Good morning and welcome to TETRA Technologies Fourth Quarter Full Year 2018 Results Conference Call. The speakers for today 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, Nancy. And welcome to the TETRA Technologies fourth quarter 2018 earnings conference call. Elijio Serrano, our Chief Financial Officer and Brady Murphy, our President and Chief Operating Officer also in attendance this morning and will be available to address any of your questions. I will highlight a few key items then turn it over to Elijio for some additional details, which in turn will be followed by your questions. I must first remind you that this conference call may contain 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, coverage ratio 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. On February 25th, we issued a press release of my plans to retire at the May 2019 Annual Shareholders Meeting as CEO of TETRA and as Chairman of the Board of CSI Compressco. I plan on standing for election to the Board of Directors of TETRA at the upcoming May 2019…

Thank you, Stu. Consolidated fourth quarter revenue from continuing operations was $282 million compared to $257 million in the third quarter of 2018 and compares to $200 million from the fourth quarter of last year. Consolidated and adjusted EBITDA from continuing operations for the fourth quarter was $46.6 million and compared to $41.8 million in the third quarter and $29.6 million in the fourth quarter of 2017. Revenue for completion services and products was $65 million and compares to $63 million in the third quarter of 2018. The modest sequential increase was driven primarily by strong year-end offshore fluids sales in the Gulf of Mexico and international markets. Completion Fluids & Products adjusted EBITDA was $13 million or 20.2% of revenue. We had no CS Neptune sales in the fourth quarter, as all of our opportunities moved to 2019 and beyond, consistent with the guidance on our prior earnings call. Water & Flowback Services revenue was $80 million in the fourth quarter, an increase of $1 million from the third quarter. Water & Flowback Services fourth quarter adjusted EBITDA was $15.9 million or 19.9% of revenue. U.S. onshore Water & Flowback Services revenue increased modestly despite concerns in the market about takeaway capacity in the Permian and Delaware basins. As mentioned in our press release this morning and in some of Stu's comments, we are making strides in our integrated management offerings and we are in the midst of being on 16 different projects at year end, up from the 11 we reported during the last earnings conference call. We have now fully integrated SwiftWater into our Permian Basin operations and are continuing to see cross-selling benefits from this acquisition. In the fourth quarter, we also completed a small water management acquisition in the Appalachian Basin and are excited to…

Thank you, Elijio. And we will now open the call to questions. And Brady will also help us with some of the Q&A. Thanks.

We will now begin the question and answer session. [Operator Instructions] The first question comes from Praveen Narra from Raymond James. Go ahead, please.

Praveen, we might have you on mute.

Praveen, your line is now open.

Nancy, maybe circulate it. We'll come back to Praveen to see if he has a better connection.

Okay, thank you. Our next question comes from Kurt Hallead from RBC. Please go ahead.

Welcome. So, I appreciate the -- I appreciate the fogginess that presents here in 2019. Maybe I can kind of go along with dynamics of this. So, you've mentioned you expect free cash flow. I'm assuming that's on a TETRA stand-alone basis to be better in 2019 relative to 2018. What kind of order of magnitude improvement would you expect on a year-on-year basis?

So, Kurt, we are going to refrain from giving specific guidance, but 2018 as we mentioned was $3 million. We believe that the impact of the Neptune wells and working capital initiatives will allow us to beat that one and put us in double digits for the year.

And can you remind us on the Neptune front, with the cancellation of this one project, what sort of order of magnitude revenue would we have been looking or would you have been expecting for that -- for that project, if it were to come through?

Yes, as you know we don't typically talk about specific well, revenue, margin et cetera. I would give you a few comments then hand it over to Brady to expand, but I think overall, the pipeline we have, the advanced testing we have, the specificity of this of jobs, we feel very, very comfortable. So despite the frustration of that one project not getting completed that we believe would have been a very successful well for us. We think we have more than other capable replacements during 2019. Brady, you might want to give a little bit more color, just the overall Neptune landscape because I know that's a big element of the strategy for everybody.

