Tetra Technologies Inc Q3 FY2025 Earnings Call

Hello, and thank you for your patience. My name is Tiffany, and I will be your conference operator today. I would like to welcome everyone to the TETRA Technologies Third Quarter 2025 Earnings Conference Call. I will now hand the call over to Kurt Hallead, Treasurer and Investor Relations. Kurt, please proceed.

Thank you, Tiffany. Good morning, and thank you for joining TETRA's Third Quarter 2025 Earnings Call. The speakers for today will be Brady Murphy, Chief Executive Officer; and Elijio Serrano, Chief Financial Officer. Before we begin, I'd like to call your attention to the safe harbor statement in our Form 10-Q. Some of the remarks we make today may be forward-looking and are subject to risks and uncertainties as outlined in our SEC filings. Actual results may differ materially from those expressed or implied. In addition, we may refer to adjusted EBITDA and other non-GAAP financial measures. Please refer to our press release for reconciliations of GAAP to non-GAAP measures. These reconciliations are not a substitute for GAAP financials, and we encourage you to refer to our 10-Q that was filed yesterday. After Brady and Elijio provide their comments, we will open the line for Q&A. I will now turn the call over to Brady.

Thanks, Kurt, and good morning, everyone. Welcome to TETRA's Third Quarter 2025 Earnings Call. Late last week, our colleague and good friend, Elijio, announced that he will retire at the end of March next year. As part of TETRA's succession planning process, Matt Sanderson will replace Elijio as CFO. Matt is currently Executive Vice President and Chief Commercial Officer, having joined TETRA in November of 2016. Through the end of March 2026, both executives will continue in their existing duties and responsibilities to deliver and execute on the company's One TETRA 2030 objectives. Upon his retirement, Elijio will continue to serve in an advisory capacity for the company. Since I became CEO in May of 2019, Elijio has played a key role in working with me and our Executive Team to refocus the company on our core fluid chemistry expertise and the results speak for themselves. From guiding the company through arguably the industry's most challenging period during the COVID-19 pandemic through the divestiture of our general partnership in CSI Compressco and shaping our One TETRA 2030 strategy, Elijio has been a strong contributor to our current success and future outlook. I, the Board of Directors and the rest of the Executive Team are very grateful for his contribution and are pleased he will continue to serve in a non-executive advisory role. Fortunately, we have a strong Executive Team that many of our investors had the chance to see and hear from at our recent Investor Day at the New York Stock Exchange in September. And as part of our succession planning process, Matt is well-prepared for the transition to CFO. The recent addition of Kurt Hallead as VP of Investor Relations, FP&A and Treasury, along with Katherine Kokenes as CAO, has significantly strengthened our current and future financial organization. I'm confident there will be a smooth and seamless transition. Now I'll summarize some highlights for the quarter, provide an update on our strategic initiatives before turning the call over to Elijio to provide some more details about the financials and our guidance. Our employees delivered very strong third quarter results against the backdrop of an ongoing challenging industry environment. Our third quarter, combined with our first half year results, allowed us to reach the highest revenue of $484 million and adjusted EBITDA of $93 million in the past 10 years. Mainly driven by chemicals and deepwater completion fluids, this 10-year record is further highlighted by the fact that the overall deepwater rig count is 40% lower than it was 10 years ago, emphasizing the significant deepwater market penetration we have achieved. For the quarter, we achieved revenue of $153 million and adjusted EBITDA of $25 million with adjusted EBITDA margins of 16%. This represents an 8% year-over-year increase in revenue and a 7% rise in adjusted EBITDA, driven by continued strength in our offshore completion fluids and industrial calcium chloride business. The third quarter Completion Fluids & Products revenues increased 39% compared to the previous year period, with adjusted EBITDA margins rising by $6.9 million. Through the first 9 months of the year, Completion Fluids & Products adjusted EBITDA margin reached 34.5%, a 500 basis point improvement compared to the same period in 2024. This was driven by a successful completion of three TETRA Neptune wells in the Gulf of America, increased demand for high-density zinc bromide completion fluids, strong contributions from Brazil deepwater projects and robust calcium chloride results in Northern Europe. For full year 2025, we believe completion fluids may reach a 10-year high. As highlighted at our recent Investor Day, the long-term outlook for the Completion Fluids & Products business remains strong, driven by deepwater completion activity, exceptional performance in our industrial chemicals business and a material increase in battery electrolyte