Good morning and welcome to TETRA Technologies' First Quarter 2018 Earnings Conference Call. The speakers for today's call are Stuart M. Brightman, Chief Executive Officer; and Elijio Serrano, Chief Financial Officer for TETRA Technologies Incorporated; 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 that this event is being recorded. I will now turn the conference over to Mr. Brightman. Please go ahead, sir.

Thank you, Cole. Welcome to the TETRA Technologies' first quarter 2018 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 highlight few key items and then 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 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 those 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. We've been very focused on the segments that will deliver higher and more consistent and predictable returns on capital the future as well as simplifying our business model. With that in the mind during the first quarter, we took a series of actions to further position us in that direction. I will talk briefly…

Thank you, Stu. Before going into the first quarter, we felt I'd like to address a few housekeeping items given the items Stu mentioned earlier. Following the divestiture in the first quarter of our offshore decommissioning and Maritech operation, the result of those businesses are being reported as discontinued operations. This would be for all prior periods and for all periods going forward. The 10-Q that we'll file and will do reflect those segments as discontinued. We are also reporting our results in three segments completion services and products, water management and flowback services, and compression. Essentially, we have moved water management from fluid and have combined it with production testing. Stu mentioned that this is one of the few areas that are growth capital will be directed towards. All fluids infrastructure is fully built and requires only modest maintenance capital. As the offshore market returns, we can increase production with volumes without requiring more capital. Friday, a week ago, we filed an 8-K to have our financial results for the past three years by quarter reflected in the new segments and reflecting offshore services decommissioning and Maritech as discontinued operations. If you haven't seen that information, I encourage you to download the 8-K. For CSI Compressco, we're accelerating our investments in large horsepower equipment. To better track utilization amongst the various sizes of equipment and to allow for better peer comparisons, we will be reporting in three categories 0 to 100 horsepower, 101 to 1,000 horsepower, and over a 1000 horsepower. We have posted to the CSI Compressco website utilization for those three categories for the past three years. First quarter revenue from continuing operations was 199 million compared to 200 million in the fourth quarter and compared to 159 million from the first quarter of last year. Revenue…

Thank you, Elijio. At this stage, we'll take questions.

We will now begin the question-and-answer session. [Operator Instructions] And the first question comes from Marshall Adkins from Raymond James. Please go ahead.

Yesterday, you gave us a pretty bright outlook on compression, pricing and utilization going forward. Stu, could you hit on the same issues for the other kind of two new divisions fluids in the water division, just tell us the landscape in terms of the utilization outlook and where pricing trends have been?

Yes, I mean we see on the water side, the similar trends as we talked about on compression yesterday, and we highlighted again today we see activity picking up, very strong in the Permian, very strong in Mitcon. We feel very good as we indicated on the initial performance from SwiftWater. The integration is going great the organization is in place. We're hitting our internal milestones on some of the back office, getting integrated the customer reaction across, so it is going great. So I would say activity will continue to increase on water. We've seen pricing go up. We're practical capacity on our TETRA STEEL. So, we'll be investing in that for produced water. We're getting very close to practical capacity on the single-jacketed hose. Same thing, we kind in that more in the freshwater, the TETRA STEEL more produced, flowback testing, we're seeing the activity pick up, pricing pick up at a lower inflection point and the water, but still we're in the double digit EBITDA margins on that business, so that continues to go well. So, we feel really good about that internationally and waters pretty much the U.S., but international testing side, we we've got EPF in the backlog that we expect will generate revenue and earnings in the second quarter, so we feel good about that. On the fluids -- completion fluids and product side, Neptune that sales funnel increases, the two projects we've been tracking we feel really good about that, and feel more confident than we did 90 days ago with LB H2 revenue and earnings. As I said more importantly, we see the sales pipeline increasing and I think as we go into 2019, we will have pretty good ramp-up of those opportunities and that will translate to revenue and earnings. Gulf of Mexico activity done, Neptune relatively flattish, pricing relatively flattish, although we’re pleased to see some major deepwater projects begin to get sanctioned. So, we've always felt that was a couple of years down the road before the base deepwater would pick up, and I think we’re beginning to see the first signs that may come to fruition. But even absent that, we have got Neptune opportunities we could handle. So we feel very good about and look at the full year guidance versus the first quarter, we see the bridge. We see the path for the balance of the year to get those numbers. We’re all very, very confident in putting the guidance hence why we put it out there.

