Tetra Technologies Inc (TTI) 2013 Q2 法說會逐字稿

Good morning, and welcome to the TETRA Technologies 2Q 2013 results conference call. All participants will be in listen-only mode.

(Operator Instructions)

After today's presentation, there will be an opportunity to ask questions.

(Operator Instructions)

Please note this event is being recorded. Now, I'd like to turn the conference over to Stuart Brightman, President and CEO. Mr. Brightman please go ahead.

Thank you, Keith. And welcome to the TETRA Technologies second-quarter 2013 earnings conference call. Elijio Serrano, our Chief Financial Officer, is also in attendance this morning and will be available to address any of your questions. Elijio will give a brief overview of our second-quarter results, and 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 such statements are not guarantees of future performance, and that actual results may differ materially from those projected in the forward-looking statement. In addition, in the course of the call, we may refer to net debt, free cash flow, revenues, gross profit, profit before tax, or earnings per share, excluding the Maritech segment and special charges, or other non-GAAP financial measures. Please refer to this morning's press release or to our public website for reconciliations of non-GAAP financial measures to the nearest GAAP measures. These reconciliations are not a substitute for financial information prepared in accordance with GAAP, and should be considered within the context of our complete financial results for the period. With that, Elijio, would you please start the financial review?

Thank you, Stu. TETRA revenue up $221 million, increased 6% sequentially, reflecting the seasonal uptick in activity of our Europe Fluids and Offshore services. Both improvements offset weakness in Canada and Mexico, consistent with what others have reported. Compared to a year ago, revenue was down 6%, primarily due to lower Offshore services. With respect to earnings, earnings per share were impacted by $0.02 per share of severance, reflecting the actions to reduce headcount in Mexico. And also reflect the severance incurred with the G&A cost-reduction initiatives of the second quarter.

Excluding Maritech and severance expense that we incurred, second-quarter earnings per share were $0.18. The weather in Canada and weaker activity levels in Mexico impacted us by $0.03 per share in the second quarter. Fluids division revenue of $100 million increased 6.5% over the first quarter. The seasonally strong Europe Fluids activity levels added to the continued solid performance from water management and offshore completion fluids. Operating margins for the Fluids divisions were 17.8%, were down slightly from the first quarter. During May, our El Dorado plant was down for several days for scheduled equipment work, as we replaced our critical heat exchanger.

Daily production levels after the switch out of the exchanger have reached record levels, adding to the continued improvements we have been seeing at El Dorado. Compared to a year ago, operating margins were 230 basis points higher, driven by the strong growth in water management. Water management revenue was up 72% versus a year ago, and operating income was up over 4 times compared to a year ago. Production Testing revenue of $47 million was down 13% from the first quarter, due to the weather issues others have mentioned in Canada, and the budget cuts in Mexico.

Feedback from our customer in Mexico is activity in the Chicontepec offshore liquids-rich region will remain soft through the remainder of this year. However, activity in the gas areas of the other regions continues to be adequately funded and represents areas for growth in the near term. US Production Testing was up 6% sequentially, as we've experienced continued month-to-month improvements. Nonetheless, pricing in the US remains under pressure as a result of lower-than-anticipated activity levels in the market. Production Testing operating margins of 9.1% were down from 11.5% in the first quarter, due to the weakness in Canada and Mexico.

US Production Testing operating margins improved significantly from the first quarter, reflecting the cost reduction implemented in the first quarter, the repositioning of assets, and the higher utilization levels of equipment. Compared to a year ago, margins remain under pressure due to Mexico and Canada, and tight pricing in the United States. Compressco revenue of $28 million was down 9% sequentially, as improvements in the US and the Eastern hemisphere were more than offset by the decline in Mexico. We have seen a steady increase in net compressor units deployed in the United States, reflecting the improving market. We have also been able to secure modest price increases in the US and Canada.

I mentioned earlier that feedback from our customer in Mexico was that activity in the Chicontepec offshore liquids reach -- onshore liquids-rich region will remain soft through the remainder of the year. Gas activity in the other region in Mexico continues to be adequately funded, and present an area for growth in the near term. We have almost 200 compressors deployed in Mexico, outside the liquids-rich Chicontepec region as activity is shifting towards a gas market in Mexico. The decline in Compressco operating margins was due exclusively to Mexico, as we gradually reduced staffing levels, as our customer's plans for the resumption of activity evolved. Feedback from last week confirmed that they will remain soft for the rest of the year in the region we noted.

