Tetra Technologies Inc (TTI) 2014 Q3 法說會逐字稿

Good morning, and welcome to the TETRA Technologies third quarter 2014 conference call.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Stu Brightman. Please go ahead.

Thank you, Amy, and welcome to the TETRA Technologies third 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. Our Chief Operating Officer, Joseph Elkhoury, is also joining us on the call.

I will provide a brief overview of our third-quarter results. Then turn it over to a Elijio for some additional details, 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 statements.

In addition, in the course of the call, we may refer to net debt, free cash flow, revenues, gross profit, profit before tax, earnings per share, excluding Ameritech segment, and unusual items 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 third-quarter 2014 adjusted earnings, excluding Ameritech, and an unusual items, was a profit of $0.12 per share. Some of the key highlights of the quarter include the following. A very successful start to the CSI acquisition. We are very pleased with the progress of the team and the response in the marketplace by our customers. This includes our ability to execute during the quarter, to our financial targets. Appointment and retention of the leadership team. And, progress made to date with the overall integration plan.

We believe we are on track for the fourth quarter and beyond, to achieve all of the objectives set forth in our acquisition economics. In addition, we've made significant progress in the continued recovery of our production testing business. During the quarter, we saw a sequential improvement in operating margins achieving 6.8% consistent with our targets.

Fluids continues to be an area of strong performance across the majority of the business areas. On the negative side, our offshore services segment's performance was significantly below the results we anticipated when we revised our annual earnings guidance in early August. There are several factors contributing to this, associated both with specific customers, and overall market demand.

In our fluids divisions, earnings were down slightly compared to the second quarter of 2014. Key trends were an increase in overall activity in the Gulf of Mexico as several smaller projects materialized. However, the overall trend in delays and deferrals of projects in the Gulf continues.

Water management remains strong, but was negatively impacted during September by some of the flooding in West Texas. This is a business in which we continue to invest capital, as we expand water transfer through additional basins and additional customers.

In chemicals we continued to strength driven predominantly by onshore shale activity. Overall, we expect the fluids division's fourth quarter to look fairly similar to the third quarter.

We are very pleased with the continued progress of our production testing business. During the quarter, our operating margin increased 6.8%, consistent with our targeted expectation. This was driven by virtually all areas of the testing business in our domestic and international geographies.

Our ongoing process of expanding and diversifying our customer base, reallocating assets to areas of strong activity, and ongoing operational improvement and cost management actions, have all contributed to the division's improved results. We expect the sequential improvement to continue into the fourth quarter of 2014 and beyond.

I continue to be extremely pleased by the overall management of our compression business. The team continues to work diligently to bring the businesses together. All elements of our innovation plan are on track, operating results continue to be consistent with the acquisition economics, and the customer response has been very positive.

In addition, during the third quarter, we completed the implementation of our ERP system in the legacy Compressco business. This project, which has been in process for several quarters, puts Compressco on the same reporting platform as TETRA with the associated costs and product benefiting -- productivity benefits. And, more importantly it will provide the means for us to bring CSI onto the common platform as we start during 2015. This is a natural progression of our ongoing efforts to increase operating efficiencies across the Company.

Our offshore services segment performed significantly below our expectations in the third quarter, and more specifically during August and September. This resulted from a combination of several factors. First, several of our customers postponed previously awarded projects. This impacted both our owned assets, as well as several additional leased assets, that we had secured.

Our second key factor was a significant decline in market demand for our P&A business. We have taken appropriate aggressive cost actions, but the activity and associated profitability of that portion of the segment has significantly declined. We expect this trend to continue in the fourth quarter.

Our barges will work through most of the quarter, as well as our major diving assets, but, we expect P&A demand to continue to be extremely weak. As we look into 2015, we expect improvement in this area, where we will continue to take appropriate cost actions to size the business accordingly.

During the third quarter, we completed additional analysis of Ameritech's remaining wells. And, determined that the degree of intervention required will be greater than we had envisioned. As a result, we adjusted Ameritech's liability during the quarter.

Our operating plan for Ameritech is to remove an additional platform during November. The remaining wells and one platform will be completed in 2015.

Our work scope during the fourth quarter will employ Tetra assets. All work requiring third-party assets, for the most part, will be deferred to 2015.

Despite the lower-than-anticipated earnings, our cash flow for the quarter improved $17 million. Elijio will go into more detail regarding the balance sheet and specifics of our cash flow.

Good morning, everybody. Let me summarize a few key financial data points and then we'll open it up for questions. TETRA revenue of $305 million increased 27% sequentially, reflecting the acquisition of CSI by Compressco on August 4. The result of Compressco and its acquisition of CSI, are fully consolidated in our financial statements. The acquisition added is $61 million of incremental revenue for the period of August 4 to September 30. Excluding the acquisition revenue, was up 1% on a sequential basis. The second quarter to third quarter seasonal decline in Europe industrial chemical sales was more than offset by stronger activity levels in production testing, mainly West Texas and Saudi Arabia.

As Stu mentioned earlier, offshore service activity levels were much weaker than expected. And, we didn't see the traditional $20 million second quarter to third quarter seasonal increasing revenue. This year, we only saw a $5 million dollar sequential increase in offshore services.

