Hello, and welcome to the TETRA Technologies, Inc. Second Quarter 2012 Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Stuart Brightman.

Welcome to the TETRA Technologies Second Quarter 2012 earnings conference call. Elijio Serrano, our Chief Financial Officer is also in attendance this morning. Given Elijio's recent appointment as our Chief Financial Officer, I will give the financial overview of the second quarter, followed by my usual presentation, which in turn will be followed by your questions. I must first remind you that this conference call may contain statements that are or may be deemed to be forward-looking statements. These statements are based on certain assumptions and analyses 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 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 net debt, revenues, gross profit, or profit before tax excluding Maritech segment, profit before tax and diluted earnings per share, excluding oil and gas derivative, and effectiveness of the Maritech segment or other non-GAAP financial measures. Please refer to this morning'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. Revenue in the quarter just ended was $234.9 million, just slightly lower than the second quarter of 2011. Excluding Maritech, revenue increased over the same quarter of 2011 by $32 million or 16%, as shown on the table on Page 7 of the press release. Most of the increase was in the Production Testing segment…

[Operator instructions] And the first question comes from Jim Rollyson of Raymond James.

It looks like the majority of the reason for the guidance reduction on earnings spends from the offshore side of things. Your original revenue guidance in that business back in February was $320 million to $350 million of revenues. You've done about $126 million in the first half, what are you thinking now for kind of revenue guidance range for the full year?

Well, I think based on some of the delays and permitting and some of the weather we've seen, we're fairly going to have revenue significantly below that original guidance. I would think, Jim, that it will probably be somewhere in the $275 million-ish range for the full year for that segment.

Greywolf acquisition has now closed, can you give us kind of some indicator for what you're thinking on a revenue, EBITDA type of basis, and maybe how much benefits included in your $0.60 to $0.70 number?

Yes, we closed last week, and as I stated in my comments, very optimistic about the markets we operate in. Teams are already working at, looking at other opportunities of our other businesses beyond testing in those markets. So we think we've got some opportunity on upside, potentially in the other segments as well. I think if you look at that business and the price we paid, it's kind of consistent of what we said previously on the other 2 acquisitions. We would expect to minimum after-tax return of about minimum 15%, obviously accretive for the balance of the year. And I think the revenue range we haven't stated, but it will be in that $50 million to $60 million type of range on a go-forward basis. And I think the earnings on that will be consistent with what we see in our overall testing businesses.

And then maybe last one from me, just given all the changes with the acquisitions you made throughout the year. Obviously, depreciation has been moving up and I suspect will take another step up with Greywolf and same thing to some extent with SG&A. What do you think the going forward run rate is now on DD&A and SG&A?

The DD&A numbers will move up a little bit. And also recognizing, Jim, that the acquisition we have intangibles that go in that number as well. So as we allocate the purchase price, which we finished for our first acquisition, we true-up the second one and then we deal with that on a go-forward basis on the third. That number will get bigger. I would guess on a go forward basis we're probably about $80 million plus on DD&A basis. If you look at the G&A, one positive thing I would add is with all 3 acquisitions, at the corporate level, there is not a need to staff up accordingly. We certainly feel with the space we've created, with the Maritech divestiture, we've got sufficient corporate resources to absorb the 3 acquisitions, and if we were to do something further, we wouldn't have to scale up that team. I would say at the segment level, the G&A ratios overall for the group are probably pretty consistent with what we see within the testing side. I don't think it's going to be big difference on about an average basis.

Our next question comes from Mike Harrison of First Analysis.

I wanted to ask just on the offshore side. It sounds like you were pleased with the utilization rate in that business, even though there wasn't as much business to go after. Can you maybe talk a little bit about your strategy in terms of which projects you're pursuing? And on those projects in particular, what kind of competitive dynamics are you seeing, is it the usual suspects, are there kind of more construction type people going after that business too?

