Tetra Technologies Inc (TTI) 2009 Q4 法說會逐字稿

Greetings and welcome to the TETRA Technologies fourth quarter 2009 results conference call. 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 Mr. Stuart Brightman, Chief Executive Officer for TETRA Technologies. Thank you Mr. Brightman, you may begin.

Thank you, Everett. Welcome to the TETRA Technologies fourth quarter 2009 earnings 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 overview of our fourth quarter 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 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 any such statements are not guarantees of future performance, and that actual results may differ materially, from those projected in the forward-looking statements. During the course of the call, we may refer to free cash flow. This is a non-GAAP financial measure which we use to understand manage and evaluate our business.

Reconciliation of free cash flow to the nearest comparable GAAP financial measure is available, in the Investor Relations area of our public website. This reconciliation is not a substitute for financial information prepared in accordance with GAAP, and should be considered within the context of our complete financial results for the period which will also be available on our website, upon filing with the SEC. With that, Joe, would you start the financial overview, please?

Thanks, Stu. 2009 was highlighted by the generation of record cash flows, a record performance by Offshore services, the commencement of production at our El Dorado, Arkansas, calcium chloride plant, the settlement of our Hurricane Rita and Katrina insurance lawsuit and the reduction of Maritech's decommissioning liabilities. Revenues in the fourth quarter were $211.7 million, 8.1% below the fourth quarter of 2008, and 16.6% below the previous quarter. The Offshore services had another solid quarter, though we experienced the usual seasonal downturn in the fourth quarter, compared to the previous. Compared to the fourth quarter of 2008 in that quarter we had unusually strong demand for diving inspection services following Hurricane Ike. The fluids production testing and compression businesses had not yet felt the full impact of declining oil and gas prices and rig count. Gross profit was $66.6 million compared to negative $11.2 million in the prior year's fourth quarter and 6.0% in the previous quarter.

In the fourth quarter of 2008, we had $45.7 million of oil and gas property impairments, access decommissioning costs and hurricane repair costs charged to income within Maritech. By comparison the fourth quarter of 2009 was favorably impacted by more than $21 million of positive items made up of $40 million of cash collected and income earned from the settlement of our Hurricane Katrina and Rita lawsuit which was partially offset by approximately $16 million of Maritech asset impairments and decommissioning liability adjustments, a $1.4 million impairment in the fluids segment and $1 million of corporate impairments. Gross profit as a percentage of revenue was 31.4% for the quarter just ended compared to negative 4.9% for the prior year's period and 24.7% in the previous quarter. Income before tax, and discontinued operations was $39.7 million, up compared to a loss of $79.9 million in the fourth quarter of 2008 and up 17.2% sequentially.

The fourth quarter of 2008, income before tax, was negatively impacted by $47.1 million of goodwill impairments in fluids and Offshore services. In addition, to the items previously mentioned, that impacted gross profit. Income before discontinued operations for the quarter was $25.4 million, or $0.33 a share fully diluted as reported. This includes a net positive $0.18 a share, with more than $21 million of items mentioned above. The reported $0.33 a share compares to negative $0.79 a share, fully diluted in the same period last year. And $0.30, in the previous quarter. For the full-year, revenues were $878.9 million, and income for discontinued operations was $68.8 million, or $0.91 a share fully diluted. Compared to revenue of $1.009 billion in income before discontinued operations of negative $9.7 million or negative $0.13 a share in 2008.