Earnings-per-share, excluding Ameritech and unusual items, was $0.12. The unusual items were primarily related to transaction costs of $13.9 million related to the Compressco acquisition of CSI. These items include bridge loan fees, legal and financial advisor fees related to the acquisition.

When computing normalized earnings-per-share of $0.12, we have also excluded a $0.02 per share favorable impact from lower taxes, that would have made earnings-per-share $0.14. On the $13.9 million of unusual items, $3.7 is included in G&A expense, and $10.2 million is included in other income expense.

Our effective tax rate in the third quarter was lower as a result of the mix of higher earnings, internationally relative to earnings in the United States. While, our international tax rate is lower than the United States.

In addition, as a result of the CSI acquisition, and our reduced ownership of Compressco, income was attributable to non-controlling interest as higher, which reduces the amount of earnings that are subject to taxes for TETRA. I expect our effective tax rate for the year to be approximately 20% on the continued mix of higher international earnings relative to US earnings and the amount of income attributable to non-controlling interests from Compressco, with a lower tax rate.

Our G&A expenses normalized to exclude the previously mentioned non-recurring Compressco transaction cost, and excluding the acquired G&A from the CSI, was $31 million compared to $30 million in the second quarter.

I will now briefly summarize a few key points for each of the divisions. We continue to see good progress from the multiple initiatives to improve the performance of production testing. Production testing revenues increased sequentially by 18%. And, our third quarter operating margins were 6.8%, to a system with a target that we have been communicating.

Of the incremental revenue, 47% fell to the bottom line, as we benefited from the redeployment of equipment and personnel, to areas of strength, our more diverse customer base, and our continued focus on lower operating costs. Revenue of $50 million was 6% above the same quarter from a year ago, and the highest since the first quarter of 2013. This was achieved despite our West Texas operations be impacted by significant rains and flooding in December.

The sequential improvement was across all our geographic areas, but was led by strong results in Saudi Arabia and West Texas which represent our largest production testing divisions. We remain comfortable with our previously communicated goals of achieving high single-digit operating margins in the fourth quarter, with a exit rate of low double-digit margins in Q4.

Fluids revenue of $105 million was 10% -- was down 10% sequentially. As the second quarter represents a seasonal pick -- peak for industrial sales in Northern Europe. Other than Europe's traditional seasonal decline, revenue increased 1% from the second quarter to the third quarter.

While we saw an increase in Gulf of Mexico fluids revenue, there remains below our traditional levels as deepwater projects continue to be delayed and get pushed out due to operational issues.

Onshore fluids, sales of calcium chloride were exceptionally strong due to the higher shale play volumes, particularly, South Texas. But we are gaining market share and are receiving stronger pricing.

Operating margins increased by 110 basis points to 15.7% during the second quarter. But, remained below our recent levels, as a result of the aforementioned weak Gulf of Mexico activity levels. Performance by our manufacturing plants continues to be strong. Water management is at the $100 million annualized revenue run rate. And, continued growth is seen in West Texas and the Appalachian regions.

Stu mentioned that the weak offshore services results that accounted for the gap of our earnings -- that accounted for the majority of our gap to the earnings expectations. Historically, we have seen the third quarter be the peak revenue and earnings period. With the revenue historically increasing by about $20 million in the second quarter. This year, we only saw a $5 million sequential increase as a result of weak P&A and diving activity levels.

Last year, in the third quarter, we generated $20.6 million of profit before taxes in offshore services. This year, we only generated $600,000 of earnings. Clearly, this was the biggest gap to our expectations.

Project that required diving services did not materialize. P&A activity was lower across the industry and with our key customers. We believe this environment will persist into the fourth quarter.

Compressco revenue increased to $96 million, with $61 million coming from the acquisition of CSI, which closed on August 4. Excluding revenue from the CSI acquisition, revenue increased sequentially by 9% on higher North America and Eastern Hemisphere activity.

Profit before taxes from Compressco, including results of the acquired company, were $6.6 million, excluding the transaction-related costs. Profit before taxes of Compressco, we collect a higher depreciation and amortization expenses from the acquisition. And, interest expense on the borrowings to complete the acquisition.

Earnings per share to TETRA from Compressco, were $0.03 in the third quarter. Without the CSI acquisition, earnings per share to TETRA from Compressco would've been $0.04. This $0.01 dilution reflects the depreciation and amortization expenses on the acquisition, the borrowing costs, and our reduced ownership percentage from 82% to 44%.

As we mentioned here in the capital rates base of the acquisition, the impact to TETRA from the Compressco acquisition, will not be from incremental earnings per share because of the items I mentioned, but from the higher cash to be distributed to TETRA from Compressco. Compressco earlier announced the distribution $0.46 per unit. Which, puts TETRA at the 15% IDR. This was achieved with a coverage ratio of 1.2 times -- 1.21 times.

We believe that Compressco's on track to attain an increase in distributions of 12% to 14% above the distribution in place at the time of acquisition with the fourth-quarter results. This will elevate TETRA into the 25% IDRs. The increased distribution to TETRA will be realized in Q1 of next year from the earnings being generated by Compressco in the fourth quarter of this year.