I'd say the first part of the question, what projects are we chasing focused on. We're focused on our traditional customers, which is going to include the bigger players that have late life properties on the shelf as well as continuing to execute our Maritech program. So it's a good blend of both. And what we're trying to do is, as we always do, as we go through the spring time, as we've got pretty good backlog, both of external and internal projects. We plan them and lay them out optimally in terms of mobilization and taken and optimizing that. And we've done as we always do, the challenges, changing that as we get to the stage of execution, when we don't have permits in place. And so we always do have contingency plans, but when you have to go to Plan B or Plan C, it's a higher cost, because you're not doing it as efficiently. So we'll continue to do that through the third quarter. I think that's the environment. And I think that situation where you've got the choppiness of this predicting the timing of the execution and overlays with the competitive market that existed, that include certain construction assets in that space. And the net combination of it is you see a very competitive marketplace for the main pieces of our Offshore Services segment been predominately the heavy lift platform removal as well as the diving segment. I think those 2 certainly are getting price realization, probably certainly below what we had assumed when we set the guidance earlier this year.

And in terms of the projects that you have won and have the permits in place, are you pleased with the execution on those projects and it's really just the permitting delays that have thrown a wrench in things?

I mean, I think if you look at the project reviews we do, looking at the execution plan and looking at the duration and the spend rates, all of those are pretty much in line with our internal estimate. So I think the execution of the works been done very well. And as I said on the prior call, I would also certainly want to emphasize that that is really specifically very encouraging as it comes to the Hedron. We've taken a large new asset, brought it into the Gulf during the fourth quarter. And have had very, very few issues in terms of obtaining work, executing work in line with our expectations. And continue to view as we go forward, the reason we bought that asset of dealing with the trend of heavier and larger structures coming out over the next period of time is absolutely the right business decision.

And you mention that Tropical Storm Debby hurt you by $3 million in earnings. Would the revenue impact there been around $15 million?

Probably, a little bit less than that because I think the margins get a little bit distorted on that $3 million, because there's a lot of cost that go in there that we incur. It can't take you at normal margin, it extrapolates, it will be less than $15 million, Mike.

And then the last question is on the Fluids business, can we get some additional color on the unexpected equipment repairs. How much cost was in Q2 and how much impact would you expect to see in Q3, and are the repairs actually complete at this point?

First thing is that how that relates to our main manufacturing facility over in Europe. And I would say since we acquired that business in 2004, that's probably been as consistent a performer as any individual business unit we have in the company. So I would look at this as a one-off and it relates to a specific piece of equipment. We just need to go in, repair. We'll probably run it a little bit longer, little bit harder to deal with some of the market opportunities that we've envisioned. We are mostly through the repair. We believe we will complete with the repair within the third quarter and exit September at a normal fourth quarter run rate. The area where there has been profit leakage is associated with some of the actions of repairing using alternative production methods and the cost associated with that. And in round numbers, it's about a $3 million full-year effect of which the majority of it will be incurred during the third quarter. So a portion in the second, the majority in the third and it should be complete within the third. And again, that $3 million aggregate number is the assumption we've made in our range for the full year earnings revision we just gave.

And the next question comes from Blake Hutchinson with Howard Weil.

Just a question first of all in the Fluids segment. You mentioned in the release, some postponement in Gulf of Mexico deepwater activity, maybe just a matter of semantics here, but does postponement mean that you had programs lined up that has been kind of push back as far as 2013 or are you suggesting some delay into this second half of the year really?

I characterize it as a delayed in the second half of the year. At the macro level, continue to emphasize, we're encouraged at what we see as a trend to higher activity as we move through the year. And this is strictly a pretty lumpy project that's moved to the second half of the year.

And you also noted in the release, it looks like some follow through in the improvement in 1Q from both North Sea and West Africa. Are these regions becoming larger and maybe a little bit more predictable. And so maybe we should be diving a little more in the model for this or just kind of some seasonal success, how should we think about it?

I would say one of the things, that we're very pleased with, is the continued growth we're seeing in our Eastern Hemisphere businesses, primarily testing in fluids driven. We built a bigger capability and we've invested in that the last several years. And this is the year where we're starting to see some of those results come through in a significant manner. So I'd say overall I would expect we're going to continue to have robust markets, that's not seasonal, and the areas where we see that strength in the 2 you mentioned which would be the North Sea and some of the West Africa countries, as well as some continued opportunities in the Middle East.

And with all the changes going on in the U.S. land market, was the underlying trend of your U.S. land base fluid business, sequentially still favorable on the quarter?

When you include the impact of the ERS acquisition, yes. If you excluded it, then we were down a little bit sequentially. And all of that associated with just the continued mix of some of the dry gas regions really shutting down, and us having to take the necessary cost actions, move people, et cetera. So I characterize the onshore markets, primarily for testing as well as for fluids, as markets that you're continuing to see the activity on the dry gas regions. That's way down. I think it's going to be like that for a while. We take the corrective actions to redeploy assets and people that unto itself make it more challenging. But we feel real good in the areas we've made the acquisition for ERS. And Greywolf and the U.S. those are going to be areas we continue to lead and exceed our acquisition economic.