We have completed the majority of our headcount reductions and are moving equipment back to the United States where market conditions are much stronger. Profit margins in the US and Canada in the second quarter improved, reflecting the price increases and the benefit of cost reductions that we've had taken. Offshore services revenue of $64.5 million, prior to eliminations for work with Maritech, was up $27 million sequentially, reflecting the seasonality of our business. Compared to a year ago, revenue was down 20% on lower, heavy lift and diving activity. Diving activity has picked up as we are moving into projects secured earlier this year on new capital and maintenance projects as compared to decommissioning activity.

Second-quarter Offshore services operating margins of 15% reflect the significant cost reductions that we have implemented. Compared to the second quarter of a year ago, operating costs are down $14 million, or 20%, as we have downsized the support structure and reduced barge-level operating costs through various supply chain initiatives, without compromising our ability to service the market opportunities. We did experience a challenging weather environment in May. Pricing also remains under pressure given the excess capacity that we still see in the market. Nonetheless, the cost actions implemented have allowed us to keep operating margins at 15%, position us very nicely to leverage upticks in activity.

Offshore services will continue to generate strong free cash flow given the minimal capital expenditures required. With respect to Maritech, during the second quarter we completed $24 million of work on the Maritech ARO with our own assets. Including work completed with assets other than our own, and work completed on non-operated properties, we reduced the liability by $22 million, net of an increase of $23.6 million to the reserve to address certain wells. Our ARO liability at the end of June was $49 million. The schedule we are working with remains on plan for us to complete the vast majority of the ARO work this year.

We have been challenged by the final wells on our schedule that require extra effort and incurred additional costs beyond what we had reserved. We are down to a handful of wells and platforms, and as is with typical 80/20 analogy, the remaining 20% of the work to be completed is the most challenging. Nonetheless, the management team is managing this daily and aggressively to complete this chapter in our Company's history. Final item I'd like to address before turning this back to Stu are the results of some of our recent initiatives that we've undertaken.

Last year, we launched an aggressive cost-reduction plan in Offshore services. We are now seeing the full benefit of those actions, with the year-over-year costs down $14 million in the quarter, or down 20% from a year ago, allowing us to minimize the impact from tight pricing in the market and periodic challenging weather conditions. We've reduced our cost structure such that we have leverage as the market continues to rebound and pricing gets better. We also launched, earlier this year, our focus on reducing G&A cost. Second quarter G&A cost, excluding severance expense, was $1.1 million lower than the first quarter.

Consistent with the actions and results from Offshore, we expect to see a gradual impact that ramps up every quarter. Our goal of reducing G&A by $16.5 million on an annualized basis by the end of this year remains on plan. With the headcount reductions taken throughout the second quarter, we are on our way towards realizing the $11 million of annualized savings from actions already implemented. We have line of sight for the majority of the remaining $5.5 million and are in the process of implementing those. With what we have achieved in Offshore, we remain confident that we will see the same impact on G &A.

The third area of focus has been cash flow and working capital management. In Q4 of last year, we raised $87 million of operating cash flow through a series of one-time initiatives. We then shifted our focus toward more sustainable working capital improvements. This is in line with our stated goal of generating $80 million of free cash flow, or $1 per share, in 2014 after Maritech, with free cash flow being defined as cash flow from operations excluding Maritech, less growth and maintenance capital expenditures. In the first quarter of this year, we generated $14 million of free cash flow excluding Maritech. In the second quarter, we generated $35 million. The first six months of this year, free cash flow, excluding Maritech, is at $49 million, well on our way to our stated goal of $80 million next year.

One of the initiatives we've been working on, as part of this process, is to improve DSO. We initially focused on the Offshore region, and in the second quarter, we ran three consecutive months of DSO under 60 days, which compares to DSO that they were averaging between 80 and 90 days outstanding in the second half of last year. That gives you a sense of the actions, and the result that we get, as we implement some of our initiatives. We believe we've demonstrated progress with our focus on tactical initiatives by accelerating Maritech to get it completed, reducing operating and G&A costs, and improving cash flow. We believe these represent the foundation towards better and more consistent financial performance by TETRA. We are not there yet and will continue focusing on the basic blocking and tackling.

