Good morning. And welcome to the TETRA Technologies’ First Quarter 2014 Results Conference Call. All participants will be in a 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. Now, I’d like to turn the conference over to Stuart Brightman. Mr. Brightman, please go ahead.

Thank you, Keith and welcome to the TETRA Technologies’ first quarter 2014 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’ll provide a brief overview of our first quarter results then turn it over to Elijio for some additional details which will in turn be followed by your questions. I must first remind you that this conference call may contain 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, revenues, gross profit, profit before tax or earnings per share excluding the Maritech segment 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. Our first quarter 2014 adjusted earnings excluding Maritech were a loss of $0.04 per share. This is below the guidance we released on February 10 primarily due to results for our Production Testing segment which I’ll discuss in detail in a moment. In addition to the special charges outlined in the press release, it is our estimate…

Thank you, Stu. TETRA revenue up ($211) million decreased 6% sequentially reflecting the traditionally weak first quarter in Offshore Services which was down $23 million compared to a total decline from Q4 to Q1 up $12.6 million for all of TETRA. Production testing was down 6% from the fourth quarter due to the challenging weather conditions that extended into February. We’re gaining traction by adding new accounts and diversifying our revenue base following (shale) sufficient of activity in South Texas. However while we’re seeing good progress with the addition of new accounts as Stu mentioned they’re taking longer to ramp-up versus what we anticipated. New wins in some areas such as the Permian Basin have been slow to ramp-up as some of our customers are waiting for the availability of frac crews. In other areas we’re picking up business from regional competitors that are going out of business or consolidating to other areas as they’re financially challenged. We anticipate that we’ll continue to see a difficult environment for production testing in the U.S. for the next two quarters as the new wins will take time to evolve into making a significant impact on the revenue. In the meantime we’ve taken aggressive cost reduction actions throughout the production testing organization. The operating loss of $2.8 million incurred in the first quarter includes $1.9 million of cost or losses from the shutting down districts, exiting start-up countries, downsizing offices, and releasing staff. In addition abnormal weather conditions in the upper Midwest and Mid-Continent region impacted earnings per share by $0.01 to $0.02 during the first quarter. Overall we continue to believe we have a strong position in the U.S. production testing market, we continue to diversify our account base to reduce reliance on significant anchor accounts, drilling and fracking activity remains robust…

And we’ll open the lines for questions now, Keith.

Yes. Thank you. At this time we will begin the question-and-answer session. (Operator Instructions) And the first question comes from Sean Meakim with Barclays.

Hey good morning gentlemen.

Good morning, Sean.

So starting off with production testing. It sounds like the challenges that you’re seeing are not a function of getting traction with the customers so much as – the transition is taking place but the ramp-up with those customers is taking a bit longer. So does that mean that you still think you have a pretty good confidence that you’re going to be able to get to something like the good run rate on the fourth quarter that would lead us to leave 2015 to look not too different than maybe how we’re envisioning at previously?

I think our exit rate this year will end up being consistent with what we outlined. I think what is going to be a little bit different clearly is the sequencing and timing to get to that run rate has taken us longer I mean you’ve seen that obviously in the first quarter. And I think that – it will make second quarter a little bit lighter than we would have thought previously. I think if I was kind of to characterize my view testing business it’s going to take us a little longer in the U.S. I think we’re doing all the right things in terms of from a sales point of view, in terms of deployment of assets moving equipment. Certainly we’ve sized the organization what is absolutely the low point of the revenue cycle. So that’s all behind us. And I think it’s going to take us a little longer, I think Mexico is going to be slower than we envisioned this year on testing. And again I make sure I differentiate testing in Compressco because the market in Mexico although off where it was five, six quarters ago it’s still relatively strong for end-of-life production enhancement in the areas we operate. And then I think the rest of our markets clearly Canada is stronger than it was few quarters ago and again we’ll have the seasonal impact in the second quarter but on a full year basis Canada should be stronger in our international markets other than Mexico should be consistent. And one thing I should mention is we’ve done the acquisition in Saudi and we’ve recently had our contracts extended, given us very good visibility of that over the next two to three years or something we expected but that positive news recently came in which again gives us confidence in the strategy we did to invest further in that business.

Right. So maybe these next couple of quarters looks a bit choppier, but the long-term outlook ends up being not that different?

We still believe that intermediate long-term this is a business that we can continue to generate the types of returns that TETRA has done historically in there. I think the transition back to that is just going to take us couple of quarters longer than we thought at the beginning of the year.

