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

Thank you, Andrew, and welcome to the TETRA Technologies’ third quarter 2015 results conference call. Elijio Serrano, our Chief Financial Officer, is also in attendance and will give a brief update; in addition, Joseph Elkhoury, our Chief Operating Officer, is with me and will help us in answering the calls. I will provide a brief overview of our third quarter results then turn it over to Elijio for additional details, which will in turn 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, earnings per share, excluding 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 the financial information prepared in accordance with GAAP and should be considered within the context of our complete financial results for the period. In my remarks, I would like to cover a review of the third quarter, a brief outlook into the next several quarters and the associated market assumptions, and finally, a summary of the refinancing that we announced earlier today. Our third quarter adjusted results, excluding…

Thank you, Stu. TETRA’s revenue up $305 million was equal to the third quarter of last year despite a 58% decline in the North America rig count. Compared to a year ago, higher revenue from the CSI acquisition and strong fluid results offset declines in production testing and offshore services. Sequentially, revenue was down only 4% from the second quarter as a result of a seasonal decline in our Europe’s Fluids business. Fluid segment revenue increased 5% from last year, off strong Gulf of Mexico activity levels, but declined $12 million in the second quarter, almost entirely due to the seasonality of our Europe Chemicals business. Adjusted pre-tax margins improved to 30.4% on revenue, up 370 basis points in the second quarter of this year reflecting leverage in our Fluids franchise from higher volumes in the Gulf of Mexico. We continue to benefit from the diversity of our revenue mix and the ability to execute on large projects, some of which were accelerated into the third quarter from the fourth quarter, as customers focused on completions activity. Our ability to secure and deliver on very large offshore projects will result in some lumpiness in our revenue. Production testing revenue of $29 million was down 42% from a year ago on the 58% decline in the North America rig count. Sequentially revenue was down 17%, due to the declining activity levels. In the third quarter, we booked $3.1 million of reserves for bad debts, reserves for VAT expenses in Latin America, and a small amount of severance expenses. Only the severance was a cash expense of $154,000 in the quarter. Excluding these charges, adjusted EBITDA margins in the second quarter were 15.9%, which compared to 21.7% in the same period a year ago. We believe that achieving positive EBITDA and almost…

Great. Thank you. At this point we will open up the lines for any question.

[Operator Instructions] The first question comes from Praveen Narra of Raymond James. Please go ahead.

Hi good morning guys. A really impressive quarter again. Congratulations.

Thank you.

Thank you very much.

When we think about the fluids division obviously, there’s more than just Gulf of Mexico but certainly Gulf of Mexico has been bit of boom for 2015. So when we think about the slight pause until 2Q 2016. Can the middle of 2016 kind of resemble what 2015 will take from an activity standpoint or does it resume I guess what magnitude will it resume at?

Yes. I think overall review that the deepwater Gulf of Mexico will be down slightly next year. There is still lot of completions out there, our customer have from the specific projects that are timed out there so I think directionally, we’re expecting a very good period as those projects pickup again and I also go back to your first point that I want to make sure we emphasize the strength of the fluids is much in deeper and broader than ones’ submarket. We’ve seen continued strength in our Chemicals business, good activity internationally and even in a market like water, which is very, very difficult, we’ve seen some improvements because of new contracts we’ve been awarded and some of the technology the team has introduced. So what we’d like to – the Gulf of Mexico was lumpy, it’s much broader than just ones’ [ph] submarket.

And with regards to water, would you expect any improvement in 2016, obviously it’s going to be a weak environment. Can Texas water improve year-over-year?

I’ll let Joseph handle that one.