90 days after the acquisition, we remain comfortable with the goals outlined at the time of the acquisition. We remain on track to invest approximately $90 million of growth capital in 2015. That we believe will generate incremental distributions at Compressco that put TETRA at the 50% IDR by late next year. And, should almost double the cash being received by TETRA from Compressco.

During the third quarter, we also successfully implemented a Compressco to TETRA financial system, in addition to a new field data capture system to support the mechanics and technicians. This system will allow us to further reduce G&A cost at Compressco and provide Compressco additional tools to manage their business. We plan on expanding the system into CSI in the coming year. Also, to reduce their expenses and give them additional tools to manage the business.

With respect to Ameritech, during the third quarter, we completed additional engineering studies and assessment of the work that needs to be done to complete the three remaining operated properties. As a result of those assessments, we increased our reserve for work to be done to $46 million at the end of September which, includes $10 million for non-operated properties.

With a property that -- with the platform that was previously obstructed with the pipeline, we plan on removing that platform in the coming days. This will leave us with two properties to complete.

All the work that can be done with our heavy lift barges will have been completed this year. We have smaller amounts of work to be done with our diving barges to remove debris and do side clearance. But the work of -- but, the bulk of the work to be done on the two remaining properties will be with third-party assets. We will be sourcing those assets next year, and depending on the availability and optimal pricing, we will schedule those accordingly.

Clearly, Ameritech has been a long and challenging road. Since the end of 2010, we have plugged and abandoned 490 Ameritech wells, both operated and non-operated. We have removed 96 platforms and we have removed 119 pipelines.

While the remaining two operated properties continue to be a challenge from the numbers I just mentioned, you can see that we have made tremendous progress, but with a significant cash burn over the recent years. We are focused on completing the two remaining properties at the most appropriate cost. Prioritizing costs and cash burn, over timing.

With the acquisition of CSI by Compressco, and our reduced ownership percentage, our balance sheet and cash flows have a much different look from before, when we owned 82% of Compressco. We continue to fully consolidate Compressco, despite the lower ownership percentage, as we are the general partner. I believe it is important to take a few minutes and fully understand TETRA's balance sheet and cash flow with a much larger Compressco in our financial statements. I previously mentioned that the impact to TETRA's shareholders from the acquisition of CSI by Compressco, is the expected increased distributions from Compressco to TETRA, as we move up the IDR thresholds.

Our consolidated balance sheet reflects debt of $939 million. Of this debt, $430 million is for TETRA and $509 million is for Compressco. TETRA and Compressco have separate and distinct debt and capital structures. TETRA, excluding Compressco, is a party to a bank agreement, and CD notes, neither are -- which are obligations of Compressco.

Compressco have a separate bank agreement and CD notes, of which, TETRA is not a party. Each party's debt obligations are independent of each other and there are no cross-defaults, nor, cross-guarantees. TETRA's debt of $430 includes $305 million of private placement notes, that mature over time, and $125 million that was house [spending] on a revolver at the end of September.

Compressco's debt of $509 million includes long-term debt, long-term notes of $345 million that mature in 2022, and $165 million outstanding on a bank revolver as of the end of September.

We believe that it is -- we believe, that to appropriately assess our balance sheet and debt structure, that one must look at TETRA's debt separate from Compressco's, and vice versa. Compressco's separate debt and capital structure, will support Compressco's capital expenditures and working capital requirements, which we anticipate through -- need by drawing on their $400 million revolver without any support from TETRA.

We have previously communicated a free cash flow of $80 million for TETRA and Compressco combined, which, included our 82% ownership of Compressco. Given our separate capital and debt structures, and our 44% ownership of Compressco's much larger operations, the appropriate measure of free cash flow for TETRA, as it relates to TETRA shareholders, should be viewed as the following. It should be viewed as TETRA's cash flow from operations, net TETRA's capital expenditures, plus, the cash that is being paid from Compressco up to TETRA.

And, to demonstrate what our cash looks like on a go-forward basis, we have been excluding Ameritech. On this basis, TETRA's free cash flow for the third quarter, was $17 million. Which, includes $5.9 million of distributions paid by Compressco to TETRA in the third quarter.

TETRA's capital expenditures were $14 million and cash flow from operations was $24 million, excluding Ameritech and the unusual items. On a year-to-date basis, free cash flow is $41 million to TETRA. Which, we have achieved despite the weaker offshore profits and the recovering production testing profitability. I will publish to our website, in our investor presentation, this cash flow analysis.

We believe that this method appropriately accounts for the cash TETRA is generating. And, available to TETRA to either further invest, reduce debt, or evaluate for shareholder return purposes, given TETRA and Compressco's separate debt and capital structures.

TETRA's capital expenditures of $14 million in the third quarter were the lowest this year. Down from $23 in the fourth quarter and from $18.5 in the second quarter, as we continue to reduce capital expenditures across all business areas, other than water management.

But, to summarize the key points in the quarter. First, production testing is making progress and we are achieving the goals we communicated. Second, the CSI acquisition by Compressco is consistent with our expectations. And, we believe we are on track to generate increased distributions that will move us towards the 50% IDRs split by late next year and increase the cash coming to TETRA from Compressco.