revenue as our customer ramps up deliveries from its first automated production line. Water & Flowback Services revenue declined 2% for the second quarter and 18% year-over-year. Adjusted EBITDA rose 18% sequentially due to better cost controls but fell 33% from the same period last year on lower activity. Sequential adjusted EBITDA margins improved by 200 basis points to 12%, driven by higher utilization of our patented automated TETRA SandStorm and Auto-Drillout units, efficiency gains and cost controls. This performance was achieved despite a 12% sequential decline in U.S. frac crew count and a 27% decrease compared to the second quarter of 2024. Despite a muted outlook for the U.S. frac crew count, we expect our onshore testing and flowback business to benefit from three industry trends: longer laterals, increased sand and water usage and a continuous rise in overall volumes of produced water. Outside of the U.S., we are seeing the benefit of a material increase in overall unconventional activity in Argentina and the Middle East. We are currently 100% utilized with our Automated SandStorm units in Argentina and have recently been awarded TETRA SandStorm work in the Kingdom of Saudi Arabia. In Argentina's Vaca Muerta region, we've been awarded five contracts related to production testing, SandStorms and two production facilities, one of which is now operational and the second is expected to go live in the first quarter of 2026. These recent wins in Argentina, utilizing the technology we've developed in the U.S. on conventional shale plays are expected to almost double our revenue next year in Argentina, helping to minimize the uncertainty in the U.S. onshore activity. With respect to our Arkansas bromine plant, we've generated $58 million of base business free cash flow and invested $28 million in the project through the first 9 months of this year. We are on schedule and under budget for Phase 1 of the project and remain confident that the plant will be fully operational by the end of 2027. The plant will have the capacity to process 75 million pounds of bromine per year, which is more than double that of our current long-term third-party supply agreement. This will also enable TETRA to generate between $200 million to $250 million in additional revenue and between $90 million and $115 million of adjusted EBITDA, as noted in our definitive feasibility report. Adjusted EBITDA target contribution is underpinned by lower input costs and additional volumes for the battery electrolyte and deepwater completion fluids business. At our Investor Day on September 25, 2025, we unveiled One TETRA 2030, a strategy focused on leveraging our core fluids chemistry expertise into new high-growth end markets, notably delivering battery electrolytes for long-duration energy storage as well as oil and gas produced water desalination solutions. Our goal is to more than double revenue to over $1.2 billion and triple adjusted EBITDA to over $300 million by 2030. We're very appreciative of the attendance and the interest in our Investor Day presentation. The feedback has been overwhelmingly positive and supportive of the strategy and the Executive Team that will deliver the One TETRA 2030 targets. On the electrolyte front, we're encouraged by the progress Eos Energy continues to make in automating their first manufacturing assembly line and its recent announcement that it will expand its manufacturing capacity in 2026. As the AI push continues to drive increasing energy demand, the importance of power stability through zinc bromide long-duration storage systems appears to be gaining traction, mainly due to its safety, scalability and domestic sourcing. To account for that, we have completed the installation of our bulk delivery system, which will significantly increase electrolyte volumes in 2026. Moving to Water Treatment & Desalination; the U.S. Oil and Gas industry is facing an increasingly urgent challenge in managing produced water, particularly in the Permian Basin, where over 6 billion barrels of wastewater are injected into saltwater disposal wells annually. This traditional underground injection method is becoming less feasible as downhole formation pressures keep increasing and storage pressure fills up. With the commercial launch of TETRA Oasis and the engineering design of the industry's first 25,000 barrel per day produced water treatment and recycling facility, TETRA is well-positioned to lead in solving this problem. The front-end engineering and design has been completed and the estimated capital and operating expenses are within our initial projections for the project. This step is facilitating commercial discussions with multiple customers, and we remain confident that we could sign our first commercial contract in the coming quarters. We have a strong free cash flow generating base business and our One TETRA 2030 strategy will enable us to leverage our fluids chemistry expertise into new high-growth end markets. We believe this transformation will enable TETRA to generate over $100 million in annual adjusted free cash flow by 2030 and drive meaningful cash returns for our shareholders. Now I'll turn it over to Elijio to discuss the financials.

