TETRA Technologies, Inc.
Q3 2015 Earnings Call Transcript

Published: 6 Nov 2015

[Operator:]

Good morning and welcome to the TETRA Technologies’ Third quarter 2015 Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Stuart Brightman, President and CEO. Please go ahead sir.

[Stuart Brightman:]

Thank you, Andrew, and welcome to the TETRA Technologies’ third quarter 2015 results conference call. Elijio Serrano, our Chief Financial Officer, is also in attendance and will give a brief update; in addition, Joseph Elkhoury, our Chief Operating Officer, is with me and will help us in answering the calls. I will provide a brief overview of our third quarter results then turn it over to Elijio for 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 maybe 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, 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 the financial information prepared in accordance with GAAP and should be considered within the context of our complete financial results for the period. In my remarks, I would like to cover a review of the third quarter, a brief outlook into the next several quarters and the associated market assumptions, and finally, a summary of the refinancing that we announced earlier today. Our third quarter adjusted results, excluding Maritech and unusual items, were $0.17 per share. This significantly exceeds the guidance we provided on our second quarter call and this is second consecutive quarter when we’ve reached these levels of performance. Some of the key highlights of the quarter include record quarterly adjusted EBITDA and operating income for the Fluids division. Another very strong quarter of free cash flow was $30 million in the quarter excluding the impact of Maritech. Based on our year-to-date results and our outlook, we have line of sight to free cash flow for the full year of about $80 million. Out third quarter performance enabled a net debt reduction of $57 million for the year. This is the fourth consecutive quarter that our leverage ratio has continued to trend down is now at $2.02 debt-to-EBITDA. Continued success of our new zinc-free heavy completion fluid in the Gulf of Mexico, earnings in our offshore services business in an increasingly challenging market, and modest losses on an adjusted basis for the testing business also in an increasingly challenging market. The consistent theme across all of our business is a focus on expanding and diversifying our customer base and continuing to manage our cost very aggressively. Similar to the second quarter, our Fluids division’s third quarter performance was positively impacted by several major projects; several of these were continuations of existing projects, as well as acceleration of projects from the fourth quarter into the third quarter. A continued expansion of our customer base in Fluids and the introduction of our new product contributed positively to the third quarter results. I would want to emphasize the performance of the Fluids divisions as broader than just the offshore fluids, as we have seen continued strength in our global chemicals business and our international fluids business. As I’ll talk about later, we see the next couple of quarters as much being lighter in major projects with an expectation that these projects will develop in the second quarter of 2016. The Production Testing division reported an adjusted pretax loss of $1.4 million for the third quarter. We continue to see very challenging markets domestically in certain international regions. Through aggressive cost cutting and expansion of our customer base, we’re able to deliver a modest loss for the quarter. CSI Compressco EBITDA increased 2% compared to the second quarter of this year, and significantly higher than the third quarter of last year. This was driven by a full quarter of inclusion of CSI in the 2015 period as well as continued strength and high horsepower compression service business in revenue strength and equipments sales. As we look at the trends in this business, we see continued reductions in the utilization of our fleet, particularly in the lower horsepower applications. In addition, the backlog of equipment sales continued to decline as our Midstream customers delayed new projects. We continue to be aggressive in cost cutting and are responding to market changes very proactively. During the quarter, we increased CCLP’s distribution to $0.5025 per LP unit, which represents a 9.2% increase over the third quarter of 2014. This is also the ninth consecutive quarter of increased distributions for CCLP. As we look at this business, we will continue to assess the distributions going forward as we look at maintaining a conservative leverage ratio and looking at investment opportunities in low risk projects, particularly focused on expanding our high horsepower fleet. Our Offshore Services segment had an adjusted pre-tax profit of $5.1 million for the third quarter. This sequential improvement is expected through the third quarter historically, being our best quarter, but I must highlight that judging that magnitude of profit in the current market environment, where our customer spending is continually being delayed and postponed, is very impressive. Our team continues to generate profits in this business based on our focus on cost and continuing diversifying the customer base to enable utilization of our major assets. During this third quarter, we spent $800,000 on Maritech’s abandonment and decommissioning. We continue to work through these obligations with the expectation that the majority will be completed by the end of 2016. Free cash flow was $30 million for the quarter. As we have noted in prior quarters, this was due primarily to our cash earnings, continued tight control on discretionary capital spending, and aggressive management of our working capital. As a result, during the quarter, TETRA’s net debt was reduced to $324 million, and our leverage ratio increased 2.02. Kind of looking out over the next several quarters, there are a few trends to highlight. The next two quarters are typically seasonally goes slow for our offshore services business. We expect activity onshore in the U.S. to showdown during the remainder of the fourth quarter and pickup early in the first quarter of next year. Overall, we have seen a continued decline in customer activity in our North American markets and increased competition in several of our international markets. As noted in this morning’s press release, the net results of this will be a slight GAAP loss in the fourth quarter of this year and we anticipate similar in the first quarter of next year. We will continue to mitigate this through aggressive cost reductions and we expect to maintain strong free cash flow in the fourth quarter. One final topic to cover is this morning’s press release announcing our $125 million unsecured notes with GSO. We continue to be extremely confident in our ability to manage our balance sheet through an extended downturn. We have demonstrated, over the last four quarters, our ability to de-lever and believe we will continue to de-lever even in a worsening market condition. However being very conservative by nature, we decided to add liquidity with the intention of paying down $90 million of notes due in April of 2016 and tendering up to $25 million for notes that mature in 2017 and 2020. At the same time, we have moved out our maturity on our $50 million secured note from April 2017 to April 2019. The net result of all of this is that we now have approximately $50 million of debt maturing prior to 2019. This additional liquidity positions us well to look at opportunities that we expect will manifest themselves during the continued market downturn. In summary, we have been very conservative and at the same time very proactive in giving ourselves additional capability. With that I’ll turn the call over to Elijio.