Three, fluids continues to the delays in the Gulf of Mexico, as deepwater projects slip. While, water management and calcium chloride onshore sales remain strong.

Number four, offshore services is going through some challenges. But, we -- as we have done before, we will aggressively manage our cost structure. And lastly, we are managing capital expenditures in working capital with further DSO improvements to continue to make progress towards our $80 million free cash flow goal despite the weaker offshore services profitability.

And, with that, Amy, let's open it up for questions.

(Operator Instructions)

Our first question comes from Jonathan Sisto with Credit Suisse.

Good morning, gentlemen.

Good morning.

Stu, I guess the silver lining here is that the businesses that you're investing in on a go forward basis; fluid, testing, Compressco, all did pretty good in the quarter. Kind of wanted to hear your view about more 2015? Some of the levers you see you can pull in those businesses and your outlook for them.

Yes, thanks, I mean, I think I agree with your summary. I think when you look at the third quarter and our commentary on the fourth quarter. I would encourage everyone to look at the businesses that we continue to invest in for our primary growth. Fluids, testing, compression, all had decent quarters. As I said on the call, compressed -- compression totally in line with the acquisition economics. Fluids, progress on some of the timing of projects in the Gulf of Mexico. Continued strength in water and chemicals and onshore in the US. And testing, great progress on the operating margin. Which, is nice to see after really working it hard over multiple quarters. So, we feel very good about that and expect to see similar performance in those businesses in the fourth quarter.

And, I think in those businesses, as we look at 2015, obviously, we've got to look at commodity prices and activity levels. As we're doing, as everybody else is doing, as we see the budgets. But, in general, we would expect to see good opportunities onshore in the water. The overall fluids continued progression in our testing margins. And, as a Elijio mentioned, very significant growth on the compression business. Resulting in opportunities to materially increase the distribution.

I think offshore services kind of, bifurcate the discussion. Offshore services, very challenging August, September. Expect that to be a challenging fourth quarter. I would expect similar earnings in fourth quarter as we saw in the third quarter on that business. We continue to do what we've done, as necessary. That business on the cost side, management's committed to sizing appropriately. We're not putting new capital into the business until we can see it clear line of improvement. And, we haven't -- obviously, that hasn't happened.

So, we'll run that tight. We'll optimize. We'll continue to take care of the opportunities in the short term. But, that's the growth engine until we demonstrate better performance. And, we think that's going to be a better market next year. But, we've got to get to through the budgets with the customers and see which ones are going to increase. There's very specific reasons with certain customers, that budgets have been cut that this year. We think that will change.

But, we've been proven wrong, so we're going to be very conservative. And, Ameritech will do the work as Elijio said, optimally, during the year on weather and asset availability by third parties. But, we do feel very good about our core businesses that we have been putting capital to work over the last year to two.

Stu, as it relates to fluids, you were pretty early in highlighting the delays around projects in the Gulf of Mexico. As early as, like, 2Q.

Yes.

How -- has, is that improving in any way? We've heard a lot from the biggest market cap down about looped currents and the like. Is that improving and will dissipate for the fourth quarter?

I think you'll see it similar to what we've seen for the year. I think the third quarter was actually a very good quarter there. But, I think that was more several of the medium-size projects coming together at the same time. That had been delayed in the first half. So, you know, that was positive.

We've had some good international activity. We continue to feel good about areas like Saudi on the fluids side. But, I think our overall approach, is that the project's going to be longer in developing. It's going to be similar going forward. And, we're not overly changing our view based on the timing of some positive timing during the third quarter.

Thanks, guys. I'll turn it back.

Our next question comes from Jim Rollyson at Raymond James.

Good morning, guys.

Good morning, Jim.

Stu, just circling back to Ameritech. Now that it sounds like you've done more detailed engineering on what remains for you guys to take out. Just curious, the risk of the liabilities getting revised upwards in any meaningful fashion from here, between now and the time you get the rest of the stuff done besides the non-ops stuff?

Yes, let me try to be very granular in some of that stuff, Jim. Because I know it continues to be a moving target and I share the frustration that others do in that respect. We are going to get one of the platforms out over the next few weeks. We think that's going to be fairly straightforward.

The main areas where we've seen the increase that we referenced during the third quarter revisions, relates to a couple of properties with the wells associated on those properties. Whereas, we've done additional analytics towards the second half of the quarter. We've seen that the scope of intervention's going to be significantly higher than we expected. And, we choose not to do it at the moment, because we still have planning, additional analysis to do, asset allocation, and we'll -- and, we want to do that in favorable weather conditions.

The last thing I want to do is take some of the challenges we've had in Ameritech and exacerbate that by layering on challenging weather conditions into that scenario. So, there is going to be another round of analytics that will take place on an ongoing basis. As they always do.

As we select the assets that will do the work, it's possible that those wells on those two fields are -- we'll look at again. And, then one remaining platform that will go into 2015 of our operated properties is one of the down structures from previous hurricanes. That, we're doing more analysis, and based on that, we're going to most likely use an outside asset to do the work. We'll continue that during the quarter. So, there is more analysis to be done. And, it's more analysis than expecting the physical work we do during the quarter to vary from what we've estimated.