And just a quick clarification on the model. For G&A we came in a little bit heavier than expected this quarter you outlined there is just one last piece to get completed. Is that still – is that kind of $31 million run rate for 2Q still a good number then?

Yes it is Sean. This is Elijio. We’ve got in the second – in the first quarter quite a bit of severance, legal fees and expenses that we incurred as we were moving and downsizing our operations. So there is about $2 million of items in there that will not recur into Q2.

Great. That’s very helpful. And just one last one. On Compressco are you seeing any incremental demand in the U.S. given where gas prices are, anything kind of incrementally beneficial for Compressco?

I think we’ve seen a little bit of a positive on the gas side as the price point has been higher I think more importantly we continue to see strong demand in the areas that we’ve invested in vapor recovery and liquids related. And the Compressco management team is very encouraged by the reception that we’re receiving four mid-size investment that we’ve done over the last couple of quarters. So I think the strategy of diversifying beyond our legacy natural gas both in liquids in larger size and internationally has allowed us to kind of offset that decrease in Mexico and position us really well, obviously we feel good about the business given the decision we recently announced on the distribution increase.

Right, right. Fair enough. Thanks a lot guys. I appreciate it.

Thank you. And the next question comes from Mike Harrison with First Analysis.

Hi, good morning.

Good morning, Mike.

You had kind of guided Q1 to the $0.03 to $0.06 range positive and then you reported the $0.04 loss. Is that delta you called out $0.01 to $0.02 of weather related headwind. But is that delta versus your expectations exclusively testing or if I look at some of the other segments, were there other areas they fell a little bit short and contributed to that $0.07 to $0.10 shortfall?

Yes, I think when you kind of take that shortfall on the low end of the range and you kind of bridge our best estimate of $0.02 for the weather and you look at the delta there, by far the majority of that was testing. We may have had a little bit of timing issue on fluids on some Gulf of Mexico shipments but it’s – you should really think of it as almost exclusively testing.

Alright. And.

Mike, I’ll add to it. The run rate that we have of revenue production testing in January was quite decent. And then we saw a drop-off in February and March that represented the gap versus what we had laid out in early February.

Can you maybe comment on where the run rate is for March into April and.

I would say that March has been flat to April and we’ve seen a modest increase in April but not yet to the run rate that we’re working toward. That’s why Stu mentioned earlier that some of the accounts that were picking up that we’ve been awarded, we think are going to take a little bit more time to gain traction as they transition from the incumbent over to us.

Right, right. Elijio you mentioned the part of the charge in testing was related to closing offices in start-up international markets. Which countries in particular did you exit and should we take that to mean that the international growth opportunity in testing is more limited going forward?

So we had just recently expanded into Colombia and Australia, those were not yet generating any meaningful revenue as we were in the start-up phase of moving people and the equipment there. We came to the conclusion that as the U.S. business has taken a little bit longer to recover than we anticipated we do not have an opportunity here to fund start-ups in countries. So we pulled the equipment out, redirected it to areas that we’ve got stronger activity and the likelihood of revenue materializing quicker is higher, so we concentrated into those countries. We do not think that, that impedes our international opportunities as we’ve seen strong growth in Latin America, in South America and also in the Middle East.

Yes. And I would kind of also think of it, Mike is in the short term we’re going to continue to focus in the countries we already have strong footprint existing relations and that’s what the investments going to be for testing.

Our tolerance level for underperforming districts is non-existent at this point and rather than give more runway, that runway is very short now.

Got it. And then I was just wondering on the fluids business, we had been seeing margins if we look kind of first half of last year, margins up in the high teens, now we’ve had a couple of quarters here that are more mid teens. Is there really just the impact of timing of Deep Water activity in the Gulf or are we may be seeing some cost related to expanding the water handling business, what else is contributing there?

I think when you look at the margin trend we still feel comfortable with where we guided for the year on margins. I think embedded in there you’ve got some clearly in the fluids we incurred some as we expected some start-up cost associated with moving equipment with the TD acquisition, and I do that as a positive, I think we moved some equipment to areas where we’re seeing very good demand and that will help us as we go through the second quarter and beyond. So there is nothing I see overall that makes us change our view of getting those margins in that area.

Alright. Thanks very much.

Thank you. And the next question comes from Jason Wangler from Wunderlich Securities.

