Tetra Technologies Inc (TTI) 2009 Q1 法說會逐字稿

Greetings, and welcome to the TETRA Technologies Incorporated first quarter 2009 results conference call. At this time, all participants are in a listen- only mode. A brief question and answer session will follow formal presentation. (Operator instructions) . As a reminder, this conference is being recorded.

It is now my pleasure to introduce your hosts, Mr. Stuart Brightman, President and Chief Executive Officer of TETRA Technologies. Thank you, you may

Thank you. And welcome to the TETRA Technologies first quarter 2009 earnings conference call. Joe Abell, our Chief Financial Officer is in attendance, and will be available to address any of your questions. Joe will give a brief review of our first quarter financial results, and I will follow with a short presentation which in turn will 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 analysis made by Tetra and are based on a number of factors. The 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 the actual results may differ materially from those projected in the forward-looking statements.

With that, Joe, would you start with the financial overview?

Thank you, Stu. Revenue in the first quarter was $195.3 million, 13.3% below the first quarter of 2008, and 15.3% below the previous quarter. Gross profit was $43.4 million, 3.1% above the prior year's first quarter, and up sequentially compared to the negative gross profit in the fourth quarter of 2008 that include oil and gas property impairments, and goodwill impairments. Gross profit as a percentage of revenue, 22.2% for the quarter, just ended, compared to 18.7% for the prior year's period, and up versus the negative margin in the previous quarter. Gross profit and percentage margins were higher despite lower revenues due largely to $5.4 million of insurance proceeds credit against operating expenses, partially offsetting this amount was a $0.5 million of employee severance costs as part of our reduction in force.

Income before tax was $18.1 million, up 60%, compared to the first quarter of 2008, and up sequentially, compared to a loss in the fourth quarter of 2008. In addition to the insurance proceeds, which increased the gross profit, other non-operating income was $3.2 million higher in the first quarter of 2009, than in the first quarter of 2008, primarily due to gains on the sales of assets. Income before discontinued operations for the quarter was $11.4 million, or $0.15 per share fully diluted. Compared to $7.4 million, or $0.10 a share fully diluted from the same period last year and compared to a loss in the previous quarter.

Looking at the quarterly performance by segment, revenue in the fluid segment was down 5.2%, compared to last year's first quarter profit before tax was $12. 2 million, up 78% over last year's first quarter, due to a favorable product mix, increased international activity, and increased service margins. Revenue in the offshore services segment was down 6.1%, quarter over quarter. Profit before tax was negative $0.6 million compared to negative $4.1 million in last year's first quarter due to solid demand for diving and cutting services and better weather than we experienced in the first quarter of '08, which contributed to comparatively better utilization in our heavy lift fleet.

Revenue in our E&P unit, Maritech Resources was down 28%, compared to the first quarter of 2008, due to production curtailments from Hurricane Ike and lower oil and gas prices. Profit before tax was $9.2 million, up 25% due largely to the insurance proceeds credited against operating expenses, gains on the sales of oil and gas properties, and decreased administrative expenses, partially offset by some hurricane repair expenses. We currently have over 80% of our pre-Ike production restored, full restoration requires re-drilling wells at East Cameron, 328, which will take place in early 2010.

Production testing revenues was down 16.6%, year over year, and profit before tax was $5.7 million, a decrease of 32% versus the prior year's comparable quarter due to decreased domestic activity as reflected by the US land rig count. Compressco revenue was up 10% year over year, but profit before tax was $6.7 million, a decrease of 4.0% versus prior year's comparable quarter due to slowing domestic activity and higher operating expenses. Slowing activity caused us to slow the fabrication of new compressor units, which increased the amount of unabsorbed manufacturing overhead, hence, increasing operating expenses. Corporate overhead and interest expense was up 1.5% quarter over quarter. We had $55.4 million of capital expenditures in the quarter which is less than expected for the first quarter. That increased by $19 million to $426.2 million debt to total capital was 44.5% at the end of the quarter, with debt increasing less than expected per the guidance we issued in February.

With that, I'll turn the conversation back to Stu.

Thank you, Joe. Before I begin the overview of the first quarter, I wanted to take a minute to acknowledge the contributions of our previous CEO, Geoff Hertel. As you know Geoff has been instrumental in Tetra's success over the past 28 years. As a leader he has been visionary in creating a culture of success and entrepreneurial nature. And creating long-term strategies that have been evolving for many years.

