Welcome to the First Quarter 2017 Results Conference Call. The speakers for today's call are Stuart Brightman, President and CEO; Elijio Serrano, Chief Financial Officer for TETRA Technologies. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Mr. Brightman. Please go ahead.

Thank you, Danielle. Welcome to the TETRA Technologies First Quarter 2017 Earnings Conference Call. Elijio Serrano, our Chief Financial Officer, is also in attendance this morning and will be available to address any of your questions; as well as Joseph Elkhoury, our Chief Operating Officer. I will provide a brief overview of our first quarter results then turn it over to Elijio for additional details which, in turn, will be followed by your questions. I must first remind you that this conference call may contain certain statements that are or may be deemed to be forward-looking statements. These statements are based on certain assumptions and 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, adjusted EBITDA, adjusted profit before tax or adjusted earnings per share 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. In my remarks, I would like to provide an overview of the first quarter of 2017 and our outlook for our business for the remainder of the year. I'm very pleased that during the first quarter, we continued to see favorable trends that we had noted earlier in the year. Our…

Thank you, Stu and good morning, everybody. TETRA revenue of $168 million decreased sequentially by 3% as improvements in Fluids and Production Testing were offset by the seasonality of our offshore decommissioning services and lower equipment sales at CSI Compressco. Fluids revenue increased sequentially by 14% to $73 million despite the lack of a significant CS Neptune project which we anticipate to begin later this quarter. The higher Fluids revenue was from an increase in traditional calcium bromide activity in the Gulf of Mexico, driven by [indiscernible] and stronger activity levels from existing customer base. In addition, our U.S. onshore oil and gas fluids sales were materially higher than the fourth quarter, reflecting the increased drilling and completions activity. Both the Gulf of Mexico and U.S. onshore gains in activity reflect the competitive advantage we have, being vertically integrated with a good cost advantage and proximity to market position. Adjusted EBITDA for Fluids of $13.6 million was the highest since the fourth quarter of 2015, excluding the benefit of any CS Neptune projects. First quarter Fluids adjusted EBITDA margins of 18.6% were also the highest since the fourth quarter of 2015 without the benefit of CS Neptune activity. We anticipate this trend to continue into the second quarter. The CS Neptune project that was previously delayed from the fourth quarter into the first half of this year is currently scheduled for later this quarter. Production Testing revenue increased sequentially by $6.2 million on the combination of stronger activity levels in North America and the sale of an early production facility in Latin America. As a result, adjusted EBITDA improved by $1.6 million and was our first profitable adjusted EBITDA quarter since the first quarter of a year ago. Adjusted EBITDA margins were 5.4%, also the highest since the first quarter…

Thank you very much. And at this stage, we'll open the lines for questions.

[Operator Instructions]. The first question comes from Sean Meakim of JPMorgan.

Stu, could you give us a sense of the contribution on the incremental margin for Fluids? Trying to get a sense for how much was our share of water management versus how much is offshore Gulf of Mexico. I know they are very sensitive the deltas have those businesses.

Yes. I mean, again, I don't want to get that granular on the subcomponents, but I think in the -- on the points we discussed on the narrative, both of those contributed. I think I would categorize it as we're continuing to see ongoing activity ramp up in North America Fluids which will -- we expect that trend to continue. And even without Neptune, we had a very strong Gulf of Mexico first quarter based on the projects that we'd done with our existing customers. And I think we feel good about that. And our North America chemicals business, particularly with the onshore activities picking up -- and we continue to have strength in our nonenergy clients as well. So hopefully, that gives you a little bit of color. The net result were the margins that we ended up with. But again, I'd highlight there were no major Neptune projects in there and those are the components that led to that revenue and earnings uplift.

Is it fair to think that the order in which you gave us those -- as an indication of the rank of the contribution? Is that fair?

I would say they're all meaningful contributions. Both the Gulf of Mexico and the water were meaningful. I don't want to rank them and kind of back into the relative percentages. I think -- again, Joseph has a couple of other points of color he'd like to add.

Sean, to simplify the contributions in the first quarter, 1/3-1/3-1/3 if you want to make it very simple, as equally as important for us compared to the -- or sequentially.

Okay. That's helpful. And then just thinking about some of the moving parts on the cash and the free cash guidance, obviously, you gave a lot of kind of good detail on some of the pieces in terms of the change. But could you give us a sense of how much of the first quarter delta would you say was working capital-related? Trying to think about how that impacts the expectation going into the back half of the year. And then can you give us a sense of the Neptune contribution to the second half in terms of the cash guidance?