In the meantime, there will be market challenges beyond our control, such as what we have seen in Canada, Mexico, and the slow start in the US Production Testing market. Operationally, we also continue to see progress on several fronts, such as the growth in the water management, the growth in the offshore completion fluids, and the improving production levels from our manufacturing facilities. Final data point I would like to add before I turn it over to Stu is our effective tax rate. We expect this year to be between 33% of 34%. First quarter was 34%. Second quarter, excluding the Maritech items, was 33%. So with that, let me turn it over to Stu.

Thank you, Elijio. As stated, second-quarter 2013 adjusted earnings of $0.18 per share, excluding Maritech and severance, was a little below the range that we had expected. What we've tried to highlight on the call is that there is a couple of markets that are tough, Mexico in particular, and those were the contributors to the shortfall, as well as some adverse weather in Canada. Just highlighting again the performance of some of the segments, and where we go for the balance of the year and beyond, Fluids continues to be very strong in all components of that segment. In fact, in the second quarter, as noted, the division recorded record revenues exceeding $100 million in a single quarter for the first time, and very close to record profits going back way in time.

Even within the second quarter, several of our Offshore projects in the Gulf of Mexico were delayed, so it wasn't the lumpiness of those projects that drove the results. It was offset by continued growth and associated investment in the water management. We continue to accelerate growth in the water, believe we've got the ability to roll this out to a broader set of geographies in the US. Our chemicals business continues to take advantage of strong market opportunities in oil and gas, both onshore and offshore. Given the last few years, we are very pleased with the continued progress in El Dorado, and the ability to meet market demand, and increased productivity in production as we've done that.

As stated previously, the Production Testing segment was negatively affected by Mexico and Canada. I would note, we have seen a slight uptick in activity as we exit the second quarter in Mexico, of both for testing and for Compressco. A lot of this has to do with the locations we operate in northern Mexico, which have a larger gas component. Canada, we expect the second half with more normal weather to be much stronger than the first half. And then in our US Production Testing business, as we've stated, we expect to show slight incremental improvement as we move through the year. We believe the first quarter was the low point for that. In fact, we saw both revenue and margin improvement in the second quarter in that business.

We expect the pace to be modest, but we have started to see that trend. A lot of it is favorably influenced by the aggressive cost reductions we took earlier this year. This is a business that, long term, we love both domestically, internationally, and we'll continue to look at investment opportunities for our testing business. During July, Compressco Partner Subsidiary announced a flat distribution. We took a conservative approach on that, given some of the headwinds that we have in Mexico in the short term. I would, again, reiterate that TETRA, both within testing and Compressco, has been in Mexico for several decades. We've done very well there, and we will continue to be investing in the short term.

We will look at opportunities to move equipment within Mexico to optimize, and as necessary, other geographies outside of Mexico, in the short term, if those opportunities present themselves. We have another round of cost-reduction activities, as the activity by district gets reset down there, we are in the process of finishing that. I'd highlight all other aspects of Compressco were positive. We continue to see growth in the US. Most of our capital expenditures for Compressco this year, unlike last year, has been domestic driven, taking advantage in the unconventional applications in our other international markets in the Eastern hemisphere and South America continue to grow and attract investment.

With the Offshore services segment, we started the quarter with some negative weather, particularly in May. As we went through the middle and balance of the quarter, we saw our utilization and revenue run rates much stronger as we exited. We are seeing this trend continue in the third quarter. Our major diving and heavy lift assets are booked into the fourth quarter, again, always subject to customers getting their P&A and pipeline work done in advance, but we believe that is on track. The market continues to be very competitive, and our success in the second quarter at maintaining margins on lower revenues is directly correlated to the cost reductions we've taken over the last several quarters.

Maritech, we continue to focus on completing the work on the remaining abandonment and decommissioning. We took a large adjustment during the quarter, given some of the challenges we had on some of the final wells. Despite that, we still believe that the vast majority of the work will be finished this year and aim to target that for completion early in the fourth quarter. Looking at the balance sheet, relatively flat free cash flow for the quarter, despite the significant amount of Maritech work that was done, net debt of $303.5 million at the end of June. Very encouraged in the first half the year of our ability to generate close to $50 million of free cash flow excluding Maritech.