As we have previously announced, Geoff will continue to be an employee, a very active Board member, and assist us on specific projects going forward. Again, I want to thank Geoff for all his support and contributions.

On the first quarter, I'm pleased with the results. The earnings in long-term debt position are encouraging in a very difficult market environment. We took very aggressive cost reduction in capital spending actions commencing last year. As certain markets continue to deteriorate, we have continued this proactive approach.

Our fluid division rebounded from the impact of Ike in the Gulf of Mexico. The increased activity levels combined with the favorable mix contributed to the overall earnings improvement. We will continue to benefit from our lower cost base resulting from our supply agreement, international operations continued to perform well. As, our previously announced contract in Brazil has not started but we are optimistic that will commence during the third quarter. We are operationally ready to commence as soon as possible.

Offshore services segment performed as expected during the typically weather-affected first quarter. The impact of hurricane related activities continued high utilization rates for our diving and cutting services. As we enter the second quarter, we believe demand for well abandonment and deep commissioning services will increase as our customers address the damage from previous hurricanes and continue to focus on mitigating risk in advance of the upcoming hurricane season. The inland markets continue to be depressed. We have sized this business for current activity in cold stacked assets as appropriate.

Overall, we will continue to market our stand- alone services in the post Ike market in integrated capabilities as necessary. Operationally, we are very focused and prepared to execute officially. We have a long history in this division, and I'm very confident that operational execution is where we needed to be.

Maritech had a much improved quarter versus the fourth quarter of 2008. This was partially driven by increasing production. We average 50.5 million cubic feet equivalent a day in the quarter versus 35.3 in the fourth quarter. This increase is due to both prior capital projects being completed, and the return of production which had been shut in following Hurricane Ike. Additionally, Maritech benefited from an asset sale in insurance reimbursements during the quarter.

As we go forward in the current commodity price environment, incremental production will continue to generate positive cash flow, but may have a negative impacts on reported earnings due to the DD&A impact. We will continue to benefit from our current hedge position for both oil and gas, 2500 barrels a day on oil and 25 million cubic feet a day on the gas. This ongoing cash earnings review will be constant and we will continue to optimize that aspect.

During the first quarter, our domestic testing business declined due to the significant drilling slow-down in the US. Aggressive cost reductions to minimize the activity and price impact continue to be taken and we've continued to address the head count in an ongoing basis. We've consolidated districts and reduced our footprint and reaction. Internationally, we continue to invest in selective markets and realize the benefits of this strategy. Compressco has experienced decreased activity due to the falling commodity prices. But not as significant as seen as other US land based businesses. We believe the production uplift value proposition continues to exist, even at these commodity prices.

The certain geographic areas where natural gas production has been shut in, some of our units have been returned and agreements terminated. In response to this, we've scaled back our manufacturing production. This results in an under absorption of overhead costs, but it consistent with the focus on managing for cash.

So in summary, we had a very good first quarter. It's a very difficult market, US land based services are probably under the most pressure. We'll continue to size and cut costs as appropriate. Internationally, we will continue to selective invest in those markets that we deem have high growth, overall, we'll continue to focus on debt reduction, cash management both from a spending, operationally as well as capital. We recognize it's a challenging market, I'm very confident in our long-term strategy that we've articulated over the years will be consistent in developing that, but also be in very operationally disciplined in the short term.

I'm looking forward to the challenge and looking forward to visiting with this group going forward. With that, would you please open the lines for Q&A.

Thank you. (Operator Instructions) Our first question comes from Mike Harrison with First Analysis. Please state your question.

Good morning.

Good morning.

In terms of the fluids business, are we looking at the new run rate there for pretax margin or can you give us some details on the mix shift that you saw in the quarter that, and any reason to think that margin might not be sustainable in the high teens range?

I think overall that, that assumption is reasonable. As I stated, we had a favorable mix in the first quarter, but I think as we continue to see the benefit of the lower cost basis on our supply agreements that those margins that you refer to are kind of where we expect to be.

And has there been any change in your view of [Conterra] since you put out your press release related to their bankruptcy?

No, we continue to stay close with them following the approximate since we put out the press release, nothing has changed and we're encouraged that the areas we noted are still applicable, and we'll continue as such.

And then in terms of the decline in drilling activity and the impact on your domestic testing business, how have your expectations for that business changed since February and is it reasonable to assume that your guidance that you gave us in February is maybe in jeopardy for that business?