And then I just wanted to clarify, I mean there has been a lot of talk, surrounding Offshore Services thus far in the call. And the weather impact to 2Q. But I just wanted to clarify that these are projects that are complete, a loss was had in Q2 due to kind of time table rather than something that gets pushed necessarily for completion in 3Q. And there is still profit attached to it. And I guess, that the point of the question really is, we spend a couple of years trying to take a lot of the risk out of the model. And has the competitive market just gotten back to the point that not only is it more competitive to win jobs, but you're kind of having to accept a little bit more the weather, time, execution risk than you have been in recent years?

I would say that in the first point of the market environment is clearly an accurate statement that the competitive landscape is very challenging. And the activity and market environment is tougher than we modeled when we put our guidance out back in early January. Clearly the combination of the activity, the permitting has led to that. With that for the most part, we've been able to maintain our typical approach on when we share weather risk in some of the quieter parts of the year and where we don't accept it, during the busier. So I wouldn't say that's changed much. It may have changed slightly, but I would not view that as a key change to the way we've operated the last year or 2. I characterized that as we've kind of moved into a risky environment for that business. I truly believe if you look at that business, I would characterize it is just more competitive than we thought in the short term. We still remain optimistic as we move into next year that will improve as the permitting cycle improves and some of the demand for the platform removal predictability of the execution time pattern that as we model for the balance of the year in our guidance. We haven't made that assumption, changing materially from the third and fourth quarter.

And the next question comes from Kurt Hallead from RBC Capital.

Stuart, I was just wondering if you might be able to just give us a little bit more update on your strategy on the international front. What kind of opportunities you may see out in front of you for the existing organic growth? And what are you thinking in context, in terms of potential acquisition opportunities?

I think on the first question on international, we've got 2 or 3 kind of just broad themes we continue to work on. The first, as I stated earlier I think our Eastern Hemisphere is scaling footprint and capability has increased significantly over the last few years. That's absolutely Optima acquisition, and with the Optima acquisition, we now clearly have a much greater critical mass, the ability to have our legacy businesses working in conjunction with Optima to kind of leverage infrastructure we have as well as capability that Optima has. So I think it's been the multiyear strategy that we're getting the organic benefit. Now we're getting the acquisition benefit from Optima. We'll continue to do that in those areas we talked about, North Sea, West Africa, Middle East, fluids testing, et cetera. I think Compressco has an ongoing strategy been primarily Latin America centric, that's where we've gotten the biggest leverage to date, consistent with what we said earlier in the year, we put a lot of capital into that. For Compressco, we've seen the benefit demonstrated during the second quarter in our sequential improvement to Compressco and we'd expect to see continued trends in that direction based on that investment. Overall the other area, we tread lightly, but we were spending some business development dollars for TOS. We're looking at certain markets in Eastern Hemisphere, where we think we're seeing evidence of potential activity. But we're not investing in advance. We will not invest in advance. We would be very conservative. We'll continue to spend business development dollars, but our primary focus on Offshore Services would be to kind of optimize what we have in the Gulf of Mexico and deal with the challenges we have there.

Then maybe the follow-up with the acquisition of Greywolf, I've been hearing some that Canada has been a little bit sluggish here coming out of the third quarter. So just wanting to try and get a general sense from you, what Greywolf may be seeing and what you're picking up from Greywolf so far?

I mean in the visits we have had and the meetings as we went through the due diligence process for last couple of months, we're seeing high utilization of equipment both in Canada and on the Gulf, and we think that's going to continue. We think the run rate is going to be very positive for the balance of the year and into next year. We're already working with them, have met with customers, trying to look at some additional opportunities with some of the other TETRA services. We've got a small Compressco footprint in Calgary. We're looking at some of the benefits of having those 2 organizations working closely together. So we haven't seen anything on our discussions or due diligence that makes us think anything other than that's going to be a very successful acquisition, similar to what we've seen on the 2 prior acquisitions we've executed this year.

Generally the sluggish rebound off of the seasonal downtick in the second quarter. Once again, from your take is no impact yet on Greywolf?

We think Greywolf will do very well in the third and fourth quarters.