Yes, sure, Stu. Yes, Kurt, so obviously the one project that we were planning for was drilled, but the completion phase was not executed, was canceled, but as we mentioned previously, those two projects that we've been tracking, one of those projects will continue into 2019, is in the drilling phase. At some point in time, we believe they will drill and complete a well that hits the Neptune pressure regime. And so, that project is still active and alive and since then, we've added another project that we mentioned in our press release in the Gulf of Mexico, typically, at least in terms of revenues, the volumes of the Gulf of Mexico wells and projects are higher than the international projects that we've mentioned previously. So again, that's that adds to our outlook and optimism for 2019 and beyond.

And maybe if I just sneak one more in, on the context of that water acquisition you acquired during the course of fourth quarter, what kind of annualized kind of revenue and profitability, Yes, well, that bring to the table?

So Praveen when we file our 10-K tomorrow, I'm sorry, Kurt, you will see when we file our 10-K tomorrow that we paid $8.6 million with $1.5 million earn out and I mentioned earlier in the transcript that we expect that 2.0 to 2.5 year payback on adjusted EBITDA basis. So that'll give you a sense of the profitability.

Our next question comes from Stephen Gengaro, who is with Stifel. Go ahead, please.

So a couple of questions. I think the first, when you look at the margins in the back half of the year for the fluids business and quite honestly, even though water business, the EBITDA margins, right about 20% and if we think about that going forward without a Neptune job in obviously on the fluid side, how do those margins evolve in '19, are they stagnant, are they -- can they trend up in a flattish activity environment like how should we think about that margin progression?

Yes, I think qualitatively in a flattish margin on the Water & Flowback side, we would expect to see continued improvement on the margins, because of the integrated projects, the automation, those will typically allow us to pull through more services get better margins. So I think that would be a positive to us. The other thing that we've seen and in the 12 months, we've owned SwiftWater and even in the two months with our Appalachian acquisition is, when you bring guys in that know the business really well, you'll start to get some revenue pull-through probably higher than you modeled. I mean I've been really impressed over the last 12 months in the integrated projects expansion, the use of TETRA Steel on -- produced water has increased even on the first two months in Appalachia. The guys up there are finding new opportunities with their existing customers to pull through some other services. So I think that kind of portfolio broadening, the recycling, the produced water all that's going to continue to be positive. On the fluid side, as we mentioned, we do feel like when we go through a period of high bromine inflation which we're clearly in today, our supply chain strategy will enhance our margins. So I think Brady and the team have been very, very focused on making sure we're allocating to the right customers and to the right regions and then when the Neptune business comes on top of that, you've seen over the last several years with the expansion on margins is with those projects. We feel really good about all three of the businesses.

Thank you. And then my second, it's a little bit detailed, but -- so when you -- so it's kind of two part. So one is, when you think about the cash flow -- only free cash flow, I wanted to a) confirm, I think, earlier you said that you'll beat the $3 million mark, and that includes the $50 million investment in equipment for Compressco, is that right?

Right, so in 2018, Stephen, we generated $3 million of TETRA-only free cash flow, which included the benefit of the distributions from CSI Compressco to TETRA. And as you know on December 20, we announced that we're cutting the distribution essentially to $0.01 per unit per quarter. We believe that our profitability in 2019 will absorb the lower distributions coming from CSI Compressco to TETRA and also will absorb a $15 million capital expenditure that TETRA will make and fund for equipment that will be leased to CSI Compressco.

Okay. That's $15 million, right?

$15 million.

And then just as a follow-on to that and I guess maybe a question for Stu or Brady, whoever wants to take it, but when we think about the long-term investment in Compressco and how that evolves, and whether it does evolve, this transaction would seem to suggest it won't evolve and I must say it's a good or bad thing, but can I read that in -- can I read into that, that you are even more excited and focused about the opportunities in compression or was the investment made with -- for other reasons?

