Good morning. And welcome to the TETRA Technologies, Inc. Second Quarter 2015 Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please also note this event is being recorded. I would now like to turn the conference over to Stuart Brightman, President and CEO. Please go ahead.

Thank you, Emily. And welcome to the TETRA Technologies’ second quarter 2015 earnings conference call. Elijio Serrano, our Chief Financial Officer; and Joseph Elkhoury, our Chief Operating Officer are also in attendance this morning and will be available to address any of your questions. I will provide a brief overview of the second quarter results then turn it over to Elijio for some additional details, which in turn will be followed by your questions. I must first remind you that this conference call may contain statements that are or maybe 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, free cash flow, revenues, gross profit, profit before tax or earnings per share, excluding the Maritech segment, adjusted EBITDA 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. I would first like to start with an overview of the second quarter then give a brief outlook of our market assumptions, which will also cover some of the rational behind the third quarter guidance included in this morning’s press release. While it is very unusual to give…

Thanks Stuart. TETRA revenue of $316 million increased 31% over the second quarter of last year reflecting the acquisition of CSI by Compressco on August 4 of 2014 and the strong fluid results. Sequentially revenue increased 27% from the first quarter with the Fluid Division up 24%. Offshore services up 203% due to the seasonality of that business and CSI Compressco up 23% on strong equipment sales. This more than offset a modest reduction of 6% in Production Testing revenue, which compares favorably to a decline in North America average rate count of 40% in the second quarter compared to the first quarter of this year. Fluid segment revenue increased 5% from last year to a record high of $103 million and increased 24% sequentially for the items you mentioned earlier. Our adjusted pretax margins improved 20% to 26.6%, up 860 basis points sequentially with especially the leverage available in our Fluids franchise. The fall-through percent or incremental margins on the incremental revenue was 63% partially aided by the benefit of an insurance settlement in our favor of $2.6 million with seasonally strong Europe Fluids business, Offshore shipments to the Gulf of Mexico and internationally in addition to strong sales of calcium chloride to non-oil and gas sector. We clearly benefited in the second quarter from the industry and geographic diversification of our Fluids business. These results were achieved despite a slowdown in our water management business that was expected given the decline in North America onshore rig count. Production Testing revenue of 35% was down 18% from a year ago and down 6% sequentially. In the second quarter, we took $1 million dollar charge for bad debt expense. Excluding this charge, adjusted EBITDA margins in the second quarter were 19.4%, up 140 basis points sequentially in a very challenging…

At this point, we will take some questions.

Thank you. [Operator Instructions] Our first question is from Marshall Adkins of Raymond James. Please go ahead.

Good morning, guys. I guess there is more to TETRA than just part ownership in the Compression company.

I think that hasn’t changed, Marshall.

You are, I think probably the only company in our service company universe that actually posted meaningful sequential improvement here. So, I want to try to understand better exactly what's going on and how repeatable it is. On the Fluid side, I understand the insurance thing and the calcium chloride. But it sounds like the Gulf of Mexico was still fairly healthy and you would expect that to continue to be relatively healthy going forward. So could you just give us a little more color on that and maybe are there any product line issues outside of the geographical issues that are driving the Fluids to do so well?

Yeah. I mean, great question and I anticipate there is going to be a lot of questions round the Fluid sustainability. Let Joseph give you a little bit more color on that because I do think it’s very important.