Thank you, Brady, and thank you for the kind words. I'm not going anywhere nor slowing down between now and next March. We've got a job to do. We ended the third quarter with $67 million of cash on hand and a net leverage ratio of 1.2x. Throughout the year, our focus has been on generating free cash flow from the base business to maintain a strong balance sheet and to self-fund as much of the bromine project as we can. We have accomplished this through aggressive cost reductions in our onshore business, carefully scrutinizing all capital expenditures and remain very focused on managing our working capital. Working capital was $113 million at the end of September, an increase of only $4 million from year-end. As a comparison, third quarter revenue of $153 million was $19 million higher than the fourth quarter, yet working capital was only up $4 million. DSO has improved two days from the fourth quarter. This highlights the focus we have on generating cash from the base business by managing inventory and receivables. Since the end of September four weeks ago, our liquidity has further improved, increasing $10 million from $208 million to $218 million, inclusive of the $75 million delayed draw feature that is available to TETRA for the bromine project. In an effort to further reduce our cost structure and reduce corporate G&A expenses, we are expecting to relocate to a new corporate office later this quarter. The new office is a short distance from the current office in the Woodlands. Compared to our current lease, we expect to reduce lease expense by approximately $2 million per year. We updated our 2025 guidance. Income before taxes will reflect a fourth quarter non-cash charge as we early terminate the existing lease and move into a new lease with significant lease concessions for the first two years. With respect to the outlook, total year projected EBITDA is now expected to be between $107 million and $112 million. This compares to our prior total year estimate of between $100 million and $110 million. And this takes into account the stronger-than-expected third quarter that benefited once again from strong offshore activity. The fourth quarter is expected to see continued weakness on the onshore side. The timing of deepwater projects in the fourth quarter will dictate whether we are near the lower or the higher end of the guidance range. Recall that as deepwater activity improves, some projects moving between quarters can have a meaningful impact on this or the next quarter, and some of these projects are hard to predict exactly when they will be completed. U.S. onshore remains challenging, but we continue to leverage automation, technology and strong cost control to keep our margins in the double-digit range. The wins in Argentina will be a tailwind for us next year and are expected to improve our onshore margins. Eos and the deepwater market will also be a tailwind for us next year. Let me close by summarizing what I believe to be the items everyone should focus on. First, the third quarter was another quarter where we outperformed with stronger-than-expected revenue, EBITDA and cash flow. We like the cadence that we are on. Second, we continue to win work both offshore and now with the significant wins in Argentina that Brady mentioned. The base business is performing in a challenging market environment. Third, the immediate milestones we laid out as the road markers toward 2030 are materializing. Eos volumes are increasing and Eos is launching the build of their second line. The bromine plant remains on schedule and within budget, all self-funded. The front-end engineering study for the first desalination facility was completed on schedule and confirms our CapEx and OpEx numbers. Now we are changing terms and pricing with customers. And we are expanding our business internationally with the Argentina wins that Brady mentioned during the Investor Day as a goal. The journey towards One TETRA 2030 remains on schedule. Brady, let me turn it back to you for closing comments.

Thanks, Elijio. Despite the ongoing macroeconomic and energy market uncertainty, we have strong conviction in the longer-term outlook and our proven ability to differentiate in the markets in which we operate and our One TETRA 2030 strategy. With that, we'll turn it open for questions.

Your first question comes from the line of Bobby Brooks with Northland.

And I want to congrats Elijio on an incredible career. Just first on the Oasis commercial engineering. It's great to hear you completed the FEED study, but I just wanted to understand, are there any further engineering work that needs to be completed or just maybe more broadly, what are the next steps there?

Certainly, Bobby. The FEED study is a crucial milestone as it confirms our estimates regarding the capital and operational expenditures, as well as the overall financials for our desalination technology. A 25,000 unit is still considered a small-scale commercial plant. We anticipate that the discussions we are having revolve around much larger facilities, which will improve the economics further as we increase volumes. The next steps involve discussing the financial aspects with our engaged customers. We currently have 7 non-disclosure agreements in place, and those customers have been waiting for us to reach a stage where we could engage in commercial talks, which have now begun. We have sufficient confidence in the engineering completed so far to enter commercial discussions and a contract. However, further detailed engineering must be undertaken to build the final plant, and that will be part of our next steps.

Would that detailed engineering to then construct the final plant be kicked off once a commercial agreement was signed or would that maybe come before that win?

Yeah. We are very confident in commercializing this technology. We are already preparing a proposal with the engineering firm we are collaborating with to begin the detailed engineering work before any commercial contracts are finalized.

Very helpful color. And then just on the CFP sales, so a step down about $90 million sequentially, but obviously, it's more importantly up $15 million year-over-year. And obviously, a big factor on the sequential step down is the absence of Neptune jobs and the seasonal industrial calcium chloride sales. What I was hoping to get a little bit more color on is thinking about that $90 million step down, is that all essentially the absence of those two factors? And then reversely, looking at the $15 million year-over-year increase, could you maybe break down what were the different factors that drove that growth?

Yeah. So Bobby, the vast majority of it was the European calcium chloride seasonality. And recall that we also had a Neptune well and a half of Neptune that we completed in the second quarter. So it was those two partially offset by the ramp-up in activity in Brazil that we've been talking about.

