Good morning and welcome to TETRA Technologies' fourth quarter 2017 results conference call. The speakers for today's call are Stuart M. Brightman, Chief Executive Officer and Elijio Serrano, Chief Financial Officer for TETRA Technologies Inc. Also in attendance is Brady Murphy, President and Chief Operating Officer. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note, this event is being recorded. I will now turn the conference over to Mr. Brightman. Please go ahead.

Thank you Austin. Welcome to the TETRA Technologies' fourth quarter 2017 earnings conference call. Elijio Serrano, our Chief Financial Officer and Brady Murphy, our President and 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 our fourth quarter results, then turn it over to Elijio for some additional details, which in turn then 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 analysis 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, backlog or other non-GAAP financial measures. Please refer to this morning's news 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. During the call, I want to provide an update on several key areas. There are a lot of positive developments since we spoke early in November. First topic I would like to address is the additions we have made to our senior leadership team. We have added two senior…

Thank you Stu and good morning everybody. TETRA's revenue of $227 million increased sequentially by 5% from much stronger activity levels in production testing, compression services and water management. Fluids was down from the third quarter as the third quarter included revenue from the Gulf of Mexico Neptune project that started in the third quarter and was completed early in the fourth quarter. Additionally, offshore services was also down reflecting the seasonality of this business. One a consolidated basis, adjusted EBITDA excluding Maritech and unusual charges, was $30 million, with adjusted EBITDA margins of 13.3%. Cash flow from operating activities on a consolidated basis was $27.8 million or 12.2% of revenue. Loss per share $0.25 for the quarter compared to $0.03 profit in the third quarter. Adjusting for the unusual items and special charges, the loss per share was $0.04 in the fourth quarter compared to a profit of $0.04 in the third quarter, also adjusting for special items. TETRA only balance sheet remains very solid. At the end of December, there were no amounts drawn on TETRA's $200 revolver. Cash on hand for TETRA was $18.5 million, up from $13.5 million at the end of the third quarter. Going into a little bit at some of the division. Fluids revenue decreased sequentially as the third quarter included the bulk of our large CS Neptune project that we completed early in the fourth quarter. Water management, Gulf of Mexico, non-Neptune, fluids and onshore fluids were all up sequentially consistent with the market trends the industry has experienced. Water management revenue in the fourth quarter was the highest since the third quarter of 2014 and is benefiting from the additional growth CapEx that we have been investing and from price increases that have been implemented. The revenue increase in water management…

[Operator Instructions]. Our first question comes from Sean Meakim with JPMorgan. Please go ahead.

Thank you. Hi. Good morning.

Good morning.

Well, just following on that last comment that Elijio made about your business being at the early stage of benefiting from pricing power. Could you maybe just too drill in a little bit how you see that across even product lines? Meaning is it fair to say that perhaps water management would be an area where you could see the most rate of change in 2018? Maybe you could rank the product categories a little bit just to give us a little more granularity of how you see that playing out in 2018?

Yes. Maybe if I would just rank them individually, I would give you what I think of the suite of businesses that are in the first tier of pricing opportunities. I would say, as we look at the exit rate in 2017 and start of this year, water management clearly is a business that has a lot of demand and the services that we provide currently as well as the services that will be expended with SwiftWater, we expect to benefit from that. Flowback testing domestically, we have seen the timing of that start to show that inflection as we added the year, we expect that's going to continue. As I stated earlier, that lag in water management of showing those trends, large horsepower compression with 92% utilization, certainly seeing the benefit there in the fourth quarter. That's continuing and I would say accelerating in the first quarter. To put that in perspective, the capital we referenced, every capital dollars that we approve between the three of us on the phone, we have the targeted customer, the pricing levels and the returns clearly articulated. We are not speculating and it's very hardwired. So those three, we feel really good about. I would say, the chemical piece of business has been steady. It didn't come down. It's been relatively steady, more modest but it's coming off a better base to start. And I would say, the offshore fluids business, similar to chemicals, with really steady, it is coming off a more steady starting point. And our offshore services business, it's going to probably be similar pricing, still challenged and we think there will a little bit more activity this year in our abandonment decommissioning, given the start of the year. So a little bit more optimistic but clearly those first three services are where we are seeing the inflection point.