So in Q3 Praveen, especially in U.S. land we were able to achieve a sequential 30% improvement in revenues during this quarter, which noticeably improved the overall margins after a difficult second quarter for water. This was in spite of the admission and drop of almost 100 rigs in Q3 over the last ten weeks. This was really driven by our ability to win some business using our automated blender. We capitalized on the introduction of also some innovative water treatment products. So overall we believe that this will continue into Q4. We see the U.S. customers may be curtailing some of the spend during the holiday season. And as a disclaimer, we’ve already seen a little bit of impact and in fact it’s mainly South Texas during Hurricane Patricia and some of the weather fronts we experienced in the last few weeks. But moving into Q1, specifically for water, we believe we have a very competitive position. We will maintain and aggressively target new share, but we believe that as you move into may be reloading budgets with our customers, may be addressing some of these drills for uncompleted wells, we can continue to deliver a similar performance in the next two or three quarters.

Okay, perfect. And then talking more about working capital, you guys have done a really good so far. As we move through 2016, is there more to be squeezed out and if you have kind of an idea of magnitude that will be helpful.

I would say that the first nine months of this year only a small amount of our free cash flows has come from working capital. We expect that we’ll benefit in the fourth quarter as the revenue slowdown and we’ll catch up on our receivables. Comparing 2016 to 2015, we don’t think this is going to be a meaningful impact from being able to generate cash from working capital. We think it’s going to be generated with cash earnings.

And one thing I would like to add to that because I don’t know that we emphasize this as much as we should. When we look at working capital and some of the improvements, a lot of that is driven by process improvements, the operating guys and the financial team are putting in place. Looking at speed and cycle time and accomplishing that and that’s a continuous process that will evolve. But a lot of the success we’ve had this year on working capital has been process-driven.

Right, okay. Great job on the quarter guys. Thank you.

Thanks.

The next question comes from Kurt Hallead of RBC. Please go ahead.

Hey, good morning.

Good morning, Kurt.

I’m just kind of curious, you guys continued to do extremely well in the completion fluids part of the business. And I was just curious how sustainable you think that is heading out in 2016, given reduced expectation for reduced EAB spending budgets.

Yes, I think we talked about on the call earlier and hopefully give some clarity to, you know, there’s a lumpy part of it, there’s no doubt about it. We’ve always said there’s going to be timing on which projects work is done. This time we benefited from several projects being pulled forward. As we look at the results for the third and fourth quarter, we have looked at it at the second half of the year and some of the timing [indiscernible] and pulling it forward. But we think as we get to the second quarter, middle of next year some of these very visible projects that we expect to be successful on, are going to manifest themselves and will be benefited. Is it at the exact level directionally, it should be similar. Our challenge is to – in addition to that diversify the customer base, so that we see the successes we’ve had in the Gulf of Mexico with new customers has been instrumental and the results continue to take advantage of our chemical footprint, which has developed new opportunities for us this year and others we expect will come in next year. So again it’s kind of – it’s the intersection of a very long-term strategy that we’ve had that we’re executing, combined with some tactical execution that is delivering diversification, cost improvements, safety improvements and a lot of the things that Joseph’s guys have been driving this year.

Got it. Now, I’m on the flip side of that, I’m just curious what you think you can do for production testing to try to minimize or offset those same impacts, right. It looks likes production testing is more vulnerable to these spending cut-backs.

So I will take this question. The Q3 performance for production testing was slightly below our objective of being profit before tax neutral. But we are still laser-focused and expect to achieve this goal for the full year 2015. The Q3 results were impacted by some unusual items like [indiscernible] you mentioned in other charges for bad debt and back taxes in Brazil. In North America we continue to capitalize on our, cost actions aggressively diversifying our customer base. We see a light deterioration or we saw a light deterioration in the revenues in spite of experiencing a drop of almost 100 rigs, like I mentioned, in the last few weeks. We were able to replace the activity drop with new business to protect our margins but, one project that pushed into Q4 for us was an international project with an early production facility. If that closed on time which was supposed to be the end of September we would have delivered similar basic performance for production testing like we did in H1. But we expect, like I mentioned to achieve our PVT neutral position by full-year 2015. Internationally we’ve seen a flatfish demand in Latin America. We continue to see the delayed recovery in Mexico. I don’t know whether this will happen in H1 or H2 2016. In Brazil and Argentina we have continued to manage the price, we have continued to manage cost to make sure that we protect our margins, as well. The big difference in Q3 moving into Q4 will be our ability to protect and aggressively go back and reclaim some of the share or the rig assignments in Saudi. This hopefully was impact also positively our Q4 moving into 2016.

