Good morning and welcome to TETRA Technologies First Quarter 2019 Results Conference Call. The speakers for today are Brady M. Murphy, Chief Executive Officer and Elijio Serrano, Chief Financial Officer for TETRA Technologies, Incorporated. 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. Murphy. Please go ahead.

Thank you, Nancy. And welcome to the TETRA Technologies first quarter 2019 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. 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 for 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 this period. Well this is my first conference call as CEO of TETRA and Chairman of the Board of CSI Compressco following Stu Brightman's previous announced retirement effective May 3 at the May, 2019 Shareholder Meeting. I'm excited an honored to take over from Stu and wish him the very best in his retirement. Stu will remain on the Board of…

Thank you Brady. Good morning, everybody. Consolidated first quarter revenue from continuing operations was $244 million compared to $282 million in the fourth quarter of 2018. And this compares to $200 million from the first quarter of last year. Consolidated and adjusted EBITDA for the continuing operations for the first quarter was $36.3 million and compared to $46.6 million in the fourth quarter and to $29.9 million in the first quarter of 2018. I'm going to spend a few minutes on TETRA's free cash flow and the balance sheet. We had no CSI compressed [indiscernible] strategy that was communicated to the market yesterday. In the first quarter, TETRA-only consumed free cash flow from continuing operations of $34.9 million. This compares to $29.9 million in the first quarter of a year ago. For the full year of 2018, TETRA-only [ph] free cash flow was $3 million profited. And as a reminder, during the entire 3.5 year downturn, TETRA generated free cash flow and was adjusted EBITDA positive for every one of those years. First half of the year, we had historically consumed cash that have generated cash in the second half of the year. This is driven primarily from changes in working capital. There are four items that drive the timing on free cash flow. The first being the timing of payable, the benefit to full year. This type of payments includes items such as insurance premiums, incentive bonuses for the prior year, property taxes, income and other taxes and other such items that are paid in the first quarter for either the prior year or prepayment for the coming year. The second is timing of capital expenditures and how we sequence them during the year. The third is [indiscernible] Northern Europe Industrial Chemicals business. For the Northern Europe Industrial chemicals…

Operator, we'll open it up for questions now.

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

I guess we could start on the integrated projects, it's nice to see number of customers using multiple. I guess I'll be curios to hear how long it took for operators to go from a single trial integrated service to adopting multiple, how many either pads or how much time it took and how you think about that?

Good morning, Praveen. I think it varies some of these operators we started early on in say Q3 of last year, so we serviced those through the end of the year. We were basically on 16 projects at the end of the year all of them were unique customers. As you move into Q1, we had five different operators adopt a second multiple or integrated offering. So that gives you a feel for the timing transitioning from 16 unique clients to now a customer base of five with multiple in the first quarter.

Okay, that's helpful and then I guess now, now that you have several projects going. Could you give us a sense as to for the segment what percentage of revenues are these integrated project?

I mean it's continuing to grow, it's becoming a meaningful part. I don't maybe Elijio can comment on the overall percentage of our North America revenue but it's the fastest growing portion of our revenue and particularly the recycling projects which we mentioned have been added. But I don't know the overall for tracking actually the overall percentage of our revenue at this point.

Praveen I would suggest that it's still a small percentage of the overall revenue from the segment. But the key part of it is that it's now a sustainable month-to-month continuous opportunity with less [indiscernible] as we typically see with water transfer jobs.

Great and then I guess just one more if I could. You mentioned some competitive pricing dynamics. I guess could you talk about how pricing is looking whether it's stabilizing across all segments or how you guys look at it?

Our TETRA Steel and our flowback business has really been pretty resilient to any degradation in pricing. We're still getting a premium we think, what's in the market. We did see in the first quarter some pricing pressures on our single jacket transfer lines, so that area in particular has seen some pricing pressures close to the double-digit range.

