TTI (2019 - Q4)

Good morning and welcome to TETRA Technologies Fourth Quarter and Full Year 2019 Results Conference Call. The speakers for today's call are Brady M. Murphy, Chief Executive Officer; Elijio Serrano, Chief Financial Officer; and Jacek Mucha, Vice President of Finance and Treasurer. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Mucha. Please go ahead. Jacek Mu

Thank you, Brandon. Today's conference call may contain certain statements that are or may be deemed to be forward-looking statements. 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 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 net debt, free cash flow, adjusted EBITDA, adjusted EBITDA margin, adjusted profit before tax or adjusted earnings per share, backlog liquidity, coverage ratio or other non-GAAP financial measures. Please refer to this morning's news release or to our public website for reconciliation 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. I will now turn this over to Brady.

Thank you, Jacek. Good morning, everyone. Welcome to the TETRA Technologies fourth quarter and full year 2019 results conference call. I will summarize some highlights for the quarter and the full year and then turn it over to Elijio for some additional financial and operational details, which in turn we'll open it up for questions. First, I'd like to start by thanking all the TETRA and CSI Compressco employees for delivering a very strong quarter while navigating a challenging energy services market, particularly in the businesses that are heavily leveraged to U.S. land exposure. In the U.S., the fourth quarter of 2019 saw the land rig count decline approximately 25% year-on-year, and many of our customers implemented a disciplined approach to capital spending with a focus on cash flows. Although, our Water and Flowback revenues declined 20% from Q3 and in line with market activity, we managed to have our best quarterly financial performance in over four years in terms of adjusted EBITDA. These strong financial results were driven by our CS Neptune project in the Gulf of Mexico, a near record adjusted EBITDA from CSI Compressco, and the diversity of our business portfolio with exposure to offshore, international and a strong industrial chemicals market. I'm especially pleased with our strategies to leverage our vertically integrated business model and to differentiate either through technology as in the case of CS Neptune, or our latest sand separation solution, or through our service delivery strategy of automation and integrated water management were very evident in our strong fourth quarter results. We achieved a consolidated $55 million adjusted EBITDA quarter on $259 million of revenue. The adjusted EBITDA was 18% higher than in the third quarter and the highest results since the third quarter of 2015. Completion fluids continue to benefit from improved activity in key offshore markets, and in the fourth quarter benefited from our CS Neptune project in the Gulf of Mexico. Completion fluid products adjusted EBITDA margins for the quarter were 35.2%, and was a third quarter in a row for this segment to generate non-Neptune adjusted EBITDA margins over 20%. The industrial chemicals business within completion fluids and products remained strong and helps offset some of the volatility in North America land business. We continue to grow our international offshore business with the award of three major projects in Asia Pacific, West Africa and Brazil that are scheduled for completion in 2020. These markets are good growth opportunities for us. We're also seeing the benefits of our completion fluids products in North America from our long-term raw material supply agreements, which we announced in December of last year that is helping us to reduce costs at several of our chemical production plants. Although the number of deepwater -- customer deepwater well completions with reservoir pressures that fall into the CS Neptune density range, reached a 20-year low in 2019, we are seeing a growing pipeline of customer deepwater projects where we believe CS Neptune is the best solution. We're currently in various stages of testing and qualifying CS Neptune for seven different customer projects in multiple markets. We have a high degree of confidence that we will be awarded Neptune work in the Gulf of Mexico and then Eastern Hemisphere in 2020. However, the timing of awards and well completions for specific wells is not yet determined. Our Water and Flowback business is heavily levered into the U.S. onshore completions market, likely the most difficult market across the energy services sector in today's environment. We've seen some pricing pressure that began at the end of the third quarter and continued into the fourth quarter, as well as the reduction in the overall completion activity. Our adjusted EBITDA for this division was $5.6 million, a decline of $5.6 million from the third