Okay, that's helpful. And, I guess, I'll ask the question that you've been hearing on all the other calls. Just, when you look at where oil prices are today, come down quite a bit. Maybe, you can just walk through your view of how that might flow through and impact your various businesses.

And, I'm thinking specifically, like, in testing you guys are on this margin improvement track. And, obviously, in the water handling business, you're kind of on this market opportunity track. But, as you just think about lower oil prices and walk through your various business lines. How you think things might shape up for next year? And, how this might impact you?

Yes, I mean you're really talking about three of our segments when you're talking about that testing fluids and compression. And, that's on the compression side, we've got a very good balance of wellhead related, gas gathering, midstream market segments with the acquisition of CSI. I mean, one nice data point is we have $140 million plus backlog of unit sales in our compression business. That gets us to the middle of next year. We feel very good about that.

That number has been very constant over the last few months as we ship. We replenish it and we feel good about that. So, on the com -- and, as you recall, on the compression side, the legacy Compressco business, about 70% of the US is end-of-life natural gas production enhancement. About 30% is liquids driven. So, kind of, that 30% of the legacy business of Compressco.

Kind of, the gas lift, gas gathering piece of CSI would have some exposure. Although, that would probably be very small in the grand scheme of things next year. So, we'll watch that and monitor that. Look at some of our long lead time items. Make sure we calibrate that.

But, I think, to date, the team remains pretty optimistic. That's going to have very minor impact on that business. Fluids, you get the water side. You've got the fluid sales into the shale. If you look at the areas we have our strongest activity at the moment. Permian, we feel pretty good with the customer base that will be in decent shape there. Appalachia, we do well. We feel reasonably well there. South Texas, another area, there may be some impact there. So, that would affect the pace of growth on water transfer, the pace of growth that we've seen on the fluids side. And, same thing on the flow back testing.

So, just like everybody else, we've had some impact. Hard to quantify at the moment. And, you know, we feel better about our protection. Particularly, given the CSI acquisition, that we are more diversified than we would've been 90 to 120 days ago.

Perfect, appreciate the color, thanks.

You're welcome.

Our next question comes from Martin Malloy of Johnson Rice.

Good morning.

Good morning.

Congratulations on the success with the CSI acquisition.

Thank you.

Just on offshore services. If I step back and look at just what has been taking place in industry over the last couple of years. With hurricanes coming through in 2005 and 2008. Causing a lot of damage and resulting in a lot of work for companies like yourselves in offshore services segment. And, then, after that, companies seemed to book to accelerate their P&A. Decommissioning of platforms out there. But, that seems to be moderating, tailing off. And, the jack up rig count's not increasing in the Gulf of Mexico on the US side. Why do you think 2015 looks better than 2014?

I think, I'd say there's two variables where I think we should see better activity next year. And, clearly your starting point that some of the uniqueness of those three hurricanes in five and eight are behind us, is certainly correct. I'd say it's been very -- there's been a lack of some of the infrastructure construction projects on the diving side that we saw last year. We haven't seen this year. And, we think with our specific customers we'll see that as we get to the second quarter and beyond next year. So, we do have a little bit of -- we have reasonable visibility into some of those diving projects that would happen at that point.

And, I think on the P&A side, we saw a couple of very specific customer budget cuts this year on that. That our feedback over the last few weeks, talking with those clients, in the -- is that they expect to see a bigger well count next year, which we should it participate in. So, I think those would be the two areas. Again, I think it would be very challenging to get that business in 2015 back to where we thought it was going to be this year. But, I do expect it will be better than what we've seen the second half of this year.

And, again, we've got -- then, internally on the micro side, we've got the guy that's very focused on asset optimization and some of the ongoing cuts, etc. And, I think we've proven over the last two years our ability to manage the cost side very well. So, it's going to be activity driven and positioning. So, I think, short answer to that, I think it can be better than this year. Clearly, not at the level that we had in our original plan for 2014.

Okay. And, then, I think the volatility of this offshore services segment makes Tetra's stock difficult for a lot of investors to own. Can you talk about longer term, how you view this? If it's a core business that you want to remain in?

Yes, I mean, clearly if you look at our results this year and you look at the predictability, or band of results on fluids, testing, and compression. It's in a narrow band. And, we've done a pretty good job of improving some of the areas like testing and operating within that predicted band over the last couple of quarters. And, I'm pretty comfortable that's going to continue.

The volatility of offshore services, certainly, is visible at the moment. And, the reality is, any set of strategic alternatives on that business -- step one is you've got to have improved profitability. We're focused on improved profitability as we are on any business that aren't -- that's not meeting our financial objectives. If you look at the market out there and others that operate in that space, clearly, we're not the only company that's challenged in that area. I mean, I think we've done a good job overall versus peer group over the last couple of years.

But, given the volatility, given the challenge, given the big miss the second half of this year, compared to what we've talked about 90 days ago -- focus number one is, let's take the short-term steps to improve, optimize, get the best returns on what we have. And, as we go through that, then you've got more range of options in the short term. Until you've got inherent predictable business at operating on a better level. It's fix with you have. But, longer term, we'll figure that out as we look at the improvement. But, it clearly is a much more volatile business than the other segments that we have.