[Elijio Serrano:]

Thank you, Stu. TETRA’s revenue up $305 million was equal to the third quarter of last year despite a 58% decline in the North America rig count. Compared to a year ago, higher revenue from the CSI acquisition and strong fluid results offset declines in production testing and offshore services. Sequentially, revenue was down only 4% from the second quarter as a result of a seasonal decline in our Europe’s Fluids business. Fluid segment revenue increased 5% from last year, off strong Gulf of Mexico activity levels, but declined $12 million in the second quarter, almost entirely due to the seasonality of our Europe Chemicals business. Adjusted pre-tax margins improved to 30.4% on revenue, up 370 basis points in the second quarter of this year reflecting leverage in our Fluids franchise from higher volumes in the Gulf of Mexico. We continue to benefit from the diversity of our revenue mix and the ability to execute on large projects, some of which were accelerated into the third quarter from the fourth quarter, as customers focused on completions activity. Our ability to secure and deliver on very large offshore projects will result in some lumpiness in our revenue. Production testing revenue of $29 million was down 42% from a year ago on the 58% decline in the North America rig count. Sequentially revenue was down 17%, due to the declining activity levels. In the third quarter, we booked $3.1 million of reserves for bad debts, reserves for VAT expenses in Latin America, and a small amount of severance expenses. Only the severance was a cash expense of $154,000 in the quarter. Excluding these charges, adjusted EBITDA margins in the second quarter were 15.9%, which compared to 21.7% in the same period a year ago. We believe that achieving positive EBITDA and almost 16% EBITDA margins when the rig count has declined 58% in North America is a reflection of our Management team’s ability to proactively reduce costs and reflects a diverse revenue mix between the U.S. and international operations. Most of our competitors and peers in the industry are seeing negative EBITDAs in this environment for well site services, while we’re obtaining mid-teens EBITDA margins. In addition to generating such EBITDA margins, we have also been able to significantly reduce capital expenditures. In the third quarter production testing capital expenditures were only $0.5 million, with adjusted EBITDA of $4.6 million, we are generating free cash at the production testing segment level. At the operating income level, our loss of $4.5 million, including all charges, and a loss of $1.4 million, excluding the previously mentioned charges. Depreciation and amortization for production testing is $6 million in the quarter. Compression services segment revenue increased $32 million from a year ago, reflecting the CSI acquisition that we completed last August. Sequentially, revenue increased 2%, primarily on stronger aftermarket sales and sales of new equipment. Total gross profits, excluding depreciation of $43 million increased 2.3% from the second quarter and improved profits from compression services and aftermarket services. It’s a percent of revenue compression services gross margins increased 200 basis point from 48.5% in the second quarter of this year to 50.5% in the third quarter. Backlog of new equipment sales declined to $46 million at the end of September. The downturn clearly is impacting orders for new equipment. However I would like to point out the gross profits from compression services, represent the vast majority of our total gross profits. For the third quarter compression services gross profits were 86%, our total gross profits for CSI Compressco. Gross profits and the equipment sales represented only 10% of CSI Compressco’s total gross profit. As a manufacturing of sale of new equipment declined we have plans in place to adjust the cost structure or fabrication and assembly operations to mitigate this decline. We will reduce our cost structure accordingly to minimize the impact of this decline. In fact from the beginning of this year, we’ve already reduced headcount by 50% our Oklahoma City facility where we are fabricating and assembling the smaller size horsepower equipment. We also have cost initiatives in place to reduce our fuel service and G&A cost. CSI Compressco’s third quarter adjusted EBITDA of $31 million or 24.4% of revenue consistent with the second quarter of this year. This attributable cash flow of $22 million increased sequentially by 6%. CSI Compressco’s third quarter coverage ratio was a solid 1.25 times, a slight improvement over the second quarter, achieved in a very challenging environment. Offshore services revenue increased sequentially by $2 million in the third quarter from the second quarter of this year. As a traditional ramp up in the summer volumes was very modest compared to year ago, revenue was down 38%, as customers continue to defer work on their decommissioning obligations. Despite a $24 million decline in revenue from a year ago, operating income improved by $4.5 million to $5.1 million excluding the impact of $0.5 million from reserves for bad debts. We believe that our offshore division’s ability to achieve 13.4% adjusted operating margins and adjusted EBITDA margins up 21% are significant accomplishments by our management team in our Gulf of Mexico competitors are shutting down operations, selling assets, and materially downsizing their business. We too have aggressively been managing our cost which is reflected in our ability to generate such margins are materially lower revenues with significant pricing pressures. For total takedown the GAAP basis, earnings per share were $0.12 in this quarter on an adjusted basis to