quarter on $15.5 million of less revenue. Adjusted EBITDA margins were 9.8%. We continue to focus on integrated projects using our automation capabilities by driving efficiencies into our operations and to provide our customers with a fully integrated water management solution. During the quarter, we peaked at 28 integrated projects with 20 different customers, up from 20 projects and 13 customers in the third quarter. Our BlueLinx automation control was deployed on 20 of these projects as we demonstrate to the customer base the advantages of this capability. We previously announced the introduction of our latest sand separation technology, which we have branded a SandStorm. During a major operator trial in the fourth quarter, SandStorm achieved greater than 95% sand removal efficiency, compared to more traditional sand cyclones of around 50%. Upon completion of the trials, we were merely awarded a large service project in the Permian Basin, which we’re now deploying in the current quarter. Since that award, we're currently negotiating an additional volume with that same customer and have penetrated three other shale plays in North America with the SandStorm solution. We also deployed more test separator units in Argentina, on our first Latin America contract for this type of equipment. While we expect the E&P operator budgets to be challenged through 2020 with an expected 10% to 15% drop year-over-year, we continue to invest in technology and automation that will help us achieve our longer term objectives. We've also launched several key initiatives to right size this business by scaling back non-profitable operations and adjusting our cost structure to nimbly respond to the changing market outlook for this business. The compression business yet again performed extremely well, benefiting from continued trend of improved utilization for centralized gas listed as a cost effective and efficient means to drive liquids production, which drives demand for high horsepower equipment. While customer drilling activity and new well capital expenditures are expected to decrease in 2020, we see applications continue to grow with our key customers in our core basins. Our adjusted EBITDA of $32.6 million was a sequential improvement of $1.3 million from third quarter, and only $200,000 less than our record high of $32.8 million accomplished in the second quarter of 2019. Our compression services gross margin slightly declined to 51.6% from a record high of 53.2% last quarter, due to increased labor and parts from weather-related outages. Utilization of our compression services fleet was 90%, second quarter in the row in the 90%-plus range. The overall fundamentals for the compression business have not changed and this segment remains one of the strongest in the oil and gas industry. However, we expect a slower pace of growth from the past two years, which is reflected in our guidance we gave yesterday on the CSI Compressco earnings call. We expect the first quarter of 2020 for our compression business to be much softer than the fourth quarter of 2019, but primarily due to decreased equipment sales and aftermarket activities, which typically has a slow start to the year. Our revenue for the fourth quarter increased sequentially to $124 million from $114 million as each product line within the Compressions segment improved its top-line. In particular, we had a very strong finish in our aftermarket businesses as the demand from our core customers remain strong. Given the timing of shipments and consistent with our expectations mentioned on our last earnings call, we ended the quarter with new equipment sales of $34.3 million, which were higher sequentially by $5.9 million. However, fourth quarter awards for new equipment sales were only $4 million, leaving our backlog as of December 31, 2019 at $36 million. We’ll continue to see a healthy pipeline of new unit sales opportunities, but we have seen several large projects that were expected to be awarded in the fourth quarter 2019 pushed out with the late awards. We still expect to receive those large orders, but not likely until the second half of 2020. We added over 26,200 active horsepower this quarter and ended the quarter with a total active horsepower of 1,059,590. Utilization for the 1,000 and higher horsepower equipment was 97.9% as of the end of December, up 50 basis points from the end of September 2019. So in summary, we had a very strong quarter in a challenging environment and we believe in the strong fundamentals behind each of our businesses. We will continue to stay the course on the strategies that we have highlighted and our employees continue to rise to the challenge including a strong commitment to excellence and year-over-year improvement in our safety performance. With that, I'll turn it over to Elijio to provide some financial comments on cash flow and the balance sheet. And then, we'll open it up for questions.