Gives us the confidence, and is consistent with what we've been saying, that next year, once we finish the Maritech work, we view our collection of businesses capable of generating $80 million of free cash flow. This is driven by just a fundamental cash generation of the business, as well as the continued operational improvement we are seeing in managing the working capital cycle. In addition, our ongoing cost reductions give us more confidence in looking forward. For the short term, we continue to be very focused on optimizing the existing assets, managing the cost side as appropriate, but we do see continued growth in our core service businesses that we will be looking for investment opportunities. Thank you very much, and with that, we will open the call to your questions.

(Operator Instructions)

Jim Rollyson, Raymond James

Stu, maybe start with Offshore. Despite, it looks like revenues were a bit weaker than we were looking for, but margins held up pretty good. Should we think about that second half, the normal third quarter probably being the strongest revenue quarter, and then seasonally falling off in the fourth quarter? And maybe some read on, do you think margins actually improve if revenues pick up in the third quarter, and then just falling off again in the fourth quarter?

Yes, I would say, based on where we are a month into the third quarter, we certainly would expect to see the normal sequencing of the third quarter being a better quarter sequentially. We've got great backlog, three full months of typically better weather. We've been fortunate in July, the weather has been good for us. With that, I would expect to see some margin improvement as we go into the third quarter. Expect to work at a pretty good rate through the first part of the fourth quarter, and then I would expect we'd see a normal seasonal decline as we get midway through the fourth quarter into the beginning of the year. So, I do expect we will see improvement over the second half of the year versus the first half in that segment.

Okay that's helpful. And on the testing business, maybe a little color, just a reminder about how much of that business originates these days from Mexico? And then I've got a margin question to ask you.

Yes, on the testing side, during the second quarter, we probably have 60%, 65%, two-thirds is US driven, even with some of the challenges. So, the biggest piece of that outside the US is historically Mexico. It's a bigger lever on Compressco then it is on testing as a percentage of the revenue. I think, as we have said on the Compressco call, typically Mexico is going to represent 25% to 30% of revenue, but not quite as impactful on testing, but still significant.

And Jim, I might add that for the total company, Mexico in the second quarter represented less than 3% of total revenue.

That is helpful. And Stu, on the margin side of that, we go back to last year just for Production testing stripping out Compressco, this used to be a mid- to high-20% margins-type business, and first half of this year it's been in the teens. Is that a function of the weather issues, the shortfall in Mexico? Is it competition that has picked up, or is it mix through some of the acquisitions? Or maybe help us understand why that is down, and do you think that will eventually trend back into those mid-20%s margins at some point?

Yes. I mean several pieces that have contributed to that margin deterioration. Certainly, in the second quarter, Canada for us, like you have seen for everybody that has reported so far, was very, very little activity. So, I think that is an anomaly, and we would expect that to go back to a normal situation as we go through the balance of the year. I think as Mexico recovers, that is usually a nice margin business for us. That will have a positive impact. In the US, we started to see a slight improvement in the margin, so that should help us as well.

Even in a tough US market, where there is a lot of competitive pressures, the margins are down, but they are respectable. We are pleased with where we are. We think we can squeeze a few more cost points out in, as I said, the activity. Internationally, on some of the Eastern hemisphere markets, like Saudi, we continue to do well. Brazil has been pretty good, about what we expected. So, going back towards where we were last year, I think it's going to take us a while, but I do believe this is a business that, certainly long-term, I view as in the mid-20%s margin, absolutely.

Okay, thank you.

Mike Harrison, First Analysis

Maritech is just the gift that keeps on giving, isn't it? Can you maybe talk in a little more detail about the complications that you encountered with Maritech, that led to you pushing the date out a little bit and how much of that was weather related? You mentioned encountering some --

Yes, that's a portion of it, it's not the main contributor. The first half of the quarter, we had some weather impact that contributed. The biggest piece of that variance during the quarter is going to relate to four or five wells that we are working on at the end of the life. We are still having some challenges getting several of those to the finish line. And, obviously, worse than we expected. As we have said, they are at the end, they are the final ones, a little bit more challenging. We've made good progress in June, in July, and the goal is to get the wells finished on those two or three platforms that are still out there, and then move into platform removal and wind that down. But that is the driver in the second quarter with those handful of wells.

And did the Maritech issues negatively effect Offshore sales and margins to the extent that you weren't, maybe, able to do as much third-party work?

It wasn't material. A very significant portion of those wells is done with third-party efforts as well. So, we were able to run through, during the second quarter, the sequencing for our heavy lift barges pretty much the way we did. Again, the only negative on that one was some of the weather we experienced in the first half of the quarter. But, I would say since the end of May through the early August, we've had a pretty good run of sequencing and weather on the barges.