exclude the $2.6 million – $2.6 million reserve for potential bad debts. $1.1 million reserve for potential settlement of Latin America VAT audit, and $375,000 of cash severance. And to assume a 30% tax rate, adjusted earnings per share were $0.17 compared to $0.16 in the second quarter of last – this year, and $0.13 in the same quarter of last year, also excluding unusual items. During the quarter, capital expenditures for TETRA excluding CSI Compressco were reduced significantly from $13 million a year ago to $3 million in the third quarter, net of proceeds from the sale of assets. We believe capital expenditures for TETRA will be approximately $21 million this year compared to $65 million in 2014 and compared to $75 million in 2013. Our CSI Compressco capital expenditures were $19 million targeted to expand our fleet with medium and large size compressors being deployed of gathering systems, central delivery systems and large oil production requirements with the emphasis on production targeted for South and West Texas. Our CSI Compressco has a strong market position. As a reminder, the capital expenditures for CSI Compressco, are being wholly fully funded by CSI Compressco capital structure without any support from TETRA or without excessing TETRA’s revolver. During the quarter, TETRA received distributions from CSI Compressco of $7.7 million, up 30% from a year ago. This represents a distribution to TETRA for the 42% of the outstanding units that we owned in our 2% general partner interest. As you recall, when we did the IPO of Compressco in 2011 and as a general partner, we were only receiving 2% of the distributions for the GP. As the distributions have been gradually increasing, we have surpassed 50% IDR in late last year after the CSI acquisition; we reached a 25% IDR. At the current annualized distribution of $2.01 per unit, we’re only 14% away from reaching the 50% IDR threshold that will significantly accelerate the distributions to TETRA as a general partner of CSI Compressco. The year-over-year increase in distributions for CSI Compressco was 9% with a coverage ratio of 1.25. And as of yesterday’s closing price of the units of CCLP were trading at a yield of 14%. As a result of all this initiatives on the lower capital expenditures, lower Maritech ARO, improved working capital management and stronger earnings. Free cash flow for TETRA was $30 million, excluding Maritech ARO or $29.4 million after spending $800,000 of Maritech in the quarter. The $30 million of free cash flow allowed us once again to reduce debt. Through nine months, we have generated free cash flow for TETRA of $62 million after expanding $5 million for Maritech. For TETRA excluding CSI Compressco, w also believe that the $29.4 million of free cash flow after Maritech when compared to adjusted EBITDA for TETRA only at $43 million is a reflection of the quality of the earnings in the quarter for TETRA. I’d also like to remind our listeners that past Maritech losses had created a tax loss carryforward for TETRA and we’re not paying taxes in the United States – in the United States despite generating year-to-date pretax profits of over $21 million. We’re only paying taxes for our international profits. With respect to the balance sheet, we previously mentioned the TETRA and CSI Compressco’s debt are distinct and separate from one another. TETRA improved our leverage ratio to 2.02 times debt to EBITDA. This leverage ratio as defining our TETRA debt agreement. This is the fourth consecutive quarter but we have improved our leverage ratio. Having registered from a high of 3.28, 12 months ago, a reduction of 1.6 times in a very challenging environment. Stu also mentioned in the – we issued the press release earlier announcing that we had secured $125 million for a seven year unsecured note. In addition, we announced that we were extending by two years the maturity of our $50 million of secured notes. We also announced that we’re – we will offer to retire up to $25 million of our existing private placement notes. We’ve got strong financial results we have been posting recently, we do not believe we would have been able to refinance and extend the maturity of $165 million of maturing debt. This is clearly not only prepares us for the – lower to longer sentiment in our industry. That is also provides us a capital to opportunistically execute on growth initiatives. It’s also affords the opportunity to support CSI Compressco with their growth and expansion opportunities. After these series of transactions between now and the first quarter of 2019 only about $50 million of debt matures, also after this transactions are averaged cost of debt is only 6.9% and only $50 million of our debt secured, while $290 million, including our bank revolver is unsecured, our revolver does not mature until late 2019. In summary, the key points of the quarter strong results, strong free cash flow and lower debt levels with an improvement with additional improvement in our leverage ratio. We expect total year TETRA free cash flow to be approximately, $80 million or $1 per share with yesterday’s stock closing price at $6.89, this represents a free cash flow yield of 14.5%. We expect activity to slowdown in next two quarters before additional Gulf of Mexico projects resume in the second quarter of next year. In our refinancing of our short-term maturities with only approximately $50 million due between now and first quarter of 2019. Overall not a bad quarter of TETRA, one of the most challenging environments, we have experienced. And lastly, we look forward to seeing many of your at our first ever Investor and Analyst conference that will be hosting here in Houston of November 12. With that, I’ll turn it back over to Stu.