Thank you, Brady. In the fourth quarter, TETRA-only generated free cash flow from continuing operations of a $1 million. Our free cash flow from continuing operations was below our expectations as some key receivables, including full payment from the large CS Neptune project was received in early January. This receipt in January will positively impact first quarter 2020 cash flow. Over the last 2 years due to the timing of payments, the first quarter has been a significant use of cash. Last year, we consumed $35 million of cash in the first quarter. This year, we expect first quarter TETRA-only free cash flow to be more than $25 million better than a year ago, reflecting the timing of collections in early January. For the full year TETRA-only free cash flow from continuing operations was a use of cash of $21 million, significantly below our expectations due to the timing of the aforementioned, key collections that slipped into January. And as a reminder, in 2019, TETRA funded almost $15 million of equipment purchases on behalf of CSI Compressco to meet key client demand. For TETRA-only, full year 2019 capital expenditures were $47 million, inclusive of the $15 million of equipment we agreed to buy at lease to CSI Compressco. For 2020, we expect TETRA-only capital expenditures to be between $20 million and $30 million, almost a 50% reduction from 2019. TETRA-only net debt at the end of June was $189 million with cash on hand of $15 million. Our debt structure does not include any significant maintenance covenant, which allows us the flexibility to maneuver through volatility in the market. I’d also like to again remind everyone that TETRA and CSI Compressco’s debt are distinct and separate. There are no cross defaults, nor cross collateral on the debt between TETRA and CSI Compressco. CSI Compressco's net leverage ratio at the end of December was 5.1 times. In annualizing our fourth quarter adjusted EBITDA, CSI Compressco to net leverage ratio would have been approximately 4.6 times, well on our way toward the 4.5 times target that we’ve been communicating. From a high of 7 times at the end of the second quarter of 2018, CSI Compressco's net leverage has improved significantly, given our capital discipline policy of not allowing for additional debt to fund growth capital requirements and reflecting the 20% return on capital we're obtaining with our investments. We will continue to improve our leverage ratio as we navigate through 2020. Yesterday morning, CSI Compressco released its 2020 revenue, adjusted EBITDA, capital expenditures and other key financial metrics for guidance. 2020 revenue is estimated to be between $430 million and $460 million with adjusted EBITDA to be between $125 million and $140 million which includes the noncash cost of compressors sold. The compression business has been one of the least effective businesses in the broader U.S. land oil and gas market, which has experienced volatility in the recent quarters. While we have seen some slow down, it’s been minimal and we are very encouraged for this business heading into 2020. At the midpoint of CSI Compressco’s full year 2020 adjusted EBITDA guidance and for accounting for cash interest expense, maintenance capital expenditures, and cash taxes, CSI Compressco expects to generate approximately $56 million of free cash flow. We expect to use between $20 million and $25 million of that distributable cash flow to find growth capital for our core customers at strong rates with 20% return on invested capital target, and we expect to use the remaining to reduce outstanding debt. When comparing 2019 to 2020 for CSI Compressco when taking the midpoint of guidance into account, we will be reducing growth capital expenditures from $47.8 billion to $22.5 million. We’ll be reducing the amount of horsepower we're adding to the fleet from 98,500 in 2019 to slightly under 30,000 horsepower in 2020. The $48 million of growth capital we added in 2019 excludes $15 million that was funded by TETRA. Out of the 29,900 horsepower that we expect to very 2020, only 10,600 is currently on order. We are being very diligent and committed to capital investments and will maintain our 20% return thresholds in our only ordering equipment on the back of customer commitment. I encourage you to read our news release on this morning and CSI Compressco’s release from yesterday for all the supporting details and additional financial and operational metrics. With that, I'll return it to Brady.

Okay. We'll open it up to questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Stephen Gengaro with Stifel.

I guess two things I would sort of just start with. Can you comment at all on the first quarter EBITDA consensus of around $41 million? Maybe the puts and takes that we should be looking at as we -- in 1Q versus 4Q?

