Tetra Technologies Inc (TTI) 2014 Q1 法說會逐字稿

Good morning. Welcome to the TETRA Technologies first-quarter 2014 results conference call.

(Operator Instructions)

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

Thank you, Keith. Welcome to the TETRA Technologies first-quarter 2014 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. I'll provide a brief overview of our first quarter results, then turn it over to Elijio for some additional details, which will in turn be followed by your questions.

I must first remind you that this conference call may contain statements that are, or 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.

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, 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.

Our first quarter 2014 adjusted earnings excluding Maritech were a loss of $0.04 per share. This is below the guidance we released on February 10, primarily due to results for our Production Testing segment, which I will discuss in detail in a moment. In addition to the special charges outlined in the press release, it is our estimate that bad weather impacted results by $0.01 to $0.02 during the first quarter.

In our Fluids division, after adjusting for a net favorable impact of $2.4 million related to unusual items, our earnings were down slightly versus the prior year's quarter and up sequentially. Overall, we continue to see good demand in our water management and chemicals businesses, and during the quarter a delay of certain Fluids projects in the Gulf of Mexico was more than offset by strong international activity. We expect Gulf of Mexico activity to pick up as we go through the year, and we expect to see strength in all of our other businesses in the Fluids division. I am pleased to report that the integration of our previously announced TD Water Transfer acquisition is going well, and we expect both this and the acquisition of the remaining ownership interest in our Saudi joint venture to yield anticipated results for 2014 and beyond.

For the Production Testing segment, after adjusting for $1-point million (sic -- see Press Release "$1.9 million") of unusual charges, we report a slight loss for the quarter. Clearly, this was disappointing and below the expectations we conveyed in our 2014 guidance release on February 10. In addition to a larger negative weather impact than was modeled in our forecast, we simply have not seen the expected increase in revenues in the US, despite several new customer awards. The aggregate impact of delays in scheduled work and a longer lead time to bring the new customer work onstream negatively impacted results for the quarter.

In addition, the lack of drilling and completion activity onshore in Mexico is contributing to a very weak market for the segment. We continue to expect the results for international testing, other than Mexico, will be consistent with our plan for the year, and that the second quarter will begin to demonstrate the anticipated revenue increase. We continue to aggressively manage costs during the first quarter, and we believe that we are at an appropriate cost run rate for the current activity levels.

Our Compressco segment reported flat profits for the first quarter of 2014 compared to the prior year. Overall, the decline in activity in Mexico has been offset for the Compressco segment by increased activity in the US. In the US we continue to see growth from liquids-related activity, and vapor recovery services have been the largest contributor to this increase. We also continue to benefit from an ongoing cost production program that drives supply chain and operational savings. Compressco recently announced a quarterly distribution increase of $0.075 per unit, which represents our sixth quarterly distribution increase over the past seven quarters. This increase moves us to the threshold of the 15% target distribution level at which TETRA will receive incentive distribution rights.

In the Offshore Services segment, we reported a loss of $8 million in the first quarter. This compares slightly unfavorably to adjusted pretax earnings of $5.2 million in the first quarter of 2013. This was due primary to the fact that both of our heavy lift barges and one dive support vessel were in planned dry dock during the first quarter. The work on these vessels has been completed, and all three have been working since the beginning of the second quarter. We have solid backlog, and we continue to believe that this segment's full-year 2014 performance will be consistent with our February 10 guidance. This expectation includes a significant sequential improvement in the second quarter, typical of the segment's seasonal pattern.

Our Maritech segment recorded a net adjustment to its abandonment decommissioning liabilities of $7.9 million in the first quarter of 2014. This related to challenges encountered on two of our remaining wells. We expect to complete the work on these wells during the second quarter, and anticipate that the majority of the remaining abandonment and decommissioning work on operated properties will be completed by the end of the third quarter.

During the quarter we generated free cash flow excluding Maritech and acquisitions of $20.5 million. This is consistent with our stated expectation of generating $80 million of free cash flow during 2014.