Got it. That's very helpful. Thank you for that. Just thinking about the water business, the growth capital you are planning to deploy, could you just talk a little bit about the unit economics on expansion or just return of capital? How do you think about that? How it looks today? Any restrictions you have on the pace of that growth?

Yes. So last year, in our existing water management business, the vast majority of the TETRA growth capital was allocated to our water management. And the vast majority that was allocated to TETRA STEEL and the vast majority of that was allocated to the most robust regions that we operate, which typically have been West Texas, Mid-Con and Appalachia. Those probably are three strongest water management markets for legacy TETRA. And we will expect to continue to invest into that market this year. With the combination of SwiftWater, clearly the Permian area becomes our number one market, our most important market and an area we are most focused on. So I would say we are very, very developed in our integration plan in terms of organizational design. The two organizations will come together day one. The leaders have been identified internally. Everybody knows the organization. The branding has been determined. The target customers have been determined. The customer base is complementary. There is no cannibalization that will take place. The product offering rationalization of lay-flat between SwiftWater and TETRA has been articulated. The team is looking at some of the additional services of SwiftWater and how do we pull that back through. The team is looking at some of the customer base of SwiftWater and how do we pull through flowback testing and product sales on fluids. So we expect that we are going to be very growth oriented. We are very confident in that. One of the reasons we haven't given the guidance yet is we want a little bit more calibration on the growth CapEx opportunity set before we report that out. By the next 30 days, we will do that and let everybody be aware of that. So that's kind of the way we look at it from a return on capital. These are very short return investments. When we looked at SwiftWater, their return on new investment has been very strong, similar to our business and we expect to continue that trend. We clearly have our target of being a very, very strong number two water solutions company immediately. That's the target.

Got it. Thank you. And one more as it relates to that, if I could. At some point now, what will be the plusses or the minuses as you think about potentially re-segmenting and giving water management or making it its own segment. At some point, does it scale enough, given the emphasis on it, does that make sense for you maybe in the longer-term?

Yes. I think it's a great question and very insightful. I think as we look at our existing businesses and how we run them, we will be taking a fresh look at the way we talk through that and report it. I am not going to say we will change, but we recognize we are beginning to create a very large water solutions business that creates a ton of shareholder value.

Fair enough. Okay. Thanks a lot.

Your next question comes from Praveen Narra with Raymond James. Please go ahead.

Hi. Good morning guys. So just thinking through kind of that margin profile you are talking about for the fluids business, just to make sure I am calibrating this is correctly, does it sound like we had a lot of EBITDA generation from the Neptune project in 4Q? So as we think about how that progresses in the first half of 2018, you are getting pricing, should we see those margins step up from the 17% level still? Or do we have a little bit more to go until we get the Neptune projects hitting the second half?

I mean obviously to give you kind of an overview then maybe ask Elijio to go into a little bit more detail. I think you have two variables. We have been very clear that we expect Neptune will be a second half revenue generator and so the impact of that. And we think we have a couple of projects, as we have said back in November, that will tie the second half revenue. We continue to be very confident on that. So when that hits, you will certainly see the margin impact as we have seen in previous quarters when that hits. As a second comment, yes, we did have a Neptune revenue in the fourth quarter but it was much more modest than we had in the third quarter as we had indicated on our November call. And then if I look at the water business, I think I made a comment earlier that a couple of the regions that usually are the largest contributors probably are ramping up as we finish February, a little bit slow in the first half of the quarter. But we are very confident when they ramp up, as they are doing right now, they will stay at that level for the balance of the year and you will see that margin progression on water management as those regions progress up. And then we will see, in my opinion, very quickly, immediately the impact of SwiftWater which, as I said, we expect to close over the next week. So you will see most of this month in the first quarter, full three months in the second quarter and I think that impact will be very visible. So those are kind of the moving pieces that as we look at the progression of fluid margins through the year.