[Stuart Brightman:]

Great. Thank you. At this point we will open up the lines for any question.

[Operator:]

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

[Praveen Narra:]

Hi good morning guys. A really impressive quarter again. Congratulations.

[Stuart Brightman:]

Thank you.

[Elijio Serrano:]

Thank you very much.

[Praveen Narra:]

When we think about the fluids division obviously, there’s more than just Gulf of Mexico but certainly Gulf of Mexico has been bit of boom for 2015. So when we think about the slight pause until 2Q 2016. Can the middle of 2016 kind of resemble what 2015 will take from an activity standpoint or does it resume I guess what magnitude will it resume at?

[Stuart Brightman:]

Yes. I think overall review that the deepwater Gulf of Mexico will be down slightly next year. There is still lot of completions out there, our customer have from the specific projects that are timed out there so I think directionally, we’re expecting a very good period as those projects pickup again and I also go back to your first point that I want to make sure we emphasize the strength of the fluids is much in deeper and broader than ones’ submarket. We’ve seen continued strength in our Chemicals business, good activity internationally and even in a market like water, which is very, very difficult, we’ve seen some improvements because of new contracts we’ve been awarded and some of the technology the team has introduced. So what we’d like to – the Gulf of Mexico was lumpy, it’s much broader than just ones’ [ph] submarket.

[Praveen Narra:]

And with regards to water, would you expect any improvement in 2016, obviously it’s going to be a weak environment. Can Texas water improve year-over-year?

[Stuart Brightman:]

I’ll let Joseph handle that one.

[Joseph Elkhoury:]

So in Q3 Praveen, especially in U.S. land we were able to achieve a sequential 30% improvement in revenues during this quarter, which noticeably improved the overall margins after a difficult second quarter for water. This was in spite of the admission and drop of almost 100 rigs in Q3 over the last ten weeks. This was really driven by our ability to win some business using our automated blender. We capitalized on the introduction of also some innovative water treatment products. So overall we believe that this will continue into Q4. We see the U.S. customers may be curtailing some of the spend during the holiday season. And as a disclaimer, we’ve already seen a little bit of impact and in fact it’s mainly South Texas during Hurricane Patricia and some of the weather fronts we experienced in the last few weeks. But moving into Q1, specifically for water, we believe we have a very competitive position. We will maintain and aggressively target new share, but we believe that as you move into may be reloading budgets with our customers, may be addressing some of these drills for uncompleted wells, we can continue to deliver a similar performance in the next two or three quarters.

[Praveen Narra:]

Okay, perfect. And then talking more about working capital, you guys have done a really good so far. As we move through 2016, is there more to be squeezed out and if you have kind of an idea of magnitude that will be helpful.

[Stuart Brightman:]

I would say that the first nine months of this year only a small amount of our free cash flows has come from working capital. We expect that we’ll benefit in the fourth quarter as the revenue slowdown and we’ll catch up on our receivables. Comparing 2016 to 2015, we don’t think this is going to be a meaningful impact from being able to generate cash from working capital. We think it’s going to be generated with cash earnings.

[Joseph Elkhoury:]

And one thing I would like to add to that because I don’t know that we emphasize this as much as we should. When we look at working capital and some of the improvements, a lot of that is driven by process improvements, the operating guys and the financial team are putting in place. Looking at speed and cycle time and accomplishing that and that’s a continuous process that will evolve. But a lot of the success we’ve had this year on working capital has been process-driven.

[Praveen Narra:]

Right, okay. Great job on the quarter guys. Thank you.

[Joseph Elkhoury:]

Thanks.

[Operator:]

The next question comes from Kurt Hallead of RBC. Please go ahead.

[Kurt Hallead:]

Hey, good morning.

[Stuart Brightman:]

Good morning, Kurt.

[Kurt Hallead:]

I’m just kind of curious, you guys continued to do extremely well in the completion fluids part of the business. And I was just curious how sustainable you think that is heading out in 2016, given reduced expectation for reduced EAB spending budgets.