Before I hand it over to Elijio, I would like to take a minute and give an update on the tactical initiatives that we've outlined over the past 18 months. I think it's important in the context of some of the challenges that we discussed on testing to go back and update this. First, 18 months ago we launched an initiative to right-size the Offshore Services division, and identified $15 million of cost savings on a business with an EBITDA run rate of $40 million to $45 million. We completed this by reducing $19 million of cost, and positioned this division to generate a strong free cash flow with very little capital and a strong backlog. We believe our Offshore division with an asset base of slightly over $150 million is significantly outperforming Its peers.

Getting Maritech done and behind and accelerating this work during the last two winters was another significant tactical initiative. 18 months ago we had over 10 operated properties that needed to be addressed. It's been a painful and costly process, but we are now down to four operated properties, two with challenging wells with formation pressure and two that just simply require a good weather window to execute. We're inside the 20-yard line, the red zone, in getting this behind us. It's possible that the two properties that have wells with formation pressure might cost us slightly more to complete, but we do believe those will be done with this and the next quarter.

The third tactical initiative was to expand our Compressco US business with the introduction of vapor recovery units and mid-size compressors to offset the decline of activity in Mexico. We have been able to increase distributions in six of the last seven quarters, despite the challenging market in Mexico. We believe we have Compressco positioned for continued organic growth and growth through acquisitions.

The fourth tactical initiative was to grow our water handling business with the introduction of the lay flat hose with the rapid deployment units. Today we have units deployed in all the major US bases and in Canada. We have grown this to be a very meaningful business, and completed a recent tuck-in acquisition allowing us to capitalize on the continued growth in fracking activity. We are beginning to see opportunities internationally and we'll pursue that over the next year in addition to continuing to grow out our North America business.

The fifth tactical initiative was to right-size our G&A cost structure. We're down to one set of remaining actions when we deploy our financial system into Compressco, allowing us to further reduce the cost structure. During the past couple of months we finalized the consolidation of the accounting functions and eliminated staff and levels of management. We have achieved $13 million of the $15 million goal, and have line of sight to the balance.

The sixth tactical initiative was to strengthen our sales force, particularly in the North American footprint, and reduce our dependence on several anchor accounts. While we have made progress in this area, the results are not as evident as the actions from the other five, but we continue to be confident we're seeing progress in that area. With that, I'll turn the call over to Elijio.

Thank you, Stu. TETRA revenue of $211 million decreased 6% sequentially, reflecting the traditionally weak first quarter in all four services, which was down $23 million compared to a total decline from Q4 to Q1 of $12.6 million for all of TETRA. Production Testing was down 6% from the fourth quarter due to the challenging weather conditions that extended into February. We are gaining traction by adding new accounts and diversifying our revenue base following [shale] sufficient of activity in South Texas. However, while we are seeing good progress with the addition of new accounts, as Stu mentioned, they are taking longer to ramp up versus what we anticipated.

New wins in some areas, such as the Permian Basin, have been slow to ramp up as some of our customers are waiting for the availability of frac crews. In other areas we are picking up business from regional competitors that are going out of business or consolidating to other areas, as they are financially challenged. We anticipate that we'll continue to see a difficult environment for production testing in the US for the next two quarters, as the new wells will take time to evolve into making a significant impact on our revenue.

In the meantime, we have taken aggressive cost reduction actions throughout the Production Testing organization. The operating loss of $2.8 million incurred in the first quarter includes $1.9 million of cost or losses from shutting down districts, exiting start-up countries, downsizing offices, and releasing staff. In addition, abnormal weather conditions in the Upper Midwest and Mid-Continent region impacted earnings per share by $0.01 to $0.02 during the first quarter.