Looking at quarterly performance by segment, fluids revenue was down 24%, compared to last year's fourth quarter. However, profit before tax was $1.6 million, up versus last year's fourth quarter, that was impacted by $23.9 million of goodwill impairment that exceeded the $1.4 million asset impairment taken in the fourth quarter of 2009. It was down compared to the prior quarter because of slower activity, and El Dorado's start-up costs. Revenue in the Offshore services segment was down 10% versus the same quarter last year. Profit before tax was $15.8 million. Pre-tax profit was up compared to last year's fourth quarter, due largely to the impairment on goodwill, taken in that quarter. It was down compared to the record third quarter of -- previous -- the previous third quarter, previous quarter -- the third quarter of 2009 due to typical seasonality which will continue through the first quarter of this year. Revenue in our E&P unit, Maritech Resources was up 99% compared to the fourth quarter of 2008, due to higher production and higher oil and gas prices, than, the hurricane impacted fourth quarter of 2008.

Profit before tax was $31.4 million, due largely to the $40 million insurance settlement, offset by $16 million of charges. This compares to negative $58.7 million, in the fourth quarter of 2008, which had $45.7 million of impairments, and compares to negative $7.2 million of profit before tax in the previous quarter which sustained some 2008 hurricane repair charges and excess P&A expenses. Production testing revenue was down 45%, year-over-year. And profit before tax was $1.8 million, a decrease of 82%, versus the prior year's comparable quarter. Due to decreased domestic activity as reflected by the US land rig count. Profit before tax was down 38.3%, compared to the previous quarter, though revenues were down only 2.6% due to foreign exchange losses and a slowdown of some of our more profitable work. Compressco revenue was down 21.1% year-over-year and profit before tax was $5.7 million, a decrease of 25% versus the prior year's comparable quarter, due to slower domestic activity.

Profit before tax was up, 8.3%, sequentially, on flat revenues. Corporate overhead and interest expense was $16.6 million compared to $4.4 million in the fourth quarter of 2008. Because of the significant year-over-year change in bonus accrual and a $6 million gain on hedge and effectiveness, following Hurricane Ike in the fourth quarter of 2008. We had $23.7 million of cash capital expenditures in the quarter. Perhaps most notably and importantly, we set a quarterly and annual record for the generation of cash from operating activities as well as free cash flow defined as cash from operating activities minus cash used in investing activities, with free cash flow of $126.9 million in the fourth quarter of 2009 and $122.6 million for the full year. Our debt decreased by $104.1 million, during the quarter and $96.7 million for the full year to $310.1 million. Cash increased over the quarter, by $25 million, and the year by $27.6 million.

We ended the year, with debt, minus cash of $276.5 million. This net debt to total capital was 32.4%, at the end of 2009. Compared to 43.7% at the end of 2008. Year-end net debt is approximately $130 million below where we forecasted in our guidance, provided in February 2009. We completely paid off our revolving line of credit in the fourth quarter, leaving the full $300 million, as undrawn on the facility. While we remain focused on cash flow generation, and cost containment, with a strong balance sheet and a more favorable business outlook, than we had at this time last year, we're once again focused on growth as well. With that, I will turn the discussion back to Stu.

Thank you, Joe. As we review the fourth quarter of 2009, I will reiterate again the major achievements of generating a record level of cash flow, and record earnings by our Offshore services segment. As Joe indicated our fourth quarter earnings of $0.33 per share include special credit and charges of $0.18 per share. As we look at some of the businesses I would highlight during the fourth quarter that our fluids division reported a sequential decrease in revenue and gross margins, primary causes were timing of certain projects in the Gulf of Mexico. Start-up expenses in the El Dorado calcium chloride plant and a $1.4 million asset impairment. A positive development was an increase in activity in our international fluids businesses. We anticipate significant growth in our fluids division in 2010, due to higher activity in the Gulf of Mexico Deep Water services, the continued ramp up of our El Dorado plant, and international expansion.

Our TETRA Offshore services segment completed a record earnings year. The fourth quarter activity was higher than the typical fourth quarter as several projects continued later into the winter months. We do expect a typically slow first quarter, in that we will see the increase in activity, in quarters two and three. This increase in activity will be driven by Ike related work albeit at a lower level than 2009 and continued demand for well abandonment activity due to our customer's risk mitigation plans. Based on our project successes in 2009 we believe we are well positioned in this business. Maritech reported a pre-tax profit of $31.4 million. Included in these results are the $40 million we received in settlement of our Rita/Katrina insurance lawsuit and approximately $16 million pretax charges associated with noncash items related to revisions of estimates of future decommissioning activities, and asset impairments.