Let me give you a few data points as you build out your model, Stephen. The fourth quarter had a really strong impact for the Neptune project. Brady also mentioned that we ended the year with some solid international offshore completion fluid projects. We don't expect that those will carry over to that extend in Q1. But Brady also mentioned that we picked up some projects that we benefit the total year. So, sequentially, expect that the fluid business will be down reflecting Neptune. We think that the onshore market ended the year slightly better than what we were expecting. The ramp down was not as bad as we had anticipated, and therefore the ramp-up is not having to be as aggressive. So, expect those to the flat to up modestly. And then, on the compression side, we had some big equipment sales that occurred into the year. We had a very large aftermarket services projects that also will not repeat. The fleet performance will continue to steadily increase, given that we're deploying more capital -- more equipment into that sector and getting good pricing. But, we will see a sequential decline Q4 to Q1 due to the new equipment sales in aftermarket services. The one positive that I’ll highlight that I think we are going to be very pleased with is first quarter free cash flow. I mentioned that last year we consumed over $30 million of free cash flow; the year before that it was somewhere in the same range. We expect that to be significantly better this year, given a lot of the receivables have slipped into the first week in January. So, I hope that gives you a little bit of color as you try to lay out your progression of the businesses.

Yes. Thank you. And when -- we can look back historically, we can get -- you can obviously clearly see the quarters where you have CS Neptune jobs. Are there any plan right now for 2020?

So, Stephen, we mentioned that we're in discussions, qualification and testing for 7 different projects. These are longer term projects. We have a high degree of confidence that we will be awarded some work in 2020. But, we really don't have a definitive time for the specific wells and dates that we could speak to at this point.

And I will mention, Stephen that even without Neptune, we've been hitting some very solid 20% plus EBITDA margins on the fluid side, the vertical integration or long-term supply agreement, the ramp up of activity internationally. That core business is holding up incredibly well in this market.

So, you mentioned a number, so I'll ask around it. But that 20% plus level is a reasonable gauge if we exclude Neptune and we exclude the second quarter European chemicals business. Is that fair?

Yes. That's fair, Stephen. Correct.

Our next question comes from Praveen Narra with Raymond James.

I guess, I wanted to follow-up on the pipeline for the CS Neptune projects. Can you kind of talk us through on the seven, how we should think about the timeline? Are they mostly 2020 -- when you say long-term, are they mostly 2021 and out? And then, also, are these projects that are being worked on through the Halliburton alliance, or are these separate from that?

Yes. Okay, Praveen. So, of the seven, currently, three of them would be through our -- Halliburton has the contract and it would be through their integrated project activity that they have. The other four currently, we are in direct contact with the operators for the testing that is ongoing. It doesn't mean when the potential award comes that it wouldn't be through Halliburton or perhaps one of the other service providers. But we are engaged directly with the operator to qualify CS Neptune on the other four. Of those seven, about -- you can think of it as half Gulf of Mexico and the other half eastern hemisphere in terms of the split.

Okay, great. And then, when I think about -- you guys mentioned the softness in Water and Flowback Services for at least the first half. How are you guys thinking about managing costs according to that? Are you guys collecting down? Are you guys holding for potential second half improvement?

Yes. So, if you look at the progression of our water business through 2019, we were still clipping along very well through the third quarter. Obviously, by the end of the third quarter, we started to see the activity decline. We started taking cost measures at the beginning of the fourth quarter. But, we were a little bit through October before we were able to get a lot of the cost out. So our actual November December results, we were fairly encouraged with, but we did have some costs in October that impacted our overall quarter. Now, as we head into 2020, we're seeing a little -- mainly flattish activity at this point from Q4 activity levels. But, we do expect the second half of the year to improve, at least under today's environment, which is difficult to predict. But, we do expect the second half to improve from where we are today.

Our next question comes from Ryan Pfingst with B. Riley FBR.

Just a follow-up on Water and Flowback. I know you're expecting a challenge in the first half. But I just wanted to ask where you think you can get your margins back up to by midyear, maybe it picked up a little bit?

So, Ryan, this is the challenge that we have is trying to predict customer spending level. It remains depressed. You've got competition out there trying to keep their crews active and putting pressure on the market. So, we're trying to differentiate ourselves and Brady mentioned several of our technology initiatives, whether it's our automation on the pump side, whether it's our integrated business model, or the SandStorm that we're introducing, those will try to differentiate ourselves and try to protect us a bit from competition with really generic product offerings. We are trying to hold our EBITDA margins in the low-double-digits. But I think in the first half of the year, we're going to be high-single-digits right, 8%, 9%, 10%. But in the back half of the year with our technology gains traction, we think we can push it up to the mid-teens again.