That’s great. Appreciate that color. Thanks a lot.

The next question comes from Stephen Gengaro of Sterne Agee CRT. Please go ahead.

Thank you and good morning gentlemen. Two things I want to focus on. The first, when you look at 4Q versus 3Q, and obviously you gave some general guidance. If I look at the different segments, it sounds like because of the timing issue that – and I’m talking about certain dollar terms of operating income, that fluids is probably the biggest along with offshore services. Is that fair?

Yes and I think, fluids is clearly going to be the biggest change much more so even than offshore services, because of some of the project timing, et cetera. I think that’s fair and easy. Joseph said we’re going to be close to breakeven on testing. And that will continue to be there. Sequentially offshore services will be down from the third quarter seasonal and fluids will be down. And I think that compression business will hold reasonably well as it’s done for the first three quarters.

That Production Testing comment was that a full-year breakeven comment or a fourth quarter breakeven comment?

A full-year breakeven inclusive of the fourth quarter improvement over Q3.

Okay, thank you. And then the second question maybe for Elijio, you obviously laid out some of the changes that you’ve made with a new debt get offering on the call. As we look at the fourth quarter and going forward, and I’m curious just trying to figure out sort of the timing of some of these things. What should the interest expense look like in 4Q and then into 1Q?

Yes. The funding of the transaction will probably closed within the next 10 days to 14 days. And at that point you can assume that we’ll have half a month – half a quarter impact from this transaction. And assume that between $125 million of debt that we absorbed and debt that we’re retiring, that the delta and interest expense is about 6%.

Okay. Okay, that’s helpful. Thank you, gentlemen.

Thank you.

The next question comes from Blake Hutchinson of Howard Weil. Please go ahead.

Good morning, guys.

Good morning, Blake.

I just wanted to understand within the fluids business. Stu obviously a pretty strong quarter on a broad basis but you do mention, I think, for the first time being happy with where you are from a manufacturing standpoint. And is this more than just, the benefits of operating at high utilization and through-put or have there been more permanent – changes that are more permanent to the model in your view, from a margin perspective brought on by changes and manufacturing?

Yes, that’s a great question. Our manufacturing business – we always have several variables going on and certainly we have continued to improve the through-put and our big plans, for example, we put some capital into our European calcium chloride plant recently to improve the operations. And we’re already seeing the seeing the benefit of that. So it’s a very specific investment with the very specific expectation that we’re seeing. We continue to evolve the productive of Elk Grove on an ongoing basis. In addition to that, we’ve got other smaller clients that as we go through the process depending on the relative cost of the raw materials, going into that, we have the ability to shift material and optimize points of production. So, again, one of the things we always try to highlight on our manufacturing business, we’ve been doing this for 30 years. This has been the part of strategy of the company, you know, it’s been a consistent thing for over 30 years and – the footprint we have, the supply chain, the flexibility, those all help us as we go through changing markets. Now that business providing chemicals, clearly there’s an oil and gas component of it where demand is down, pricing is getting more challenging and the team needs to offset that with customer expansion in non-energy markets. That’s a big focus of the operating guys as we go forward, but we all – again, reference the Analyst Day coming up. That’s one of the real themes that the team is going to layout there in a little bit more granularities, just some of these very specific areas we do have differentiation both from a footprint, both from a technology that we think is sustainable. I mean there’s a piece that is sustainable versus the market conditions and a portion of that’s lumpy and it’s going to be lumpy over the quarters, so a part of it is pretty good base to build on.