Excluding these items, Maritech would still have earned a profit during the quarter. Production was slightly up and we expect that trend to continue as we move forward. I would also highlight the significant amount of well abandonment and decommissioning activities completed by Maritech during 2009. In the production testing segment, the domestic market showed signs of improvement. Our focus continues to be in the US on the shale activity. We expect to continue recovery in this business domestically. Internationally, the fourth quarter had a decrease in activity and foreign exchange losses in certain markets. We expect this to improve and we will continue to invest internationally in this business. Compressco fourth quarter results improved primarily due to the benefit of our cost initiatives. We continue to be encouraged about recent market trends and the underlying margins we have generated in this business during difficult market environment.

The fourth quarter saw record free cash flow generation. For the year we achieved $122.6 million of free cash flow. It is clear that our stated strategy of reigning in discretionary capital, controlling overall spending and a focus on working capital management was successful. Our net debt was $276.5 million, and we finished with a fully undrawn revolving line of credit, of $300 million. We have the financial flexibility to look at strategic growth opportunities while still maintaining the financial discipline we demonstrated in 2009. As I close out our commentary on 2009 and look ahead, there are several additional items to highlight. First, fluids. We have successfully completed construction of our El Dorado plant, and will begin to see the benefit of this long term strategy. Production will continue to ramp up during the year, and this benefit will be particularly seen in the second half of the year.

Our long term supply agreements position us to take advantage of growing Gulf of Mexico Deep Water and international markets. On TETRA Offshore services during 2009, we have demonstrated our ability to generate strong results and have better positioned this segment for the future. For Maritech we have significantly reduced hurricane risk in this business, and are positioned for a profitable year in 2010. Production enhancement through 2008, we were able to generate very high returns on this business, in record sequential quarters. We believe we are beginning to see the recovery in this domestic market and continue to see significant opportunities internationally which we will continue to invest in. Everett, at this time will you please open the lines for Q&A? Thank you.

Thank you sir. Ladies and gentlemen at this time we will be conducting a question and answer session. (Operator Instructions) Our first question today comes from the line of James West with Barclays Capital. Please proceed with your question.

Good morning, Stu, good morning, Joe.

Good morning, James.

Stu the fluids business the margin for the fourth quarter was a little lighter than what we were looking for. Now clearly as you have your new plant come online, you got the Petrobras contract and deep water gets better I would think the margins would improve throughout 2010 but should we assume that they stay at this level near-term and then have a spike in the second half or is it going to be more of a gradual improvement?

I think, a couple comments first, the fourth quarter margins were clearly influenced by the items I highlighted which would be the El Dorado start-up as well as some of the delay of some of the Gulf of Mexico projects we have in the backlog as well as the $1.4 million impairment that we wrote off at year end. As we look at 2010, this is going to be a business where we certainly see sequential improvement as we go forward. I think you got several things working. I think you will see the activity on the deep water increase as we go through the year.

You will see the -- the benefit of El Dorado, certainly be much more in the second half of the year, as opposed to the first half. So when you put all that together, I think you will see a pretty big step-up in the second quarter of this business versus the first quarter. You will get kind of the benefit of El Dorado being more in the second quarter and beyond. Over laid with our normal seasonality of our European chemicals business. And kind of the sequential build-up of the Gulf of Mexico as well as international. So probably the biggest step up will be as we go into the second quarter I suspect.

Okay, is El Dorado is that dragging the margin down for 1Q? I guess would you have all the expenses but the lower volumes as you recover.

Yeah, I think you will see that in the first quarter. You will have the normal ramping up of a large asset that will take us, certainly through the first quarter into the second quarter to get towards the production rates that we expect. Which is kind of the normal operating mode in a project of that scale.