Though utilization pricing across the board on that guidance you just mentioned, your water margin expectations are meaningfully better than what you put out the last few years. How much of that is the addition of SwiftWater versus just the core business getting a higher pricing and better flow through?

Yes, it’s a meaningful combination of both. SwiftWater on the metrics, we quoted and obviously a very higher-margin business, but other elements of the legacy business on the water side for TETRAs very high as well. So I think we've always had a similar margin made SwiftWater, probably average is up a little bit, but we were still in that general direction on the TETRA side.

And the next question comes from Blake Hutchinson from Howard Weil. Please go ahead.

Just first wanted to touch Elijio on your free cash flow commentary, you mentioned you know that there was a ramp in activity towards the end of the first quarter that there was a little bit of a pull-through for the Company's. I guess I want to also and just when we think about second quarter, we have the European bills and perhaps you will be billing kind of second half Neptune project. Do we need to think about be prepared for 2Q to perhaps be another decent-sized draw before we start improving the second half?

We don’t think that the second quarter will be any size any near the size of consumption that we had in the first quarter. And yes, there is a buildup and inventory and AR that we had with Northern Europe but that inventory is drawn by the end of the second quarter and then we start some of those collections into June time period. We think Neptune will be closer to backend of the year. And therefore, I think that we will see working capital monetize Q2 and Q3.

And then, a divisional question is as we kind of dig deeper in to understand that these new divisions, you did call out I guess in the release some downtime at one of your manufacturing facilities. As we look at the first quarter number, does that have perhaps an undue influence? I guess, when we think of factory downtime that can be quite a drag on margins. But that is impactful perhaps for completion fluid and products as just slow start to the year in the Gulf and U.S. land.

A couple of areas. First, we did mention on yesterday's call for CSI Compressco that we had an unusually and abnormally hard freeze in the early part of January and we have spent almost $1 million, people’s time and parts either going out and unlocking equipment or proactively addressing equipment so that it would not lock up during that time period. So, CSI Compressco took about $1 million here in Q1 associated with that. On the fluid side, we did have some shut down from our chemical plants from heavy rains and weather conditions that we saw on the eastern side of the United States but also the fact that it's about $1 million in the first quarter. So that's reflected in our numbers that clearly we don’t expect that kind of weather in Q2 and beyond.

And then, just perhaps one more, I'm not sure if this is lost in the commentary, just the base testing margins, given the slow start in the U.S. I think you guys outlined the recurrence of production facilities and talked a lot about the water business, the kind of base testing business take step back in terms of margins during the quarter that we should expect to recoup itself if the U.S. picked up exiting the quarter?

So, we've had some very strong activity on EPF Q4 with a couple of very large projects. Q1 was a slightly smaller project. And then we’re expecting another project in the second quarter. To some extent those are distorting the margins of production testing. But, I would say that if you were to look at our run rate that we started with in Q3 that we have continued to see sequential and modest increases in production testing base margins, both for the United States and our Saudi business. And with the pricing that Stu mentioned we’re able to achieve and the volumes continuing to increase, we think that the gross margin continue to improve, and we've guided the full-year in the low 20s for the segment, which includes strong performance in the production testing side.

And the next question comes from Martin Malloy from Johnson Rice. Please go ahead.

I wanted to ask you about the water flowback side. Maybe if you could just give us some more perspective about the competitive dynamics there and ability to add additional -- your ability to add additional capacity?

Yes. I think, water and flowback testing, very fragmented businesses, they always have been. We like our position with the scale that we have in Permian now. So, we feel like we’ve got a very, very strong position there on the water. And we think we will have a larger position in testing as we get some of the synergy. We certainly have been very disciplined on the water side to invest in the specific areas that we see as the higher return. So, if you look at all of our internal capital and our acquisition of SwiftWater and acquisitions we may look at in the near future, it's all around the water transfer at the well site, being focused on the produced water, recycling. Those are the main areas. And we have some ancillary services with SwiftWater we think will help us. So, we’re going to be very disciplined in that area. We think we can continue to grow organically. The majority of that $40 billion to $50 billion of capital we referenced in the guidance is going to be around that business this year. Testing continues to be very fragmented but we’re showing good gains in several of the areas. And we expect we will continue to invest as necessary in certain sizes and areas we’re getting near full capacity and we will look at investment there. But we like where we are in that water solution space. We see that as a bigger play, more integrated. We don't have to be all things to all people, but with the range of services we have, we think we can leverage that with our big customers.

