Tetra Technologies Inc (TTI) 2009 Q2 法說會逐字稿

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

It is now my pleasure to introduce your host, Stuart Brightman, Chief Executive Officer for TETRA Technologies Incorporated. Thank you, Mr. Brightman; you may begin.

Thank you, Latonya. And welcome to the TETRA Technologies Second Quarter 2009 Earnings Conference Call. Joe Abell, our Chief Financial Officer, is in attendance this morning and will be available to address any of your questions. Joe will give a brief review of our second quarter financial results. I will follow with a brief presentation which in turn will be followed by your questions.

I must first remind you that this conference call may contain certain statements that are or may be deemed to be forward-looking statements. These statements are based on certain assumptions and 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.

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

Thank you, Stu. Revenues in the second quarter were $217.9 million, 28.4% below the record second quarter of 2008, but 11.6% above the previous quarter.

Gross profit was $40.4 million, 47.8% below the prior year's record quarter and 6.9% below the previous quarter. Gross profit was impacted by the special charges that I'll elaborate on momentarily.

Gross profit as a percentage of revenue was 18.5% for the quarter just ended, compared to 25.4% for the prior year's period and 22.2% in the previous quarter.

Income before tax and discontinued operations was $13.6 million, down 70% compared to the second quarter of 2008 and down 24.8% sequentially. Income before tax was negatively impacted by special charges and credits of $13.5 million pre-tax.

The special items include $12.5 million of excess decommissioning expenses, impairments and uninsured expenses associated with Hurricane Ike remediation for Maritech; and $6.8 million of impairments in our Fluids segment or our 50% ownership investment in a European calcium chloride venture; partially offset by a $5.8 million gain from a lawsuit settlement in our production testing segment. This net negative $13.5 million amount is equivalent to $0.12 a share fully diluted.

Income before discontinued operations for the quarter was $9.2 million or $0.12 a share fully diluted. This amount once again was negatively impacted by the $0.12 a share I just mentioned. The reported $0.12 compares to $0.40 a share fully diluted in the second quarter of last year and compares to $0.15 a share in the previous quarter.

Year to date, revenue was $413 million and income or before discontinued operations was $20.6 million or $0.27 a share fully diluted.

Looking at quarterly performance by segment, revenues in the Fluids segment was down 35.5% compared to last year's second quarter. Profits before tax was $1.2 million, down 92% over last year's second quarter due to decreased industry activity; recall that this segment includes a $6.8 million impairment.

Revenue in the Offshore Services segment was up 15.7% versus the same quarter last year. Profit before tax was a record $23.0 million, up 99% compared to last year's second quarter due to strong demand for heavy lift, diving, cutting and plug and abandonment services driven by Hurricane Ike remediation work and risk mitigation plug and abandonment activity for undamaged wells and structures resulting from less economic wind insurance coverage offered by underwriters in the 2009 season.

Revenue in our E&P unit, Maritech Resources, was down 40% compared to the second quarter of 2008 due to production curtailments from Hurricane Ike that are being addressed, as well lower oil and gas prices. Profit before tax was negative $11.4 million due largely once again to the $12.5 million of special charges. This compares to positive $17.6 million in the second quarter of 2008. Due to the uneconomic windstorm insurance coverage, we have decided to self-insure this risk for the June 2009 to May 2010 hurricane season.

Production testing revenue was down 43% year over year and profit before tax was $7.4 million, a decrease of 20.9% versus prior year's comparable quarter due to decreased domestic activity as reflected by the U.S. land rig count. This segment was benefited in the current quarter by a $5.8 million lawsuit settlement.

Compressco revenue was down 10.1% year over and year and profit before tax was $5.9 million, a decrease of 23.2% versus the prior year's comparable quarter due to slowing of domestic activity.

Corporate overhead and interest expense was down 25.7% versus the second quarter of last year to $12.3 million. We had $39.8 million of cash capital expenditures in the quarter. Our debt decreased by $27.1 million during the quarter and $7.7 million year to date, to $399 million.