Good morning, guys. Hi, Marshall. Just to give you a little bit of color moving forward. Of course, Q2 was exceptional with our Fluids and Stu covered the reasons moving into the next half of the year where like we said in the previous two quarters, very comfortable with our Q3 backlog. It’s going to be consistent with our backlog in the last two quarter excluding a couple of projects that didn’t move into Q2. We have been in touch with every single customer on every single project that we have moving into the second half of 2015. And we believe our customers seem to want to continue the current projects. In addition to the Offshore projects that we have, most of the U.S. plant performance has been due to winning expand market share in general and the increased use of our completion Fluids due to visible use of these disposables composite plugs, which is really reducing the cost our customers by eliminating some of the coil tubing cost in these -- competing these wells. On the topic of the Fluids strength and the new products, we mentioned several points here. My intention is to really talk about the multitude of why the Fluids backlog is strong. In the Gulf of Mexico, we did complete 11 projects in Q2. We saw the benefit of our ultra deepwater filtration units that we introduced in the second half of 2014 and we also introduced a new product that is zinc free and heavy fluid than we are working with one of the main customers, major customers in the Gulf of Mexico. In land, we introduced the automated blender to help our customers save money on water management and water transfer by mixing produced water and fresh water and really reducing the money…

Yeah. That’s very helpful. So it sounds like it’s not just the Gulf of Mexico that’s strong but it’s U.S. land that actually performed well despite relatively crappy U.S. land market and international as well. Did I hear that correctly?

Yes. Yes, I think our onshore Fluids as well as our international Fluids continued to be strong. The area that is the one weakness that cut us part of the Fluid segments water and we talked about that last quarter that’s continued. The water transfer is certainly activity wise and pricing wise under a lot of pressure and we expect that to continue.

Were there any specific customer and this was kind of broad-based, correct?

Yeah. We have our magnitude of customers that cut across the revenue and the results for the quarter.

Last one for me. Baker Hughes, Halliburton merger, will that have any impact on that Fluids business at all?

It’s hard to say. It might certainly -- we are very focused on continuing to introduce technology to be a very viable player in that space and the more we can step into fill any void that’s created, that would be great. So, we are not modeling, projecting it but we are certainly doing everything within our control to better position ourselves.

Thank you, Stu. Thanks, guys.

Our next question is from Sean Meakim of JP Morgan. Please go ahead.

Hey. Good morning, guys.

Good morning.

Well done on the quarter.

Thank you.

I want to talk little about Compression. So from a TETRA perspective, what’s your view on distribution growth for CCLP from here, trying to balance the desire to show the market some form of consistent growth in the distribution but also managing cash and what could be more challenging downturn there?

Yeah. I think those are the variables that as we get together as a Board every quarter, we review the outbound forecast view of the assumptions, the predictability, to be conservative on the coverage ratio, make certain -- we don’t get ahead of ourselves, look at the capital and target. I think the thing you heard on the call yesterday, we try to reiterate today is we are still putting growth capital into that business and continue to. And it’s very, very targeted in the areas we are putting it in are in areas where we continue to have utilization in the mid 90. So, we balance the balance sheet, the leverage, the distribution expectations, the returns on individual capital, and we try to take as balanced approach as we can and we have a great debate internally what that needs to look like.

Okay. Thank you for that. And then thinking about on the cost side, you guys have done a great job managing the cost structure, but it’s been an ongoing process for over two years now. And so if the downturn improves the more protracted, which seems like the base outlook at the moment. I guess it would be helpful to see what other leverage due to pull, other things that Joseph, Elijio are working on to maintain profitability, even if the downturn stays more protracted.

Yes. I will let each of those guys give their perspective of what they’re working on within their responsibility.

All right. So this is Joseph. Thank you for the question. It’s important that we give a little bit of color to the tactical execution and the cost actions that we have done. As a disclaimer, I always tell the division has that you will never be able to cut cost. So part of our practical execution is to diversify our customer base. And like Elijio mentioned in his prepared remarks, we need to make sure that we diversify towards more stable, lower risk and highly active customers. And that part of our tactical execution has paid dividends. In addition to that, talking about the cost, in the first half of 2015, we have achieved around $30 million from headcount reductions and multiple other cost management initiatives. That includes supplier cost management, market pricing on fuel and lubricant negotiations, the consolidation of several of our suppliers so that we can get better pricing and better quality and delivery. Also, fleet consolidations with regards to our vehicles, aggressively consolidating what we need and what we don’t, and basically monitoring all discretionary spend on hotels, rental cars, travels and so on. So that gives you enough I guess for some of the H1 2015 or the first half of the year and we see that benefit carrying with us into the second half.