Good morning guys. Just curious I could on – Compressco with the VRU work you said it was – it’s been a pretty big driver. Could you just comment on the size of the horsepower of those units are and then just kind of maybe even where throughout the business you’re seeing those units go?

Yes. Most of it’s going to be the similar horsepower as we have on our standard GasJack, so it’s going to be the small wellhead type horsepower. And geographically the application is predominantly on the tank batteries and collecting some of the vapor recycling it and we’ve got a nice base kind of going through multiple districts clearly South Texas, Mid-Con probably big two of the better performing districts, (Rockies) for vapor recovery.

Okay.

I think the message I want to continue to hammer on Compressco is we set that up as an MLP to focus on growth. The guys have done a really nice job growing the profitability and expanding organically into areas to more than offset some of the challenges in Mexico in the short term in natural gas over the last few years and building a broader more diversified set of applications and compression capability is the fundamental strategy that Ron and the team are working on.

That’s helpful. Thank you. And then just curious now that call it almost halfway through the quarter, how the weather has been out in the Gulf, if you’ve been able to kind of get back to quarter “business” as usual I guess at least just from an activity and just being able to move assets around the standpoint?

Yes, I’d say – I just split that into two pieces. One, the work we did on the dry-dock we’ve got that done on schedule and below budget from a cost point of view. So the team did a great job executing that – we’re back to work I’d say the weather in April was a little bit worse than we would see in a normal April so far May is above what we would have expected.

That’s helpful. Thank you.

Thank you. And the next question comes from Jim Rollyson with Raymond James.

Good morning guys.

Good morning, Jim.

Stu, going back to production testing. If we think about you mentioned the run rate in January was pretty good and then dipped in February, March and it sounds like it’s relatively stable to slightly improving right now. And you’re going to get the exit rate that you thought you’re going to get to just based on customer interactions and wins, just it’s a timing issue. Should we think about that ramp in the run rate as a fairly linear function from where we are today towards that exit rate or is it going to be more of an exponential curve, how do you think of that plays out?

I think it’s going to be somewhere in between. I think the step up in the third quarter is going to be over the second is going to be bigger than the second over the first and I think the fourth will be a pretty significant step up too. I mean again we have really good intelligence, we’ve gotten some awards recently that we feel real good about, feel better when we see what portion of that work we actually go out and execute and we’re in the process of seeing that in several years. We’ve had a couple of competitors that have smaller, regional competitors that have exited which is very good. It’s the first time we’ve seen that and why we’ve been able to step in and pickup some of that work. So again I think given that we’ve done – we’ve seen the pace of that translate to longer – translate to revenue that’s why I would kind of categorize it is probably a bigger step up in the third quarter. And also recognize when you look at it sequentially you’ve got the seasonality of Canada which works against us a little bit in the second quarter. Obviously it’s a big positive for us as we move into the third quarter.

Right. And on the margin side of that equation, you guys have been taking cost out here and there starting in Mexico last year and you kind of detail some of that and you’ve moved some equipment around. As we think about margin progression obviously just revenues growing in the third and fourth quarter alone will help margins but are there any other costs like moving equipment in that and cost reduction things that also help expand margins maybe counter or different from the cycle of just the revenue impact?

I think if you look at most of the headcount and structural issues we’ve got that behind us Jim and we’ll get a full quarter benefit in the second quarter of that. And I think that will help kind of the margin versus the revenue count being a little bit slow to ramp-up as I described. And some of the equipment re-distribution I think we’ve got most of that behind us too. So I think that piece of it gets less as we move into the second quarter. And so again I think the margin progression will be slow but I think third quarter is probably the biggest step up of both revenue and margin from sequentially. And again reality is that’s slower than we talked about in February for the reasons I mentioned.

Yes. Alright. Last thing from me I guess. Good news is despite the challenges you had in production testing, you’re still on track on your free cash flow generation. So Elijio once you get things ironed out and back to work in production testing, let’s say going into next year. Where do you think I mean I’d guess and it implies free cash flow actually has upward bias from your $80 million number as we get into 2015?

So Jim the $20 million of free cash flow in Q1 is despite probably one of our highest quarters of capital expenditures that we’ve seen in recent periods simply because a lot of the dry-docks we’re doing on the vessels. So I think you’re right, but I want to be cautious about building expectations while we’re managing to production testing, clearly we believe that we’ve got upside to it, but we don’t anyone to start leaning in that direction until we deliver on the production testing side.

Understood. Thank you guys. I appreciate it.

Thanks, Jim.