Debt to total capital was 42.8% at the end of the quarter. In addition, we increased cash by $9.8 million in the quarter to $23.6 million. In our guidance for the year released in February as you will recall, we had expected debt to approximate $480 million at the end of the quarter. We are pleased to be about $100 million below expectations of net debt due to cost control and the liquidation of our oil spots for $23 million. We remain focused on cash flow, cost reduction and deleveraging.

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

Thank you, Joe. During the second quarter, the major accomplishments were record results for our Offshore Services group, a solid performance by Compressco, and as Joe mentioned, a continued favorable performance on our long-term debt versus our targeted internal debt levels. This last item is evidenced by the end of the quarter long-term debt of $399.2 million and cash balance of $22.6 million.

As Joe noted, included in our second quarter results are special credits and charges of a negative $0.12 a share which I'll speak to during my presentation.

Our Fluids division was negatively impacted during the second quarter by lower activity levels both onshore and on the Gulf of Mexico shelf. Overall, the trend towards more activity in the deep water and ultra-deep water markets in the Gulf of Mexico will benefit this business. We also believe that our fluids contract in Brazil will commence over the next several months. Furthermore, our El Dorado, Arkansas project continues to track to a year-end completion.

I am very pleased with the quarterly results of our TETRA Offshore Services segment. We achieved record quarterly results through extremely high utilization of our major assets. Our abandonment and decommissioning, diving and cutting services have been extremely busy. This is being driven by both the demand by our customers to mitigate risk in an environment where unfavorable cost, retention and coverage limits for windstorm damage have accelerated plug and abandonment; as well as the direct impact caused by Hurricane Ike. We have received orders related to Ike on both integrated services, bundled and stand-alone services basis. This multi-pronged marketing approach continued to be our strategy. Again, we've learned from the experiences over the last several years the optimal way to market in this environment.

Execution continues to be excellent, as evidenced by the increase in profitability and improved margins. We expect this business to enjoy a favorable market environment going forward.

The Maritech loss was caused primarily by three factors-- excess decommissioning expenses, impairments and uninsured expenses associated with Ike damage. Without these items, Maritech would have achieved slightly positive results.

A major contributor to these results was the continued acceleration of abandonment and decommissioning within Maritech to reduce the risk exposures. Several of these projects proved to be extremely complex, which contributed to the variance.

During the quarter, production increased production increased to an average of 57.1 million cubic feet equivalent per day compared to 50.5 million cubic feet equivalent in the first quarter.

We will continue to manage the Maritech business within its free cash flow, with a continued focus on risk minimization. As Joe noted, during the second quarter we monetized our oil hedges, consistent with our conservative approach to reducing our debt position.

Production testing continues to operate in a very difficult domestic market. Headcount cost reductions, asset and people redeployment, will continue to be our approach. Internationally, our testing markets continue to be strong and we will continue to invest selectively in growth markets.

Compressco had a very strong quarter despite depressed commodity prices. Margins continued to improve through aggressive cost reduction activities. The profitability of this business in the current market continues to reaffirm the value-added component of this production enhancement service.

In summary, we achieved a record quarter for our TETRA Offshore Services segment. We expect this business to continue to behave very strongly. Compressco had a strong quarter, again further evidence of our value-added proposition.

Long term debt cash management continues to be a focus of the Company. We manage for cash through reduction of CapEx and OpEx.

Though our markets onshore U.S. for Fluids and testing as well as the shelf for Fluids, continues to be difficult, we are confident we will continue to proactively downsize and manage the cost. Long term, our deep water position and our overall market position in testing leaves us positive for these future growth opportunities.

Latonya, with that, will you please open the lines for Q&A?

Thank you. (Operator Instructions). Our first question comes from Jim Rollyson with Raymond James. Please proceed with your question.

Good morning, Stu and Joe.

Good morning.

