Good morning and welcome to TETRA Technologies Third Quarter 2023 Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions]. Please also note that this event is being recorded today. I will now turn the conference over to Rigo Gonzalez, Manager of Corporate Finance and Investor Relations. Please go ahead.

Thank you, Joe. Good morning, and thank you for joining TETRA's third quarter 2023 results call. The speakers for today's call are Brady Murphy, Chief Executive Officer; and Elijio Serrano, Chief Financial Officer. I would like to remind you that this conference call may contain statements that are or may be deemed to be forward-looking, including projections, financial guidance, profitability and estimated earnings. 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're 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, returns on net capital employed 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 should be considered within the context of our complete financial results for the period. In addition to our press release announcement, we encourage you to also refer to our 10-Q that we filed yesterday as well. I will now turn it over to Brady.

Thanks, Rigo. Good morning, everyone, and welcome to TETRA's third quarter 2023 earnings call. Our third quarter delivered solid financial results in our base business with adjusted EBITDA of $26.1 million, the highest third quarter since the third quarter of 2015, while significantly advancing our strategic initiatives. Because of the second quarter seasonal peak in our Northern European Industrial Chemicals business, the underlying strength of our business is highlighted by our year-on-year growth and our progression from the first quarter. Year-on-year, we grew revenue 12% and adjusted EBITDA by 40%. Compared to the third quarter of 2023, we grew revenues 4% -- first quarter, sorry, of '23, we grew revenue 4% and adjusted EBITDA by 27%. Our 2023 year-to-date adjusted EBITDA of $83 million already well exceeds our full-year 2022 adjusted EBITDA of $78 million. As of the end of the third quarter, our trailing 12 months adjusted EBITDA was $103 million. Furthermore, as of September 2023, our trailing 12 months return on net capital employed or RONCE, a non-GAAP measure was 20.7%, highlighting our focus on driving returns above our cost of capital to enhance shareholder value. I'll provide additional color on our overall Q3 performance, but first, I'd like to highlight a historical milestone for the company. As a reminder, on June 26th of this year, TETRA announced that it had entered into a memorandum of understanding with an indirect wholly owned subsidiary of a Fortune 500 company for the purpose of pulling respective bromine mineral rights in Arkansas Smackover formation. This was done in support of an application for a 6,138 acre brine production unit with the Arkansas Oil and Gas Commission, or AOGC, for the purpose of bromine and lithium extraction from the brine. In September, the unit application was unanimously approved by the AOGC giving…

Thank you, Brady. Completion Fluids & Products segment revenue was $73 million, representing an increase of 24% year-on-year. Sequentially, revenue decreased $25 million reflecting the seasonal decline in our Northern Europe industrial calcium chloride business in addition to two large deepwater projects that we expected in the third quarter that did not materialize. Adjusted EBITDA margins, excluding unrealized losses on investments was 30.2% and our second consecutive quarter above 30% without the benefit of any large CS Neptune projects. These margins reflect a vertically integrated business model that we have that has significant leverage to higher volumes. The value of our long-term supply agreements that protect us during inflationary periods and our strong market positions that allow us to pass along price increases. We have not yet seen a ramp-up in activity for our PureFlow long-duration battery storage electrolyte light [ph]. Our main customer for PureFlow recently received a conditional award for a Department of Energy alone that is expected to support them as they ramp up production in 2024. In the meantime, all available zinc bromide fluids are being directed towards high-pressure deepwater wells. Water & Flowback Services revenue improved 3% year-on-year and was flat sequentially despite the pullback in the U.S. onshore drilling and completion activity. Adjusted EBITDA margins improved by 13% year-on-year and by 4% quarter-on-quarter. Adjusted EBITDA margins further improved by 60 basis points from 18.4% in the second quarter to 19% in the third quarter of 2023, which is the highest adjusted EBITDA margin, since the fourth quarter of 2018 and is consistent with the goals we set earlier this year. We remain focused on operational efficiencies, margin expansion and returns on capital. In October, we sold one of the three early production facilities in Argentina to the operator for an amount between $5 million…

Thank you, Elijio. I think we'll open up for Q&A, and then we'll have some closing comments.

We will now begin the question-and-answer session. [Operator Instructions]. And our first question will come from Martin Malloy with Johnson Rice. Please go ahead.

Good morning.

Good morning, Martin.

My first question is on the deepwater activity outlook. And could you give us some perspective maybe basin-by-basin, North Sea, Gulf of Mexico, Brazil in terms of your thoughts on '24 outlook and maybe Neptune -- the number of Neptune projects?