Thank you. And the next question comes from Blake Hutchinson with Howard Weil.

Good morning guys.

Good morning, Blake.

Just to start off to help us kind of qualify what healthy backlog means in the Offshore Services division? Can we expect that weather permitting your two major assets having seen a dry-dock either can be pretty fully utilized certainly through construction season if not the rest of the year, are there still gaps to fill in? And then again qualitatively more third-party work expected this year rather than those assets being tied up on dispositions of Maritech assets?

Yes. I would say if you look at kind of putting some meat on the bones on the question, our two direct barges are very well backlogged through the third quarter into the fourth quarter. I would expect will fill any shortfall with spot business we’re kind of – I would say we’re kind of in that mix of having a little bit of availability. But a very full backlog and very much third-party customer-driven. We’ve only got one or two platforms with Maritech, it’s a small number this year, we’ll get that done, but I think the team has done a really good job of transitioning to virtually a full third-party backlog which is really important to that business as we go forward. And our main dive asset that we have similar backlog we feel good about through the third quarter into the fourth quarter. So I would expect we’ll work deep into the fourth quarter with great utilization and then kind of as we always do to see what the market looks like mid fourth quarter and make that determination of whether it would make sense to continue or to bring it in for the winter.

And Blake I would add that our backlog includes a multi platform campaign of one customer. So we’ve got a lot of back-to-back projects to be effective with our barges.

Great. It sounds like good visibility versus previous – last couple of years here. So some points of clarification on what’s been as so far. Within the fluids business as we see WIT and the Saudi consolidation. Should we assume from a mix standpoint that those are – those margins are more on par with your onshore U.S. business?

I would say that that’s probably the case, that’s the case on the water and I would expect the international piece like most of our international business to probably be a little bit above the average.

Okay, great. And then Elijio can you refresh us or give us some sort of parameter for where we started the year here with regard to Mexico in production testing at this point? Are we certainly sub 10% maybe some 5% of overall mix to production testing?

I would say the production testing in Mexico revenue is minimal.

Okay. Got it. And then again the $2 million you mentioned in is hitting just to be precise here on that. That was hitting the corporate line and was separate from the $1.9 million charge you absorbed in production testing?

So good question, let me give you clarity on that. So production testing incurred cost as we were shutting down offices, moving equipment around, laying off people, severance related cost, losses in the countries that we pulled out of $2 million. And that one was probably equally split between G&A and operating expenses with the production testing.

Okay, great. Thanks. Thanks for the time. I’ll turn it back.

Thank you. And the next question comes from Martin Malloy with Johnson Rice.

Good morning.

Good morning.

If you – on the production testing side if you’ve got the contracts with the customers. Can you help us with why it’s taking longer than expected to displace the incumbent?

Well I think there are two elements of it. One it’s taking longer to get the awards and second once we get the awards you need to then go out, usually these aren’t just an award that goes to one service company, you usually have a couple of folks that are awarded that, you then go out and start the work and get more than your fair market shares as you go forward. So I think it’s a combination of the two. I think the biggest part to-date is it is just taking a lot longer to convert to the new customers and get the award. I think the timing of starting is less the problem than the timing of getting the award. And if it’s work that you’re taking away from somebody else which is the case, there’s a conversion time that it takes to go through the process of the MSA and the negotiation in the pricing and qualifying etcetera. And I think that’s just taken a little bit longer.

So Martin if you go through the sequence you get on the business then qualify through procurement you agree terms and conditions then you agree pricing. Then they award you and qualify you as an approved supplier or service provider. No one customer has only one service provider for this kind of service, they’ll have one to three. So then once you are qualified they tell all their rig superintendents here is what you’re using, here is your approved list of suppliers and then on a well-by-well basis they start calling you every fifth opportunity than every fourth opportunity, than every third opportunity. Then you become all of a sudden their primary service provider as they get comfortable with you. So right now we’re progressing to where we’ve got the work awarded we’re in the approved service supplier list, we’re getting the fourth or third call-out and now progresses to their gradually we become the primary service provider.

Okay. That’s very helpful. And then on corporate overhead, when I look back to your guidance you’ve guided for about $45 million in corporate overhead for the year. During the first quarter it was $17 million.

Right.

Is that corporate overhead guidance for $45 million for the year is still good?