And Praveen on that and on the compression side, when we saw a rebound early next year, we started ordering equipment and there was some customer commitments with pricing that we could attain early last year that equipment started getting delivered in Q4 and Q1 and the equipment is being delivered in Q2 and beyond, an equipment that we priced in Q2 and Q3 of last year and now those are starting to come in at rates higher than what we've been deploying. So we're just now getting the benefit of that premium pricing for orders that were placed in Q2 and Q3 of last year, on that compression side.

Perfect, thank you very much guys.

The next question comes from Sean Meakim from JP Morgan. Please go ahead.

So I was just going to see that you're into another Neptune deal, but just given the uncertainty that's go inherent in the project. Could you maybe just give us some parameters around how we should think about the timing between when the project begins, when you think you would get a go, no go on the need for Neptune and then how long until you'll be able to recognize revenue? And it's meant more to be not to be so specific to this project, but for this type of project again I know there's a lot of, a lot of these can change for a project like this in the deepwater. But I think it will be helpful for us understand what that cadence looks like.

Right, so as I mentioned Sean your drilling has commenced. We're familiar with this particular field. There's existing production there, so we have fairly high confidence level that the well will be productive and we're pretty familiar with what the pressure regimes are projected to be. So from that standpoint, I think our confidence level is fairly high. But as you know, it is a deepwater well the pressure regimes could be different than anticipated. So wont' really know until they've drilled through the reservoir, taken the pressures, make sure they've got the zones that they want to complete and we'll be ready to mobilize on Neptune. So hope that gives you a little bit of color, but that's probably about as much as I can give at this point.

Can you give a generic timing is going from commence that drilling towards completion and how long that takes to make it into revenue for TETRA?

The completion phase at this point is projected probably latter part of Q3, if they stay on the drilling plan as we understand it. But again as we've seen before some of these projects can move to the right a little bit. But we would recognize revenue when that completion fluid is deployed for the well.

Got it, okay. That's very helpful. And then just so one on flowback. Can you maybe just give us a sense of on a run rate basis excluding some of the transitional issues we had in the quarter? Does the change in customer mix don't have an impact on margin or is the project based activity more what can drive differential in the margin and if we go to back half of 2019 and private E&P's, do we get ramp up activity. Is it fair to say that you'll try to pursue some type of all the above strategy in other words trying to maintain these new relationships you've been developing while also trying to win back some of the other work than maybe a bit more transitory?

Right. Yes. Absolutely. Let me answer the second part of that first because we really the relationship we had with some of the smaller independence who had to reduce their activity and we obviously plan to stay in contact with them, with their plans and as they go back to work. We feel we'll be ready to support them. But clearly we like the fact that we were able to transition so quickly in Q1 to the larger E&P's demonstrate the value to them and obviously they're going to be a more important part of our business going forward. From the margin standpoint, I think in terms of the highest impact clearly the shift in revenue was very unusual for us to see that type of shift in the same quarter, so I think mob and de-mob cost when you're mobilizing, you have a higher and de-mobilizing you have higher manpower cost and you're not getting the full services revenue for your equipment and offering that impacts your margins pretty significantly and we saw that in Q1. I think the flowback gear that we had a record quarter in Q4, the repair cost was second part of the largest contributor and then as I said, the single jacket transfer line pricing was down somewhat from previously but in terms of sequencing that's the lowest impact that we think in the overall margin progression from Q4 to Q1.

Got it. Thanks a lot, Brady.

The next question comes from Stephen Gengaro from Stifel. Please go ahead.

I guess two questions, the first just from a bigger picture perspective. I mean you talk a little bit on that in your prepared remarks about this, that when you think about the products within the TETRA family and you think about returns on capital going forward. can you help us sort of with a roadmap to returns on capital that meet your cost to capital, what needs to happen, whether it's market driven, whether it's TETRA specific, which products are - guessed in are just contributors etc.? Just so we sort of understand that outlook there over the next say one to two-year.