Great, that’s helpful, Stu. Just in terms of – from a modeling perceptive, it would like the offshore services business maintained at least a pretty good utilization base load. And you mentioned just kind of in the commentary just kind of a slow operating environment. From a modeling perspective, should we be thinking may be even worse than slow where we see a significant amount of ideal time for most of your assets or is it really just pricing that’s been a shock every year and you’re still kind of getting a decent base load on your assets and…

And again I’ll give a quick answer and Joseph may choose to expand it. I mean, I think we’ve got pretty good visibility that our major assets are going to work well into the fourth quarter, typically they don’t work all the way through December. Pricing is tough. And that’s the case. We highlighted internally. The results we made with the revenue degradation versus prior quarters – years, I mean, we – to be honest we’ve been taken a large amounts of cost out of tasks for several years. And I continue to be impressed by the team’s ability to squeeze out in buckets of $50,000, $100,000 opportunities that aren’t real visible. And it’s very, very tactical and granular and the team has absolutely adopted the – understand that the market is not going to help us in that business, it is not going to be market led in a short-term, but it’s still a big backlog of work for the intermediate term. We’re predicting the timing of it is very difficult.

So let me just add to Stu a few things, indeed the Q3 division performance was very much exceptional. I’m very proud of everybody on this U.S. team. But like Stu mentioned, this was really mainly driven by a lot of small aggressive cost management and a very disciplined approach to where the money has spent. But we have also succeeded in getting more of what I consider as a fair share of this depressed spends in the Gulf of Mexico in Q3 moving into Q4. We have tried to push the envelope on the utilization and the loading up our assets way into Q4. And in some cases, we’ve benefited from that approach and other cases like I mentioned whether impact in Q4, we have not benefited so much, but the sales and op teams are working together on a daily basis to not only improve the utilization and loading of the vessels and the cruise and who actually is onboard of these vessels, but also to manage the selection process of each of these projects from a profitability perspective. As we move into fourth quarter, we’ll see the impact of the weather like I mentioned, but we will also see may be a positive impact of the expansion of the loading and utilization of our assets way into the may be the end, beginning part of December.

That’s great. Thank you so much and we’ll look forward to the rundown next week. I’ll turn it back.

Thanks.

The next question comes from Jason Wangler of Wunderlich. Please go ahead.

Hi, guys. Good morning. It’s kind have been hit a couple of different ways. But just – for my edification of the fluids side and the declines you see the next couple of quarters. You don’t necessarily see it becoming a seasonal business. So to speak is it just how the timing is kind of shaking out the next few quarters? Is that fair to say?

Yes, I mean, I think the areas where the next few quarters are impacted is not tied to seasonality. We’re always going to have as we said before, that second quarter impact of European Chemicals business, but some of the lumpier projects we have are really just the timing of when the work takes place.

Okay. I appreciate it. And then on the GSO note, is there any prepayment ability or is there penalties is on that, I’m just kind of curious as you guys continue to generate a lot of cash flow just if there is an option on that side?

Yes, there is always – there is your typical components where if you wanted to pre-pay it’s going to cost some money. So I think the way you should look at that is – where we get to expand this a little bit more is, we’ve talked through the capital structure all year, as most companies are doing in this environment. And as we thought through we progressively have continue to feel better about where we are based on the year-to-date results. So every time we update the analysis on our thoughts, as the management team would feel better about it. We’re not certain where the bottom is how long it’s going to be, but under every scenario where we look at, we’re in good shape with our balance sheet through those, those stress testing actions. So clearly this is a positive proactive – two elements, want to be conservative. We want visibility to paying down the $90 million. We want visibility to extending maturities in the headline of having about $50 million due in 2017 and nothing else the 2019. You will relate that balance sheet metric with our operating performance. I would challenge the audience to give us other companies that sit in that position. And we think there is going to be opportunities next year. We want to continue to build out the areas that we highlighted is being strategically important. This gives us more capability to do that.

Makes sense. I appreciate it.

The next question comes from Martin Malloy of Johnson Rice. Please go ahead.

Good morning. Just following upon that last answer, could you maybe talk a little bit more about the areas that you might look to put some capital to work.