Thank you.

Our next question comes from Mike Harrison at First Analysis.

Hi, good morning.

Good morning, Mike.

I was hoping I could get an update in the testing business. An update on the competitive environments in the basis, basins where you're working? Are you able to secure attractive pricing on, kind of, a project-to-project basis? And, can you, maybe, give us any metrics on how your customer base has expanded and diversified over the past two to three quarters?

Yes, I think I would characterize the competitive nature being similar. I don't think we're getting any improvement in the overall market environment that's correlated to -- that's driving our improved performance. My view is, we've got a handful of items that we have very aggressively focused on over the last four, five, six quarters that we've talked about. That being, diversification of customers, reallocation of assets, cost management. Just continuing to make certain we offer best-in-class service delivery and quality and safety.

And, I think between asset reallocation, cost management, diversification of customers, sales expansion. Starting to see some nice benefits internationally, in places like Saudi, a little bit better market in Canada. I think all of those have done it. But, I wouldn't give credit to a better market environment as giving us any of that benefit. I mean, it's all been internal execution.

So, my -- real appreciative of the hard work that the team has done to move that in the right direction. And it's an area where Joseph has clearly spent a lot of his time the first quarter. And, will continue to. And, building on the progress we've made over the last year. And we look at it, it's a big 740 basis points, a big step up sequentially. And, we came in exactly as we expected when we had the call in August.

And, in terms of the number of customers you're serving. I mean, is that customer base up 20% versus where it was at the end of last year? Help us understand that.

Yes, I'm not certain I've got the exact number in front of me. But, I mean directionally, that's probably not a bad estimate in the US. We track dollars of new customers; the number. And it's certainly a significant number, to give you some, kind of, metrics to throw around it. The number of new customers, certainly, is north of 15 to 20 of what we've picked up in the US from 12 months ago. I mean, if you go to -- if you had the customer list. And, where -- you look at where we're getting incremental activity. The sales team is, kind of, brought in order of magnitude, 15, 20 plus.

All right, then on the CSI side. Are there any surprises that you've seen? As you get into some of the newer markets, outside the traditional wellhead compression and other markets that Compressco was involved in? And are you seeing additional opportunities as you're digging in on that business a little more?

Yes, I think if you look at the CSI, I think there's -- all the learnings have been positive. Everything is -- come together very nicely. We've got several instances where the combined sales team has been able to leverage relationships and bring incremental revenue. Fairly straightforward. That's great. I think we've found that the operating guys have line of sight to get us towards that $8 million integration savings we expect in 2015. So, we're very pleased with that.

The guys are focusing on the existing customers, existing basins, and the capital allocation of that $90 million growth capital number that we've referenced will be in the existing basins where we already have footprint that we can leverage. So, the good news is no major surprises and it's going very much according to plan.

All right. And, maybe, a last one for Joseph. You've been pretty quiet, so far. But, I was hoping, maybe, you could talk about what attracted you to the Tetra opportunity? And, what your main focus projects are at the moment?

All right. Good morning, everybody. It's nice to take part of the analyst call. Especially, when some of the tactical execution that has been put in place over the last few months is starting to bear fruit on the results of the production testing. Specifically, with the 740 basis point improvements quarter over quarter. Which, would, as we see it right now, after we close October, is continuing towards the stated objectives and moving into Q4.

What attracted me to Tetra is the opportunity to lead some very diversified businesses from where I came from. And, try to move from services that are diversified and target customers across the upstream and a little bit of the midstream with compression. And, try to move up the value chain, in terms of figuring out how to bring those services together into more of a bundled service approach.

If I wanted to talk about how we're trying to link up all these businesses. We're looking at adding valuable solutions. And, we're working with specific customers today on linking up frac flow back, water transfer, water treatment. And, trying to figure out how to become the preferred fluid manager around the wellhead. That's really what I'm focused on.

Over the short term, my main focus has been on building the playbook of the tactical execution. With that, really focusing on restoring profitability in all our operations. Making sure that we address and eliminate the redundancies in the system. Continuing with the plans that were put in place before I arrived at Tetra. Figuring out the best ways to optimize our costs and leverage our back office from business systems to supplier management.

And, definitely my biggest focus is on growing profitably. Diversifying our customer base, allocating the resources that we have, without the need to spend new capital, to locations where we can expect better returns. So, that summarizes the things that I've been focused on in the first, three, four months of my assignment at Tetra.

All right, well thanks very much and welcome aboard.

Thank you.

Amy, any other calls?

The next question comes from Stephen Gengaro at Sterne, Agee.

Thanks, good morning, gentlemen.

Good morning, Stephen.

Two questions. I think first, Elijio, can you give us, just quickly, your expectations for depreciation, SG&A, and interest costs in the fourth quarter on a, kind of, Tetra-consolidated basis?

So, the incremental DD&A that we picked up as a result of acquisition of CSI. Let me tell me you. Give me a second. It's $9.6 million. And, that reflects, essentially two months of DD&A for the acquired company. So, you can assume that we'll pick up an incremental $4.5 million above our existing run rate. That, above the third quarter numbers.