Stu, you mentioned in the Offshore Services business, obviously a great quarter there; and you said-- mentioned a favorable environment kind of looking forward. Thoughts on third quarter, assuming you don't have any weather interruptions another similar kind of repeat quarter?

I think, barring any weather interruptions which so far we have had none, we should see a very strong third quarter in that business as well; for all the reasons I mentioned in my presentation.

And do you think-- this always historically depends on the mix of business you're doing; but how are feeling about the margins in the second quarter and sustainability in the third quarter?

I think the overall performance should be fairly similar. As you noted, the margins have moved up and I think that's a combination of improved utilization, some of the cost reductions we've taken over the last year, the integration of the organization continuing; as well as just very good execution on the projects that we've had. So I would expect that should continue.

And on the Fluid side, if we back out-- obviously the revenue side of the business is down with just activity but if you back out the $6.8 million charge, your margins there shot up into-- my numbers say about to the low 30% range. Is that because you're starting to see some contributions from the lower-priced contracts that you had signed before as a bigger percentage of mix, or what's going on there and kind of how do you feel about margins going forward in Fluids?

I think the margins in Fluids-- we certainly expect to see the continued benefit of our supply agreement, as we've said before that will kind of be impacted by the volumes that we run through. But I think the margins that we've seen kind of year to date on that business are going to be fairly consistent with what we've seen going forward. We get the benefit in the second quarter, as we always have, from the seasonality of our calcium chloride business in Europe. We had the benefit, as we talked about in the first quarter, of just a very good mix. So I think overall the margins we've kind of outlined for the full year; we still feels those are probably appropriate.

Okay, that's helpful. And then Maritech; obviously a lot of things going on there; the decommissioning expense, that kind of seems like part of your business but it's maybe a little bit elevated. When you look at that going through the second half of the year, do you see still this elevated level of decommissioning and also I guess related to that is the out-of-pocket expenses that are related to Ike repairs-- do you still have some of those to go-- kind of how are you thinking about that second half?

If you look at Maritech, when we gave our guidance earlier in the year, we kind of said two things on Maritech. One, that we'd manage within our free cash flow that business and allocate a good portion of that towards plug and abandonment and less on the capital side, which we've continued to do. And we said from an earnings point of view, it would be a pretty small number this year and during the first quarter we got the benefit of some of the unusual credits. During the second quarter, we took the opposite, some of the negatives of some of the unusual charges in that business.

But I think overall, we still think that business will behave for the full year, similar to what we've talked about where there won't be a bunch of plus or minus on the profit side, we'll manage within the cash flow; continue to aggressively reduce the liability side.

Going back to the other two parts of your question; we did intentionally accelerate that spend on the abandonment and decommissioning during the second quarter. I would not expect, just because of the strategy of getting that done in advance of the hurricane season; that that amount of spend will be as much in the second half internally, as it was the first half.

And the last question, in terms of additional spend that we have; we've gotten through pretty much the property damage piece with Maritech. We did a lot of the intervention work on Ike during the second quarter. We still have some more to do, but we made a lot of progress on that during the second quarter.

Excellent; thank you very much.

Our next question comes from Mike Harrison with First Analysis. Please proceed with your question.

Hi, good morning.

Good morning.

If you could walk through the strategy on cashing out the oil hedges and increasing the gas hedges?

I'll take that one, Mike. Let me start with the accounting treatment. First of all, there is no difference between leaving the hedges in place versus cashing them out because for GAAP purposes we amortize the value of that contract just as if the contract were in place. So over the contract life, if the contract had remained in effect, we amortize that $23 million gain. We would get the cash-- if gas prices or oil prices in this case were identical to the strip at the time we cashed out, we would have the identical cash; we just received it earlier, with a very modest discount. But on a discounted basis, we received the same amount of cash we would have received over time; accounting-wise identical treatment.