All right. And in the Fluids business, how much did the El Dorado down time hurt earnings? And could you maybe talk about how much of a margin boost we could see from the improving production rates?

Yes, again, first thing is, this event that Elijio referenced in El Dorado was certainly planned. We had it in our base business for the year. We had it timed. Planned way in advance, and the team up there did a superior job of pre-planning project management, getting some of the ongoing preventative maintenance done during the down time. So we went in, we were down for several weeks, which is what we expected. We had taken the necessary steps elsewhere in our other plants to be able to support the market gap that we had for a few weeks. We came out on time, on budget, and ramped up at or above what we had expected, and exited the quarter at a production rate that was higher than we've had to date.

We've always said that on the Fluids division, in aggregate, we think we would be getting the margins to the mid-, high- 20%s. If you look at where we've been the last several quarters, we are in that mid- 20%s type of margin. I think as we go forward, we will continue to see some small, modest sequential improvements in margin. Part of that driven by some of the productivity gains in El Dorado, just like we've seen that sequence the last several quarters. As well as water, as well as continued growth in the Gulf of Mexico. The thing I always try to highlight, on Fluids, is we have made a lot of investment, not just in El Dorado, but in our ability to make calcium bromide, zinc bromide, expanded our capabilities, expanding our blending capabilities in the Gulf of Mexico. So, we are well invested and capable of dealing with the increased volumes.

And then the last question I had is on Fluids. Can you walk through for us how your raw materials are priced in that business? And, net net, as we think about the possibility of bromine prices coming higher, does that help you on a relative basis or hurt you?

On a relative basis, if bromine prices go up that is a positive to us. We have long-term agreements that give us some protection against those bromine spikes. Particularly as it relates to Fluids going into the Gulf of Mexico, deepwater and offshore. The calcium chloride, we have other raw materials sources that are independent of that, but the big piece that goes offshore, when we see bromine prices going up at the supplier level that is positive for us.

All right, thanks very much.

Kurt Hallead, RBC Capital Markets

So Stu, gentlemen, I was wondering if you might be able to just give us an update on how things are progressing in the context of your streamlining the operations, and what your game plan is again, exiting 2013? Is everything still pretty much on track?

Yes, I think if you look at the key elements we've highlighted, and what we are focused on over the balance of the year in 2014, I think Fluids, we just continue to look for additional opportunities on the water. Leverage the investments we have made in the good onshore fluids market, and I think that's all, as the numbers indicate, rolling along as we expected. Testing, we've squeezed the organization in the areas that we needed to headcount wise, continue to monitor that in Mexico. One of the other efforts that Elijio and his team are doing across the full company, is we are spending a lot of time just continuing to refine and enhance the management information, the systems, the operational efficiency, all the back office that supports the operations, particularly as we've done acquisitions and hope to do more in the future.

That is just a platform we want to continue to improve, and become more and more efficient. Collections, invoicing, that is all part of that overall operational improvement. Offshore services, again strong backlog through the third quarter into the fourth quarter. The team has not stopped on cost reductions. They have that ongoing effort to just look at every opportunity, and we have seen that translate to margins being flattish versus last year, and a much smaller revenue line. So, I feel good about that. ¶ And then Compressco, we have been aggressive in Mexico taking the headcount down. We've been aggressive in looking at how we move equipment. And other than Mexico, I think all our other markets are growing. And so, we just continue to focus on what we do, and we feel good about hitting the numbers the second half of the year. We've referenced in the press release, which positions ourself for a nice positive year next year, highlighted by the cash generation we will get post Maritech.

Okay, that's great. And then with respect to, once again, we know that Maritech can be somewhat unpredictable. In terms of the way things you're laying out for the rest of the year, you guys think that this is a situation that we can be talking about a year from now?

I don't. I think we are going to finish the year with a very modest amount of liabilities on the balance sheet. I think whatever is left at the end of the year will be non-operated, or something weird that has come up unexpected. But, I think that is going to be a very small number. We are very, very focused internally on closing that chapter in 2013. And again, we've had surprises. We are not pleased with the magnitude of the adjustments that took place. I remind everybody the number is down to $49 million, it's a smaller number. It's getting whittled away, and we expect to see finish this year.

