Good morning, and welcome to TETRA Technologies Third 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.

Thank you, Marlise. Good morning, and thank you for joining TETRA's Third 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-Q that will be filed later today. I will now turn it over to Brady.

Thanks, Elijio, and good morning, everyone. Welcome to TETRA's third quarter 2022 earnings call. I'll summarize some highlights for the third quarter a current outlook as well as provide an update on our low carbon initiatives before turning it back to Elijio to discuss cash flow, the balance sheet, income taxes and liquidity. In the third quarter, we achieved some strong financial results but also some very key milestones with regards to the strategic direction of the company, which we communicated 21 months ago following the sale of our controlling interest in CSI Compressco. And when we introduced our strategy to leverage our core strengths around [indiscernible] to the evolving, rapidly growing low carbon energy technologies. Starting with our financial results, our total third quarter revenue and adjusted EBITDA were $135 million and 18.6 million respectively. Adjusting for our seasonal decrease in our Northern European industrial chemicals operation, revenue and EBITDA increased approximately 75.5% and 12% from the second quarter respectively. Adjusted EBITDA excluding unrealized losses on investments of the $0.5 million was 19.1 million for the quarter. Our results were led by energy services business which grew revenue 15% and EBITDA 33% quarter-on-quarter. A compelling data point on how well we have executed on our Water and Flowback multiyear strategy is that our annualized third quarter revenue for this segment equals the full year revenue in 2018 when the average frac crew count was 441, or 35%, above the third quarter of 2022. The segment also increased adjusted EBITDA margins from 15.1% in the second quarter to 17.4% in the third quarter. Both segments Water and Flowback services and completion fluids and products increase their EBITDA margins from the second quarter. With regards to our strategy, we executed exclusive technology agreements for recycling produced water from oil and gas…

Thank you, Brady. Adjusted EBITDA for the third quarter was $18.6 million in comparison to 18.7 million in the second quarter, but was up 24% from $15 million in the third quarter of last year. The third quarter included mark to market losses of $548,000. Without the mark to market losses adjusted EBITDA in the third quarter was $19.1 million. The second quarter included mark to market losses of $710,000. For those of you doing modeling, the fluid segment results include [Technical Difficulty] of mark to market gains from our holdings and standard lithium and carbon fleet, corporate and other includes the mark to market loss of $733,000 from our holdings in CSI Compressco. The third quarter included $2.7 billion of non-recurring charges and expenses. This compares to $4.7 million in the prior quarter. Cash from operating activities was $2.1 million. Capital expenditures net of cash proceeds from the sale of assets was $12 million, compared to $10.3 million in the second quarter. Free cash flow or cash from operating -- free cash flow and cash from operating activities in the capital expenditures was negative $9.8 million in the third quarter. We expect total year capital expenditures in the $40 million range, which includes prior noted investments in SandStorm’s with payback significantly better than 18 months, and in early production facilities in Argentina with strong margins. And with the expectation that the client vitals project back within a two-to-three-year period after the startup of those facilities. Working capital consumed $8.6 million in the third quarter compared to $4 million of cash generated in the second quarter. As we had mentioned in our prior call, we expected to build inventory for some significant deepwater international projects coming up in the fourth quarter and expect that third quarter free cash flow to…

Okay. Thanks, Elijio. In closing, our earnings from our base business continues to improve while the significant upside from our Arkansas resources and low carbon energy opportunities continue to become more defined. While the frack crude count isn't likely to materially change before 2023, we believe our North American land business can continue to increase EBITDA margins and capture more share. The global offshore completion fluids business is subject to longer cycle recovery. But we're pleased with the project awards we've been captured this year, and expect this market to continue growing at an even higher pace in the coming years. With deepwater projects providing significant upside to TETRA through our high value offerings for this market, including Neptune. With that, we'll open it up for some questions.

[Operator Instructions] Our first question comes from Stephen Gengaro from Stifel.

So a couple of things for me. The first is probably pretty straight forward. When you look at, I mean, the consensus has yet about 21 million in EBITDA in the fourth quarter. I know the quarter we just reported had some gains and stuff. How do you see the bridge in the two segments between the third and fourth quarter? Like how, what are the positives and negatives? I'm mean I understand seasonality, but how should we be thinking about the progression just for the fourth quarter?

A couple of items to consider, Stephen. One of them is we think that our onshore business water flow back will continue to do well and the EPS in Argentina will continue to do well. Brady mentioned that Eos made an announcement yesterday that to take advantage of some of the tax credits that they were pushing quite a bit of revenue originally scheduled in Q4 into 2023. That clearly will have an impact on us as it'll push some of our expected sales to them that were ramping up quite nicely from Q4 into 2023. So I expect, that one to be a bit of a headwind. Then I think we continue to see some inflation on raw material prices, but at the same time, we do have some nice big projects coming online overseas, especially in South America. So those are the items that I think you should take into account when considering the Q4 projections.