What effectively we did was locked in a $23 million gain. What happened since then is oil prices have gone up, so the value of those oil hedges has diminished. We cashed out when we thought there was an opportunity to realize a gain, lock it in, which we did; and therefore apply the $23 million to the repayment of debt. Obviously we have less interest expense going forward, because of reduced debt by that $23 million and then have the identical GAAP accounting treatment. So that was the logic-- to lock in a gain. In hindsight, it was the right decision.

And on the gas we wanted to, as we always do, establish our position with a majority of our production going forward as hedged. So we took that opportunity to do that on the gas side for next year.

And should we assume that at some point you guys will go ahead and lock in oil price hedges for the rest of '09 and 2010 as you see appropriate?

As we see appropriate; yes.

Okay. I was hoping also you could give me what the split between your oil and gas production is in Maritech; what it was this quarter and going forward do you expect that to change?

I'll take that one, Stu. Before Hurricane Ike, we were close to 50/50; probably slightly tilted toward oil. We're still remediating one of our down structures. Once we re-drill wells; that is an oil property that will come back on. So at the time right now, we are more like 55% gas, 45% oil.

Okay. And then I was also hoping you could just comment on the Petrobras contract in Fluids. Recently, Petrobras was saying that they were-- there was some talk about pulling back a little bit on their new production activities and working on extracting the most that they could from existing production. Any sense for how those actions, if they take them, are going to impact your Fluids contract with them?

We still think that the contract we have is going to start over the next several months, end of the third quarter or early fourth quarter; still confident in that situation.

Alright; thanks very much.

Our next question comes from James West with Barclays Capital. Please proceed with your question.

Hey, good morning, Stu. Good morning, Joe.

Good morning, James.

Stu, on the production testing business which has clearly been the toughest market that you're in currently in domestically. Is there an opportunity to do further consolidation here as some of your competitors are under a lot of stress?

Yes, I think two points; one, as you stated clearly that is a difficult market and one that suffers from the commodity prices and rig count more than anything else that we have. I do think in that business which is characterized by a fairly fragmented set of competitors in the U.S., that there are going to be some stress points sooner than later and there may be some opportunities there.

Again in the past, as you recall, we have been a consolidator in that business through an acquisition we did in 2006. So we'll continue to look if those opportunities come up; whether it makes sense long term. Clearly in the short term, asset utilization isn't where we want to be and we'd have to look at that equation. But depending on which opportunity and which region and long term what the prospects are; we would look at it.

We like the testing business long term. Short term, we'll continue to hunker down in the U.S. and invest internationally and grow that business as we're currently doing.

Okay. And then I had a clarification on the Maritech business; the excessive decommissioning expense; was that you guys working on your own properties with your equipment or was that a third party?

It was all of the above. We--as I said, we took on some pretty complex projects with our eyes open during the quarter, wanting to get that work done before the hurricane season. And in some cases, we were able to utilize our own assets. In some other cases, they were projects that required us to go outside because it was beyond the physical capabilities of our own assets. So it was a combination and that was kind of the landscape for that activity.

Okay. And then just-- I'm sorry.

I was just going to add, the jobs were very successfully executed and the Offshore Services group is quite proud of the execution. There were no execution issues at all. We tackled a couple of our nastiest structures and are very pleased with the success that we had and as Stu said going in, with eyes wide open, knowing that there were going to be difficulties encountered and they were handled very well.

Okay, that's helpful. Thanks, Joe. One last question from me; I know you guys have put out earnings guidance for the full year. I believe the range was kind of $0.70 to $0.90 for the full year. As we think about the second quarter, we can look at I guess two ways. One, your reported $0.12 or we could back out all the charges here and get to a much higher number. When you think about your range, do you guys include charges, exclude charges; how does that match up with the guidance you have out for the year?

I think when we look at the business overall, several of those items one would argue are truly one-off and stand-alone. Others are higher than you would expect your normal run rate, because we did a lot more work. When we kind of look at it, we look at it somewhere in between. I mean we basically certainly expect on the items on the Fluids and testing; those are one-off. On the Maritech, several of those are one-off and some of them I expect in my opinion-- the excess decommissioning cost was higher than we would normally have just because of the amount and complexity of what we do.