Yes, I mean, I'll take the first pass and if Brady wants to add, that's great. Again, clearly how we continue to evolve CSI Compressco is a very strategic question and a very good question. And we've done great with that business, the cash flow it's brought to the parent company has been very beneficial. When I look at the $15 million backstop, I think I put in the context, Stephen of -- we know -- we've looked at the cash flows of the business this year given the guidance that's out there. We made a decision to pay down the Series A with cash, instead of equity, due to the stock price, which I think everybody has universally applauded. We look at next year and we see in the range of $60 million of free cash flow available for that business. So we are very focused on how we use that cash to continue to delever, which we want to get down below 4.5 judiciously reported to growth CapEx that high-return projects with busy customers that we want to continue to build out and think through the distribution policy. So the $15 million is just -- as we've looked at the capital allocation this year, we thought that was an investment we wanted to make as a company and we thought the best source of that in the short-term would be TETRA. And as Elijio referenced over the next five years, CSI Compressco has the ability to take that equipment back by it and keep it under its asset base. So it's -- I look at that as kind of a temporary one-time-ish type of investment that makes sense given all the other variables that are intersecting. I would not view that as a strategic statement of intent, one way or the other.

[Operator Instructions] Our next question comes from Praveen Narra with Raymond James. Go ahead, please.

I guess if we can talk a little bit about the integrated water uptake, obviously, a lot of projects coming up. Can you talk about both the customer profiles of those who are seeing the uptake? And if you could kind of -- can you talk about how the profitability comparison of how you guys have talked about it at the Analyst Day?

Yes. We'll let Brady handle that because he is kind of the leader on that initiative.

Yes, I mean these are very important projects to us. As far as the customer base, it really goes across all of the operators from the major IOCs to the smaller independent. So we're seeing uptake and support really across the board. In addition, we've expanded where we started in the Permian to now the other regions that we mentioned in our press release in the Appalachian region, in the Mid-Con and we're now -- and one in the Rockies as well. So the uptake across the customer base goes across the board. The margins on these projects, we believe will be -- and demonstrate better margins than our typical discrete services, primarily because of the efficiencies that we can bring utilization of people, who are on the job sites longer, the actual pricing for us is sometimes better. So Yes, overall, it's just a -- it's been a real -- its uptake has been stronger than we anticipated and continuing to gather momentum.

And then I guess following up on the prior question, just in terms of prioritization of capital. So you mentioned how at TETRA, CSI agreement kind of falls in, but how do you see future capital expenditures going forward, is it largely the build-out of these advancements? Or are there just some areas where you're getting sub one-year payback? How do you think of it?

Yes, when we look at it and I would say if you look at the profile of the two TETRA businesses, fluids is -- we've made those major investments over the years. When I look back over all the changes we have made, which I think all great changes for the future, the one consistent theme is, we've always continued to grow the fluids business and build that infrastructure. And I think we've seen in the last several years, it's a great free cash flow vehicle. So I don't see a lot of new investment going into the fluids. I think the Water & Flowback, we have a distant number two market share in that business growing, but there is still a big gap. I think the strategy we have on the integrated solutions, the coverage in all the basins, some of the proprietary technology on recycling, that's the area where you will see most of that CapEx. We expect at the middle of the cycle those are going to be 18-month paybacks. So those are the types of things, you don't have to -- you can do within free cash flow and makes sense. And again, we are very, very sensitive to the focus on returns and capital allocation and the thing nobody ever sees except management is the projects to get turned, the decisions we decide not to go forward on. So I would give credit to Brady's operating team, Elijio's team, will be very disciplined on capital, but I do think going forward water will be placed with most of that organic growth is going to come from.