Okay, then this last thing, then, just on free cash flow. Is there any dynamics that play here that may cause you some concern about achieving your free cash flow targets once Maritech is done?

On free cash flow, Kurt, so in the second quarter our CapEx run rate is consistent with what we've previously guided. So that was not driven by us pulling back hard abnormally on CapEx. So CapEx into the second quarter was about $25 million, annualizes to about the $100 million that we've talked about historically. You've seen that the earnings have not been at the level that we have expected. So, we've achieved that free cash flow this by weaker earnings through very aggressive working capital management. In the process, and we think that we are still several steps away from maximizing that opportunity. The $8 million that we've targeted for next year, I think is a target that we get more comfortable with every quarter.

Great, all right, thanks. That's it for me.

Blake Hutchinson, Howard Weil

Just so we leave the call loud and clear on the progressions in Mexico. We had a pretty steep ramp down as the quarter went on, but Stu you mentioned that, at least in July, elements of the business had improved. If we strip out severance costs, is the comparison between Q2 and Q3 overall for Mexico a flat one or are we still going down in Q3?

I would expect on a normalized basis, Q3 will be sequentially better.

Okay, great.

I think the second quarter was the low point in Mexico. I think it's going to get sequentially better, but I think the third quarter looks more like the second quarter than the first quarter. It's going to come up slow.

Great that's --

And Stu, I might add that, just to add a bit more color to that, by the June time period we were redeploying assets, even from the [Costa Rico] region into other regions, that were showing signs of activity. To where, by the end of the quarter, we had redeployed assets within Mexico to show a little bit of an uptick.

Good, great, that's really helpful. And then, just getting in a little bit to the Fluids business, and if we go back to the first-quarter call, we had anticipated the typical influx in European calcium chloride business, I think to the tune of maybe $15 million. Maybe it was not as powerful? Or was the Gulf and El Dorado being down just working against that to mask that seasonality a little bit?

Yes, I think the second quarter in Europe, which is our big quarter there, was pretty similar to what we expected, maybe not quite $15 million but a pretty big uplift as far as that goes. I think the Gulf of Mexico wasn't as lumpy as the first quarter. So, as you look at a flattish quarter, I mean strong, but flattish on earnings, you've got the continued sequencing up on water. You've got the seasonal benefit of the European chemicals business. You've got the Gulf of Mexico lumpiness down a little bit. Again, I think that picks up again in the third quarter. And then you have, even despite some of the challenges that we had, the planned retrofit in El Do, you had a pretty flattish earnings in domestic chemicals business, which again says a lot for where we are in the overall process with that group.

Great, that is exactly what I was looking for. And then just finally for Elijio, I want to make sure we understand how your benchmarking, and as we speak about the ongoing G&A savings initiatives, you talked about $11 million going to $16.5 million annualized. And $1.1 million reduction in G&A in 2Q from 1Q. Should we be, as we follow it home here, should we be thinking as1Q as your benchmark, or what is the benchmark that we are starting from really?

I would use Q4 last year as a starting point.

Okay.

And then we started reducing headcount a little bit in Q1, but mainly in April, and then we did subsequent reductions in May. So we didn't get, in the second quarter, the full benefit of the headcount reductions that contribute towards the $11 million.

Right.

Then the remaining $5.5 million, our actions that we are going to take between now and the end of the year that are a bit more entailing in times of profits changing, and renegotiating of contracts. So, when you enter 2014, our G&A cost ought to be one-twelfth of $16.5 million lower on a monthly basis, than where we were Q4 of last year.

Excellent, that's great, helpful, and thanks for setting that out for us. I'll turn it back, guys.

Michael Marino, Stephens

Just to follow-up on one of the questions just asked on the Fluids business. A lot of moving parts there. Going forward, do you guys expect Fluids will be up sequentially, despite the seasonal help you had from Europe in Q2?

I think, again not to get too precise on that, I think if you look at the trends over the next couple of quarters, I would expect certainly you don't have that seasonal element in Europe on the chemicals side the second half. I would expect we continue to see positive trends on water, given the investment that we continue to make in that business. And, I would think we see positive trends on the Gulf of Mexico. And I would think, given some of the production rates we see in our domestic manufacturing plants, we continue to see positive trends. So, as the prior call referenced, it's a pretty good spike up in the second quarter in Europe, so I think it will look similar. I wouldn't want to portray that there is a huge ramp up there, but there are elements of the other components that will offset the seasonality of Europe.