Okay. Perfect. And then I guess when we think about the ability on the compression to gain pricing and the attractive returns you are seeing in that business, obviously, we are seeing growth CapEx from the CCLP side. is there any chance that we see TETRA help finance any of the growth opportunities that are out there for compression? Or should we see that mostly as financed just through the CCLP arm?

A couple of things, Praveen. The first one is that the revenue and profit coming across from non-fleet additions is quite impressive. You have heard from the addition of new order that we received that there is some significant profit coming. We talked about part sales increasing materially. We talked about aftermarket services increasing materially. And then now we are starting to see some benefit of pricing. So I expect that very rapidly on a quarterly EBITDA basis, those trends are going to be much stronger to support the ability to draw on the revolver. However, at the same time, we are seeing the debt market to be very attractive and whether we extend our revolver with the existing group that we have or whether we go out and refinance that facility, we believe that there is enough capacity in the market, given the trends for CSI Compressco that they fund all their growth opportunities without any support from TETRA.

Okay. That's great. On the production services side, obviously the margins were pretty impressive and you talked about how that wasn't just the sale. Can you talk about how the competitive dynamics of that business are different than they were back in the prior upcycle in 2012, 2013, 2014?

Yes. I think at a high level there is clearly more capacity that's entered the market as it typically happens through the growth cycle that we saw in that earlier time period. So I think that's out there. I think that's why that profit recovery has lagged a little bit. But I think similar to last time, we are seeing the areas where we are being favorably impacted being the tactical execution of specific customers in regions that are willing to work with us because of the size of the opportunity and the quality and safety that we bring to the process. If you go to the customer detail that correlates to this growth, it's very high grade customers that are very active and we performed well. In some cases, we have performed both on water management and testing and that's helped us. That's a strategy we will continue to work and accelerate with SwiftWater where we could combine the two. So I think the customer mix with the activity has allowed us to move pricing and do that. It's been very tactical but it's clearly visible over the last couple of quarters.

And Praveen, I would like to add a couple of items from the production testing. We clearly had two very strong trends occur in the fourth quarter. One of them is, we had a large early production facility sale occur in the fourth quarter. And by the way, that's the second one of this year. We had one in the first quarter. We had one in the fourth quarter. And I also mentioned in my remarks that we are expecting to have one in the first quarter. So in the last five quarters, we have had three quarters that benefited from those. So the impression that these are one-off, it is starting to be more common type events. The fortunate or unfortunate thing is that the strong revenue and profit coming from that sale might have overshadowed the improvement of what we are seeing in North America. With a strong rebound in the U.S. activity level, we are seeing amounts of water and sand being injected that have to be dealt with after the well is brought online. It is driving up demand from the production and flowback testing side in the United States. I would suggest that the U.S. numbers are much stronger than the impression one might have that are overshadowed by the EPF sale that occurred in the fourth quarter.

Perfect. Thank you very much guys.

The next question is from Marty Malloy with Johnson Rice. Please go ahead.

Good morning.

Good morning.

I am just following from the last question. On the production testing side, can you help us a little bit more in trying to get a sense of what the underlying business is doing? If you take out the sale and the impact of the revenue on EBITDA side, the results were better for that segment than I had anticipated during the quarter.

Right. Marty, in my comments I mentioned that revenue was up significantly and that the EBITDA margins were the strongest that we have seen in a while. And both were driven, if you were to move the EPF to the side, I think the number would still have been surprisingly strong versus what the most believed that was achieved. And again, I think it's all driven by volumes, utilization of resources but probably more important is our customer base. The customer base that we have is not the customer base that is using every local competitor out there. The customer base is the large independent, the super majors. They put a significant value on the quality, safety and they are also customer that are willing to engage us and rewards us for the equipment and the resource that we bring to the well site.

And just a question here on the onshore water. Approximately what percent of the fluids revenue do you expect that to get to? Could it end up being like a third of the fluid segment revenue?