Your next question comes from the line of Martin Malloy with Johnson Rice.

Elijio, best of luck with your future endeavors upon retirement. First question I wanted to ask about was just in terms of the offshore market. It seems like it's been strengthening for you all. And when you look at the subsea tree orders for the industry, they've been trending up. Can you maybe talk about your confidence as you look forward to '26, '27? And any early indications as to whether Neptune projects are a possibility in '26?

Thank you, Marty. We observe the same trends in offshore activity from discussions with our customers and the increasing orders for subsea trees. We are very confident about the prospects for 2026 and 2027 and beyond. We believe the deepwater market is set for a sustained period of growth, especially as the U.S. shale play stabilizes. Regarding Neptune, our project pipeline has never been stronger. We are quite confident that we will have work to execute in 2026 and beyond with Neptune. However, we prefer not to disclose specific details until we have well-defined projects awarded; then, we can provide more information, but our confidence is high.

Great. For my follow-up question, I wanted to ask about the desalination side. It's very encouraging to see that you expect a first commercial project in early 2026. Can you remind us of the capital cost for one of these standard facilities and your outlook for the initial couple of commercial projects, whether the facilities will be owned by the customer or TETRA, and how that breaks down?

I will explain the commercial model we are using. First, TETRA will always own the core technology within the plant. We have a few different commercial models. One is a long-term licensing model where TETRA maintains ownership. We also have a shared capital model and another option where the customer funds the capital if they have a lower cost of capital and prefer that route. This gives us several flexible models, but in any case, TETRA will keep control and ownership of the core technology in the plant. Regarding capital expenditures, general industry estimates suggest around $1 million of CapEx for every 1,000 barrels of desalination. These figures relate to the core technology we provide. Additional costs may occur due to civil works and the source of power for the project. However, these are approximate numbers that we are confident about.

Your next question comes from the line of Stephen Gengaro with Stifel.

I apologize if you touched on this earlier, but at a high level, when we think about '26 versus '25 and we think about the first half of '25 in the fluids side, can you outline the puts and takes into '26, maybe even off the back half of '25, if it's easier given what we know about the deepwater fluids business in the first half? And then maybe along with that, you did mention confidence in the deepwater business. What's the timing look like? Because it sounds like the ramp recovery in deepwater is kind of a mid-'26 event based on what some of the larger cap service guys are playing. And how does that kind of fold into the timing of your product sales?

Yes, I'll begin with that, Stephen, and then Elijio can provide some additional insights. As we look ahead to 2026, we see several significant growth opportunities within our business. We've highlighted Argentina, where the recent awards indicate we should double our revenue there in 2026 compared to 2025. The Middle East, particularly with the recent SandStorm awards, will also contribute to our growth. We expect Eos to experience a substantial ramp-up from us. Eos activity in 2025 is projected to exceed 2024 levels, although it hasn't significantly impacted our business thus far. We anticipate it will become a meaningful part of our business in 2026. Regarding our deepwater operations, we have strong positions in the Gulf of America, Brazil, and the North Sea, especially in Norway, where we have clear visibility into upcoming projects and customer plans for 2026. This visibility is why we are confident about our prospects in those markets for 2026. Additionally, Neptune has the potential to be a game-changer for us. Our confidence for 2026 is robust. We will provide more details on whether these developments will occur in the first half or second half of the year as we approach the beginning of the year. All these elements lead us to believe that we will have a strong year in 2026 in the deepwater sector. Elijio, would you like to add anything?

Stephen, you brought up an interesting point about rig activity. As you know, the rig count doesn't fully capture our opportunities related to completions. Therefore, I wouldn’t directly connect what you’re hearing from drilling contractors about a slowdown in contracting with our expectations for the completions side of the business. Additionally, if you look at the second half of this year in relation to the first half of next year, Brady mentioned Argentina where we are seeing a ramp-up. We expect yields to continue increasing, which will boost volumes. Each second quarter, we typically see an increase of about $15 million in our European calcium chloride business, and the Brazil market is also performing well. Therefore, we see several positive factors that should support us in the first half of next year compared to the second half of this year.

I don't know if you'll answer this, but if we exclude Eos, does fluids grow '26 over '25?

We believe so because of the deepwater market and the activity that we're seeing out there.

Your next question comes from the line of Tim Moore with Clear Street.

Congratulations Elijio on his retirement plan, and he will be well missed. So just maybe starting out on desalination. Can you maybe provide us with an update on the beneficial reuse ag growing season for Eos? I can't remember if that needed maybe two growing seasons. And then just on the topic, you talked about FEED study and progress and everything. Can you just maybe remind us of any remaining regulatory-related milestones that that first customer might have to do in Texas to get signed off to really start the construction?