So Sean, let me address those questions. All the use of cash was on working capital. We had a really strong ramp-up toward the back end of the quarter which didn't allow us to invoice and collect it before the end of the quarter. And that's continuing into April. And also, remember that traditionally, we have seen Fluids peak in the second quarter, especially as the Northern Europe activity hits its highest volume and all that revenue is monetized in Q3. And then offshore decommissioning starts off with an incredibly low base in Q1, ramps up in Q2, peaks at Q3 and then we monetize all that AR in Q4. Three years ago, when we generated revenue of $80 million, $60 million of that came in the second half of the year. Two years ago, when we generated revenue -- free cash flow of $120 million. $80 million of that $120 million came in the second half of the year. So there's a seasonality that's built into our business that consumes working capital in the first half and monetizes that working capital in the second half. And we expect to see that trend. Then the Neptune project, we mentioned that we're going to begin that in the back end of the second quarter which means that we'll probably monetize the AR in the third quarter. And then we have previously mentioned that there's incremental project or half project coming also up in the Gulf that will be done in the second half of the year which we expect to also monetize that AR in the second half of the year. So all that leads toward a significant use of cash on working capital in the first quarter and that should be monetized in the second half of the year.

The next question comes from Praveen Narra of Raymond James.

So I just wanted to kind of follow up on Sean's question a little bit. And I can certainly appreciate that you did not want to get too granular with this. But if we think about the Gulf of Mexico sales in the first quarter, how do those margins compare to a normal Neptune project just relative to each other?

I think consistent with our prior calls, we don't delineate that. Clearly, the Neptune has a higher margin than the standard. But again, the margins associated with the Gulf of Mexico in the first quarter clearly were very good as well to contribute to that overall margin that we had.

Okay. And then, I guess, if we think about the Gulf of Mexico, we've heard about some other service companies kind of reducing their footprint in the Gulf of Mexico. Can you talk about kind of how you guys capture market share today and then how that competitive dynamic has either shifted or how you guys are seeing that today?

Yes. I'll let Joseph handle that one because he's got the market share memorized.

Yes. So simply, in 2016, we tried to improve our customer base and we won several smaller to medium-sized anchor accounts that have helped us on year-to-year market share position. Our customer base has been more active in the first quarter. We expect that to continue for the majority of 2017. And the wins that we have with regards to spot sales have helped us a little bit as well in the first quarter. Moving into the rest of the year, we will continue to aggressively target that spot market to improve our position. In terms of market share positioning, with regards to our completion fluids brand, we feel very comfortable that we can retain and maintain those market share wins we've had in the last 18 months.

Yes. And again, I don't want to miss the opportunity because I want to continue to highlight it, just the overall strength of our Fluids business. We've got several businesses. Sometimes, we get into a lot of detail of different pieces which is fine. But again, the margins we're generating, our superior position on water management in the U.S. -- there's a lot of information out in water in the public domain these days. We have a very strong franchise and our continued new technology and our position, as Joseph mentioned, on the completion Fluids and the industrial piece that continues to perform, it's a very powerful combination that should always be the headline of what people think about when it comes to TETRA.

So Praveen, just additional color on the rest of the year. Elijio did mention the seasonal pickup in our franchise in Northern Europe, so that will happen in Q2. We have seen an improvement in oil and gas for our chemical products on land in the first quarter and we expect that to continue for the rest of 2017 if we can really maintain those commodity prices around the $50 oil and not have another kind of head fake here moving into the rest of the year. And then lastly, we started slow on international, both on Fluids and Production Testing. And looking at the first part of Q2, we're picking up activity both on Fluids, completion fluids in addition to our Northern Europe chemical products and our Production Testing internationally, specifically in Saudi. So that should help you really in your model if you're trying to figure out the rest of the 2017 projections.

The next question comes from Stephen Gengaro of Loop Capital.

I'm going to ask one more question on the Fluids side and then I'll move on. But the second quarter, you talked about some of the positives that you have. The incremental margins that you saw fourth quarter, first quarter, can they be replicated in Fluids in the second quarter given what should be pretty solid revenue improvement?