And Sean, the only other significant initiative that remains other than just adjusting this activity moves between locations is the implementation into the acquired company, CSI of our ERP system. They will allow us to leverage the support structure that we have in Houston and be able to bring synergies for both entities. So that’s the next significant initiative, but any of the effect on that will not be realized until next year.

Got it. Okay. Very helpful. Thank you, guys.

Thanks, Sean.

Our next question is from Stephen Gengaro of Sterne Agee CRT. Please go ahead.

Thanks. Good morning, guys. One more question on the fluid side, I think traditionally the European calcium chloride business adds kind of $7 million to $10 million sequentially. And I wanted to get a sense for if that number is about correct? And then also can you give us any more detail on kind of how much got pulled from third quarter to second quarter, i.e., kind of how we should think about the base of 2Q numbers going into 3Q on Fluids?

The first part of the question I will address and then I will turn it over to Stu. So you are right, the peak of our Europe business is the second quarter and we traditionally see a $10 million sequential improvement.

And then on the acceleration, Joseph, you may correct me if my numbers are wrong. There were couple of projects that came through faster. When you aggregate those two, they probably add up to $10 million of revenue in round numbers.

Okay. And so that’s kind of $20 million aggregate. The margin profile of those two businesses relative to the rest of Fluids, obviously Gulf of Mexico and European calcium chloride versus the rest of Fluids. Is that much different?

We’ve always said that the Gulf of Mexico has a little bit higher margin profile than the average for the overall Fluids division and that the chemicals business in general is pretty consistent with the overall average. And the seasonal element of the business is not positive or negative toward a full 12-month margin would be on that type of business.

Great. Thank you. And then one other as a general question, when you -- you mentioned I think in the release and I think couple of times on the call, expansion of the customer base. And I think you’re talking about that in terms of both the US landside and the Production Testing, as well as the fluid side Offshore. But can you just clarify and add a little color to that?

Yes. I mean, the way we talk about the expansion of the customer base, that’s a key metric that we have across the company. We track every month the dollar revenue associated with new customers from the bottom-up and that’s a very visible metric within the company. And we’re targeting as a total -- within our total revenue this year that we expect that number is going to be over a $100 million, which again offset some of the natural volumes. But that’s just going out with new customers, new products, new geographies that we haven’t done before. And we measure that every month. And when we talk about it, we’re talking about it on a company-wide basis.

And that will include new customers, plus new product expansion?

Yes.

The $100 million, okay.

Yes.

Great. Thanks for the details.

Yes. But I am glad you asked that, Stephen. It’s a very, very important that we continue to emphasize that in addition to the very aggressive cost, we are focusing on customer diversification, expansion as well as, as Joseph highlighted, the technology and innovation that we are investing in.

That’s why you showed up well in the numbers.

Thank you.

Our next question is from Jason Wangler of Wunderlich. Please go ahead.

Hey, guys. Just had one the Neptune Fluids, where you see in that rolled out to specifically? And just maybe just the market that you’re seeing, I guess, even geographically, or do you have any color about size I guess? Where is that really kind of the focus early on with it and where do you see it going as you kind of push it out to the market?

All right. I will take this. Thank you for the question. I recommend that everybody just clicks on our external website and go through and please read the CS Neptune data. But just to give you a bit of overview, this a zinc free, environmentally friendly heavy fluid. We can go up to 15.4. And I am not going to bore you downward the details, but we see the first application with a couple of our major customers in the Gulf of Mexico. We hope to go beyond a single customer with the single first wealth commercial application. We are targeting many other customers in the Gulf of Mexico. We hope to win one or two additional customers moving into the second half of 2015 and the beginning of 2016. Our secondary markets for this would be a niche application in the North Sea. In the North Sea, zinc is not utilized, it’s prohibited, and what we feel we can do is offer our customers a cheaper alternative to the sodium bromide in those markets. But again, we believe that that is a niche application due to the limit of the heavy brine that we have currently. We will continue to invest in this product. We will continue to make sure that we can target a larger envelop, but at this stage, it’s still a niche applications with maybe three to four wells a year.