Sure. So it's a little early for 2024 until we see customers' budgets that we expect to see over the coming months. But in general, we feel very good about our position in the key markets that -- where we expect to see growth, Brazil, certainly being one of them. North Sea, obviously, a second one for us and in Gulf of Mexico. We expect to see growth in each of those -- in those markets and our market position, we think is strong in each of those markets to benefit from that growth. But in terms of specific numbers at this point, it's a little premature for us to talk about that. We're really excited about the -- now pretty much quarter-on-quarter, we're seeing CS Neptune jobs in the North Sea. And again, as a reminder, those jobs are typically a bit -- they are quite a bit smaller, medium to smaller size jobs compared to the big deepwater Gulf of Mexico jobs. But we are tracking several projects that we expect to materialize in 2024 for Neptune, obviously, both in the North Sea on a continuous basis and also in the Gulf of Mexico.

And Martin, I'll also remind everybody, we made three key investments at the end of last year and early this year. We expanded our storage and blending capacity in the Gulf of Mexico and in Brazil. And then we picked up a tuck-in acquisitions in the North Sea. We've also positioned inventory into each of those key markets. So I would suggest that we prepare ourselves to take advantage of the ramp-up in deepwater activity.

Great. And then for my follow-up, I wanted to ask about the desalinization technology that you have. And I think I heard you say that with this first customer, there could be multiple basins involved. I was wondering if you could maybe give us some additional color in terms of the level of customer interest here?

Sure. Yes. I mean, it's a tremendous customer interest. We have been partnering with a major U.S. North America shale producer as we've gone down this journey. As we've mentioned before, we have two different solutions, one for what we call low salinity produced water, and then one for high salinity, which the lower TDS water, Salinity waters is with our high rank partnership with our proprietary pretreatment solution. And then for the higher salinities such as the Permian Basin, which is obviously a larger overall market with our KMX relationship, again with our pretreatment proprietary solution. So the engineering on both of those is progressing very well. We're still on target to either have it wrapped up by end of the year or potentially bleed into the first part of 2024, but this is very important for us to get this right. But we have a very supportive customer that is working with us and the regulatory authorities making very good progress on getting the regulatory authorities to not only create beneficial reuse water, but be able to use it in various applications in both the Permian Basin and as I mentioned, and in South Texas project.

Thank you. I'll turn it back.

And our next question will come from Stephen Gengaro with Stifel. Please go ahead.

Thanks. Good morning everybody. I think a couple of things. One is, Elijio, you talked about the -- I think it's a couple of jobs that sort of didn't show up in the quarter that you had expected. When we think about the fourth quarter, how should we think about progression and one or two of those jobs positively impact the fourth quarter?

Yes. So Stephen, we tried to highlight in our comments, as deepwater jobs become a bigger and bigger portion of our revenue, we are going to see some quarter-to-quarter fluctuation. As I mentioned, we did 15 deepwater completions in the Gulf of Mexico in our record setting Q2 and nine in Q3. That mean, the rig count hasn't changed. The amount of activity hasn't changed. It's really more of a scheduling issue. And remember, these deepwater jobs are worth 5x to 10x more revenue to TETRA than a non-deepwater job. So they move the needle in terms of the number of jobs that get executed. We did have one job that was very unique that was actually canceled because of the dry hole, which is very rare as you probably know, in a development campaign. Unfortunately, that well is not going to come back. But that's a pretty rare example of when a job would get canceled. When we think about the fourth quarter, I would think of it in terms of -- right now, I think we're going to be closer to kind of the Q3 activity levels that we saw in terms of overall deepwater completion activity relative to the record set in Q2. But again, that's why we feel -- you really need to look at TETRA's business over a longer horizon now because of the timing of these deepwater jobs. That is starting to include Brazil. It's going to start to include more deepwater jobs in the Eastern Hemisphere as well.

Okay. Great, thanks. And when we think about the water side, I mean, it was impressive that your performance was as good as it was, given what's going on in the U.S. land with a little bit of a, we think a short-term log activity. But when you think about that business, and it's hard for us to sort of separate out the impact of what you're doing now in Argentina, can you give us a sense for sort of how much of that business is U.S. land? And maybe a couple of the -- do you think that the outperformance relative to U.S. land activity levels is sustainable?