And the next question comes from Stephen Gengaro from Sterne Agee.

Just wanted to clarify 2 things. One, can you remind us on the fluid side, what kind of seasonality coming off from Europe, we should think about in the third quarter?

We already state that our second quarter is by far our largest quarter, in terms of the European calcium chloride business. The rest of the businesses in fluids are not significantly cyclical. So in general, if you look at the moving pieces of fluids, we would expect the European calcium chloride business to be down sequentially in the third quarter versus the second, not the U.S. piece of our calcium chloride business to be similar. Onshore U.S. to be similar, and as I noted earlier, we've probably had a little bit less activity from a timing point of view. And in our Gulf of Mexico, we would expect that to a pickup in the third and fourth quarter. So that would be a positive and continued strength internationally.

And would you give us a sense for the percentage of fluids that's Europe?

I think we've already said from our revenue point of view, we're probably in the range of 15%, 20% of our total fluids revenue coming from Europe. Again on the calcium chlorides business, not in aggregate, that's just the calcium chloride business. But overall, Stephen, the point I had highlighted on fluids, without getting too granular, is that, I think the overall view on the fluids is we're going to be at the levels we expected or above for the full year. If you look at where we are for the first half of the year, we're kind of running above. That run rate is above what we had for the guidance. And we think for the full year, we're in pretty good shape on fluids.

And then, I guess 2 other things. One is a follow-up on fluids, from your overall margin perspective. We've sort of been expecting to see a somewhat gradual uptick in margins over the next several quarters, both because of volumes, but also because of raw material cost and your supply range. I mean is that still something that you would sort of bless going forward?

I think we've said that our Fluids margins in 2012 would be up from what we saw last year. We've achieved that year-to-date. Our margins went up sequentially during the second quarter, as well as compared to the similar time period last year. So I think we're continuing to see the slow, but steady improvement in those margins. And I think we're kind of running right at the target margins we expected, plus a little bit.

And next question comes from Joseph Gibney of Capital One.

Steve, could you update us a little bit on from where we stand on the Gulf of Mexico deepwater volumes on the fluid side. I know it was a loose target to exit this year, maybe 60% to 70% of pre-Macondo levels. Is that still a reasonable range? Just trying to get an update for where we stand there, with full understanding that you've got a bit of lag period?

I think that's still a pretty good assumption of where we should finish up the year on the trends.

And just a couple of modeling related questions, I'm just curious. I know last quarter included some minor contribution Optima roughly 20 days. Do you happen to have what production testing gross margins would have been stripping out Optima and ERS for this quarter?

I don't have that specific number at my fingertips, Joe, but I would say that the impact of those was slightly positive to the average margin.

And then just last one, just to clarify the $1.1 million in acquisition related cost on the testing side. Where did that flow through? Is that impacting gross profitability with testing, was that in G&A, was that in the others? Just trying to clarify from a modeling stand point?

It will all be within the testing segment and it will kind of be spread mostly in the G&A, and also be a portion that's in the gross margin.

Next question comes from Bill Dezellem with Tieton Capital Management.

Relative to the fluids business, do you still have cost savings measures that you can institute at the El Dorado facility or is there really not much left available there?

As we go forward, we still view there is opportunities for the cost and reductions and margin improvements. Again recognize, we're still operating in a market environment particularly on the non-energy segments, that's not as robust as it's been. So as we see the volumes go up as we see continued recovery in the Gulf of Mexico, in addition to just the pure incremental ongoing improvements and the way we operate daily. There are still opportunities for that business, as we finish the year and go into next year.

Is there a point that the fluid margins are going to see an extra benefit because you have some of that higher cost product finally working its way through out of inventory and through COGS and moving to a lower cost inventory, or is that more over of a gradual process and really aren't going to be noticed on any quarter or 2?

See it's a gradual process that we pretty much worked our way through. And if you go back, several years ago as we've changed our supply chain strategy and went through the discussion of the impact, we've seen that over the last couple of years that the improvements. And I think the real opportunity said on that is as we go forward, and you see the increased activity in the deepwater. We feel we've got a very robust long term supply chain position on that business that positions us very well for that activity, both from a cost perspective and equally important from a supply and cycle-time perspective. But I think it's a long-term investment, and long-term set of agreements we have that we'll continue to see those long-term strategic advantages.

And are you finding that the permitting reference in the deepwater that permitting there is moving forward better than the permitting for well abandonment?