Okay. And so then it sounds like maybe we will get a little bit information on kind of those couple of wells that we’re targeting this call the next six months as the year goes on or maybe even early '16 and it will kind go from there?

Absolutely, and we are tracking it very closely. What we would like to do is like as Stu mentioned is continue to grow that new business, whether it’s through geographical diversification or new product introductions in the markets where we actually work today.

Great. I will turn it back. Thank you.

Our next question is from Mark Bianchi of Cowen. Please go ahead.

Hi, Elijio, apologies if you mentioned this when you’re talking about the free cash flow. But I am curious how much of a working capital either released or consumption occurred during the quarter and how should we be thinking about that for the third quarter, given the decline in Fluids revenues that you’re expecting?

Well, two data points Mark. The first one is at the free cash flow was very little from working capital improvement. However, revenue increased sequentially over $60 million. Yeah, we’re able to keep for example, receivables flat to down slightly and therefore had no cash -- working capital burn as a result of that. So it’s almost exclusively from cash earnings in the second quarter. And we think that we’ll see in the third quarter very little from working capital improvement.

Okay, okay. Great. And maybe just on the Offshore business because we haven’t really talked about that yet. Curious how you’re thinking about that strategically? I know the interest is there to potentially exit the business but maybe the markets not there. Any other kind of creative ideas that are being tossed around maybe say a leaseback opportunities or anything that could be something additional to a sale?

Yeah. I mean, we’re always going to be focused on optimizing the business. The way you do that is in the short-term with the financial results in managing the business. So I think our result compared to last year on much lower revenue in a market that’s worse from a competitive point of view, clearly shows that we’re managing it very tightly and effectively. As we continue to do that, we need to see hopefully some of the deferred spending by our customers will begin the reverse over a period of time and we’ll get a little bit of help on the volume. But until that happens, it’s just focused on the business but we always look at the full range of options of all of our businesses. This one clearly when you look at the capital allocation, we haven’t put a lot of capital back into the business because in the short term there is not a payback for that. But we look at the alternatives that go with that.

Got it. Nice work guys. I’ll turn it back.

Thanks, Mark.

Our next question is from Martin Malloy of Johnson Rice. Please go ahead.

Congratulations on a good quarter in difficult environment.

Thank you.

On the corporate overhead, that $17.2 million run rate, would that be roughly applicable for the second half of this year?

No. The second half of the year will be slightly below those numbers.

Okay. Great. And then Production Testing you mentioned some international strength, could you maybe talk a little bit more about that in terms of geographies that you're seeing that in?

All right. This is Joseph again. The last two quarters, I tried to go country by country in the international space and give you what we believe will happen compared to previous quarter. So, let me start with Canada. There was a significant ramp up in rig count coming out of the seasonal rig count drop in Q2 but nothing that compares to any previous record. This has been the slowest rig count recovery in the last decade in Canada. So there, our main objective is to continue to try and figure out how to be at the operating income level flat. So moving into Q3, we’ll see a very slight improvement to our Q2 performance. In Saudi, we continue to see strong demand but we are struggling with the rig assignments and what we want to do is make sure that we get our fair share of the business. So, our Q3 performance and second half performance will be very comparable to our first half performance in Saudi. In Brazil, we have continued to subcontract some of our packages to one of the largest oil field services companies and we see that continuing into the second half, so that’s been our PVT or operating income level positive as well. That gives you an overall view of where we operate. We still have a couple of the EPS projects ongoing. We will continue to operate those into the second half of this year. And we’re looking for other possible projects on the early production facilities for one or two of our existing EPS that we’re currently not running in that space. In addition to that our Mexico business is flattish. We had believed that the second half of the year will bring us a little bit more activity in Mexico. This is still yet to come. We’re still chasing it and we hope that maybe moving into 2016 with the new oil regulations and focus in Mexico, we might see some improvement in 2016 but not in the second half of the year. So this gives you a little bit of color to the international space.