And then, on SandStorm, I know it's a new technology that you've just introduced, but will that business have similar margins to the base border business or maybe, a little bit better?

Our margins on that particular technology will certainly be additive to our current base business. We're getting reasonably very good pricing on our SandStorm technology. And as we deploy more and more of those kits to replace the -- either our existing sand cyclones or our competitors’, in the case where we gain share, that should be beneficial to our margins.

[Operator Instructions] Our next question is a follow-up from Stephen Gengaro with Stifel.

I guess, two more quick ones, gentlemen. The first, the cost savings initiatives you talked about recently, how are they progressing?

Repeat the question, Stephen, the cost one.

I'm sorry. The cost savings initiatives. I think you talked about $8 million to $10 million of cost savings that you're expecting.

Right. So, we issued a press release at the end of last year outlining several initiatives, including a write-down of our El Dorado facility. We have continued to very aggressively pull cost out of the system. We’re focused on those areas that [technical difficulty] pressure out there, such as the Northeast in the Mid-con market. But, our field organization automatically adjusts week-to-week, based on the activity level. Then, at the corporate level, between Brady, I and our Executive VP, we didn’t start taking structural changes. And part of the $8 million to $10 million that we referenced last year were those kind of structural changes to pull out? I would suggest that we're more than halfway towards implementing all those cost initiatives.

And then, just -- I know this question comes up a lot, but I’ll ask it anyway. When you think about the corporate structure and the product lines and some of the -- basically just the way the TETRA’s now organized, are there product lines that you like to add, you'd like to get rid off and clean up the structure? Where do you stand on that whole thought process as it pertains to sort of shareholder value and debt levels, et cetera?

I'll start off and then I'll let Brady add incremental color to it. I think, we and the Board have demonstrated that whatever actions we need to take to create shareholder value, to create an entity that can generate consistent free cash flow and get better, more predictable margins, we’re willing to take it. We did that with the disposal, our off-road [ph] decommissioning business, we did this with the investments and the acquisition of the SwiftWater and the GRGO [ph] businesses that we did to strengthen our Water and Flowback testing business. And at this point, we will continue to evaluate all our segments. If we believe that there's an opportunity to enhance shareholder value, simplify the structure, we will not be shy about launching those initiatives.

Yes. I don't have much to add to that. I will say, we do like the business segments that we're in. Our water business in North America we believe is fundamentally sound long-terms, particularly as we introduce new technologies and focus on the produced water side of the business. And that ties in very well from a technology standpoint to our capabilities on the completion fluid side. And of course, the compression business still is very strong for us right now. But as Elijio said, we will continue to discuss with the Board, what are the appropriate strategies for us to either divest or acquire as we look forward.

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

Thank you. So, I'd like to just reiterate a couple of key messages to leave you with for our fourth quarter and full year. First, we talked about the Gulf of Mexico Neptune completion project that aided our already strong results, generating EBITDA margins of over 35% for our completion fluids products segment. Even without Neptune, that segment produced to EBITDA margins above 20% for the third straight quarter, and we expect that to continue. Second, we continue to see the U.S. land market as a challenging market, facing some pricing pressures and lower operating budgets in 2020. But, we're committed to investments in technology to differentiate our businesses and right size our cost structure. We see our U.S. land leverage businesses decline some in the fourth quarter and expect the challenging start of the year but we do feel good about the long-term capabilities of this business and our resilience. And third, our compression division continues to achieve operational and financial record highs and hitting the key financial metrics we've laid out for them. Despite the weaknesses of the broader oil and gas industry, this business continues to stay strong. While some slowdown in equipment sales are likely, we still project our adjusted EBITDA to increase year-over-year in 2020, assuming the midpoint of our guidance as we've laid out. Lastly, while we were somewhat disappointed to the year-end and our generating negative cash flow, it is only due to timing of some key receivables. We remain very focused on cash flow generation going into 2020 and expect to generate considerable cash flow in the full year. Thank you very much for participating on our call. That will end our call today.

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