The Argentina business is in the mid-$20 million a year revenue range with three early production facilities. Q4 is clearly going to be different because we're selling, it's a one-off opportunity, the early production facility. And the operating fee on a monthly basis to continue to operate the facility will decline. But the vast majority of our business is U.S. shale plays, highly concentrated in the Permian Basin, where we think we've got a strong presence and with the SandStorm Technology and the water chemistry that we're using on the water side. We think those have represented competitive advantages and that we have been able to gain market share without deteriorating pricing is evident from the margin improvement that we've seen.

Got it. Thanks. And if you don't mind one more for me. When we think about the strength in your Fluids business, obviously, we talked about the deepwater side. And when you think about raw material supply demand, usage of bromine, the potential ramp in PureFlow in 2024 and then sort of the development of the bromine opportunities, how should we triangulate all that around your supply, your margins and maybe the CapEx needs you may have in '24?

Yes, so Stephen, as you know, we have a long-term supply agreement with one of the producers in Arkansas. But our demand well exceeds that contract, we have been fortunate to get spot bromine prices that have been fairly attractive this year relative to prior year. Some of that is just driven by the kind of the global bromine market, which because of China's economy being down, et cetera, those prices have come down and there's more material available. But we expect that to be a fairly short-lived window for us to be able to acquire the volumes at the pricing that we need for bromine, which again is another reason why by 2026, we really want to have our own supply coming online to keep pace with our oil and gas business as well as the projections from Eos.

Got it, great. Thank you for the color.

Sure, thanks Stephen.

And our next question will come from Tim Moore with EF Hutton. Please go ahead.

Thanks and congratulations on the hearing outcome last month. It's also nice to see -- yes. I mean, it was great. I was watching that online. It was nice to see the multiyear multi-well Gulf of Mexico contract extension. And I really appreciated Elijio's crystal clear comments about having enough liquidity to provide equity dilution because I'm sure a couple of investors were thinking about that a year ago, but it's very clear now you don't have to issue equity. So I just want to follow-up on one update that Elijio had already mentioned, about the buyout of the one Argentina early production facility. Just out of curiosity, and if you look back the last nine months or so, how were the EBITDA contributions or even the past year from the facilities compared to maybe what you expected? And when do you think next year, another one or two could come online? Would it be next summer or next fall?

So the EBITDA contributions are significantly higher in our base water management and flowback business because they're more capital intensive. And obviously, we're only making the investment to achieve a return on capital. Now after the first two, we communicated to the market that we will continue to build and operate early production facilities, but we were not going to fund the CapEx on behalf of the customers. We believe that our CapEx will be better served by directing it to our investments in Arkansas that we think have a significantly longer tail to it. We expect that by maybe the back end of next year, we could add a fourth EPF because remember, even though we sold this early production facility, we will continue to operate on behalf of the customer. We just won't get the income associated with the capital invested, but we will continue to get income associated with people and maintenance of that facility. So we're dropping to two owned EPF and one client-owned EPF that we're providing people and equipment, and we'll probably add another one late next year or the year after that.

Great. That makes a lot of sense, Elijio. And maybe what would be helpful is -- I don't want to put any words in your mouth, Brady gave some comments maybe on a little bit of a timeline for this. But if we're switching gears maybe to the bromine and lithium carbonate equivalent development projects, you're making a lot of progress there. There'll be the FEED study completed soon and then the preliminary economic assessment. When do you think -- maybe you can just talk us through kind of the milestones and rough timing, when you think maybe if everything goes well and contracts are signed, could you start building some of the infrastructure December next year?

Well, we certainly feel the construction will start well before that, Tim. So timing wise, the way we see things playing out. First, now that our binding terms of our MOU go into effect with the unit approval, we are in negotiations with our partner for the joint venture operating agreements, responsibilities, et cetera, between the partners. That's a critical issue. We like to think we can have that done if not by the end of the year or early in 2024. In the next couple of weeks, we expect to have our resource report completed. Again, that will quantify the amount of bromine and lithium in our Evergreen unit, which will be an important milestone. The FEED study, we're anticipating to have completed for lithium within plus/minus 10% from a detailed engineering in the first quarter. And then from that time point, obviously, we'll be working with our respective Boards, both our Board and our JV partner's Board's for an FID decision point. But in parallel to all of that, we're looking at all the long lead items that we would need to account for, if we were to start early on this project and understand what those long lead items would look like. Obviously, we've not made any decision on investment on those long lead items, but we're going to be taking a careful and close look at that as we finish up the year as well. So that's kind of the timing of things. But we would certainly be thinking about starting construction well before second half of 2024.