Overall, we continue to believe we have a strong position in the US production testing market. We continue to diversify our account base to reduce reliance on significant anchor accounts. Drilling and fracking activity remains robust for our flowback testing services. The number of new entrants into our space appears to have come to a stop, and we are seeing signs that some of the recent entrants are not being able to remain in business under the existing conditions. As Stu mentioned, the new accounts we are winning are simply taking longer to transition to meaningful revenue levels versus our expectations.

Compressco revenue was down 8% sequentially, as the fourth quarter of last year included significant one-off sales in the compressors in the United States. Compared to a year ago, revenue is down 3% as the steep decline in Mexico was almost completely offset by stronger US activity, primarily with a vapor recovery unit.

Fluids Increased by 18% to a record high of $105 million with the addition of the revenue from the Saudi Arabia joint venture, the incremental water management revenue from the acquisition we announced in January, and strong fluid sales in South America and the Middle East. These were partially offset by weaker activity in the Gulf of Mexico caused by projects being delayed in the second half of the year.

Operating income of $18.4 million (sic -- see Press Report "$18.5 million) included a net favorable impact of $2.4 million on a purchase price adjustment, following the acquisition of a joint venture in Saudi. This record revenue includes, despite weaker Gulf of Mexico activity, reflects our strategy of continuing to invest in the business where we believe we have a competitive advantage in a robust market.

Offshore Services operating loss of $8 million is consistent with our expectations, as we had three of our five barges going through a dry dock inspection during the first quarter. We expect a ramp up in activity as we begin executing on the meaningful backlog that we have built for the year.

Maritech incurred an operating logs of $6.5 million during the quarter, reflecting work done on one property with two wells with formation pressure. As our barges are undergoing dry docks and the first quarter is traditionally a challenging weather period, we did not work on the other three remaining operated properties. We expect to resume work on these three operated properties during the second quarter.

Free Cash flow. Despite the weak first quarter profitability, we generated slightly over $20 million of free cash flow by aggressively managing working capital. We improved days (inaudible) spending by seven days. We've contributed to the $20.5 million of cash flow. As a reminder, we have targeted $80 million free cash flow goal, with free cash flow being defined as cash flow from operations excluding Maritech, less capital expenditures.

We believe that as activity ramps up and profitability improves, we will consume some amount of working capital gains achieved in the first quarter, but remain comfortable that the $80 million goal is attainable despite the weak Production Testing results. Expect that capital expenditures will come down materially in the remaining quarters of the year, as the first quarter was front-end loaded with some of the dry dock capital.

The result of the tactical initiatives that Stu mentioned has allowed us to improve free cash flow. In 2011 we generated $20 million of free cash flow excluding Maritech. In 2012, we generated $5 million on the same basis. Last year we generated $62 million. Clearly, we are on the path toward our goal of $80 million. The first quarter free cash flow of $20.5 million further signifies that we can managing working capital, even when earnings are temporarily weak. The impact of those tactical initiatives has put us in a position to evaluate the use of cash post-Maritech.

We expect to recommend to the Board later this year the best use of cash, be it a dividend program, share repurchase, debt reduction, or acquisitions to our businesses that are performing consistent with our expectations. Additionally, we have indicated that we will evaluate and execute on acquisition opportunities to grow Compressco, Water Handling, and Fluids. Other than Production Testing, we believe the progress on our tactical initiatives has positioned us to begin pulling the strategic levers that will reposition TETRA to generate improved cash flows and consistent earnings. We are focused on gaining traction with Production Testing sales initiatives, as it is the remaining tactical initiative that needs to gain traction. The other five significant initiatives, as Stu mentioned, have progressed consistent with our expectations. With that, let me turn it back to Stu.

We'll open the lines for question now, Keith.

(Operator Instructions)

The first question comes from Sean Meakim with Barclays.

Good morning, gentlemen.

Good morning, Sean.

So starting off with Production Testing, it sounds like the challenges that you're seeing are not a function of getting traction with customers so much as the transition that's taking place, but the ramp up with those customers is taking a bit longer. Does that mean that you still have pretty good confidence that you're going to be able to get to something like a good run rate on the fourth quarter that would lead us to believe 2015 could look not too different than maybe how we were envisioning it previously?