I think overall that business in the US is certainly going to be challenging. I'd say the activity levels that we're seeing at the moment are below what we had thought earlier in the year, and that part of the business will certain be under pressure. I think there's other parts of our overall businesses that have opportunity in them, but I think that would be the toughest business through the rest of the year.

And last question I have is maybe for Joe. Was wondering what cash from operations were in the quarter and then in terms of the debt increasing less than your internal plan, should we take that statement to mean that you expect a peak debt level will be lower than the $480 million that you had previously suggested, and what is contributing to you guys coming in below that plan right now?

What is contributing to us commanding in below what we had guided in February is just a continued focus on cash flow and capital expenditures discipline, so the main reason that debt is down is we have been very diligent about managing capital expenditures. I won't stick my neck out and make a forward projection, certainly the trend is positive. We did guide towards a peak of $480 million in We did guide towards a peak of $480 million in the second quarter. I certainly will stand by that estimate and don't see too much risk, that we will exceed that, but I'm into the sure I'm going to stick my neck out and say we will be dramatically below it.

All right. Thanks.

Next question comes from John Fitzgerald with Raymond James. Please state your question

Good morning, guys.

Good morning.

Looking to the offshore segment obviously, it's typically down in the first quarter. Do you guys think you can return to a gross margin level somewhere near the 20% range? Going forward?

I think as we look at the rest of the year, we're going to see as I noted the activity picking up in the second and third quarter and we will continue to see the diving and cutting services being busy, utilization on our barging will increase over the second quarter. And I think we'll go towards margins consistent with what we put in our overall guidance for the year. I think that business overall will perform similar to what we expected.

And is the hurricane repair work still, do you expect that to continue into the summer? Or has most of that been worked off?

As we said before, there's various stages of it. We had expected last year that the evaluation inspection piece would be very very active, right out of the bat, and we've seen that with our diving and cutting services. We expected that some of the work that is more difficult to perform during the winter would get delayed into better weather. We're starting to see that now, and I think a hot of that work will get down going forward. I certainly thing it will care on through the year, and into next year. Again, we've talked about it in the past, lessons learned from Rita and Katrina, we are in a position to market stand- alone discrete services, as well as for those customers that are looking for an integrated solution. We have that capability and project management expertise.

And then switching to Maritech, production was solid in the first quarter, and you you guys were able to lower your costs. Do you think you'll be able to move that down any further going forward? Or should we keep it in this high $7 range?

I think as we go forward, as Joe said, most of the production that was tied into Ike other than east cam 328, we brought most of that back. We brought on some new projects in the first quarter that contributed to that increase, and I think as we go forward, it will be similar to what we've seen.

Thanks.

Next question comes from Dan Orr with Alley Asset Management. State your question.

How is it going?

Good morning.

First of all, Stu, congratulations on the promotion, and congratulations to all of guys there on a good quarter.

Thank you very much.

Most of my questions have been answered. I guess the only question I have here is so should we look at it that the guidance you gave earlier in the year, the overall number probably stays intact, but just more of a contribution from fluids, less from production enhancement. Maritech, essentially as is as well as Compressco (inaudible) looking at you planned?

Yes, I think if you look at the businesses, clearly our testing business is going to be the one that's currently under the most pressure in the market, just from an activity point of view. I think we had a very good fluid first quarter. We had favorable mix. Second quarter, fluids will get the benefit of our seasonal strength and chemicals business and Europe, but I think overall, the businesses as you described will be, that's accurate, and the testing will be the one - - all the land based US businesses will be the ones that are going to be the toughest market to operate in, but I do think the others offshore will cycle through the way we described. Second quarter being better, third quarter as we get into the season, and overall, I think you summarized it very well.

Okay. Great. So that $0.70 to $0.90 range is still fair in your model you're thinking?

I think in aggregate, our businesses are kind of going similar to what we described earlier in the year.

Perfect. Okay. Last question, in terms of the fluids business, it seemed like most hurricanes, it looked like activity wasn't going to pick up, and you did a great job in the margin front and activity levels in general - - is that more of a market share related issue or is the Gulf of Mexico just holding up better given that it declined so much faster, so much sooner than the US land market?