Well, maybe we get two different capital structures. And clearly on the TETRA side, the area we’ve invested last several years has been tied to fluids. I think that would be the most logical anything that leverages our technology expands, our technology gives us more regions. Joseph and his team have a nice long list of ideas that they are running through process to validate and quantify and that’s an ongoing process, not an annual event only. That’s the area that we focused. On the TETRA side, we’ve got the – the CCLP balance sheet in currency and we will continue to look for opportunities they realizing – we want to be conservative on the leverage. We will look at the balance between reinvesting and the balance sheet and the distribution and the yield that we’re getting on our distributions and as we always do have a good discussion at the Board level of how to integrate those thoughts.

Okay. And you mentioned new products in your press release on the fluids side – outside of a Neptune are there any other new products that maybe you wanted to highlight. Maybe you could give us an updated in terms of adoption in the market for Neptune.

Yes. I’m very pleased that you asked that question. We’re prepared for the response.

All right, so just we had several questions round the lumpiness so if we think in half shorter than quarter I think we would be able to kind of replicate what we did in halves versus H1, H2 of 2015 moving into 2016. But to give you a flavor of the CS Neptune adoption, we have continued successful implementation of the large project we have in the Gulf of Mexico some of it we’ll continue into next year. In the previous call, I provided colors to saying, okay, look guys, we will explain to you when we start signing additional customers. We have signed another customer, we should start preparing and for the – what I call the qualification process and the auxiliary testing for CS Neptune for the projects for the second customer. We have met with a dozen customers in North America and a little bit less than a dozen customers in Europe as well in the last quarter and we feel confident that, we’ll be able to continue growing and developing the pipeline to really replicate what we have done in 2015 next year. With regards to other products I mentioned the automated blender with water, I also mentioned some innovative water treatment products that have allowed us to grow in Q3 versus Q2, our top line by almost 30%, we continue to hope that, we’re somewhere at the bottom of the rate cycle. We can’t control that, we control the process associated with that. But we focused, laser focused on gaining market share. With regards to the international fluids and U.S. land fluids, we were able to repeat our Q2 performance. We have the solid performance in Africa, the North Sea and the Middle East and we hope to continue to do that moving into Q4 and Q1 of 2016. We did benefit also from the introduction of the additives I mentioned in the second quarter and we’re very pleased with that momentum especially with products like PayZone clean, our BioPol products and other interesting clean up chemicals. In the Gulf of Mexico beyond the big projects like I mentioned we signed one but as to mention in this remarks we also benefited this quarter from two large projects that were supposed to be flattered [ph] in Q4 and they closed in Q3 as we continue looking at differentiated solutions, I’m pleased with the team and the investments we made in what I call the ultra deepwater filtration unit. We have seen growth in that particular application. Moving into Q4, we would see the same type of achievement and we have had, due to the success of those filtration we have seen and had several requests for our customers to go beyond what we do today and try to customize those filtration units towards specific solutions and the deepwater, whether it’s in the North Sea or the Gulf of Mexico. That gives may be a summary of the additional products we introduced.

Great, thank you. I look forward to catching up with you all next week.

Thanks.

The next question comes from Sean Meakim of JPMorgan. Please go ahead.

Hey, good morning.

Good morning, Sean.

So just a follow-up on the Neptune discussion. Can you give us a sense of – is that type of product accretive to margins today? Does it need more skill to get there and what type of adoption rate? Just a little more sense of that trajectory and how it can impact results over time?

Sean we prefer not to talk about margins specific to any product, or any project.

Yes, I’ll just added to this over the short-term, we can’t really tell you whether you can sustain some of the margins or actually predict some of the margins moving into what I call the adoption and the expansion phase. So we’re still with one customer, we want to see more of the application so that we can may be predict a little bit the margins, and the futures and our ability to really move into this niche application. It’s still a niche application, we have interest from several of our customers. But as we develop the pipeline we learn a lot more about our own cost structure, the security of supply, the cost of that supply, and the application of that for different customized solutions for different well applications. They are all valuable that today with specific project you can’t really address or you can’t say this is the margin I can retain or predict for the next year. But on the top line we hope to repeat what we’re seeing and the first application in the second and third of this year.