I think exit rate this year will end up being consistent with what we outlined. I think what's going to be a little bit different, clearly, is the sequencing and timing to get to that run rate's taking us longer. I mean, you've seen it, obviously, in the first quarter. And I think that makes the second quarter a little bit lighter than we would have thought previously. I think, if I was going to characterize my view of the testing business, it's going to take us a little longer in the US I think we're doing all the right things in terms of from a sales point of view, in terms of deployment of assets, moving equipment. Certainly we've sized the organization for what is absolutely the low point of the revenue cycle, so that's all behind us. I think it's going to take us a little longer.

I think Mexico is going to be slower than we envisioned this year on testing. Again, I make sure I differentiate testing in Compressco because the market in Mexico, although off where it was five, six quarters ago is still relatively strong for end-of-life production enhancement in the areas we operate. And then I think the rest of our markets, clearly Canada is stronger than it was a few quarters ago. Again, we'll have the seasonal impact in the second quarter, but on a full-year basis, Canada should be stronger. And our international markets, other than Mexico, should be consistent.

And one thing I should mention is we've done the acquisition in Saudi. And we've recently had our contracts extended, giving us very good visibility of that over the next two to three years. It was something we expected, but that positive news recently came in, which again gives us confidence in the strategy we did to invest further in that business.

All right, So maybe after -- maybe this next couple of quarters look a bit choppier, but the long-term outlook ends up being not that different?

We still believe that intermediate and long term, this is a business that we can continue to generate the type of returns that TETRA has done historically in there. I think the transition back to that is just going to take us a couple of quarters longer than we thought at the beginning of the year.

Then just a quick clarification on the model. For G&A, even though we came a little heavier than we expected in this quarter, you outlined one last piece to get completed. Is that still (inaudible) $31 million run rate for Q2 still a good number then?

Yes, it is, Sean. This is Elijio. We got in the second -- in the first quarter quite a bit of severance, legal fees, and expenses that we incurred as we were moving and downsizing our operations. So there's about $2 million of items in there that will not recur into Q2.

Okay, great. Yes, that's very helpful. Just one last one. On Compressco, are you seeing any incremental demand in the US, given where gas prices are? Anything incrementally beneficial for Compressco?

I think we're seeing a little bit of a positive on the gas side as the price point has been higher. I think more importantly, we continue to see strong demand in the areas that we've invested in vapor recovery liquids-related, and the Compressco management team is very encouraged by the reception that we're receiving for our mid-size investment that we've done over the last couple of quarters.

So I think the strategy of diversifying beyond our legacy natural gas, both in liquids, in larger size, and internationally has allowed us to kind of offset that decrease in Mexico and position us really well. Obviously, we feel good about the business, given the decision we recently announced on the distribution increase.

Right, right. Yes, fair enough. Thanks a lot, guys. I appreciate it.

Thank you. The next question comes from Mike Harrison with First Analysis.

Hi. Good morning.

Good morning, Mike.

You had kind of guided Q1 to the $0.03 to $0.06 range positive, and then you reported the $0.04 loss. Is that delta -- you called out $0.1 to $0.02 of weather-related headwind, but is that delta versus your expectations exclusively Testing? Or if I look at some of the other segments, were there other areas that fell a little bit short and contributed to that $0.07 to $0.10 of shortfall?

I think when you kind of take that shortfall on the low end of the range, and you kind of bridge our best estimate of $0.02 for the weather and you look at the delta there, by far the majority of that was Testing. We may have had a little bit of timing issue on Fluids, on some Gulf of Mexico shipments, but you should really think of it as almost exclusively Testing.

All right, and --

Mike, I'll add to it. The run rate that we had of revenue Production Testing in January was quite decent. And then we saw a drop off in February and March that represented the gap versus what we had laid out in early February.