So when we talk about getting within that guidance, guidance range; clearly the more of that unusual charges and credits we include, the more confident we are and without that we still think, as we've said all along, it will be challenging to get to the bottom of that. And we'll do that as diligently as we can. But equally as importantly in our minds, we're very focused and want everybody to be focused on the long term debt and cash position that we've been able to manage through the second quarter.

Okay. That's a fair point. Thanks, Stu.

Our next question comes from Joe Gibney with Capital One Southcoast. Please proceed with your question.

Thanks. Good morning, guys.

Good morning.

I just want to follow up on the testing side. You referenced in your release being opportunistic in terms of moving some odd equipment into what you deem to be active domestic districts and some international markets. Could you give a little more color there, specifically where you're shifting some things around and where there's possibly some more opportunities in terms of activity versus the drop off?

Again, within the U.S., clearly some of the conventional plays-- the activity has gone down and we've been moving people and assets out of there to some of the newer plays in the shale areas that you hear about. Outside the U.S., it's kind of consistent with what we said-- we've been saying that we feel very good about testing business in Latin America. And we feel good on other international markets, which for us which has been more of the Middle East. So that kind of is where the shipment to detail is. And we continue to spend a lot of time on an ongoing basis reviewing where the best utilization and opportunities are for that equipment.

Okay, and Joe, a lot of great progress here on the debt pay down. Could you just reiterate again, and I apologize if I missed it earlier, what the CapEx spend in the quarter was, your outlook for the back half of the year and then kind of directionally how we should be thinking about further debt pay down for the second half?

The CapEx for the quarter was $39.8 million. So year to date, I think that puts us at about $95 million. If I recall correctly, we have guided at $185 million. The largest components of that $185 million for the year were the Arkansas calc and chloride plant and the new headquarters building; both are front-end loaded in the year. The headquarters building is completed. We're well advanced and have completed many stages of the Arkansas plant.

The back half of the year should be less than the front half of the year. And so far, since we've trended under the run rate for the full year, my speculation is we will continue to do that in the second half of the year and under-spend what we originally guided.

Okay. That's helpful; and any thoughts on the debt pay down side?

We have exceeded our expectations on debt repayment. We're certainly not going to let our foot off the accelerator. I hope we continue paying debt down further. As Stu mentioned, at least on the Offshore Services side, the third quarter looks favorable. So I think we have the prospect to have some further debt reduction.

Okay, helpful; and last one just circling back around on the Maritech side-- how should we think about production I guess, in the back half of the year? I know we're in the re-drill scenario for East Cam and that's more of a 2010 event at this point. But should we be holding in this kind of mid-to-high 50 run rate on production and any kind of--?

I'd say the balance of the year, it should be holding pretty similar to where we were during the second quarter.

Okay. Okay, that's helpful. And just given the fact that you've monetized some of your oil hedges; kind of where do we stand now in terms of your remaining percentage of your '09 production as hedged?

On oil, we don't have any hedges. We cashed out all the oil hedges. On the other hand, those hedges which ran through 2010 for GAAP accounting purposes we have the identical treatment. So you will see the impact of those hedges; it's as if we get the $23 million of cash up front, but we amortize it over that period of time, during which the contracts would have run.

So as one of the other parties had questioned, are you going to re-hedge 2010? The response was-- certainly, as appropriate we will do so and at the appropriate time we'll begin looking at 2011. We have already added a gas hedge for 2010, supplementing the existing gas hedge that we had in place for that year.

On the gas side, with that hedging, we're probably still not all the way where we'll end up, but we're probably over that 50% mark. Typically, we tend to be more towards two thirds of the production hedged. So we probably have a little bit more work to do there and then oil, as Joe said, we'll continue to look at that and decide what we want to do.

Okay. I appreciate it, guys. Thank you, I'll turn (inaudible).