Sure. And then just a final question from me, the balance sheet is now in great shape, cash flow has been phenomenal throughout -- was phenomenal throughout 2009 and should really only be going higher as we go through 2010 as the earnings pick up. Clearly there is acquisition opportunities but have you guys considered also, buying back your own stock, you're sitting here with the lowest multiple stock I think in the group of companies that I cover.

Yeah, I would say we have between Joe and I probably discussed that a little bit more frequently, and for the reasons you just referenced. And I suspect as we look out over the next period of time, we will watch that a little bit closer but that is an option we will look at.

Okay. Thanks, Stu.

Thank you.

Thank you. Our next question comes from the line of Jim Rollyson with Raymond James. Please proceed with your question.

Good morning, guys.

Good morning, Jim.

I guess to start with, impressive to see your Offshore division do quite well in the fourth quarter, given that all the guys you sort of compete with have kind of come the other direction relative to expectations. So you mentioned first quarter, seeing the seasonal dip, but I am kind of curious just in general maybe why you saw better opportunities in 4Q versus everybody else and kind of how you see -- you gave guidance for the full year but just kind of curious as to how big a dip you're thinking in 1Q relative to 4Q.

Sure. I agree with your first part of the comment. We were very pleased with the results of Offshore services during the fourth quarter. The reason I think we had that solid a quarter is a couple of projects that we had been working on, our customers chose to continue to run those all the way towards the end of the year. We just got the benefit of that, that you probably wouldn't have had in a pre-hurricane time period. So it was related to a couple of very specific projects that ran later. Going to the second part of your question is kind of we lay this out over 2010, we certainly have seen the decrease in activity for the first quarter that you have heard many folks discuss over the last few days. So we will have a significant dip in the first quarter.

We expect as we go into the second quarter, that we will see that seasonal pick-up. The quote activity is picking up. We think some of the successes we had last year position us to get our fair share of the business. And I think you will see second quarter going up, third quarter being strong. Typical fourth quarter seasonality, in which would be better than the first. But surely not as strong as second and third. So I think it will be more of the historical quarterly roll out in the aggregate as we said in our guidance earlier this year, it will be a good year, a very good year but not at record levels we generated in 2009. The kind of business we like and think we will do well in.

Sure that obviously implies your margins will be the lowest in the first quarter and get better as you go throughout the summer season.

Yeah, I think that's an accurate statement.

Then just switching gears on the Maritech side you mentioned production from East Cameron 328 coming back and ramping up. Maybe just outlook on some of those fields that have been held back because of third party issues, and -- how you see that, your production levels playing throughout the year and particularly, how you see that playing on your costs? Because your costs are still in Maritech even backing out the noncash stuff, just running a little bit higher than what we have been thinking so I am kind of curious what you're thinking on the cost side.

Yeah, I think if you look at the production side most of the items that we referenced in relation to the fourth quarter production have been resolved. I think you will see for Maritech the first quarter production, in aggregate being fairly similar to what we showed in the fourth quarter. With the exit rate, probably being higher than that, and that will continue as we go forward. We're still very comfortable with the overall production rates that we laid out in the guidance, last month. On the costs side, I think the assumptions that built into our guidance, we're relatively comfortable with. I think Maritech's positioned to do similar to what we laid out in the guidance last month, and with those cost assumptions -- we don't -- we feel relatively comfortable that we've got a good handle on the cost and they're projected in our guidance for the year.

Okay, thanks guys.

All right, thanks, Jim.

Thank you ladies and gentlemen. Our next question comes from the line of Mike Harrison with First Analysis. Please proceed with your question.

Hi, good morning.

Good morning, Mike.

Sticking with Maritech for a moment, you noted the additional well hedge for 2010. Was that something you had baked into your guidance for Maritech revenue and PBT? Or does it -- or would it change your guidance at all?