Can you maybe comment on where the run rate is for March into April?

I would say that March has been flat to April, and we've seen a modest increase in April, but not yet to the run rate that we're working toward. That's why Stu mentioned earlier that some of the accounts that we're picking up, that we've been awarded, we think are going to take a little bit more time to gain traction as they transition from the incumbent over to us.

Right, right. Elijio, you mentioned that part of the charge in Testing was related to closing offices in start-up international markets. Which countries in particular did you exit, and should we take that to mean that the international growth opportunity in Testing is more limited going forward?

We had just recently expanded into Colombia and Australia. Those were not yet generating any meaningful revenues. We were in the start-up phase of moving people and equipment there. We came to the conclusion that if -- if the US business is taking a little bit longer to recover than what we anticipated, we do not have an opportunity here to fund start-ups in countries. So we pulled the equipment out, redirected it to areas that we've got stronger activity and the likelihood of revenue materializing quicker is higher. So we concentrated into those countries. We do not think that that impedes our international opportunities, as we've seen strong growth in Latin America, in South America, and also in the Middle East.

I would kind of also think of it, Mike, as in the short term, we're going to continue to focus in the countries we already have strong footprint, existing relations, and that's where the investment is going to be for Testing.

Our tolerance level for underperforming districts is nonexistent at this point. And rather than give more runway, that runway is very short now.

Got it. And then was just wondering on the Fluids business, we had been seeing margins, if we look kind of first half of last year, margins up in the high teens. Now we've had a couple of quarters here that are more mid-teens. Is that really just the impact of timing of deep water activity in the Gulf, or are we maybe seeing some costs related to expanding the water handling business? What else is contributing there?

I think when you look at margin trend, we still feel comfortable with where we guided for the year on margins. I think embedded in there you've got some -- clearly in the Fluids we incurred some, as we expected, some start-up costs associated with moving equipment with the TD acquisition. I view that as a positive. I think we've moved some equipment to areas where we're seeing very good demand, and that will help us as we go through the second quarter and beyond. There's nothing I see overall that makes us change our view of getting those margins in that area.

All right. Thanks very much.

Thank you. And the next question comes from Jason Wangler from Wunderlich Securities.

Morning, guys. Just curious, if I could on (inaudible) Compressco with the VRU work. You said it's been a pretty big driver. Could you comment on the size of the horsepower those units are, and even where throughout the business you're seeing those units go?

Most of it is going to be the similar horse power as we have on our standard gas jacks. So it's going to be the small wellhead-type horsepower. And geographically -- the application is predominantly on the tank batteries and collecting some of the vapor and recycling it. We've got a nice base kind of going through multiple districts. Clearly South Texas, Mid-Con would be probably be two of the better performing districts, Rockies for vapor recovery.

Okay.

I think the message I want to continue to hammer on Compressco is we set that up as an MLP to focus on growth. The guys done a really nice job growing the profitability and expanding organically into areas to more than offset some of the challenges in Mexico in the short term, and natural gas over the last few years, in building a broader, more diversified set of applications and compression capabilities, the fundamental strategy that Ron and the team are working on.

That's helpful. Thank you. Just curious, now that we're, and I'll call it almost halfway through the quarter, how the weather's been out in the Gulf, if you've been able to get back to, quote unquote, business as usual, I guess, at least just from an activity and just being able to move assets around standpoint?

I'd say I'd split that into two pieces. One, the work we did on the dry dock. We got that done on schedule and below budget from a cost point of view. So the team did a great job executing that. We're back to work. I'd say the weather in April was a little bit worse than we would see in a normal April, and so far May is about what we would have expected.

That's helpful. Thank you.

Thank you. The next question comes from Jim Rollyson with Raymond James.

Good morning, guys.

Good morning, Jim.