Our next question comes from Bill Dezellem with Tieton Capital. Please proceed with your question.

Thank you. I want to make sure that we're clear in understanding the hedges, just following the last question. So essentially you got the cash right up front. But although you do not have the hedges on your books from an earnings perspective, it's essentially as though you do have those hedges?

Exactly, yes. From a GAAP accounting perspective, the value received for those hedges is amortized over the contract life.

I'm going to belabor this for a moment. So if you were to then put on hedges for 2010, are those actually treated as hedges since you essentially have earnings that will be coming in as though you did have hedges already? It almost seems as though you would be double hedged. Is my question making any sense?

Yes, it does. And the-- essentially we would have locked in the value of one contract and entered into a new contract; there would be no double counting. Perhaps this would be a better conversation taken offline in more detail. I don't know if I could explain it in any greater detail at the moment.

No, that's fine Joe. Let me switch topics entirely then. Debt pay down; given that your--you hit your year-end target at the end of Q2 and you just recently said you'll continue to plan to pay down debt; what is your new target for the end of the year?

We aren't going to publish a new target. Certainly, we believe we'll continue generating cash and apply that cash to debt repayment.

I think, without giving a number, I think we're confident that it will come down below the targets based on where we are now and there will be a little bit of timing issues during the third quarter on some stuff that-- on some liabilities that ended up coming on stream later than we had thought, but other than that small timing, I think the fundamentals of being very aggressive on CapEx minimization and we've been able to maintain our working capital ratios very well in a difficult market. I think between those factors, we're confident we'll come down again between now and the end of the year. But we haven't disclosed that number at this stage.

That's fine. And then relative to the Petrobras contract; you mentioned that you anticipated it'll start in the next few months. Are you anticipating though, that the volumes will be at the level that you were previously anticipating or will it be at reduced levels?

We think it will be similar to what have always expected; it just had been delayed in the start.

And then stepping back kind of from a strategy perspective with Maritech; would it be fair to say that previously your approach with Maritech was really to make a bet against Mother Nature. You'd take on the risk for liability that other operators were offloading and you got paid for that with the cash flow from those properties. But essentially now, you're essentially reducing your bet against Mother Nature? Is that a fair way to look at, from a big picture perspective, how you're thinking about Maritech?

I'm not certain I would categorize it exactly like that. I think you've got to look at the history. That business was formed as an overall strategy to get into the end-of-life late-life Gulf of Mexico shelf, base load our Offshore Services group. We've done a very good job accomplishing that goal. As those businesses, both Maritech and Offshore Services, have grown they've both been able to take on additional capabilities. Maritech has been able to exploit a lot of the assets that we bought-- find additional drilling opportunities. Offshore Services has continued to grow its third-party customer base. If you look at the split at the moment, clearly the majority of the business for that segment is third party.

We think there's going to continue to be opportunities for Maritech. We'll continue to look at them opportunistically, as the evolution of the shelf continues. We're just very cognizant in the short term of taking down our debt, making certain all of our businesses kind of pull in their CapEx spend as well as continuing to reduce that risk profile of Maritech in advance of the hurricane season.

So I think we have a lot of opportunities going forward. We're just going to be very cautious on looking at them within the overall portfolio of the Company.

Thank you, both.

Our next question comes from Thad Vayda from Stifel Nicolaus. Please proceed with your question.

Good morning. Could you guys please provide the components of the $12.5 million unusual charges, impairment, decommissioning and then what you characterized as unusual expenses-- how does that break down?

We have left it as an aggregate. I think we've said in the press release that in aggregate those three unusual items would in aggregate have more than offset the loss in Maritech and given us a slight positive.

Yes, but really only the impairment charge is truly extraordinary. The other two strike me-- well maybe accelerated as actually being just what you normally do. So for purposes of getting to a-- sort of a better operating performance number for the period, I think we kind-- it seem to me we need to know that.