Yes. Again, I think Joseph was more precise than me on delineating the portions of it. And I think, as we said, we expect the onshore to continue to be strong and ramp up and we plan to deploy some additional capital in that business. The Gulf of Mexico non-Neptune was probably a little bit busier in the first quarter than we would anticipate on the average going forward, more a function of the specific jobs by the specific customers that we did really well on. And the seasonality that we always see in the European chemicals, that's kind of well documented historically of what that does. And the Neptune piece, as I said on the earlier question, typically has a little bit -- has higher margin than the average fluid. So I think if you put all those together, we feel pretty good about the margin progression.

So Stephen, I would encourage you to go back and look at the quarterly trends for the Fluids margins and you can see the impact every time that we've done a CS Neptune project and what it's done to our overall margins.

Okay. And can you comment on the Fluids side, how the U.S. land revenue growth compares to rig activity sequentially?

Yes. So if we take the low point of the rig count from last year to current, that has doubled. In our Fluids franchise on land, we have definitely exceeded those rates. And by the time we're at full run rate by midyear, we would have more than tripled the top line compared to the low point of 2016.

Okay. And then just one more on the -- actually, it's on the Fluids side as well. Several years ago, there was a -- I'm trying to remember the actual drivers, but there was a shortage and a sharp rise in the raw material cost. And you guys have the vertical integration strategy. You saw kind of an explosion in Fluids margins for a period of time. Given the industry trends right now and the demand growth that we're seeing which is pretty rapid, are you seeing anything on the input cost side that could potentially lead to maybe not the same level of magnitude but that kind of increase in sort of -- your peers pushing prices on Fluids and you benefiting from the raw material that you have secured?

Yes, nothing of any material nature.

Okay. All right. And then just one quick one. Production Testing, can you give us any sense for the size of the early production facility in South America just so we could sort of get a sense for the modeling impacts going forward?

We prefer not to be that granular given that it's one project with one customer. But I would say that the sequential improvement was driven by a combination of North America and that EPF sale.

The next question comes from Martin Malloy of Johnson Rice.

Question on the Fluids and the additional growth CapEx there. It sounds like it's maybe about $5 million there. I just want to confirm that it's roughly correct. And then maybe if you could talk about the payback that you're looking for there.

Yes. I mean, again, I'm not going to get that specific on the amount of the growth CapEx other than to say the operating guys are very focused on identifying the mix in the geography and that is -- that will contribute to the revised free cash flow. So we feel pretty good about that.

Okay. And then on the Neptune side, could you talk about your international opportunities and maybe update us in terms of some additional customers looking at or maybe approving the product?

Yes, I'll do that. This is Joseph. Good question. On CS Neptune, like Elijio mentioned in his prepared remarks, we expect to start this project towards the back end of Q2. That was the project that was delayed from 2016. So the revenues and the margins should really start somewhere around the end of Q2, moving into the second half of the year. Once that project is completed, we have a partial project that was kind of put on hold in 2016 that will start in Q3 and hopefully finish in Q3. With regards to pipeline, like I mentioned earlier in the Q4 call earlier in 2017, we continue to aggressively hunt for opportunities. We have a couple of credible opportunities still in the pipeline. These are the same opportunities that I spoke of earlier in the year. The product would have had a lot of other applications were it we were more active in, say, the offshore new projects. So with some of these customers, we're talking about projects that will be kicked off later in the year moving into 2018 rather than work that may or may not happen in 2017.

[Operator Instructions]. The next question comes from Cole Sullivan of Wells Fargo.

Most of my questions have been answered already. But on the Fluids side, you talked a lot about the different activity components that you're seeing. Can you give us a little bit more color on where you're seeing pricing within each of those fluid businesses?

Yes. I mean, at a real high level, I think the pricing has held up reasonably well offshore. I think we're starting to see some improvements onshore. That's part of that ramp-up. And then on the industrial, the chemicals side, I think that's held up reasonably well. So it's all -- we're seeing the improvement in the areas you would expect. In the areas that held up during the downturn, they continue to do well.

Okay. I guess last on the backlog for Offshore Services. It sounds like it's shaping up pretty well. Can you walk through how much visibility you have for this year? Is it everything's, I guess, pretty much over to 2Q and 3Q? Can you go into a little more color there?

Yes. I mean, we feel very comfortable with our projections for the second and third quarter. What we're trying to figure out is if we can extend the season into October and November, like we've done in 2015. So we're -- I want to try and give you a number, but it's really not public information. We've never given that number. But it's definitely more than around 3/4 of our projections for this year. And we feel comfortable between the verbal awards and the POs received that we can deliver our projections for the rest of the 2017 revenue and related margins.