[Stuart Brightman:]

Yes, I think we talked about on the call earlier and hopefully give some clarity to, you know, there’s a lumpy part of it, there’s no doubt about it. We’ve always said there’s going to be timing on which projects work is done. This time we benefited from several projects being pulled forward. As we look at the results for the third and fourth quarter, we have looked at it at the second half of the year and some of the timing [indiscernible] and pulling it forward. But we think as we get to the second quarter, middle of next year some of these very visible projects that we expect to be successful on, are going to manifest themselves and will be benefited. Is it at the exact level directionally, it should be similar. Our challenge is to – in addition to that diversify the customer base, so that we see the successes we’ve had in the Gulf of Mexico with new customers has been instrumental and the results continue to take advantage of our chemical footprint, which has developed new opportunities for us this year and others we expect will come in next year. So again it’s kind of – it’s the intersection of a very long-term strategy that we’ve had that we’re executing, combined with some tactical execution that is delivering diversification, cost improvements, safety improvements and a lot of the things that Joseph’s guys have been driving this year.

[Kurt Hallead:]

Got it. Now, I’m on the flip side of that, I’m just curious what you think you can do for production testing to try to minimize or offset those same impacts, right. It looks likes production testing is more vulnerable to these spending cut-backs.

[Joseph Elkhoury:]

So I will take this question. The Q3 performance for production testing was slightly below our objective of being profit before tax neutral. But we are still laser-focused and expect to achieve this goal for the full year 2015. The Q3 results were impacted by some unusual items like [indiscernible] you mentioned in other charges for bad debt and back taxes in Brazil. In North America we continue to capitalize on our, cost actions aggressively diversifying our customer base. We see a light deterioration or we saw a light deterioration in the revenues in spite of experiencing a drop of almost 100 rigs, like I mentioned, in the last few weeks. We were able to replace the activity drop with new business to protect our margins but, one project that pushed into Q4 for us was an international project with an early production facility. If that closed on time which was supposed to be the end of September we would have delivered similar basic performance for production testing like we did in H1. But we expect, like I mentioned to achieve our PVT neutral position by full-year 2015. Internationally we’ve seen a flatfish demand in Latin America. We continue to see the delayed recovery in Mexico. I don’t know whether this will happen in H1 or H2 2016. In Brazil and Argentina we have continued to manage the price, we have continued to manage cost to make sure that we protect our margins, as well. The big difference in Q3 moving into Q4 will be our ability to protect and aggressively go back and reclaim some of the share or the rig assignments in Saudi. This hopefully was impact also positively our Q4 moving into 2016.

[Kurt Hallead:]

That’s great. Appreciate that color. Thanks a lot.

[Operator:]

The next question comes from Stephen Gengaro of Sterne Agee CRT. Please go ahead.

[Stephen Gengaro:]

Thank you and good morning gentlemen. Two things I want to focus on. The first, when you look at 4Q versus 3Q, and obviously you gave some general guidance. If I look at the different segments, it sounds like because of the timing issue that – and I’m talking about certain dollar terms of operating income, that fluids is probably the biggest along with offshore services. Is that fair?

[Stuart Brightman:]

Yes and I think, fluids is clearly going to be the biggest change much more so even than offshore services, because of some of the project timing, et cetera. I think that’s fair and easy. Joseph said we’re going to be close to breakeven on testing. And that will continue to be there. Sequentially offshore services will be down from the third quarter seasonal and fluids will be down. And I think that compression business will hold reasonably well as it’s done for the first three quarters.

[Stephen Gengaro:]

That Production Testing comment was that a full-year breakeven comment or a fourth quarter breakeven comment?

[Joseph Elkhoury:]

A full-year breakeven inclusive of the fourth quarter improvement over Q3.

[Stephen Gengaro:]

Okay, thank you. And then the second question maybe for Elijio, you obviously laid out some of the changes that you’ve made with a new debt get offering on the call. As we look at the fourth quarter and going forward, and I’m curious just trying to figure out sort of the timing of some of these things. What should the interest expense look like in 4Q and then into 1Q?

[Elijio Serrano:]

Yes. The funding of the transaction will probably closed within the next 10 days to 14 days. And at that point you can assume that we’ll have half a month – half a quarter impact from this transaction. And assume that between $125 million of debt that we absorbed and debt that we’re retiring, that the delta and interest expense is about 6%.

[Stephen Gengaro:]

Okay. Okay, that’s helpful. Thank you, gentlemen.

[Stuart Brightman:]

Thank you.

[Operator:]

The next question comes from Blake Hutchinson of Howard Weil. Please go ahead.

[Blake Hutchinson:]

Good morning, guys.

[Stuart Brightman:]

Good morning, Blake.

[Blake Hutchinson:]

I just wanted to understand within the fluids business. Stu obviously a pretty strong quarter on a broad basis but you do mention, I think, for the first time being happy with where you are from a manufacturing standpoint. And is this more than just, the benefits of operating at high utilization and through-put or have there been more permanent – changes that are more permanent to the model in your view, from a margin perspective brought on by changes and manufacturing?