Okay. And when -- you mentioned EOS, is that a sequential drop or is it just not growth?

For the onshore?

For the Eos, you mentioned that they were pushing revenue after 2023.

Yes, that'll be a sequential decline.

And then the other maybe bigger picture question, as we sort of think about, free cash generation and you have these projects that you're evaluating and thinking about funding, how should we think about or how do you think about, CapEx versus need to generate free cash and reduce leverage in a world where sort of the world’s service peers are all basically have no debt and are starting to give cash back to shareholders? I know you're in a different spot because you have these significant growth opportunities, but how do you sort of balance those two?

We made some significant investment for early production facilities in Latin America this year. We don't expect that level of investment to occur in 2023 or likely 2024. Those are going to generate some very, very high margin returns. We also make quite a bit of investments on the SandStorms that our returns are very strong. We expect that CapEx next year will be below the $40 billion that we had this year. I mention the types of returns that we're seeing in the lithium business by others. They're incredibly strong. We're going to continue to generate free cash flow, pay down debt to have the capacity to either fund from cash on hand the initial bromine investment or to have capacity on a revolver to fund those investments. So at this point, generate as much free cash as we can, use it to fund the initial part of the bromine. Then we can evaluate the lithium second after that.

[Operator Instructions] We'll now hear a question from Tim Moore from EF Hutton.

Brady, you mentioned that the purchasing bromine at the spot market and continuous supply chain shortages. I'm just trying to wrap my head around maybe gross margin in the fourth quarter with that impact. And you may also provide an update on the Finland calcium chloride plant was disrupted. I mean, how far along is that to getting back to normalization? Or is that more of a spring 2023 time horizon?

Sure. So, regarding the bromine, you're probably well aware, we do have a long-term supply agreement to provide our bromine, because our business was so strong in the first half of this year. We will consume the supply volumes that we are committed to ahead of schedule, but frankly, and what that leaves us with in the fourth quarter, because we still have great opportunities as this market still in the early days of a recovery. We have to go to the spot market for bromine. Now that will affect our margins as Elijio indicated in the fourth quarter. But we see that as a onetime issue that will affect this in the fourth quarter, and certainly not as we go into 2023 is resumed back to our contractual supply and volumes from our existing contract. Again, the longer term, I think it points to why we are so focused on being able to develop the Arkansas resources, because that will give us a significant uplift in volumes of bromine to help us not only with our completion, fluids business, for future growth. but also for the energy storage side of things. On a [indiscernible] plant, we've continued to make progress. We've heard from the second quarter, which had a pretty significant impact to us from almost a complete disruption of supply due to the Russian Ukraine conflict. As we progress through the year, we're not 100%, back to 100% capacity yet, or full production, but we're probably 80%, 70 to 80%, of where we would like to be, and we're making progress, essentially each quarter. As we move forward to that, we're quite confident that we will be able to be full speed by our second quarter peak sales seasons that that we need to take advantage of.

Is there any update if you've shipped out any calcium chloride for that six month order that you received from the international lithium processor?

We continue to deliver, that's that was a fairly sizable order. So it was not all shipped at one time. And we continue to have monthly deliveries to meet that commitment. We'll have completed that order before the end of the year. And then we will reassess where orders stand for next year with this supplier and others that are potentially using this same process.

I'm glad you won that initial made an order. Just switching gears to your early production. Argentina facilities. We know that the first one was online for the full quarter. You mentioned on the call that the second one comes online and we bid next year. Can you give us a rough sense of maybe what the revenue potential is there on an annualized basis between the facilities when they're both running is it going to be 15 million to 20 million?

We have two units operational. They both came on line early July, and they operate essentially for the full quarter. That third one is expected to come online, either at the end of Q1 or the beginning of Q2. So that'll be the third one that we have out there. And the revenue is actually not as significant as we might want. But the margins are very strong given that they're a bit capital intensive. So it's more on the margin enhancement and the margin dollars that it's bringing, then the revenue associated with it.

And one other question I just had was, it might be too early to even comment on this. But I'm just wondering, as your customers, E&P folks begin to do their capital allocation budgets, which probably started last month. Is there any initial read or take on how much the spending increase could be next year, for E&P and CapEx? Given that, the strong oil prices and gas prices have held up so well this year?