It would -- it would have a very minor impact. We had always assumed that we would probably put some additional hedges on on that so we didn't have it per se but we kind of had a little bit of that assumption in there. I wouldn't look at it -- it will help a little bit but some of it we already had factored into everything we laid out.

In terms of the pipeline problems, with the third party, I guess I didn't understand completely, are those problems completely resolved? Can you also comment on roughly how much production has been shut in by those problems?

The vast majority are solved and we have got production there and consistent with what we thought would happen for the quarter. In the aggregate, as I said, the quarter -- Maritech's production for the first quarter will be similar to the fourth quarter, with the exit rate going up. So I think we have gotten through the majority of it kind of consistent with what we had expected. With that, we're very pleased with what we're getting out of East Cameron 328. The guy's done a great job getting that back in the fourth quarter, at rates equal to or above what we had expected.

All right. In the fluids business, can you quantify exactly how much start-up cost there was in the quarter so that we can sort of extrapolate an operational --

Yeah, I would prefer not to get that detailed on that item. I think I would just leave you, Mike, with the idea that we certainly -- we started production, got good product during the fourth quarter. Continued to ramp that up during the first quarter. And like any large facility that has a high fixed cost element that absorption portion will get better as we get towards the full capacity. We're moving it up, but it's going to probably take us a couple of quarters to get to that which is what we expected.

All right, last question or set of questions I had was related to cash flow. How much of your cash from operations in 2009 was generated from working capital? How much of a use of cash would you expect working capital to be next year? Then given your guidance range that you provided previously, where would you project free cash flow for 2010 assuming you hit the midpoint of that guidance.

Okay. The principal sources of cash would be earnings, in particular, the very strong earnings that we had in Offshore services. All the noncash charges that we've discussed on the conference call, that negatively impacted earnings, of course added back in the cash flow, the largest positive item that boosted earnings, was a cash item. So, unlike noncash items, that $40 million of earnings boost, related to the hurricane settlement was also a cash boost, so remember that. The collection of receivables was highly correlated to the strong activity and revenues of the Offshore service area, with the seasonality, being in the business, always seasonal, seasonally turning down, in the fourth quarter.

So, after a record very strong third quarter, we collect those receivables in the fourth. The fourth quarter is always a strong collection quarter for us. Then, collections therefore for the year are therefore positive, so, I don't expect that working capital swings and becomes a source of cash next year. I think it remains a -- or use of cash. I think it remains a source but not on the magnitude that we saw this year.

Yeah, clearly, during 2009 it was a source and as Joe said we think we have got a pretty good handle on it going forward. I really feel good that the operational focus on working capital is in place and will continue. So I think we will continue to show the overall metrics equal to improving as we go forward.

All right. And in terms of the guidance, any thoughts on free cash flow, if you hit the midpoint of guidance?

Yeah, I think we had said in the -- previously, that if we hit the midpoint of guidance we would be, hopefully, towards that $100 million free cash flow number. That would be the target. Again that's with the earnings and the capital that was laid out as well as the Maritech decommissioning activities in the January guidance.

Understood, thanks very much.

You're welcome.

Thank you. Our next question comes from the line of Joe Gibney with Capital One. Please proceed with your question.

Thanks good morning, Stu and Joe.

Good morning.

Hit most of the high points here but just a couple quick ones. Just curious on the Maritech hedging side, just to follow up on some of the Q&A there. I know your general stance is always to be roughly two-thirds hedge. Can you give us an update where we are in terms of your production forecast or coverage in 2010 of your expected production. Are we near that two-thirds or are we already there?

Yes, we are, Joe. We're at that level. So there is no pressure to apply any additional hedges for 2010. We need to begin over the next several months, looking at our hedge strategy for 2011, but we're where we want to be, for 2010.