[Stuart Brightman:]

Yes, that’s a great question. Our manufacturing business – we always have several variables going on and certainly we have continued to improve the through-put and our big plans, for example, we put some capital into our European calcium chloride plant recently to improve the operations. And we’re already seeing the seeing the benefit of that. So it’s a very specific investment with the very specific expectation that we’re seeing. We continue to evolve the productive of Elk Grove on an ongoing basis. In addition to that, we’ve got other smaller clients that as we go through the process depending on the relative cost of the raw materials, going into that, we have the ability to shift material and optimize points of production. So, again, one of the things we always try to highlight on our manufacturing business, we’ve been doing this for 30 years. This has been the part of strategy of the company, you know, it’s been a consistent thing for over 30 years and – the footprint we have, the supply chain, the flexibility, those all help us as we go through changing markets. Now that business providing chemicals, clearly there’s an oil and gas component of it where demand is down, pricing is getting more challenging and the team needs to offset that with customer expansion in non-energy markets. That’s a big focus of the operating guys as we go forward, but we all – again, reference the Analyst Day coming up. That’s one of the real themes that the team is going to layout there in a little bit more granularities, just some of these very specific areas we do have differentiation both from a footprint, both from a technology that we think is sustainable. I mean there’s a piece that is sustainable versus the market conditions and a portion of that’s lumpy and it’s going to be lumpy over the quarters, so a part of it is pretty good base to build on.

[Blake Hutchinson:]

Great, that’s helpful, Stu. Just in terms of – from a modeling perceptive, it would like the offshore services business maintained at least a pretty good utilization base load. And you mentioned just kind of in the commentary just kind of a slow operating environment. From a modeling perspective, should we be thinking may be even worse than slow where we see a significant amount of ideal time for most of your assets or is it really just pricing that’s been a shock every year and you’re still kind of getting a decent base load on your assets and…

[Stuart Brightman:]

And again I’ll give a quick answer and Joseph may choose to expand it. I mean, I think we’ve got pretty good visibility that our major assets are going to work well into the fourth quarter, typically they don’t work all the way through December. Pricing is tough. And that’s the case. We highlighted internally. The results we made with the revenue degradation versus prior quarters – years, I mean, we – to be honest we’ve been taken a large amounts of cost out of tasks for several years. And I continue to be impressed by the team’s ability to squeeze out in buckets of $50,000, $100,000 opportunities that aren’t real visible. And it’s very, very tactical and granular and the team has absolutely adopted the – understand that the market is not going to help us in that business, it is not going to be market led in a short-term, but it’s still a big backlog of work for the intermediate term. We’re predicting the timing of it is very difficult.

[Elijio Serrano:]

So let me just add to Stu a few things, indeed the Q3 division performance was very much exceptional. I’m very proud of everybody on this U.S. team. But like Stu mentioned, this was really mainly driven by a lot of small aggressive cost management and a very disciplined approach to where the money has spent. But we have also succeeded in getting more of what I consider as a fair share of this depressed spends in the Gulf of Mexico in Q3 moving into Q4. We have tried to push the envelope on the utilization and the loading up our assets way into Q4. And in some cases, we’ve benefited from that approach and other cases like I mentioned whether impact in Q4, we have not benefited so much, but the sales and op teams are working together on a daily basis to not only improve the utilization and loading of the vessels and the cruise and who actually is onboard of these vessels, but also to manage the selection process of each of these projects from a profitability perspective. As we move into fourth quarter, we’ll see the impact of the weather like I mentioned, but we will also see may be a positive impact of the expansion of the loading and utilization of our assets way into the may be the end, beginning part of December.

[Blake Hutchinson:]

That’s great. Thank you so much and we’ll look forward to the rundown next week. I’ll turn it back.

[Elijio Serrano:]

Thanks.

[Operator:]

The next question comes from Jason Wangler of Wunderlich. Please go ahead.

[Jason Wangler:]

Hi, guys. Good morning. It’s kind have been hit a couple of different ways. But just – for my edification of the fluids side and the declines you see the next couple of quarters. You don’t necessarily see it becoming a seasonal business. So to speak is it just how the timing is kind of shaking out the next few quarters? Is that fair to say?

[Stuart Brightman:]

Yes, I mean, I think the areas where the next few quarters are impacted is not tied to seasonality. We’re always going to have as we said before, that second quarter impact of European Chemicals business, but some of the lumpier projects we have are really just the timing of when the work takes place.

[Jason Wangler:]

Okay. I appreciate it. And then on the GSO note, is there any prepayment ability or is there penalties is on that, I’m just kind of curious as you guys continue to generate a lot of cash flow just if there is an option on that side?

[Stuart Brightman:]

Yes, there is always – there is your typical components where if you wanted to pre-pay it’s going to cost some money. So I think the way you should look at that is – where we get to expand this a little bit more is, we’ve talked through the capital structure all year, as most companies are doing in this environment. And as we thought through we progressively have continue to feel better about where we are based on the year-to-date results. So every time we update the analysis on our thoughts, as the management team would feel better about it. We’re not certain where the bottom is how long it’s going to be, but under every scenario where we look at, we’re in good shape with our balance sheet through those, those stress testing actions. So clearly this is a positive proactive – two elements, want to be conservative. We want visibility to paying down the $90 million. We want visibility to extending maturities in the headline of having about $50 million due in 2017 and nothing else the 2019. You will relate that balance sheet metric with our operating performance. I would challenge the audience to give us other companies that sit in that position. And we think there is going to be opportunities next year. We want to continue to build out the areas that we highlighted is being strategically important. This gives us more capability to do that.