Stephen let me start that and I'll let Brady add to that. three distinct segments and as you know, we've got a separate capital structure for CSI Compressco and other than this $15 million support that we're temporary providing for them, we kept them pretty much distinct and separate and then everybody lived within their cash flow. Well in the TETRA side starting first with the fluids business. You know that we've got a vertical integration we built out manufacturing facilities. We've got a very good network of distribution point, barges to move equipment back and forth on the opportunities across the globe and we've got that network fully built out. And so deepwater rebounds we don't have to add more manufacturing capacity. We don't have to add more barges to move product around. We don't have to add more tank farms to hold the product out there. It's really going to be cost of goods sold that move through the system and you've seen that during the downturn we can run this business with maintenance capital under $5 million a year. So the deepwater starts to benefit the rebound and the deepwater starts to benefits, there's very little incremental capital required on the fluids business. Now on the Water and Flowback testing side, we've been investing in recycling, in water treatment and in the value added coming from the TETRA Steel technology and we have previously mentioned that we're getting returns of 18 to 24 months on this investment and we've got [indiscernible] rate that we negotiate aggressively with all the requirements coming in from the various operating unit in terms of who's getting the capital. Those that are getting the best pricing that are getting consistent utilization and as we move now into some integrated projects. We're being out there and project multiple months at a time instead of de-mobilizing and re-mobilizing every couple of months. So - we turn expectations for this segment, remain in the 18 to 24-month period then with CSI Compressco we've been mentioning that we're attaining 20% return on capital. We're getting five-year payback on 20-year equipment. It is our position that we're pricing at the top of the market when we compare in here what others are doing out there. Those returns are holding. We're starting to concentrate our business toward those large operators that have the balance sheet to be more consistent in their spending patterns and I think that we're starting to see that on the CSI Compressco side especially when you look fall through rates in the 70% range on the compression services side, so that's how we think of it. We look at CSI Compressco as a standalone 20% returns on capital, focus on core customers. The water flowback 18 to 24 months and the fluids networks already fully built out, we don't expect to add more capital to that business.

Okay, thank you. But when you talk about those part portions of those businesses, will that be enough to drag the entire segments across the capital?

We believe so.

Okay, thank you. And then just as a follow-up or non-related follow-up, when I think about the second quarter consensus it was like $47 million, $48 million EBITDA and we sort of think about the moving pieces on the three segments. Any comments on the current consensus and also, as you assume to think about that, is there - which segments you think we see the biggest sequential improvement in?

We ended the third quarter with our three segments performing at a better run rate than we started at the first quarter. We've got a first pass of our April numbers and were encouraged, what we see. We think that the biggest impact is going to be first from the compression side of it. As more equipment gets deployed and then we also mentioned yesterday that equipment sales is almost going to double from Q1 to Q2 and then we're expecting second quarter equipment sales to be in the $50 million range compared to somewhere around $25 million range in the first quarter. So we think that those will translate into a very nice ramp up in EBITDA Q1 to Q2. The second area that we expect to see a benefit as we've now completed or we have seen a significant transition on the towards major versus the smaller independent that's gaining traction that's converting to incremental profitability, we think that will be the second significant benefit. Then if we get timing in our favor on some of the completion fluids offshore that will be the third opportunity on upside.

And then you also get the seasonal impact, right on the fluid side.

Yes and we have historically seen revenue improved from Q1 to Q2 anywhere between $10 million and $15 million of revenue with a very nice fall through of EBITDA through that.

Okay, great. Thank you for the color.

The next question comes from John Watson from Simmons Energy. Please go ahead.

On the mob and de-mob cost in Q1, should we think about that as being about $5 million on the EBITDA line?

We're not going to go into that level of granularity. I wouldn't suggest that it wasn't as much as $5 million but focus more on it - it was de-mobilizing and before we start generating revenue on the new opportunities we've got downtime of people transitioning our equipment from one project to the other. But the actual out of pocket cost were not that high.

Okay, got it. Thanks Elijio and then the repair cost in the flowback. Can you talk us through what that means? I think for some of your flowback equipment you charge back through repair to your customer. Can you give us some color regarding the higher repair cost in the first quarter?