Stu, going back to Production Testing. If we think about -- you mentioned the run rate in January was pretty good and then dipped in February, March, and sounds like it's relatively stable to slightly improving right now. And you're going to get to the exit rate that you thought you were going to get to, just based on customer interactions and wins, just it's a timing issue. Should we think about that ramp in the run rate as a fairly linear function from where we are today towards that exit rate, or is it going to be more of an exponential curve? How do you think that plays out?

I think it's going to be somewhere in between. I think the step-up in the third quarter's going to be -- over the second's going to be bigger than the second over the first, and I think the fourth will be a pretty significant step-up, too. Again, we have really good intelligence. We've gotten some awards recently that we feel real good about. I'll feel better when we see what portion of that work we actually go out and execute, and we're in the process of seeing that in several areas. We've had a couple of competitors that have -- smaller regional competitors that have exited, which is very good. It's the first time we've seen that in a while. We've been able to step in and pick up some of that work.

So again, I think given that we've done -- we've seen the pace of that translate to longer -- translate to revenue, that's why I would kind of categorize it as probably a bigger step-up in the third quarter. And also recognize when you look at it sequentially, you've got the seasonality of Canada, which works against us a little bit in the second quarter, and obviously is a big positive for us as we move into the third quarter.

Right. And on the margin side of that equation, you guys have been taking costs out here and there, starting in Mexico last year, and you kind of detailed some of that. And you've moved some equipment around. As we think about margin progression, obviously just revenues growing in the third and fourth quarter alone will help margins. But are there any other costs, like moving equipment and cost reduction things that also help expand margins? Maybe counter or different from the cycle of just the revenue impact?

I think if you look at most of the headcount and structural issues, we've got that behind us, Jim, and we'll get a full-quarter benefit in the second quarter of that. I think that will help kind of the margin versus the revenue being a little bit slow to ramp up, as I described. And some of the equipment redistribution, I think we've got most of that behind us, too. So I think that piece of it gets less as we move into the second quarter.

So again, I think the margin progression will be slow, but I think the third quarter is probably the biggest step-up of both revenue and margin from -- sequentially. Again, the reality is that's slower than we talked about in February, for the reasons I mentioned.

Yes. Last thing for me, I guess. Good news is, despite the challenges you had in Production Testing, you're still on track on your free cash flow generation. So Elijio, once you get things ironed out and back to work in Production Testing, let's say going into next year, where do you think -- I would guess that implies free cash flow actually has upward bias from your $80 million number as we get into 2015?

Jim, the $20 million of free cash flow in Q1 is despite probably one of our highest quarters of capital expenditures that we've seen in recent periods, simply because a lot of the dry docks we're doing on the vessels. I think you're right, but I want to be cautious about building expectations while we're managing the Production Testing. Clearly we believe that we've got upside to it, but we don't want anyone to start leaning in that direction until we deliver on the Production Testing side.

Understood. Thank you, guys. Appreciate it.

Thanks, Jim.

Thank you. The next question comes from Blake Hutchison with Howard Weil.

Good morning, guys.

Good morning, Blake.

Just to start off, Stu, help us kind of qualify what a healthy backlog means in the Offshore Services division? Can we expect that, weather permitting, your two major assets having seen a dry dock, either can be pretty fully utilized, certainly through construction season, if not the rest of the year? Are there still gaps to fill in? And then again qualitatively, more third-party work expected this year rather than those assets being tied up on dispositions of the Maritech assets?

Yes. I would say if you look at, kind of putting some meat on the bones on the question, our two derrick barges are very well backlogged through the third quarter into the fourth quarter. I would expect we'll fill any shortfall with spot business. We're kind of -- I would say we're kind in that mix of having a little bit of availability, but a very full backlog, and very much third-party customer driven.

We've only got one or two platforms with Maritech. It's a small number this year. We'll get that done, but I think the team has done a really good job of transitioning to virtually a full third-party backlog, which is really important to that business as we go forward.