[Jason Wangler:]

Makes sense. I appreciate it.

[Operator:]

The next question comes from Martin Malloy of Johnson Rice. Please go ahead.

[Martin Malloy:]

Good morning. Just following upon that last answer, could you maybe talk a little bit more about the areas that you might look to put some capital to work.

[Stuart Brightman:]

Well, maybe we get two different capital structures. And clearly on the TETRA side, the area we’ve invested last several years has been tied to fluids. I think that would be the most logical anything that leverages our technology expands, our technology gives us more regions. Joseph and his team have a nice long list of ideas that they are running through process to validate and quantify and that’s an ongoing process, not an annual event only. That’s the area that we focused. On the TETRA side, we’ve got the – the CCLP balance sheet in currency and we will continue to look for opportunities they realizing – we want to be conservative on the leverage. We will look at the balance between reinvesting and the balance sheet and the distribution and the yield that we’re getting on our distributions and as we always do have a good discussion at the Board level of how to integrate those thoughts.

[Martin Malloy:]

Okay. And you mentioned new products in your press release on the fluids side – outside of a Neptune are there any other new products that maybe you wanted to highlight. Maybe you could give us an updated in terms of adoption in the market for Neptune.

[Stuart Brightman:]

Yes. I’m very pleased that you asked that question. We’re prepared for the response.

[Elijio Serrano:]

All right, so just we had several questions round the lumpiness so if we think in half shorter than quarter I think we would be able to kind of replicate what we did in halves versus H1, H2 of 2015 moving into 2016. But to give you a flavor of the CS Neptune adoption, we have continued successful implementation of the large project we have in the Gulf of Mexico some of it we’ll continue into next year. In the previous call, I provided colors to saying, okay, look guys, we will explain to you when we start signing additional customers. We have signed another customer, we should start preparing and for the – what I call the qualification process and the auxiliary testing for CS Neptune for the projects for the second customer. We have met with a dozen customers in North America and a little bit less than a dozen customers in Europe as well in the last quarter and we feel confident that, we’ll be able to continue growing and developing the pipeline to really replicate what we have done in 2015 next year. With regards to other products I mentioned the automated blender with water, I also mentioned some innovative water treatment products that have allowed us to grow in Q3 versus Q2, our top line by almost 30%, we continue to hope that, we’re somewhere at the bottom of the rate cycle. We can’t control that, we control the process associated with that. But we focused, laser focused on gaining market share. With regards to the international fluids and U.S. land fluids, we were able to repeat our Q2 performance. We have the solid performance in Africa, the North Sea and the Middle East and we hope to continue to do that moving into Q4 and Q1 of 2016. We did benefit also from the introduction of the additives I mentioned in the second quarter and we’re very pleased with that momentum especially with products like PayZone clean, our BioPol products and other interesting clean up chemicals. In the Gulf of Mexico beyond the big projects like I mentioned we signed one but as to mention in this remarks we also benefited this quarter from two large projects that were supposed to be flattered [ph] in Q4 and they closed in Q3 as we continue looking at differentiated solutions, I’m pleased with the team and the investments we made in what I call the ultra deepwater filtration unit. We have seen growth in that particular application. Moving into Q4, we would see the same type of achievement and we have had, due to the success of those filtration we have seen and had several requests for our customers to go beyond what we do today and try to customize those filtration units towards specific solutions and the deepwater, whether it’s in the North Sea or the Gulf of Mexico. That gives may be a summary of the additional products we introduced.

[Martin Malloy:]

Great, thank you. I look forward to catching up with you all next week.

[Stuart Brightman:]

Thanks.

[Operator:]

The next question comes from Sean Meakim of JPMorgan. Please go ahead.

[Sean Meakim:]

Hey, good morning.

[Stuart Brightman:]

Good morning, Sean.

[Sean Meakim:]

So just a follow-up on the Neptune discussion. Can you give us a sense of – is that type of product accretive to margins today? Does it need more skill to get there and what type of adoption rate? Just a little more sense of that trajectory and how it can impact results over time?

[Joseph Elkhoury:]

Sean we prefer not to talk about margins specific to any product, or any project.