I think the regulatory environment has been very positive over the past year. Just to clarify, we are not the ones applying for permits; our customers handle that. They will retain ownership of the water and be responsible for the permitting process. All the information we have indicates that regulators are facilitating this well, so we don't have concerns on that front. Regarding our project with EOG, we have a non-disclosure agreement in place, which limits what we can share. However, I can say that everything is progressing smoothly and successfully, and we are encouraged by the pilot’s progress. It is focused on grassland studies, but that’s about all I can disclose at this moment, other than that it is going very well.

Understood Brady. That was helpful color. And then just switching gears to Eos Energy. They hold their quarterly earnings call next week on the 6th. Can you just give us a sense of maybe TETRA's lead time visibility on rolling orders? I mean, is it kind of a rolling 60- or 90-day advanced planning period for you to get the solutions ready for PureFlow Plus and electrolytes? I'm just kind of thinking about that as we model out the fourth quarter and that probably ramps up for them and you benefit.

Yes. So we're in constant dialogue with Eos on a weekly basis between our manufacturing team and their procurement team at the executive level, appears to be almost like a weekly or every other week call. Once we get purchase orders, we can turn it around quite quickly. As you know, we're producing the electrolyte out of our West Memphis facility. That facility is producing the zinc bromide that is either used for the offshore market or we further purify it and increase the purity levels there to meet the Eos demand. And all the incremental products that we buy are available on short notice. So we can turn around purchase orders within 30 days from Eos.

Great. That's really helpful color, Elijio. And then my last question is because most of the others already asked and my favorite theme in the last few years has been desalination, but you don't get asked a lot about your calcium chloride business, and we know there's seasonality drop in the third quarter every year. But how would you kind of quantify the overall business 9 months year-to-date? Does it grow more than 5% this year, the industrial calcium chloride?

So Brady, I'll take that one. One of the things that we joke about is the leader for our calcium chloride business, Tim Moeller, every time he gets in front of the Board, he talks about a record quarter. And they literally have been achieving a record quarter with the calcium chloride business. They have found additional applications for calcium chloride. They continue to expand and gain market share. So that business is one of our little crown jewels that probably isn't recognized and appreciated as much as it should. And they've been outperforming the Consumer Price Index by a nice factor.

If I could just add to that, Tim, as we outlined in our Investor Day, that business tends to grow faster than GDP by more than 300 basis points.

Your next question comes from the line of Josh Jayne with Daniel Energy Partners.

First, just as we think about offshore opportunities into next year, you've hit on it a little bit. Maybe you could just talk through your key markets, Brazil, Gulf of America and North Sea. And in the event that we've seen this over the last couple of years, things can slip to the right when thinking about offshore projects. Could you discuss which of those markets you may expect to hold up better than others in the event operators become increasingly cautious and just talk through those opportunities a bit more.

Yeah, sure, Josh. I mean, I think keep in mind, the Brazil awards that we were awarded, we've really only seen a half a year of benefit from Brazil this year. So next year, we're expecting to see a full benefit and not really anticipating any change to that program. I would say the same for the Gulf of America. We've mentioned in our Investor Day as more and more operators start moving out to the lower tertiary, these wells have significant productivity. And even in a lower cost environment, we anticipate those projects to continue to move forward. So no real change in our outlook for Gulf of America. And then North Sea, I'd say the same. Equinor and the businesses in Norway continue a very strong pace. Again, we're not anticipating much change there. Now keep in mind, the rest of the markets, even though we may not have a strong service operation in a lot of other deep markets around the world, we do sell our completion fluids through the major service providers since, again, they don't manufacture their own completion fluids. They buy them from companies like TETRA. So we actually have a pretty strong market presence around international markets around the world, but through the service providers. That can probably be a little bit more volatile than the three key markets that I've mentioned, and we'll see as we get into the 2026 planning process with our customers. But again, everything we're hearing about the deepwater market is a multiyear growth story for us.

Josh, the other thing I would add is if you look at our investor deck and our historical results for the Completion Fluids & Products segment, those margins hold up in almost any cycle. During COVID, we saw margins improve in the two COVID years over the prior year. So that business has strong resilient margins even during slower periods.

There are no further questions at this time. I will now turn the call back over to Brady Murphy for closing remarks.

Thank you. I appreciate everyone joining us for the call today. Again, despite the current macro and energy market uncertainty, again, we have very strong convictions in our base business performing to the levels that it is as well as the future outlook, again, related to our One TETRA 2030 strategy. So thank you very much for your participation. We'll conclude the call.

Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.