Absolutely. I'm glad you asked the question, because again when we talk about the permitting challenges we're having, it really relates to our Offshore Services segment. And conversely we've seen tremendous improvement on the other side on the drilling and the related impact on our Fluids business. So very good point to highlight.

Given that this administration is supposed to be more green and environmentally conscious, it seems as though, it should be the opposite. They should be restricting the drilling in the offshore, and in fact getting the permits moving for the well abandonment. Would you help us understand what you think the underlying dynamics are there to create?

Bill, I think I am going to again thank you for your question on the permitting and kind of take your implied suggestion on what my view of the permitting we can discuss it offline. I think I'll keep my focus on just talking through the segments of TETRA and where we are in the overall. But I'll be happy to share that opinion separately with you.

And the final question is future acquisition thoughts share with us, where your mind set is at now from a strategic standpoint given what you've accomplished so far this year?

I think if we take a step back, when we back in the second quarter last year monetized Maritech and kind of at that stage, where we really think we've got some good growth opportunities on our existing services business that we think we can execute on within a reasonable time period and in conjunction with that look at alternatives, if we're not able to execute and redeploy. I think the 3 acquisitions we did, plus the long-term strategic investment in the Hedron, we are very well positioned. I think at this stage my primary focus is executing on those investments that we've made, which aggregate over $200 million over the last 15 months in optimizing the assets we also have relative to the markets we're in et cetera. I think there are still opportunities out there. I would say in the short-term, we're going to be very focused certainly through the balance of this year and into next year executing on the businesses that we have, continuing to look strategically, but probably not actioning that in the short-term of other opportunities. But also making certain that we finish the Maritech work over the next year, that's $100 million of cash we need to spend, so I think the cash generation from our businesses are going to be very strong going forward. But in the short term, we need to recognize we've got that Maritech expenditure and we want to keep the checkbook in balance, as we go through the next year. But I think probably short answer is we're going to be very focused on the existing business and not quite as acquisitive as we go through the next quarters.

We have a follow-up question from Stephen Gengaro of Sterne Agee.

Stuart, I was actually going to ask you a similar question, and if you want take it offline you can. But I was curious if you thought that the permitting process was just more due to backlog in DOEM or if it's some other factors. If you think that they're focused on getting some of the drilling activity back to work because of sort of the need to get rigs back to work as opposed to the abandonment side or do you think there are other things behind it, and you can choose them?

Again, similar to the prior question from Bill, that's probably a discussion. We can talk about separately, Stephen. I've got views on it, but let's do that separately.

And just one other follow-up on the Offshore Services side, as you sort of look ahead over the next 12 to 18 months, is your sense that the margin profile and the slowness we've seen in the business throughout this year will persist going forward? Or do you think it's a shorter term issue?

I mean, my opinion is that we must be pretty close to the bottom of that cycle in terms of the market environment. And again that business, it's been tough to forecast. We expected upturn in activity. And if you go back over the last 1.5 years, we've been fairly optimistic that the outer line would convert to higher activity, and being the large player in that space at our Offshore Services segment, we would benefit from that. That hasn't happened to the extent, nearly that we expected for the reasons I mentioned earlier. So again, I still maintain, that that will happen. We're not in our projections for the third and fourth quarter anticipating that. As we migrate to next year and we start looking in more detail at our outlook for 2013, we'll kind of see the progress in those areas that happens during the third quarter, come back in 90 days and kind of update the group on our current views of it. But intuitively, I think it will get better. It's just been lot slower than we modeled, that I ever thought it would be. And again, I would add to that, I think in terms of where we're positioned, and how we're executing and what our results are, to what would be whatever the relevant payor group is which was a tough set of data to get a lot of information on. But I do believe, we're performing well in the market conditions we do, and taking the necessary steps. And we'll continue to look at more aggressive actions to deal with the shortfall.

As we have no more questions at the present time, I'd like to turn the call back over to Mr. Brightman, for any closing remarks.

Thank you, Keith. And again, I appreciate the questions. And hopefully, we've been able to give a thorough update of where we are in different businesses and convey our optimism on the acquisitions, and some of the positive trends in the lot of our markets. And we'll look forward to updating the group in a few months, when we finish out the third quarter. So thank you very much.

Thank you. That concludes today's teleconference. You may now disconnect your phone lines. Thanks for participating. And have a nice day.