Clearly the impairment number; I would agreement with you. And the hurricane repairs-- we had some of that in the first quarter, we had some of that in the second quarter. Excess decommissioning, while we have that on an ongoing basis, the magnitude of that this quarter, given the amount of that activity that we did was clearly much higher than our normal run rate on that. It's kind of tough to answer the specifics without going into the components of each one of those, Thad.

Thad, I really think that what you have creates a run rate, if you look at the full amount. We don't expect to encounter the excess decommissioning cost anymore than we expect to re-encounter the impairments with the insurance repairs. So I think you do have an accurate run rate. These are not run-of-the-mill type standard jobs that you're going to see repeated over and over.

And I think, with-- trying to give you a little bit more comfort in the response is, as I said earlier, this is a business that over the course of the year we said would make very little money either direction. And we had some big positives in the first quarter, some big negatives in the second quarter. And for the full year, we haven't changed our view of the business, so I think you need to look at it as a full year, as opposed to trying to look at specific quarterly sequencing on that business.

We've said the production should be similar for the balance of the year, as we've seen in the second quarter. And as for the full 12 month period, a lot of these extraordinary charges and credits for Maritech would kind of net out for the most part.

Okay. Switching to the testing division; could you remind us what the international domestic split is in your revenues currently and what you anticipate it will be going forward or where you would like it to be going forward?

Yes, on the testing piece, typically we have about 75% will be domestic. That number has probably increased a little bit this year; just because of the positive on the international and the contraction in the U.S. Long term, we certainly would like to see that international percentage continue to grow dramatically, and we'll continue to invest accordingly.

Ratio-wise, as the market comes back in the U.S. and hopefully we start to move back towards higher activity in the U.S., but the short and intermediate percentages may change; but long term, I think the way to think about that business is we'd like the international piece to be significantly above 25% in an environment where our U.S. business increases from where it is now back towards some of the historical levels we've enjoyed.

Okay, that's helpful and I appreciate that it's difficult to kind of talk about the profitability relatively speaking; but is there an advantage from a margin perspective to the international or should we look at this as being about the same?

Typically we would expect our international margins to be better.

Okay. As far as the decision to self insure; can you walk us through how you made that decision and what you think it saves you over the next year or so, or over the period- I'm sorry?

Well the process we went through is-- we went through our normal process in the spring of meeting with all the players and going through and understanding the economics. And when we looked at the data between the premiums, the retention, the limits, the sub-limits; we just felt very strongly that it made sense not to take on that windstorm just because of-- between the premium and the deductible, I mean that first layer of exposure we would be eating all of that and it was very, very significant and the incremental coverage we'd get would cap out at a relatively small number.

So we kind of went through that process and we spent a lot of time; we had a lot of meetings. And we came to conclusion as we got towards the end of the prior policy life, to go on our own.

I think the premiums-- again we're going to continue to insure our normal exposure for Maritech; so it's purely the windstorm that we're not; and that's probably a number that over a 12-month period is in excess of $20 million.

Okay, thank you. That's very helpful.

Recognizing that it puts more emphasis on us internally to continue to aggressively do the work that we did during the second quarter. And clearly those two actions were related to each other.

Fair enough. That's a good way to explain it. And I guess the last question; anything new on the Chemtura bankruptcy from your perspective?

We continue to meet and discuss and believe we're making progress and feel confident that all of our plans related to those agreements will continue to move forward in a positive manner.

Okay, thank you.

Our next question comes from David Grumhaus with Copia Capital. Please proceed with your question.

Good morning, guys.

Good morning, David.

I was hoping that maybe you could clarify a little something about the Petrobras contracts. I know you've been hesitant to kind of give any kind of dollar amount associated with the contract. But considering it's kind of starting up over the next couple of quarters, I was wondering if you could give us a ballpark about what you think like a quarterly run rate maybe for the end of this year or maybe next year- [what you see]? And then just maybe just touch a little bit on what types of margins you'd expect to see on this type of work?