So the number that is locking my brain is that we’re working toward a quarterly total G&A of $30.9 million, that’s our goal. When we set that target we’re averaging $35 million per quarter at the end of 2012, we lost this initiative if you recall Q1 of last year. So we’ve been able to drop it from $35 million to $32 million and the $32 that we have today has a little over $1 million, almost approaching $2 million of items such as severance, legal expenses and items that we incurred during the second quarter. When I look at my internal estimates for the second quarter and what we’re seeing the $30.9 million is what we’re planned for.

Okay. Thank you.

Thank you. And the next question comes from Marc Bianchi from Cowen.

Hi guys. On the fluids performance in the first quarter there was some impact from delays in the Gulf of Mexico and some weather impacts. If we were to normalize that where would margins have been?

I think margins are going to be just about what we’ve got at the guidance. I think with our view of the fluids business for the quarter and the full year is both from our revenue and margin we should be certainly above where we’re within the guidance range.

Okay. And you would say that, that would be the case equally through the quarters here, we don’t really need to see a ramp-up per se from second quarter through the end of the year and those have been pretty consistent?

You’ll have the normal seasonal impact in the second favorable in the second quarter from our European Chemicals business, but absent that we’re not looking at a huge improvement rate on margins to get to that.

Okay. And maybe could you offer some comments on just the competitive landscape in fluids as it stands right now?

Yes, I’d say it’s been pretty steady on the water side. We continue to do a good job of differentiating our capability with TETRA STEEL and there is certainly a lot of people out there with lay flat systems that we’re competing with. But I think we continue to hold our own on the maintaining the growth, putting the assets we’ve invested to work being intelligent on the pricing side. So we know that’s going to be competitive, we knew we introduce that, it’s going to attract a lot of other people, I think that all the other elements of the fluids are about consistent with what we’ve seen no deterioration there at all.

Okay, very good. Thanks, Stu. I’ll turn it back.

Thank you. And the next question comes from Doug Dyer with Heartland Advisors.

Good morning gentlemen. Just to elaborate on the Gulf of Mexico delays. Is this still kind of a sequencing problem in the Gulf or is there something more to work here?

No, we just think it’s a sequencing timing at our customers, we expect to continue to be busy and we should see that pickup as we go through the year, we don’t see anything that’s changing in our view of the opportunity sets there.

Alright. And with regard to the free cash flow in the first quarter, how much of that was a reduction in working capital and you also mentioned that CapEx was higher than normal. So how should we think of CapEx being at a normalized rate for the rest of the year?

So capital expenditures in the first quarter were at about $29 million and I would say that it’s at least $10 million higher than what we think the immediate quarters are going to be. We’ve got quite a bit of items that were related to the dry-docks in the Offshore Services side. So that worked against us, but expect that the full year guidance that we gave it’s about $120 million, we’re going to be significantly below that number, given where the production testing business is. Then in terms of working capital from managing our payables, receivables. The seven day improvement in DSO gave us about a $20 million favorable impact. That clearly that’s not going to repeat into the quarters as business ramps up. So we assume some of it will be consumed but it tells you that we can aggressively manage our working capital during periods where profitability is challenged.

Alright. Thank you very much.

(Operator Instructions) And we do have another question from Bill Dezellem from Titan Capital Management.

Thank you. I actually have a couple of follow-up questions. First of all on the water handling systems front. Would you please discuss the competitive fence that you feel that you are building?

I think the area we’re able to continue to differentiate ourselves relates to the design of the hose that we have, the supply chain relationship and the type of deployment tool. I think the combination of the deployment tool and the construction of the pipe gives us a superior product and I think our experience in delivering it consistently gives us that ability to differentiate ourselves. So we’re out, that’s what we’re promoting and we’ve been successful of doing it, Bill.

Thank you. And then I also would like to follow-up on the offshore backlog question. I ask it a slightly different way if I may. How does your book of business and anticipated activity look today compared to how it would have looked one year ago at this time and two years ago at this time?

I would say it’s probably similar to about a year ago but with a much larger third-party mix within the total. And I would estimate that it’s larger than it was two years ago.

And that change of mix to more third-party business. How does that translate from an earnings standpoint from a shareholders perspective?

It shouldn’t have an impact. It should be neutral.

Great. Thank you.

Thanks, Bill.

Thank you. And as there are no more questions at the present time, I would like to turn the call back over to Mr. Brightman for any closing comments.

Thank you. And again all questions, I appreciate the participation and Elijio and I look forward to updating everyone early August on the second quarter results. Thank you.

Thank you. The conference is now concluded. Thank you for (attending) today’s presentation. You may now disconnect. Have a nice day.