I think you get a lot of different pieces in the fluids. For us during the first quarter just about all of them were going reasonable well. In the gulf we had the activity impact in the fourth quarter from Ike. Some of that has come back, you still have a 30 plus percent decrease in rigs that are contracted, so the overall activity is going to be challenged. We're fortunate in the first quarter, we had a good mix with our customers in the type of product that we supplied. As you go forward, I still think the fact that our customers will be busy, but the number of rigs under contract will be less than they were last year, the two variables to look at. We continue to benefit as we said as supply agreement kicks in, and some of our older inventory cycles through as the volumes are there. We get some of that impact, we saw some of it last year, we continued to see some of it in the first quarter. On an international fluids businesses, are performed well, and we expect will continue to, so probably the only piece of the first quarter, that was a little bit even more favorable was just the pure mix that we had in our Gulf of Mexico - -

This sounds good. Congratulations, guys.

Thanks.

Next question comes from Victor Marchon with RBC Capital Markets

Thank you, and good morning. Near, first question was on Maritech. I wanted to see if you guys could provide some guidance as in to how you see production of volumes through the rest of this year.

I think overall, our production will be similar going forward to what we've seen as our exit towards the end of the third quarter, we stated the average for the third quarter was just over 50 million equivalent. And we exited the quarter at a higher rate closer to 60, and I think somewhere in that run rate we'll see out going forward, as we've says previously, we've scaled back our capital dramatically. We're being disciplined in making certain we stick to that, and lot of the benefits of prior capital, we've seen that in the form of increased production during the first quarter, I think you'll see it being similar.

Okay. Similar to the first quarter level or exit rate?

Exit rate.

And the oil, other one was as it relate to the insurance reimbursements. Are you guys going to see anymore of that going forward? Or is this the one- time, and captures all of it in the first quarter?

No, I think we're going to continue having hurricane repair costs offset largely by hurricane proceeds or insurance proceeds. Hopefully it's a little more relatively matched in subsequent quarters so it's not as big of a Delta there, but it will take us next several quarters to continue hurricane repair work and collections.

We look at our insurance, we've got insurance from the previous Ike, Rita, Rita, Katrina that Joe referred to as well as just the ongoing spend on reimbursement on Ike. We feel very good on Ike that everything is covered. We've at go a process to send documentation in expeditiously and optimistic that all will flow through.

Okay. Thank you.

Next question comes from Bill [Dezellweitz] with Titan Capital Management.

Thank you. I had an interrupts, so I apologize if I missed this, but would you give us the size of the gain on sale that you experienced in Maritech and also back to the reimbursement. Was that, number one, quantify it if you would, and number two, was that nor the Rita, Katrina hurricanes, or Ike?

The insurance proceeds were $5.4 million related to Rita, Katrina. The gain on sale of assets was $2.6 million and I The gain on sale of assets was $2. 6 million and I that answers your questions if I'm not mistaken.

In addition to that, we had some expenses in Maritech during the quarter related to the hurricanes that offset that, I believe that number was about $1.9 million.

Yes.

So further clarification, the gain on the asset sales, that's something that we expect will have some of those transactions during the year. It's tough to predict when it will happen.

We always disclose those amounts in the Q as you will see when it's filed.

Thank you. And then relatively to the gain on sale that you were discussing since that's part of your ongoing normal operations, circling back to a prior question, questioner that asked about the $0.70 to $0.90 EPS guidance, and whether that was still valid, those gains on sales numbers are included in your $0.70 to $0.90 guidance for this calendar year. Is that correct?

Yes, we would always have some of that type of activity in our normal Maritech plan and associated guidance.

Thank you.

As well as the insurance proceeds. That's also reflected.

Thank you. And shifting entirely different topic to the testing group, which international markets are you growing your testing business in? Right now, we're growing that business in Latin America, Middle East, and those would be the two primary areas that we're growing and continuing to make investment.

And in light of the commodity prices, are you anticipating that you will be able to continue to grow those businesses and those two regions, and if so, why? What's providing you that opportunity? First part of the question, I do believe we'll continue to grow those businesses. The reason being is we - - we're in a position where we are having infrastructure, we've demonstrated value and we've got customers that still talk about spending significant amounts of money in those areas for those services. So I think we're fortunate that we are in the areas where they will continue to be activity, and we have very good relationships. We've seen no sign of, from the customers otherwise.

Thank you both.

Thank you.

No further questions at this time. I'll turn the conference back over to management foreclosing comments.

Thank you very much, and we appreciate everybody being with us today. And we'll look forward to discussing the second quarter results as we move forward and thanks again.

Thank you. This concludes today's teleconference, you may disconnect at this time.