Okay. And my next question is on the offshore completion fluid side. I just want to ask about the first part, the Neptune projects and if these are new customers and if it’s international markets that some of these opportunities are in for second half of the year. And then, as we hear more news about FIDs with Brent over $70. When that really starts to impact your deepwater completions fluid size, is it more of 2019?

Yes. I think the first of the question on two projects we referenced for the second half of the year, both of those are with new customers internationally. But, both of those customers we have been working with for a long period of time, and they are very familiar with the product they’ve done the testing. We’ve got all the elements in place. So, it really becomes the timing of the drilling and then subsequent completion. So, the new customers, but they are not -- but the customers we have been working on Neptune with for multiple quarters. So, we feel very comfortable about that. And as I said earlier, we’re finding additional customers looking at additional applications, looking at how we expand the customer mix and applications on a global basis. I think, when you look at the deepwater, in my opinion, at $70 oil price, you'll continue -- you will see new projects sanctioned. Our customers are all very, very successful in bringing down the breakeven cost over the last three to four years. I think that we will start to see hopefully the impact of that new investment as we get to the second half of next year and into 2020. I think, we are seeing activity pick up in the North Sea for our existing business on fluids. So, I think if you kind look at on a global basis, we’re seeing some activity picking up, some orders picking up there. And I expect the international fluids piece to contribute to the positive bridge for the last three quarters of the year.

And the next question comes from Stephen Gengaro form Stifel. Please go ahead.

I guess, two questions. One is, when I look at the TETRA only cash flow guidance, could you provide a little additional color on that? I was -- as I said, back into it, I was struggling a little bit. Could you just kind of give us a sense for how you get there? I assume does that include the distributions?

Yes. So, what I would do Stephen is if you look at the guidance that we provided in the press release, maybe take a midpoint of EBITDA and then at the very back of that press release, we provided a reconciliation to PBT. So, we’ve given you interest expense. And you can I think back off interest expense from EBITDA, back off midpoint of CapEx and then assume a small amount of cash taxes given our tax loss carry forward in the United States and then that in the distributions of the $12.6 million that I mentioned coming in from CSI Compressco and then from there you can assume that the delta is going to be a small use of working capital.

Okay. That's the gap; the filler is the working capital. And then, second, as you provide us with the new color and the new segments, are you willing to, particularly for the non-compression business, are you willing to give us a rough estimate, even if you are looking back to 2017 on sort of the geographic split on those two segments?

We’ll file the 10-Q, you will see that the new revenue recognition standards that went in will have a geographic split. So, I’ll defer to the 10-Q that would be filed, so you can have a bit of color on the geographic split.

Okay. And then, just one final, as we think about the growth that you are projecting relative to your guidance, I imagine that on the water side, you're layering in SwiftWater, but the bulk of that growth on water and flowback side is driven by just increased U.S. activity. And I think I guess, similarly on the fluid side. Is that how we should think about the primary growth drivers in ‘18 in the U.S. land?

Right. So, look at it from two perspectives. The first one is that the first quarter included $8 million of revenue for March from the acquisition of SwiftWater. Q3 -- I mean Q3 and beyond will obviously have three months of revenue, so that’s $60 million type pick-up automatically. And Stu mentioned that we’re also adding growth capital, primarily on the water transfer side all in the United States that I think will also be a significant driver. And then, with the rig count continuing to increase and the water volumes continuing to be significant, I think the demand on the flowback testing will continue to also be higher. So, yes, it will be U.S. driven and it will the full benefit of the SwiftWater acquisition.

And the next question comes from John Watson from Simmons and Company. Please go ahead.

Stu, I really appreciate the simplification of the story, I think we all do. Is there anything else that TETRA has planned to further simplify, to further streamline the business that you can share with us?