[Elijio Serrano:]

Yes, I’ll just added to this over the short-term, we can’t really tell you whether you can sustain some of the margins or actually predict some of the margins moving into what I call the adoption and the expansion phase. So we’re still with one customer, we want to see more of the application so that we can may be predict a little bit the margins, and the futures and our ability to really move into this niche application. It’s still a niche application, we have interest from several of our customers. But as we develop the pipeline we learn a lot more about our own cost structure, the security of supply, the cost of that supply, and the application of that for different customized solutions for different well applications. They are all valuable that today with specific project you can’t really address or you can’t say this is the margin I can retain or predict for the next year. But on the top line we hope to repeat what we’re seeing and the first application in the second and third of this year.

[Sean Meakim:]

That’s all and that makes a lot of sense, that’s fair. So then just shifting to CCLP a little bit and that the backlog on the equipment side was cut about in [ph] half sequentially. I was curious if you had more color on what was driving that. Is it just a function of customer budgets running out always we get into year-end, budget exhaustion? And can we see perhaps some improvement in the first quarter as budgets reload or is it more a function of just kind of folks looking to reduce capital spending where they can and perhaps going forward the outlooks have reached a bit more conservative.

[Stuart Brightman:]

Sean, we’ve seen bidding and coding activity remain attractive. But we’re also seeing customers reluctant to pull the trigger and actually issue purchase orders. We think that the bookings that we had in the third quarter are going to be a low point. We expect that there’s some opportunities to close in some of those open bids and proposals that are out there. But again I’ll go back to my earlier comments in that only 10% of our margins are, gross profits are coming from equipment sales. And we’ve got the ability to flex the cost structure just like we’ve done in any other division in TETRA out of our Compressco business.

[Elijio Serrano:]

I think as a tangent to that we want to emphasize there’s parts of our compression services business that continue to be very strong on the large horsepower and the team is focused on how we invest in there and how we continue to grow. So we’re very cautious on the capital. But the capital we’ve deployed is very high return and we’ll continue to do that.

[Stuart Brightman:]

Just to add one more comment yesterday Tim and Elijio covered this in the CCLP earnings call. We are looking at opportunities to help some of our customers where they may be interested in selling some of their compressors that they have and maybe large, more attractive segment, so that we can lease it back to them. So it can be a purchase lease-back for us and an opportunity for them to have access to some cash to continue to deploy. So we’re looking at many growth opportunities but to touch on what Elijio mentioned with regards to the pipeline in terms of quotes activity, we have seen that drop 20% to 30%, but what we have seen drop significantly, is actually pulling the trigger on that quotation whether it is with us or our competitors. So when you look at win rate versus the large quotations, it’s really impacted by the customer pulling the trigger and wanting to spend that money.

[Elijio Serrano:]

And the last comment, Sean is that Tim has mentioned in the past when he went through this downturn in the last ‘09, it was the exact same patent he’s seeing right now. So this is consistent with what we expected coming into this downturn.

[Sean Meakim:]

Got it. That’s very helpful. Thank you.

[Operator:]

[Operator Instructions] The next question comes – is a follow-up from Stephen Gengaro of Sterne Agee CRT. Please go ahead.

[Stephen Gengaro:]

Thank you. Two quick ones gentlemen. First, can you give us a rough estimate on a production testing business is how much is outside of the U.S.?

[Stuart Brightman:]

It’s about half-and-half.

[Stephen Gengaro:]

Okay. Okay. Thank you. And then secondly, I don’t want to read into this too much, but this comment you made sort of stood out to me when you talked about the new financing. I think we’ve made comment that it affords us the opportunity to support CSI Compressco under the growth and expansion opportunity. Is that just now is it something there that I should be more aware of or is could we feel like thought that CSI was completely funding itself.

[Stuart Brightman:]

It is and that’s the way, you should think about it, and if we’ve got more liquidity for general investment on high return projects and you know the question we always get is, as the GP sponsors, TETRA’s view in investing in CCLP and our answer is always the same as a function of the project and the ability of CCLP to fund it on its own and we look at that through the eyes of all of our alternative investments. But I wouldn’t leave into with that, the reason the driver, the catalyst, for doing it was to greater focus on that issue. That’s not the intent.

[Elijio Serrano:]

And I will add that, we talked about CSI Compressco looking at buying assets of operators for the midstream company that may want to divest those assets and then we come in and back to deliver the long-term contract. It’s in a scenario like that percentage itself. And CSI Compresco made it incremental capital to do it. We will be available to support them in that perspective. But from an organic growth, I’ve run the business month-to-month, quarter-to-quarter, they’ve got more than adequate liquidity to do that.

[Stephen Gengaro:]

Great, I appreciate, you’re clarifying that. Thank you.

[Operator:]

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

[Stuart Brightman:]

Yes. Thank you. And as always great questions, appreciate the following obviously, we’re really pleased with the quarter. We’re very pleased with our new financing with CSO, and look forward to long and strong relationship. As I said after the second quarter, I’d be demystified in thank all of our team for delivering. They’ve worked hard, they’ve made tough decisions, executed excellently and it’s a great effort. We’ll look forward to catching up in early 2016 to review the fourth quarter and talk about 2016. So thank you.

[Operator:]

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