Brady mentioned that in the fourth quarter of the volumes on the flowback testing side were incredibly high. It was one of the peak quarters that we've seen in recent history. As we complete one job and move to another we have to pressure test all the equipment. We have to go through and clean up equipment and any repairs that have to be done, if we believe it was caused specifically on a customer project due to the debris coming through or pressure that was different than what we modeled in, then we will charge it to the customer. But you have to come in and pressure test everything once it comes off and go through a cycle of doing that periodically and that's really the process that we went through.

Okay, that's helpful. Thanks Elijio and just one more within water and flowback. Are there any facility sales that we should be anticipating in the second quarter?

Not at this time.

Okay, great. Thanks for the color guys. I'll turn it back.

[Operator Instructions] our next question comes from Thomas Curran from B. Riley FBR. Please go ahead.

Elijio for the water and flowback services division. Could you just share with us what the revenue split was last quarter and this quarter between the two segments water services and flowback and treatment?

We've stopped providing that granularity, but I would suggest the water flowback is the greatest revenue stream within that segment. And that is inclusive of water treatment also.

In both quarters?

Correct.

Okay and then Brady, could you give us an update on specifically for the water side? Where you're at with your automation plan and at what point you would expect to have that concluded?

Sure. I mean - you may be aware we have a lot of components of our current offering automated whether it's the pumps, whether it's our distribution manifold, whether it's our recycling units. The next phase really is taking the entire system that's on location providing a holistic closed-loop automated software to be able to run that program even run that operation even remotely and we're in the final stages of testing that software as we speak. We're deploying it to couple of trial clients in this quarter and again we believe that will be another step change in the overall automation capabilities of TETRA.

Great and just in terms of the percentage of your pumps and manifolds that are automated at this point. Where do you stand currently for each?

Yes so we have nearly 100% of the pumps that we own, we always have a portion of our pumps that are on rental. Those we're working on a solution to be able to automate those are well, but that portion of that fleet remains not automated. But again we're working on a solution for that. The really the rest of our manifolds are recycling equipment that's deployed with automation capability, so that would be 100%.

All right, thanks for taking my questions.

Thomas, I'm going to add one more data point to the question that you raised. Remember that in the fourth quarter we did an acquisition of water treatment and water transfer company in ten Northeast so now we've got the full three months benefits in the first quarter. Therefore the water management business increased sequentially and the production testing was done modestly and we attribute a lot of it towards the integrated projects plus the acquisition now with three months in the first quarter versus one month in the fourth quarter, just little bit more cornered to the question you asked.

Thank you for that reminder, it's helpful. I appreciate the responses.

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

On the last call there was an international Neptune project that was looked like it could be in the veins for the second half of the year. Is that something that's still in the pipeline at this point?

Yes, we actually have a fairly significant list of international pipeline projects. Now whether that falls into this year or 2020, little bit difficult for us to predict at this point. We don't like the comment until we actually have a secured order, but we're still tracking quite a few and a growing list of projects again through some of those through the Halliburton relationship that one could come into this year, but multiple projects hopefully in the coming years as well.

Okay and then just quickly on offshore and completion fluids. It looks like the 2Q is kind of ticking up in the commentary that you guys made on the second quarter expectations. How do you see that activity overall in 2019 versus 2018, is there any way to kind of frame that?

Yes on the offshore side our fluids business we believe internationally will continue to outpace 2018, we're clearly seeing some increased activity and opportunities for us. We also feel the Gulf of Mexico will be potentially up from 2018 certainly with the CS Neptune project that we have in our plans that will clearly be the case, but even with our base bromine business demand looks fairly strong. So we would say, yes year-over-year we should be seeing increased activity.

All right, I'll turn it back.

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

We appreciate your interest in TETRA Technologies and thank you for taking your time to join us this morning. This concludes our call.

The conference is now concluded and you may disconnect your line. Have a good day.