Thank you. Very helpful.

Our next question is from Jim Wicklund of Credit Suisse. Please go ahead.

Good morning, guys.

Good morning, Jim.

Impressive quarter and impressive move in the stock. A question and if you’ve answered this I apologize. But you laid out 24% of your people non-CSI in the quarter, yet revenues were up and you note that some of the revenues were from and Fluids at least were from accelerated activity, robbing Peter to pay Paul third quarter into second quarter. Can you kind of reconcile the revenue growth and the improvement in the quarter with the 24% reduction in workforce?

Yeah. I mean, we may not have been clear to way we describe, but that 24% looking at it versus June 30 of last year. So it’s kind of compared to where we’re a year ago. But the general question of how we getting the throughput with the workforce reduction, it several things and I think the teams done a really good job of not just reducing people and activity but structurally changing a significant parts of the company in terms of how we organized, flattening new organization, consolidating facilities, at the same time from an overall back office point of view, continuing to centralize and really taken a lot of the support functions out of the divisions and bring them into a common centralized corporate pool. So those are all structural enhancements that will continue as -- whenever the volumes pick up. I think we also benefit on those types of metrics by Gulf of Mexico being a significant portion of the growth, doesn’t typically have the labor-intensity of some of our other businesses. And I think more importantly it highlights our ability to really respond to market activity, because we are vertically integrated. I think it's very important to highlight on the Fluids that, we've been building out this strategy for years and years, and when we do find a new product opportunities, a new customer opportunity, a new market expansion, our ability to respond to it is immediate.

So let me just add to Stuart’s comments here. It has not been easy. This is -- I want to give kudos to all our division leaders, I want to give kudos to all our support functions. And yes, 24% is a big number, but I can tell you that everyone at TETRA today is really multiple has to make sure that we can manage this downturn. It is kudos to every single employee at TETRA that is basically coming up with ideas where we can preserve cash and look for opportunities to improve our financial performance.

Well, ability to scale and structural improvements over just cyclical improvement are always things that we look for. As a follow-up, Maritech reminds me of the divorce that just never seems to close. The costs are obviously coming down, $300,000 in cost, $4 million in CapEx and you say you will be done in ’16? Can you remind me what you expect the remaining CapEx to be and when you say 2016, is that Q4 or by the end of the year, Q1 or by the end of the year?

Yeah. I think, we’ve got around $50 million in around numbers left to do as of June 30th. And we’ll do 4, 5 balance of the year. We’re scheduled to do most of the remainder next year. There is a couple of properties we don’t operate at Offshore, will may get kicked out. And I expect the majority of the work we do will be middle second half of the year. We certainly don’t want to be working in the first quarter with the weather, just like everybody else kind of defers that until they get better weather environment. So we’ll be pragmatic in meeting our obligations, but also being aware of the overall market environment out there and our continued focus on the balance sheet.

Okay. And finally, for good compressions it’s always been good, because you need compress to move product and there is gas and olive oil that we produce. Everybody is been bringing down natural gas prices? What you should guys outlook for natural gas over the next year or two?

Yeah. Jim, I think we’re of similar opinion to the masses that that’s not going to be a major solution for us. We are going to have to self-help and do all the things we talked about from a cost and customer expansion. And the guys need to invest in that wisely into the areas where there is continued strength and that’s what they are doing. I think Tim and his team over at the MLP are very focused on leveraging our strengths. You heard Elijio mentioned, we will have an ERP implementation over the next year to really get to Compressco, and CSI groups fully effective and efficiently on a common system across all of the functions with the same system as TETRA and allows us another incremental piece of efficiency.

Excellent. Okay. Gentlemen, thank you very much.

Thanks, Jim.

Our next question is from Blake Hutchinson of Howard Weil. Please go ahead.