Okay. And, then, on the interest side? I assume the G&A's relatively similar.

Yes, and the same way on the interest expense. And, on the interest expense, remember to exclude in other income expense, the nonrecurring transaction cost. And, on the interest expense when you look at the amount of -- give me a second, of interest that we picked up from CSI, it's about $2.5 million in for the two months of the third quarter. So, you can assume that we'll pick up another $1.2, $1.3 million on top of that for a full 90 days.

Great, thank you. And, then, getting back to, sort of, Stu, to the overall picture. Your -- I mean, it does seem like your, kind of, what I'll call, your core segments, are doing fairly well. Is there any change in plans here as far as what we're doing on the Ameritech side? What we're doing, sort of, on the offshore services side? As far as a different attack on improving, slash, getting rid of the liabilities? Or, is it just kind of more of the same? I mean, you've assessed the situation, and you just, kind of, plow ahead from an execution perspective from here?

Yes, I mean I hate to characterize it as more of the same. Because, I'm not certain I'm thrilled with the -- I'm certainly not thrilled with the revisions we've had. But, I'd say we're spending an incredible amount of execution time with Ameritech guys, using the expertise in our offshore services group and just making certain we've got the best execution plan out there. This isn't an execution issue. To be very, very clear. This is the type of challenge that a normal EMP, Gulf of Mexico, shelf company deals with. This is not Ameritech unique. And, the difference is, we're at the last three properties, some challenging wells. That, as we go through the analytics, are proving to have bigger challenges than we thought. And, it's as simple as that.

So, when you see new info and more complexity, you need to take a step back and make absolutely certain your execution and your engineering plan, planning, and your asset allocation and the timing. One subtlety is, clearly, we wanted to get this done this year. We've said that over and over again.

And, probably the one minor shift is, we want to get it done absolutely as soon as possible. But, we want to get it done with the lowest cost in the optimal way. And, if that takes us longer to do, than we had thought, that's what we are going to do. We're not going to go and make the situation worse by doing it sub-optimally. So, that's probably a slight deviation. Based on new learnings that we've had in the last 60 days.

And, on the offshore services piece, we'll continue to do what we've done the last couple of years. We're not going to spend growth capital in a market that's choppy. That's not a reasonable expectation. And, we're going to task our team with doing exactly what we've done in some of our other businesses over the years. Improve what we have; focus on the opportunities; look at construction, as well as abandonment decommissioning. Make sure we're positioned on some of the big diving projects as we go forward.

Leverage the integrated services that we have where we do it; really, really good job on the complex technical projects that involve planning project management in multiple services. Look at a couple of low risk, close-to-home international markets as appropriate. Don't diversify for the sake of diversification and be very, very tactical. And, the management team clearly understands that this is a tactical business in the short term until we demonstrate improved profitability.

Just like it was on testing. This is no different than the approach we took on testing. It's just a different market. And, Joseph is spending a lot of his time with the team. Going through the tactical execution. Just like we've done on testing.

Okay. Great. No, that's helpful. Thank you.

The next question comes from Joe Gibney at Capital One.

Thanks. Good morning, guys. Just a couple quick ones for me. Elijio, you referenced as it pertains to the Ameritech AROs, prioritizing costs and cash flowing over time. I certainly appreciate that. Timing, nonetheless, is still a very acute investor topic when it comes to dispensing this legacy business.

So, as it pertains to the remaining wells and platform that are expected to be completed into 2015. I mean, what, as it stands now, what are your thoughts on what that timing means? If you don't want to address that yet and it's still more of a moving target, predicated on completing this first platform, I fully understand. Just trying to appreciate what you're saying now in terms of the timing on the remaining removals on your ARO obligations?

So, Joe, three properties left to be done today that we operate. One of them can be done with our assets. That's removing a platform on that property that had the pipeline running next to it. So, we're going to be addressing that in the next week-and-a-half. And then get that one done and behind us. At that point, all the work that can be done with our own assets is essentially done and behind us.

The two remaining properties require significant third-party assets based on the engineering study and the assessments that have been completed in the last 60 days. And, they 're costly as you can see by the reserve that we adjusted in the third quarter. We want to do it at the right time, with the right pricing, and best weather conditions. Knowing that those assets are beyond our control. So, we're going to go out to the market. We're going to price what it takes to get a rate to come in and get our -- go back into some of those wells. Based on pricing and timing that we get, we're going to make that call. Whether that's April or May, we'll decide based on pricing and availability of assets that we need.

And, I mentioned also earlier, that these targets that we've made of getting this behind us. We've eliminated almost 500 wells in the last three years. Almost 100 platforms and over 100 pipelines. We're down to the last few. We're not going to rush and do it at any cost. We're going to do it at the optimal cost. And, if that pushes us out several months to a couple of quarters, so be it.

The other thing I'd add to that, Joe, just to reiterate. We're very focused on our cash targets we've laid out there. So, again, the timing and the execution, and capital deployment across the Company. It's all part of one overall integrated approach that we look at. And we're very focused on hitting those targets that we've laid out.

