Good morning, and welcome to TETRA Technologies First Quarter 2021 Results Conference Call. Speakers for today's call are Brady Murphy, Chief Executive Officer; and Elijio Serrano, Chief Financial Officer. [Operator Instructions]. I will now turn the conference over to Mr. Serrano. Please go ahead.

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 analysis made by TETRA and are based on a number of factors. These statements are subject to a number of risk 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.

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 underway. 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 & 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…

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 deconsolidated -- 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 carry forward that will allow us to offset future U.S. pretax 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…

[Operator Instructions]. And the first question will come from Stephen Gengaro with Stifel.

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?

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.

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?

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.

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?

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.

Got it. And then, one final one from me is just the balance sheet, you're -- 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?

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.

[Operator Instructions]. The next question will come from Samantha Hoh with Evercore ISI.

Samantha, we might have you on mute.

Sorry about that. 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.

Sure. 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?

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.

Okay. 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?

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.

Okay. 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?

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 will -- should be operational anytime now. But yeah, 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 in -- 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.

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?

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.

Okay, I'll take a look at it.

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

Thanks. So just 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?

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.

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.

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 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.

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.

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.

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