estimate we have a roughly a 30% market share of the what we call high value completion fluids, which typically contain bromine and that would be North Sea deep water deepwater. That would be Gulf of Mexico deepwater. That would be a Brazil deepwater. A little less so in other markets, but overall, we think we have a very strong position with our what we call high value completion fluids business. If that's helpful. On the margin side, I'm not sure we would share the details of a breakdown, family breakdown of our products. If I understood the question correctly. Was that the question?

No, that's super helpful. Thanks so much.

Okay.

The next question is a follow up from Martin Malloy with Johnson Rice. Please go ahead.

Thank you just had one follow up CarbonFree. I saw the announcement that they made with respect to collaborating with BP on developing solutions for industrial facilities. Anything to report there in terms of the potential demand for calcium chloride from for these type of projects?

Yes. We saw the announcement as well. And we know new the CarbonFree had been working with BP for some time is actually one of our investors in CarbonFree. And we continue to engage very carefully with CarbonFree as they look for the deployments of their plants. I know you have a stay in touch with their CFO quite a bit any update from your side?

Yes, so CarbonFree from our dialogue with them continues to make progress with their pilot plant, whether the design of technology. Clearly the announcement with BP is further endorsement of their technology. We believe that their next step is to secure the proper capital, then launch their program. And once they get to that stage, we expect to participate from them with them. But practically speaking, we think that any significant calcium chloride sales to them is still quite a bit out a minimum of a year before they have any significant impact.

Thank you.

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

Thank you very much for your joining us on our call. That concludes our Q4 earnings call. Thank you.

The conference has now concluded. Thank you for attending today’s presentation. You may all now disconnect.