Yes. I mean, again historically we have said on the legacy businesses, it's 20% to 25%. When we update the guidance, we will probably give a little bit better answer to your question. I don't want to start projecting the impact of the acquisition. But clearly it's going to be on the other side of 25% on a go-forward basis once we get the acquisition and get some of the synergies.

Great. Thank you very much.

Your next question is from Stephen Gengaro with Loop Capital. Please go ahead.

Thanks. Good morning guys. Two things, if you don't mind. It actually may be three. But I will start with production testing just to try to organize it a little bit. The early production facility sale, generally we kind of think about it as maybe as high $6 million, $7 million. I mean is underlying production testing, did it do $30 million in fourth quarter revenue?

I prefer not to break out production testing between the different segments. But the early production facility was in excess of $5 million.

Okay. And is the margin materially different than your underlying business?

No.

Okay. And then just as we think about this going forward, I know you said you would give some more specific guidance in the next several weeks. I think currently the consensus for 2018 EBITDA is like in the $170 million range. Is that at least in the ballpark of where you guys are thinking, excluding SwiftWater?

I would say it's in the ballpark. We will add some more color on that. But I think the take away from this call, I hope is that we are very bullish on the trends on our fluids in 2018, on the legacy business. With the trends in water management, the additional organic investment in water management, the expectation on Neptune in the second half of the year, we are seeing several international fluids market show more activity. So I think part of the fourth quarter margin also is a very quite muted international fluids and I think some of that was timing. We will see that benefit as we go through the first half of the year. So that's positive. The chemicals business always will be steady. We have got a couple of specific growth items in there that will contribute to that. Testing, as Elijio mentioned, we have seen both, the most important thing on testing is the progression domestically and our confidence going forward. Compression, all the pieces of compression are going up. We think we have a line of sight financing plan that enables us to participate at the rate that our operating team is demanding. The team is very aggressive on securing new business with existing customers with known contract and Elijio and I will have a financing plan to support that that is not restrictive. And then offshore services, we think the market is a little bit better. But that's a modest EBITDA. That's not a big contributor to the number. So the big pieces that contribute to the number, we are confident on, Steve.

Great. Thank you. And then just one quick one, maybe it's quick, may not these days. Elijio, where should we be modeling the tax rate for 2018?

We believe that on a pro forma basis, the tax rate in 21% and that's a very good point, Steve. And I would also like to remind everybody that on a cash basis, both TETRA and CSI Compressco have tax loss carryforwards that will allow us to shield any income generated in the United States from cash taxes. Therefore, I think if earnings improve, we are going to see a fall-through from profit before tax to cash flow probably quite strong. But to show it on a pro forma basis, normalized we are going to use 21%.

Okay. Great. Thank you guys.

[Operator Instructions]. We do have one follow-up from Praveen Narra with Raymond James. Please go ahead.

Hi guys. Just one quick follow-up. In terms of the working capital, I just wouldn't see the normal drawdown and AR in inventory that we normally see in 4Q. Can you talk about that? And then how you expect that to progress, at least foreseeable on 2018?

Good point, Praveen. So historically, we have seen Q3 and Q4 be the strongest working capital generators as we monetize a lot of the revenue from the offshore decommissioning business that hit the peak in Q3 and then begins to tail off in Q4. That was more balanced. If you look at the revenue for offshore services, Q3 and Q4 didn't move significantly. I think that the cash draw in Q1 from working capital will be slightly higher than we normally have seen. But then we think that the trend of collections in Q2 to Q3 and Q4 will be slightly better than what we have historically seen.

Okay. Perfect. Thanks guys.

Ad this time, I am showing no further questions. I would like to turn the call back to Mr. Brightman for any closing remarks.

Thank you. And again, I appreciate all the good questions and as you can hear, we are very confident in the business outlook for this year across our major businesses and look forward to updating the guidance as we absorb SwiftWater and then reporting out the first quarter early in May. So thank you very much.

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