Okay that's helpful. And Stu just curious to get some of your comments on the international testing side and I apologize if you addressed this in your remarks earlier. But is the decrease in activity you reference in the call and what we're seeing here is this just a little bit of a sluggish delay versus the signs of inflection that you're seeing here domestically? Just curious if you can comment.

Yeah, yeah. I think -- I am glad you asked that question. Because I wanted to make sure I got that point across crisply as -- we look at it as kind of a timing issue of getting some of the projects started and continued in funding and expect that to be rectified early in the year and continue to be a growth area for us. We feel very good about our existing international testing markets as well as expanding into new markets.

Okay very helpful, I appreciate it. It covered most of the other ground. Thanks, guys.

Thank you, Joe.

Thank you. (Operator Instructions) Our next question comes from the line of Bill Dezellem with Tieton Capital Management. Please proceed with your question.

Thank you I would like to start with the impairments and I realize they are pretty small but could you please detail what was impaired in the fluids business and then secondarily what the corporate impairment was, please?

Yeah, on the fluids, it was an asset under utilized asset that we have, in the US, that is an area where we have very little activity, doesn't affect us operationally going forward. And then, the corporate was just a general asset that we had that we chose -- looking at it that it was slightly impaired and took that charge.

And when you say a general asset --

It is just an item we had on the balance sheet related to one of our assets at the corporate level.

And then let me shift, if I may, to testing. Do you get any sort of a disproportionate impact from an increase in horizontal drilling versus any other type of drilling? Or is it more just natural gas versus oil that is the key?

Well, for us it is typically a business that is driven by natural gas more than oil. Although there is an oil component and it's a business that as we start to go more and more into the shale plays, that creates typically, a longer duration of our people and equipment out there. So that's a positive mix for us. So that the trends that you see, as folks are going more and more into Marcellus, and Haynesville, and Eagle Ford are all positive for our testing business.

And would you please help us understand why it is that your people are on the wells in the shale plays longer?

They are just higher volumes, longer duration, takes longer to do the flow back testing, and clean-up that we do out there.

Thank you.

Thank you. Our next question comes from the line of Victor Marchon with RBC Capital Markets. Please proceed with your question.

Thank you, good morning guys.

Good morning, Victor.

First question, Stu. Just wonder if you could give us some brief comments on pricing, for each year, your segments, where you are today and sort of what your outlook is as you progress through this year.

Yeah, I think at a high level for the businesses, all of our service businesses, we have got a relatively flat price environment. We have not built a significant change in that even in some of the markets that we expect to recover. We have said also previously on the Offshore services, that we probably had a little bit more favorable mix in 2009, than we will see in 2010, related to the nature of some of the projects on Ike and, again, that is built into the guidance and moving down from the record performance of 2009. But all in all not a dramatic impact in what we're looking at.

As you look across your segments and the activity levels maybe looking out to the later part of 2010 and 2011, if you were to say which segment were to see the pricing, some pricing back end would that be on the testing side or what is your sense there?

I think if you're going to look at the pricing, it is kind of hard to pick one that might lead the charge on that. I would expect we will have, hopefully, slow improvements in those businesses, where the activity comes back. I think it takes -- usually takes a little longer to get that going, than it does to see the activity. It usually lags a little bit. But there is not one that sticks out, Victor, as being the most likely.

Right. Okay. Second one I had just as it relates to the Gulf of Mexico on the fluids side, the delays in the fourth quarter. Are those getting kick started here in the first or is it something that may start up second, third quarter.

No, we should see the activity pick up in the first compared to where we've been. I think we have seen evidence of that.

All right great. That's all I had. Thank you, guys.

Thank you, Victor.

Thank you, ladies and gentlemen there are no further questions at this time. I would like to turn the floor back to Management.

Well, thank you very much, and I appreciate all the questions and we will look forward to updating you on our first quarter results in early May. Thanks again.

Ladies and gentlemen, this concludes today's teleconference and you may disconnect your lines at this time. Thank you for your participation.