And Tim, our shareholder base is not -- does not have a mining background or a large construction background. So I think it's important to keep reiterating the process and the steps of what we've achieved to get there. We want to make a decision with as much data to manage the risk of such projects. And again, just to make sure that everybody is on board, a quick recap is last year, we published a preliminary economic assessment on the bromine project and that was after drilling one test well, and we laid out in our investor presentation the expected economics on bromine by itself. This year, we've just now completed the second test well. And from there, we're going to be able to move from inferred resources, which is the least defined category. And shortly, we'll publish measured and indicated volumes of bromine and lithium. And then from there, we can evolve it to move toward the economic assessment on the lithium side once we complete the engineering study. So there's a series of methodical steps and gates we're going through to get to a final investment decision, and we're going to stick to that discipline to make sure that we manage the risk and fully outline everything that's required to get this done. Now as part of that, we expect that between last year and this year, we will have spent $19 million of cash to do that, some of which we've shared with our joint venture partner. But the cash flow number that I talked about earlier are after spending $19 million over the last couple of years, which tells you how strong the base business is performing, setting us up to invest in Arkansas.

Great. Well, Brady and Elijio, that was very helpful color and the details and the timing of everything. I just had one more question since my desalination question already got asked. One question that I had was just maybe jumping ahead on bromine-related products, that seems like if things go well, that production will probably come on a little bit before lithium. How far in advance would you start having discussions with potential customers to maybe offtake supply tied to those prime leases in bromine? Would that start next summer? Or do you have to wait more until you have things in place?

Yes. Tim, I think we're well ahead of you on your projected timelines for some of this stuff because clearly, Eos, we see as a key offtake provider, and we're having great discussions with them in terms of meeting their new Z3 ramp-up battery demand. So that's one for sure. We have another PureFlow customer that we're in discussions with, that we've not announced publicly. So that's part of this demand requirement for bromine. But on the oil and gas side, we are also having some kind of longer-term offtake discussions as well because we've never had our own bromine supply. These are new discussions for us but now that we'll be completely integrated from the bromine supply all the way to the end products, these are discussions that are pretty meaningful for us with -- on the oilfield services side as well.

That's terrific. I always like it when companies exceed my own expected timeline [indiscernible]. That's great to hear. And that's my questions.

Thanks, Tim.

[Operator Instructions] Our next question will come from Stephen Gengaro with Stifel. Please go ahead.

Thanks. Two follow-ups for me. In the last couple of quarters, and I know there were some circumstances you guided and I was wondering if you had a view of the current consensus, which is around $27 million in EBITDA for the fourth quarter?

Yes. So Brady mentioned earlier that on the water flowback side, we believe that we can stay approximately at the levels that we're at, assuming that there's no material pullback at the end of the year that we've seen historically, even though the last couple of years, we're not there. The fourth quarter is really going to depend on timing of some of the big projects that we have anticipated, whether they straddle Q4 and Q1 is to be seen. And it's hard to predict with some of the big projects that we have out there.

Got it. That makes sense. And then just a final one for me is when -- you've reduced leverage a lot, and I know there's differences clearly in the business models. But a lot of the, at least, oil service peers have been ultra-focused on free cash flow generation and returning capital. I understand you guys have a use for that capital as far as investment. But when you think about free cash generation, is there a measure we should use when we think about free cash flow conversion relative to EBITDA? Or any kind of guidelines you could put around how you think about free cash generation on an annual basis as I look out to next year?

Yes. I would suggest, Stephen, that in 2022 and 2023, those were significant investment period for us, especially on the onshore site. We were building up capacity in the Permian Basin. We built three EPF in Argentina. And then on the fluid side, we expanded blending and storage capacity in Argentina -- I mean, sorry, in Brazil. We did that in the Gulf of Mexico, and then we did a small tuck-in acquisition in the North Sea. I would suggest that the last two years were heavy investment periods. We're going to pull back on those to accelerate free cash flow to direct toward the bromine and lithium assets in Arkansas. I would expect that in the coming years, free cash flow will be in the $40 million range from the base business to help us invest in Arkansas without diluting shareholders.

Excellent. Thanks for the color.

Thank you, Stephen.

And this concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Murphy for any closing remarks.

Well, thank you. In closing, we're very pleased with our third quarter results as the best EBITDA third quarter that we've had in eight years since 2015. And I'm very, very pleased with where our two businesses stand, Water & Flowback as well as our Completion Fluids & Products heading into 2024. And clearly, very pleased with the major milestones that we continue to achieve and the strategic opportunities that the company has and the partnerships that we're developing along the way. So we'll keep you posted. But thank you all very much for your participation today.

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