Good morning, guys.

Good morning, Blake.

Joseph, in your review of kind of the international landscape for Production Testing, I didn't necessarily hear anything that was kind of a call out of significant sequential improvement over the 1Q. So, I mean, should we chalk up the success on the topline more to kind of the efforts over the last 12 to 18 months to be the first call with significant customers and this is really the quarter where we saw the most progress in those efforts, U.S. land focused?

Yeah. That’s well said. When I first came to touch with the team, we rallied around Production Testing because we had lost significant accounts that we had to anchor accounts for us in the U.S. land operation and to diversify the customer base. What we really needed to do is cut down on projects that we did not make money on. So over the last year, what we have done proactively is look for those opportunities, that’s why in the prepared remarks and what Stu mentioned. The customer diversification has been from money losing contracts to profitable contract. What we have tried to do is lower the risk of exposure with customers that we believe are highly leveraged moving into 2015. We have successfully diversified those. We maybe working for a lot more customers, but we believe that the customers we are working for in this current environment are the active ones and the ones that can pay us on time. We have successfully tried to do that into the second quarter. But if you look at 10-Q that we’ll put out next week, you will see that the G&A for that division has improved significantly, Stu alluded to structural different organizational levels. We have flattened the organization, accelerated the decision-making and increased the amount of sales people. We have to win some of those contracts. So, this summarizes our performance today and the U.S. land onshore

Great. That’s very helpful. And then I was hoping to just -- I don’t know the best way to approach this but the Fluid certainly stands out for the quarter, but Testing and Offshore services tip to kind of eke out profitability in this environment is impressive. In Offshore services, can you characterize the type of asset utilization that you are experiencing right now? And I say that just because I'm trying to understand how low you’ve actually gone and still remain profitable? And then as follow-on to that, would you expect a kind of normal construction season, positive progression for that division or is it kind of what you see, what you get right now?

Yeah. I think if you look at the business in the second quarter and kind of the progression we see for the balance of the year, overall I would characterize as just incredibly low demand. I mean, and there is just a deferral of spending by our customers that is -- as you call started, it’s started last summer and accelerated as the commodity prices came down and that’s continued. So there is no increase in demand taking place at all other than the seasonality of where we are at. We had very good utilization to the second quarter on our major diving and heavy lift assets. We expect that the majority of those assets will continue to work through the third quarter into the fourth quarter. We have a couple of gaps on our barge schedule that that we’re working on filling, but that’s reflected in the overall guidance that we talked about. On our P&A business, we have very wisely staffed that and scaled that at a much lower level than we had a year ago because of the unpredictability of the demand. And I think that’s beyond the obvious help on the cost side. I think that's helped to stabilize the business from a labor workforce point of you. Predictability, we feel really good about that. Our diving business has real low demand. There aren’t a lot of construction projects. We had third-party that released through the end of last year that we had stated we released. And we don’t not anticipate the need for a third party additional asset in the near term. Hopefully, next year, we’ll see a couple of projects come to fruition that would give us the opportunity to match a third party leased to that particular project. But overall other than the typical seasonal progression, where the first quarter is the worst, second quarter is significant better, third quarters is a little bit better, fourth quarter comes down again. It’s a tough business and to get to breakeven or above in that business. And again realize we have virtually zero internal work for Maritech and better than that business. So it’s all third-party in an incredibly tough market is a real credit to that leadership team. It’s not an easy job and the guys have done a phenomenal job, managing incredibly difficult situation.

And no doubt. I’ll turn it back with thanks. Thanks guys for all the detail provided throughout the call.

Thanks.

This concludes a question-and-answer session. I would like to turn the conference back over to Mr. Brightman for any closing remarks.

Yes. Thank you for all the questions. And again, thank you to our entire team at TETRA. Everybody in the company around the world did a phenomenal job in a very tough market. We are all proud of the group and we look forward to meeting our guidance for the third quarter and talking about it in early November. So thanks.

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