And how does that mix shift effect profitability in that segment?

I don't think it's going to have a material impact on margins. We've been pretty steady on the margins in the mid-20%s for a period of time, and slowly seeing that go up.

Okay great, thanks. That is all I had.

Stephen Gengaro, Sterne Agee

Two questions. The first, when you are working through these cost-savings initiatives, is it having any impact on your earnings capabilities? How should we think about it from those terms, as you right size operations?

My opinion, Stephen, is the areas that we've done most of the work, if you go back to Offshore services, the company wide G&A, some of the reductions we made on our domestic onshore businesses as the market softened, as well as Mexico. My opinion is, we've done a very good job being aggressive, and I haven't seen signs of any elements that are uncomfortable from us going too deep or impacting our ability to service our customers, and respond to any projected increases in activity. I think we've done a pretty good job being aggressive, and getting all elements of the company to participate and recognize the objective that we have.

I'll give you some detail. If you look at Offshore services a year ago, Q1 a year ago versus today, at that point we had two heavy lift barges, today we still have two heavy lift barges. We had three diving barges, same thing today. And then we have capacity for several P&A spreads, we still have that capacity. So, when we make this aggressive reductions from the Offshore side, we collapsed back-office functions, we consolidated support functions, we consolidated management teams, without touching the revenue generating assets.

The only area that we have impacted is Mexico, so that as Mexico scaled back, we obviously reduced headcount, but if the PEMEX ramps back up in Q1 of next year, we believe that we've got the ability to add those resources back into Mexico. All the G&A reductions are not impacting revenue generating operations. Here is where we are focused on streamlining operations, and consolidating operations, and sharing resources among the multiple divisions, so that we can get some leverage and cost reductions in that area.

Another area I would highlight, Stephen, just on that theme, because it really is an important theme of when you make changes your ability to continue to increase profitability, is the numbers we referenced are net numbers. There are some adds we've made in strategic places that have netted down to that number. We have taken the time, in a down market in certain areas, to look at elements such as business development, and certain geographies and certain divisions. Where I believe we have strength in the team. We are still looking in certain areas. So I think, that is something that we've decided where we want to be on the overall cost [bucket], taken the steps. But we have also recognized some areas we wanted to improve, and we've built that into the formula.

And a lot of it, also, has been renegotiating of pricing with our service providers. That, just as our customers are aggressive with us in terms of what we charge for our services, we are equally aggressive with our service providers to match what is happening on the other side.

Okay, okay and then when you look at your guidance change, is that primarily Mexico, and a worse Canada, or is there something else there that has surprised you? Maybe, in the US a little slower than expected? I mean, is there anything else that led to the change?

That's pretty much it, Stephen. We looked at, as I in one of the earlier questions, second quarter being the bottom point in Mexico, way off the first quarter. Getting slightly better as we move through the third and fourth quarter, but now we just have a big miss versus the guidance. The second quarter that is behind us in Canada, and just an overall slower recovery on the onshore US, which is predominantly testing. Those are the two, three items that we did the revision related to.

Okay, thank you, and then one final question, and this is something I, quite honestly, struggle to get my arms around. But, when we look at Offshore services, and when we look at the work you are doing for Maritech, is the eliminations number a good proxy for the revenue generating capabilities you are losing out on, by work you are doing for yourself and by -- (multiple speakers)

I would phrase that a little differently. I would say that is a good proxy to represent the revenue we intend to replace after Maritech with the other third-party work.

It is. Okay, and therefore that would be gross profit opportunities that would fall to the bottom line which are currently not?

No, I think that internal revenue today is generating gross profit, and in the future it needs to be replaced by similar revenue and profit generating activities with third parties.

Okay, at similar margins. So, it doesn't change the bottom line, too much, is what I'm getting at, but it does change the cash flow?

Right, right. And again, the vast majority of that work that we are doing currently is related to taking the platforms, cause we are at the final stages there, so the real onus falls on that group to go find that replacement revenue and margin.

Okay, that's very helpful color. Thank you.

(Operator Instructions)

All right, there is nothing more at present time, so I'd like to turn the call back over to management for any closing remarks.

Thank you very much, and as always I appreciate the great questions, and Elijio and I will look forward to updating the group in early November on the third-quarter results. Thank you very much.

Thank you. The conference is now concluded. Thank you for attending this presentation. You may now disconnect. Have a nice day.