Our main dive asset that we have, similar backlog. We feel good about through the third quarter into the fourth quarter. So I expect we'll work deep into the fourth quarter with great utilization, and then kind of, as we always do, see what the market looks like mid-fourth quarter and make that determination of whether it makes sense to continue or to bring it in for the winter.

Blake, I would add that our backlog includes a multi-platform campaign for one customer. So we've got a lot of back-to-back projects to be effected with our barges.

Great. Sounds like good visibility versus previous last couple of years here. Some point of clarification on what's been asked so far. Within the Fluids business, as we see WIT and the Saudi consolidation, should we assume from a mix standpoint that those margins are more on par with your onshore US business?

I would say that that's probably the

Okay, great. And then Elijio, can you refresh us, or give us some sort of parameter for where we started the year here with regard to Mexico and Production Testing? At this point are we certainly sub010%, maybe sub-5% of overall mix to Production Testing?

I would say that Production Testing, Mexico revenue is minimal.

Okay, got you. And then again, the $2 million you mentioned is hitting, just to be precise here, that was hitting the corporate line and was separate from the $1.9 million charge you absorbed in Production Testing?

Good question. Let me gave you clarity on that. Production Testing occurred costs as we were shutting down offices, moving equipment around, laying off people, severance-related costs, losses in the countries that we pulled out of, of $2 million. And that one was probably equally split between G&A and operating expenses within Production Testing.

Okay, great. Thanks for the time. I'll turn it back.

Thank you. And the next question comes from Martin Malloy with Johnson Rice.

Good morning.

Good morning.

On the Production Testing side, if you've got the contracts with the customers, can you help us with why it's taking longer than expected to displace the incumbents?

I think there's two elements of it. One, it's taking longer to get the awards. And second, once we get the awards, you need to then go out, and usually these aren't just an award that goes to one service company. You usually have a couple of folks that are awarded that. You then got to go out and start to work, and get more than your fair market share as you go forward. So I think it's a combination of the two.

I think the biggest part to date is it is just taking a lot longer to convert to the new customers and get the award. I think the timing of starting is less the problem than the timing of getting the award. And if it's work that you're taking away from somebody else, which is the case, there's a conversion time that it takes to go through the process of the MSA and the negotiation and the pricing and qualifying, et cetera. And I think that's just taking a little bit longer.

So marty, if you go to the sequence. You get on the bid list, then qualify to procurement, you agree terms and conditions, then you agree pricing. Then they award you and qualify you as an approved supplier or service provider. No one customer has only one service provider for this kind of service, they'll have one to three. So then once you're qualified, they tell all their rig superintendents, here's who we're using, or here's your approved list of suppliers.

Then on a well-by-well basis, they start calling you every fifth time, every fifth opportunity. Then every fourth opportunity. Then every third opportunity. Then you become all of a sudden their primary service provider as they get comfortable with you. Right now we're progressing to where we've got the work awarded. We're on the approved service supplier list. We're getting the fourth or third call out. And it now progresses to where there --gradually we become the primary service provider.

Okay, that's very helpful. And then on the corporate overhead. When I look back to your guidance, you guided for about $45 million in corporate overhead for the year. During the first quarter it was $17 million.

Right.

Is that corporate guidance for $45 million the for the year still good?

The number that is locked in my brain is that we're working toward a quarterly total G&A of $30.9 million. That's our goal. When we set that target, we were averaging $35 million per quarter at the end of 2012. We lost this initiative, if you recall, Q1 of last year. So we've been able to drop it from $35 million to $32 million. And the $32 million that we have today has a little over $1 million, almost approaching $2 million of items such as severance, legal expenses, and items that we've incurred during the second quarter. When I look at my internal estimates for the second quarter and what we're seeing, the $30.9 million is what we're all planned for.

Okay. Thank you.

Thank you. The next question comes from Mark [Vihaney] from [Cowen].

Hello, guys. On the Fluids performance, there were some impact from delays in the Gulf of Mexico and some weather impact. If we were to normalize that, where would margins have been?