Yes, we're expecting in the high to double digits to 10% level. And again, another way that we track that Tim is the frack companies, the service companies in terms of the frac fleets additions or bringing back into the market. And that's by our calculation, running close to that 10% level of additional frack crews. Right now, the market is constrained by available frack crews. We think that that will help next year in terms of increasing the overall E&P spend as growth opportunities for us in North America. As far as international goes, I think it's a little too early to tell. But clearly, the international markets, I think, will exceed that 10% growth, but will probably give you a much better picture in our next earnings call after the E&Ps announced their budgets.

Terrific. That's a great sneak peek, and thanks for that color. One other final question actually just came to mind. You mentioned the desalination, produce water pilot project with a CL operator. Do you think that could be commercially viable in the third quarter of next year?

Yes, this pilot is actually going to be completed within a 30-day window. And we've already tested the results, with our own pilot at our West Memphis facility. So we're very optimistic, we will achieve the results, it's really more of setting it up on location. The equipment operating in real time with this customers produced water. But after that 30-day trial, we have full expectations that we will be entering into a commercial contract. And we have a significant number of other customers wanting to get pilots of similar nature set up but we'd like to get this first one completed first, and then get a commercial arrangement in place and then move forward from there.

We now have a follow-up question from Stephen Gengaro from Stifel.

Thanks. So you mentioned in the press release earlier about your supply agreements and the bromine the needs to buy it on the spot market. I imagine that's driven by strong demand. Where are this year have you seen sort of the strongest demand that is maybe different than prior years that's driven you to this position? And how do you see that unfolding going forward as far as your contracted volumes versus kind of what you need in 2023?

Yes. Appropriate question, Stephen. I mean, we've had some very good awards this year. The Brazil market, we haven't seen really a lot of the benefits from it yet cause those awards are just and contracts are just getting started. But we've had to build inventory, well ahead of those contracts starting. At Gulf of Mexico we've had a great market wins this year as validated by the Kimberlite report. Again, we have to build product ahead of time before a lot of that activity starts. We've had some good wins in the, in the North Sea and, and even in the Middle East, where we've seen the offshore market in Saudi Arabia really pick up. So when you combine those four markets and what we've had to do getting inventory prepared for a lot of these ramp ups, that's where we've consumed our normal or ongoing supply agreement ahead of schedule. But we don't think we will see that type of pressure going into next year. But if we do that's great. That just means we have more demand. We will channel more of our completion fluids to the high margin opportunities such as Neptune and take advantage of that.

So when we, when we think about the impact of those contracts, and as you build inventory going into next year, should fluids margins with that and the pure flow, should fluids margins be creeping higher next year because of the calorie content of what you've built inventories for?

That to be the case, Stephen, we've not given guidance on next year yet. We'd like to make sure we understand the full EMP spend budgets and, but for the visibility that we have of our contracts, the awards that we've won this year, the Neptune opportunities, I would fully expect that.

Our next question comes from Martin Malloy from Johnson Rice. Please go ahead, Martin.

Good morning. Had two questions. The first is on EOS and their announcement yesterday. They also talked about retooling their factory to in preparation for the Z3, their next generation battery coming out. And I believe that was supposed to be commercially introduced and kind of impact more second half of ‘23. Could you maybe talk about your expectations for the sales of Pure Flow the next, first half of next year compared to second half?

Yes, I don't want to give too much color until Eos maybe has their call and gives more guidance as it relates to that. But obviously we've been working very closely with them, with their current technology as well as their E3. We believe the E3 will be from what we know, from a production process a much more streamlined, easier to ramp up type of technology, which will allow our electrolyte flow to grow even faster than what we were able to achieve with our current technology because it is a quite complicated, you know, battery technology that they've been producing up to this point. So we, the only thing we will be able to communicate in that is as they've announced, they've pushed a lot of their Q4 sales into next year. And we'll have to let them give you more color on how they plan to roll out their units for next year.

Okay. And then with respect to carbon free, can you maybe talk about the outlook there in for potential calcium chloride sales in light of the Inflation Reduction Act and some of the benefits for carbon capture that were in that?

Yes. We remain an active dialogue with a carbon free management team in terms of are they our own site selection, first customer, contract, capital race, and so on. And we remain enthused about the progress that they're making in their technology. We don't believe that they're going to represent a revenue opportunity for us. Best case very late 2023, but most likely 2024 and we believe that a lot of the funds available from the Inflation Reduction Act or the bipartisan bill are equally applicable to carbon free. But potentially also to us as we create correct production facilities that are dedicated to each of their carbon capture operations.

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 participation today. This will conclude our third quarter earnings call. Thank you.