I think, at the moment, we've accomplished an awful lot. If you go back over the last few years, we’ve been pretty consistent on the themes and where we’re going to invest and what was noncore. As we look at it today and just take a step back, we’re comfortable with the three businesses. We’re organized internally around the three businesses. We have a lot of opportunity to invest in each of the three. Again, the fluids, there is less of a need for capital given the capacity that’s in place. But we feel there is a lot of free cash flow and growth in that. So, the short answer is, there is nothing that we look at today that is non-core. Everything we have, we like. We think we can grow it. We can scale it. We can derive positive cash flow et cetera. I think it's easy to understand. We really try to continue to make certain strategy, the results, our vision, the guidance this year. That's all part of making the business as simple, transparent as possible. And I think we tried to lay out how we go from the first quarter run rate to the full year guidance with the comments on SwiftWater’s results in March, the growth of water management, the capital allocated to it, our view of the deepwater, our view on Neptune, the commentary yesterday, today on CCLP pricing utilization, CapEx, Horsepower. So, I think it's a very easy to understand strategy as well as easy to understand steps to achieve the financial results this year. And I would also add, the balance sheet on the petro side, we’re in very good shape with liquidity and leverage. On the CCLP side, we’re in very good shape with no covenants, $100 million of cash that we’re deploying. And I think Elijio, Brady, myself and Owen on the CSI Compressco side also understand that we need to, over period of time, take that debt down on CCLP. We have space today with the covenants but over period of time, clearly, we want to have the leverage ratio lower than we have today. So, we’ve said that we’re consistent; that’s an action. We will continue to evolve as the business performs and the markets allow us to.

Right, okay, makes sense. I know, we’ve touched on SwiftWater and flowback quite a bit but I’m going to try another question. It looks like to me and correct me if I'm mistaken that SwiftWater EBITDA margins are slightly higher than TETRA’s legacy business. Is there anything that SwiftWater's doing operationally that explains that delta or that the TETRA legacy business could learn from to maybe bridge that margin gap.

I think that’s a good observation. I think, we are -- I’ll let Brady add to my comments at the end. I think, we’re very locked in understanding those processes that SwiftWater has comparative basis to TETRA. TETRA businesses are spread out across the North America. So, there are some that are performing at that level or above, some that are underneath. The weighted average is, as I said, below what SwiftWater is producing. But I do think there are lessons learned. I think, a big opportunity within the strategy that we've seen out in the Permian. I think it’s very, very important is the differentiation of the single versus double jacketed hose. I think, there is a clear market distinction between what is preferred in the produced water versus freshwater application. And we’re starting to unlocked that value. We now have the full portfolio in the Permian to really do that differentiation and price difference and fit for purpose. And I think that's a lesson that we understood but we're seeing it graphically now that can be exported to our other regions as well. Brady, you may...

Yes. Thanks, Stu. John, I think, SwiftWater is a very efficient operation. They are concentrated in the Permian to have a very good customer base that they’ve been working with to generate some good margins. But I will say, some of the highest price increases opportunities that we're seeing are coming on the TETRA STEEL side where as Stu mentioned, customers are looking for produced water solutions for handling the higher pressures, the environmental sensitive fluids that are flowing through there. So, I think over time, you are actually going to see those margins converge between the Tetra legacy and what SwiftWater has been generating.

And the next question comes from Cole Sullivan from Wells Fargo. Please go ahead.

It looks like -- it sounds like there is some visibility for Neptune over the second half for international jobs. When I look at the revenue and margin guidance for the segment, the revenues are higher than our model, and margins look like they are little bit lower. Are these jobs that are in the potential backlog, I guess had higher revenue level than we've seen previously, but maybe lower margins, just because of other factors? Can you walk us through that?

Cole, good morning. Let me add a data point and then I'll turn it over to Stu and Brady. If you remember that every second quarter of the year when our Northern Europe business picks up, we see a bump up in revenue of $10 million to $15 million. So, when you annualize Q1 and see that the projections are materially higher, taking into account that’s just about a $10 million to $15 million bump in Northern Europe business. And then with respect to Neptune, I’ll turn it over to Stu and Brady to make some comments.

I think, as you kind of look at the Neptune that we're looking at, the margins are going to be strong. I think, the revenue per project will probably be a little lower than we saw on the previous Neptune. But again, it's directionally similar to what we've seen. So, I think between that and the second half of the year, the seasonality in Europe on the chemicals business full-year, fourth quarter and beyond, SwiftWater and increasing investment on the water side, that's kind of the bridge to that higher -- maybe higher than you anticipated revenue and associated margins.

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

Thank you. And as always, I appreciate the great questions and the continued interest. Clearly, you can hopefully feel the excitement from our side, the changes in our view of where we are going. And we will look forward to updating everyone after the second quarter results in early August. Thank you very much.

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