Yes, if I could just add to that, Stu, certainly, the TETRA Steel, even with the activity declines that we've seen since the end of Q4 were sold out. In TETRA Steel, we'll continue to make investments in that technology. The recycling, as Stu, mentioned we're still seeing uptake in that even with a little bit lower activity on the completion side. And the automation component of that we -- that's a key enabler for all of our integrated projects would be priority areas for us for capital allocation.

The next question comes from Thomas Curran with B. Riley FBR. Go ahead, please.

For Water & Flowback, could you update us just -- how does the pipeline of potential M&A prospects look as we sit today? And what have you seen in your regional markets in terms of new entrants? How has the competitive landscape evolved since the last call?

I'll cover the first part of M&A and then I'll ask Brady to take the second part on the evolution of the competitive landscape over the last few months. I'd say the Water & Flowback is an incredibly fragmented market, always has been, will continue to be. Lots of opportunities for consolidation. We looked at many opportunities last year, and again, when you look at some of the adjustments in the numbers, you'll see that we had some fees associated with transactions we did, we also had some fees associated with transactions we didn't do. And we think there's a lot of others water-related companies that either have specific technology or certain geography with innovation that augments what we have, the most recent acquisition up in Appalachia is a great example. We've been in this company up in Appalachia forever in our water business predominantly up in the Northeast area, and our testing business is predominantly done in the Southwest area and we now add a really great water company to that, so I don't expect to see those bundled projects in the Southwest continues. So I think there's going to be a strong pipeline and we have very strong internal definition of what our balance sheet is going to look like. I said the last several years, Elijio has taken a lot of time with his team to remove the covenants to give us flexibility. I think we learned some lessons in the downturn of not wanting to be in a position to issue equity, when we don't want to. So I think that oversight gives us the flexibility, but we're going to do in a context of maintaining the pristine balance sheet at TETRA and we're certainly not looking to issue equity at this price point. So when the world gets better, when we hopefully see improvement to the valuation of the Company, the activity gets more predictable, I think the space we invested in will do organic and inorganic. So I'm very optimistic about the ability to grow both organic and inorganic in North America. Brady, you want to tell what the competitive landscape?

Yes, no, I'll just add a little bit of color to your comments. It is a very fragmented market. We believe, there's a lot of room for consolidation and that we are in a great position to be part of that consolidation activity. If you look at our strategy with the integrated projects where we have a strong water business, but perhaps not a strong PT or vice versa, when we add that other component to a local market like the acquisition in Appalachia, we immediately see the benefits of an integrated business, which we've already taken advantage of in Appalachia as we've mentioned. So that will continue to be something we're focused on and looking at opportunities on a go-forward basis. I actually see more consolidation because of the efficiencies that can be brought then, then we're seeing in terms of significant new entrants from our perspective.

As a follow-up, Brady, I know you just mentioned that you're sold out of the TETRA Steel, not surprising. And I'm sorry if I missed this earlier, but could you update us on where you ended 2018 in terms of total temporary transfer miles opposed both TETRA Steel and then just standard industry lay flat and based on the fact that water will be commanding such a large share of the CapEx budget this year, where you would expect to exit this year in terms of inventory?

Yes, Thomas, I don't believe we actually communicate the mileage of those externally for a single jacket and TETRA Steel is -- so I'm afraid I may not be able to answer that.

We have --

Sorry, Stu.

So, we haven't. So I just want to jump in. I'd give some color, but historically we have -- we haven't quantified miles of single or double-jacketed.

Would it be fair to say though that you'd expect to meaningfully increase it over the course of this year?

Yes, I wouldn't expect that to be the case, Thomas. Yes.

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

Thank you. In summary, I think it was a great quarter, great year. I think we're incredibly well positioned in this volatile market to perform very well in '19. I'd say most importantly as this is my last call with Brady and Elijio will handle with me, the Company is in great shape, incredibly proud of what we've accomplished and I'll leave the Company in awesome hands with these guys as well as all the other folks that are back around the world. So thank you all for your support over the years.

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