I think margins are going to be just about what we've got [in] the guidance. I think with our view of the Fluids business for the quarter and the full year is, both from a revenue and margin, we should be certainly about where we are within the guidance range.

Okay. And you would say that would be the case equally through the quarters here? We don't really need to see a ramp-up, per se, from second quarter through the end of the year? (Multiple speakers) pretty consistent?

You'll have the normal seasonal impact in the second -- favorable in the second quarter from our European chemicals business, but absent that, we're not looking a huge improvement rate on margins to get to that.

Okay. And maybe, could you offer some comments on just the competitive landscape in Fluids as it stands right now?

I'd say it's been pretty steady on the water side. We continue to do a good job of differentiating our capability with TETRA steel. There's certainly a lot of people out there with lay flat systems that we're competing with, but I think we continue to hold our own on maintaining the growth, putting the assets we've invested to work, being intelligent on the pricing side. We know that's going to be competitive. We knew when we introduced that. It's going to attract a lot of other people. I think all the other elements of the Fluids are about consistent with what we've seen, no deterioration there at all.

Okay, very good. Thanks, Stu. I'll turn it back.

Thank you. And the next question comes from Doug Dyer with Heartland Advisors.

Good morning, gentlemen. Just to elaborate on the Gulf of Mexico delays, is this still kind of a sequencing problem in the Gulf, or is there something more at work here?

No, we just think it's a sequencing timing. Our customers, we expect to continue to be busy and we should see that pick up as we go through the year. We don't see anything that's changing in our view of the opportunity set there.

All right. And with regard to the free cash flow in the first quarter, how much of that was a reduction in working capital? And you also mentioned that CapEx was higher than normal. How should we think of CapEx being at a normalized rate for the rest of the year?

Capital expenditures in the first quarter were at about $29 million, and I would say that it's at least $10 million higher than what we think the immediate quarters are going to be. We've got quite a bit of items that were related to the dry docks on the Offshore Services side. That worked against us, but expect that the total-year guidance we gave, about $120 million, we're going to be significantly below that number, given where the Production Testing business is.

Then in terms of working capital from managing our payables/receivables, the seven-day improvement in DSO gave us about a $20 million favorable impact. That -- clearly, that is not going to repeat into the quarter as business ramps up. We assume that some of will be consumed, but it tells you that we can aggressively manage our working capital during periods where profitability is challenged.

All right. Thank you very much.

Thank you. (Operator Instructions)

We do have another question from Bill Dezellem from Tieton Capital Management.

Thank you. I actually have a couple of follow-up questions. First of all, on the water handling systems front, would you please discuss the competitive fence that you feel that you are building?

I think the area we're able to continue to differentiate ourselves relates to the design of the hose that we have, the supply chain relationship, and the type of deployment tool. I think the combination of the deployment tool and the construction of the pipe gives us a superior product. And I think our experience in delivering it consistently gives us that ability to differentiate ourselves. When we're out, that's what we're promoting and we've been successful doing it, Bill.

Thank you. And then I also would like to follow up on the offshore backlog question, and ask it slightly differently, if I may. How does your book of business and anticipated activity look today compared to how it would have looked one year ago at this time and two years ago at this time?

I would say it's probably similar to about a year ago but with a much larger third-party mix within the total. And I would estimate that it's larger than it was two years ago.

That change of mix to more third-party business, how does that translate from an earnings standpoint from a shareholder's perspective?

It shouldn't have an impact. It should be neutral.

Great, thank you.

Thanks, Bill.

Thank you. As there are no more questions at the present time, I would like to turn the call back over to Mr. Brightman for any closing comments.

Thank you. Again, all good questions. I appreciate the participation. And Elijio and I look forward to updating everyone early August on the second quarter results. Thank you.

Thank you. The conference is now concluded. Thank you for today's presentation. You may now disconnect. Have a nice day.