That’s all and that makes a lot of sense, that’s fair. So then just shifting to CCLP a little bit and that the backlog on the equipment side was cut about in [ph] half sequentially. I was curious if you had more color on what was driving that. Is it just a function of customer budgets running out always we get into year-end, budget exhaustion? And can we see perhaps some improvement in the first quarter as budgets reload or is it more a function of just kind of folks looking to reduce capital spending where they can and perhaps going forward the outlooks have reached a bit more conservative.

Sean, we’ve seen bidding and coding activity remain attractive. But we’re also seeing customers reluctant to pull the trigger and actually issue purchase orders. We think that the bookings that we had in the third quarter are going to be a low point. We expect that there’s some opportunities to close in some of those open bids and proposals that are out there. But again I’ll go back to my earlier comments in that only 10% of our margins are, gross profits are coming from equipment sales. And we’ve got the ability to flex the cost structure just like we’ve done in any other division in TETRA out of our Compressco business.

I think as a tangent to that we want to emphasize there’s parts of our compression services business that continue to be very strong on the large horsepower and the team is focused on how we invest in there and how we continue to grow. So we’re very cautious on the capital. But the capital we’ve deployed is very high return and we’ll continue to do that.

Just to add one more comment yesterday Tim and Elijio covered this in the CCLP earnings call. We are looking at opportunities to help some of our customers where they may be interested in selling some of their compressors that they have and maybe large, more attractive segment, so that we can lease it back to them. So it can be a purchase lease-back for us and an opportunity for them to have access to some cash to continue to deploy. So we’re looking at many growth opportunities but to touch on what Elijio mentioned with regards to the pipeline in terms of quotes activity, we have seen that drop 20% to 30%, but what we have seen drop significantly, is actually pulling the trigger on that quotation whether it is with us or our competitors. So when you look at win rate versus the large quotations, it’s really impacted by the customer pulling the trigger and wanting to spend that money.

And the last comment, Sean is that Tim has mentioned in the past when he went through this downturn in the last ‘09, it was the exact same patent he’s seeing right now. So this is consistent with what we expected coming into this downturn.

Got it. That’s very helpful. Thank you.

[Operator Instructions] The next question comes – is a follow-up from Stephen Gengaro of Sterne Agee CRT. Please go ahead.

Thank you. Two quick ones gentlemen. First, can you give us a rough estimate on a production testing business is how much is outside of the U.S.?

It’s about half-and-half.

Okay. Okay. Thank you. And then secondly, I don’t want to read into this too much, but this comment you made sort of stood out to me when you talked about the new financing. I think we’ve made comment that it affords us the opportunity to support CSI Compressco under the growth and expansion opportunity. Is that just now is it something there that I should be more aware of or is could we feel like thought that CSI was completely funding itself.

It is and that’s the way, you should think about it, and if we’ve got more liquidity for general investment on high return projects and you know the question we always get is, as the GP sponsors, TETRA’s view in investing in CCLP and our answer is always the same as a function of the project and the ability of CCLP to fund it on its own and we look at that through the eyes of all of our alternative investments. But I wouldn’t leave into with that, the reason the driver, the catalyst, for doing it was to greater focus on that issue. That’s not the intent.

And I will add that, we talked about CSI Compressco looking at buying assets of operators for the midstream company that may want to divest those assets and then we come in and back to deliver the long-term contract. It’s in a scenario like that percentage itself. And CSI Compresco made it incremental capital to do it. We will be available to support them in that perspective. But from an organic growth, I’ve run the business month-to-month, quarter-to-quarter, they’ve got more than adequate liquidity to do that.

Great, I appreciate, you’re clarifying that. Thank you.

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

Yes. Thank you. And as always great questions, appreciate the following obviously, we’re really pleased with the quarter. We’re very pleased with our new financing with CSO, and look forward to long and strong relationship. As I said after the second quarter, I’d be demystified in thank all of our team for delivering. They’ve worked hard, they’ve made tough decisions, executed excellently and it’s a great effort. We’ll look forward to catching up in early 2016 to review the fourth quarter and talk about 2016. So thank you.

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