I know I will disappoint you with my response, but-- I apologize in advance. I'm going to continue to not get into the specifics of pricing and volume associated with it. I think we've always said it's going to be multi-year and it will have a positive impact, be good margins and that all the investments in people, inventory and equipment to support that operation is already on the balance sheet. And I think we'll continue to go with that explanation.

Is it material enough in the back half of the year where we'll be able to notice it-- we'll be able to meaningfully see it in the numbers?

I'm not-- again, given that it's-- it may start part way through a quarter, that's going to make it difficult unto its own. But as I've said before, I would not look at this as a game-changer type of agreement. It's an important agreement for us, important contract. Unto its own, it is not going to be something that is a game changer. But it's very important and we're looking forward to starting and moving forward.

Okay. And then I was going to ask on Fluids; it looks as though the Gulf of Mexico rig counts kind of continue to tick down here in anticipation of the hurricane season; sequentially, considering that you have kind of a strong second quarter in Fluids, typically because of calcium chloride in Europe and the fact that the Gulf of Mexico rig count is down further; do you think that Fluid results in the third quarter ex- the Petrobras contract will be weaker generally or do you think the second quarter's performance is kind of sustainable in the third quarter?

I think for the reasons you mentioned, that a lot of times in the third quarter the activity gets constrained in the Gulf as well as the benefit we saw in the second quarter from the seasonality of the European calcium chloride business; I think your assumption is correct, that it'll be more challenging in the third quarter.

And then the previous caller or a caller earlier talked about the margins in Fluids. I just want to make sure that he was correct when he said that he added back the charges to the gross profit line and your margins were actually up sequentially ex the charge; is that correct?

No. I mean I'll go back and clarify as I read through that in more detail subsequent to the question. The margins, when you just exclude the impact of that other charge in the quarter, sequentially it went down in the second quarter. That's why I said-- again, it's consistent what we've always said. The first quarter had a lot of unusual favorable mix customer margins that would not repeat on a go-forward basis, that we benefit in the second quarter from our European business and that again, for the full 12-month period, our margins would be similar to what we had in the guidance.

Is that charge included at the gross profit level or is that included at the operating income level?

It's at the operating income level.

So it's not-- so the gross profit margin that I see calculated was the pro-forma margin; that's pro forma for the charge?

It's below that; the margin you see does not reflect that charge. That's in other income.

Okay, that's in other income. Okay, I just wanted to be clear on this. And then a last question guys; is second quarter, is that the bottom for your production enhancement division? Do you feel like that'll be the bottom of-- barring a significant collapse in the--

I think if you look at it and focus in on the U.S. business, we've certainly seen during the second quarter a significant decrease in the rate of decline. It's certainly a flattening effect in activity level as we exited the quarter. So I think that's probably our view on the activity.

I do think there'll be on the testing side, continued pressure in the market in the pricing. And as I said earlier, you get a lot of activity down. We've seen-- we probably will see that continue out a little bit longer. But I think we're getting close to that bottom for that testing business.

And as I said earlier, Compressco we're very pleased during the second quarter on the margin improvement and I really think that's a key part of what we accomplished during the second quarter within the Company.

Do you think that Compressco-- is that going to be a lag sort of revenue decline. Do you expect the results there to tick down over the next couple of quarters as gas production rolls over--?

Again, I'm a little bit limited in what I can say on a go-forward basis on Compressco for the reasons we've talked about in the past. But I do feel that we've shown that business doesn't have that magnitude of decline that other land-based businesses have had associated with commodity prices. And I feel very good that that model and the value add we demonstrate to the customer for Compressco has allowed us to hold up much better than others in that space and that's it's been even further improved by a lot cost reduction activities we've done.

I'll turn it back. Thanks, guys.

Thank you.

There are no further questions at this time. I would like to turn the call back over to Mr. Brightman for closing comments.

Okay. Well, thank you very much and we'll look forward to talking about our third quarter in a few months and keep everybody updated. Thanks again.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.