A couple of additional comments just to kind of further expand that. First, we're seeing, for the first time in probably 2.5 to 3 years, increased spending by the operators. I mean, that's been delayed, deferred. And that spending is clearly starting to increase. And secondly, I would argue that our balance sheet as a company and the strength of that and our ability to go out and compete with this business on a relative basis continues to get stronger and stronger. And I think that's noted by our customers and I think it's very important as they look at these complicated jobs that they see the stability of our business and our people in that segment.

There's a follow-up question from Stephen Gengaro.

Just a follow-up on Cole's question on the Offshore Services side. You talked about being in a better position from a backlog perspective. Would -- is it fair that the income that you generate in that business in the middle 2 quarters should be above a year ago?

We would expect, for the full year, we're going to be above last year. And we've said the sequencing of the quarters is probably similar to historical patterns.

Okay, great. And then just one other follow-up. And I know this came up on the CSI call last -- I guess yesterday. The pricing on the -- in general -- because I looked at sort of the revenue sequentially, 4Q to 1Q. Even on the rental side, it was kind of flattish. But it could be that I guess the price because utilization is up a little bit. On the higher-horsepower units, you said you're close to kind of seeing some price. Do you think you'll see that in the next couple of quarters? And if you do, when does that sort of hit the income statement?

Yes. I think from a pricing perspective, we probably have seen the majority of the impact of the concessions we've given over the last several quarters. So moving forward, I do not want to have any projections that pricing is not -- is going to turn. The sales cycles and the placement of compression is normally in months rather than in weeks, like Production Testing and land fluids and water management. So to turn it around from a pricing and revenue per horsepower average is going to take more than a few months to recover. So we hope that we will see the benefits of some of the new placements on the large horsepower which, on a relative basis, are much better rates than 2016. But in a relative basis, the deployed horsepower will be insignificant in the short term. So it will take a few quarters before we see a large impact from pricing. On the mid-to-lower horsepower, that hopefully will turn much quicker because of the amount of expected horsepower deployment here over the next 2 or 3 quarters.

There's a follow-up question from Martin Malloy.

I also had a follow-up question on Compressco. On the smaller and mid-horsepower units, I guess I would have thought that we'd see an increase in terms of utilization by now given that gas prices have been relatively healthy here for a little while. And also, if you can maybe talk about the inquiries or activity levels related to vapor recovery on those smaller units.

Yes. So on the mid to small horsepower, we've seen an increased number of inquiries, if you will, related to gas lift and vapor recovery, specifically on really wet applications and the oil applications. The main challenge is the current rates for those compressors, right? So we've seen an increased inquiry level in the Permian, the Delaware Basin, the SCOOP/STACK and the Niobrara. So our backlog of opportunities continue to increase and we have had a couple of months of net increases on the low-horsepower segment with regards to number of compressors. Like I mentioned, hopefully, we will continue to face additional demand as the economics of those -- or the lower-horsepower class, as the economics of that lower-horsepower class start to improve for our customers, we will see increased demand and hopefully, utilization will turn. We, on a relative basis to last year, feel more confident that the economics are better. You have to figure out whether the customers are willing to deploy that capital on those wells in the short term.

The next question comes from Marc Bianchi of Cowen.

You guys have already discussed this a little bit, but I wanted to clarify on the progression of Neptune over the next couple quarters. Do I have this right, that the project that carried over from last year which is about half complete, so there's another half project, that's the one that's starting up at the end of second quarter and then goes into the third and then there's another project in the third? Is that correct? Or if not, could you correct me on it, please?

I think you've got it backwards. I'm glad you asked because we must not have made it as black and white as we should. The larger one should be the one that starts at the end of the second quarter and goes forward. And that should be followed by the one that started last year that would get finished.

Okay, great. And all of that would presumably wrap up by the end of the third quarter. Is that kind of the best estimate at this point?

It is. It is.

Okay. And then what else do you have that could potentially fall into '17 on that front, if there's anything?

I think Joseph had answered that before, but I'll let him give a quick response again because I know it's important.

Yes. I mean, there are, like I mentioned earlier, Marc, a couple of other credible opportunities. I do not want to sit here and guess that they're going to happen in 2017. The probability of them happening in 2017 is low. Anything could happen. But at this stage, we're looking towards the end of the year and 2018.

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

Yes. Thank you very much. And as always, I appreciate the questions and we will look forward to catching up in early August with the second quarter results. So thank you very much.

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