Okay, makes sense. I can appreciate that. Last question. Just trying to calibrate a little bit on offshore profitability. Elijio, I mean, you reference additional cost cuts. 4Q tracks similar to 3Q, as you've alluded to, I mean, we exit this year; I'm talking gross profitability. Kind of, low to mid single-digit percentage run rate on a business, historically, that can be, call it mid-teens.

So, if we're flattish next year in 2015. You're taking some costs out. It seems some of this business comes back on these customer-postponed projects. What is the -- on a gross profitability basis, I mean, what can offshore run at next year? Is this a -- is it a double-digit margin business? Or, are we going to be challenged to get to that level?

So in 2013, after we went through a round of cost reductions, we were able to get up in the 12% type operating margins. But, we -- which we think was top quartile versus the industry. When you look at the results of some of our competitors and peers out there. Clearly, this year is going to be way below that number because of a highly unusual weak third quarter that we saw. When compared to either a year ago, or to the second quarter, we thought we were going to be North of $15 million profitability and we ended up slightly above break even.

We don't expect the Q3 of next year is going to be anywhere near that low-level. We expect that we'll see a seasonal slow start to Q1. As, we're at the dock because of bad weather in January, February, and early March. We expect that in the second quarter, we'll come out on projects that are out there. That we're bidding decent pricing on.

We do have a project that gives us some usage of our assets into the summer, already ahead of us. And, I think that you'll see us with a strategy coming out of the first quarter focused on utilization with a lower cost structure. To get us North of the wind, we're going to end up this year. But, I think below the low double-digit margins that we ended in 2013.

Okay.

If you take a midpoint between those, it's most likely what 2015 looks like for offshore services.

All right. That's helpful. I appreciate it, guys. I'll turn it back.

Our next question comes from Rob Fink at RBC capital.

Hey, it's actually Kurt Hallead here.

Good morning.

Hi. So, a lot of ground's already been covered and probably going to rehash some things that have already been asked and discussed, probably inadvertently. So, I apologize in advance for those that've already asked some of these questions to you guys on the call. The Ameritech thing is like an albatross, huh?

This was supposed to be, I remember about a year-and-a-half ago, you guys indicated that it was likely to, kind of, be off your books by the end of 2013 or early 2014. That was the end of 2014 and now it's some time in 2015. It's not a -- this is not a negative commentary. I can understand there some challenges involved with it. But, again, what kind of assurances do think you guys can have that it's definitely going to get done in 2015?

Well, certainly, it's taking us longer. That's a fact, if you compare it to our prior statements and at a higher cost. If you look at what we've got to get the next year on the one structure and this -- and the two properties that have the challenging wells. Clearly, based on our record, there's obviously a risk that it takes longer and costs us more. We haven't gotten to all the engineering on it, etc. As I say all the time, based on what we know at the moment, we think we have a reasonable estimate. But, there's always going to be additional learnings when you get out there and see it.

I mean, you are talking about, wells that are challenging. A structure that's a down structure where we haven't had full access to it yet. We've had some. We've planned it based on that. Until we're out there and you have full access, you run the risk that it's changing. And again, I would encourage you and others to benchmark and think about this to others that have similar properties out there that will -- that are seeing the same type of challenges. So, it's a best estimate.

It's going to -- the thing you can rest assured, is we are not going to execute until we've done all the engineering, all the project management, the optimized asset allocation. And, we think we have our best chance of executing safely at the lowest cost. But, the intent is to get it done. The intent was to get it finished this year.

But, we think at the end of September that reflects everything that we know now and we're going to get a good portion of that work done with our Tetra assets during the fourth quarter. And, that last structure and the associated wells of two properties, our game plan is to get that done in 2015. And, we won't start the work until we have a weather environment that's optimal.

And, Kurt, again, take it at a higher perspective, over the last three to four years. The population that we have to deal with is down tremendously. And, we've eliminated almost 500 wells, almost 100 platforms. And, we're down to one platform and we've eliminated all the pipelines, almost 120 of them. When you look at the population of issues that we have to deal with, we can count them on a couple of -- on one to two hands now, versus where we were just several years ago.

So, what was the thought process in the context of providing earnings guidance, excluding Ameritech? As, at the end of the day, Ameritech is part of your operation, until it's not, right? So, what was the perspective on providing your earnings guidance ex-Ameritech?

I mean, methodology wise, we would anticipate doing that early part of next year. As we always do. And, in the -- similar segment thoughts as we do, and with our best estimate of what the cash spend for 2015 is. So, when we get to the end of January, early February and have that call, we'll have an updated estimate based on the work that we've finished during the quarter; work that remains; any thoughts differently than what we have. And, we'll make a statement as to when we expect to get that done next year. So, you know, -- as we always do, take our best shot based on what we know of giving details and supporting it.

We've tried to be, Kurt, as transparent as we can with the information that we have at the time. And, then we'll let the investment community assess the pre-and post-numbers, with or without Ameritech.

Okay. I was wondering if you guys could give us some thoughts on where -- what -- give us your thoughts on simplifying the corporate structure going forward?

I'm not certain now. I'm interpreting that as the portfolio of businesses? If that's the question, Kurt, I will respond accordingly. I think, hopefully, one of the consistent messages that we continue to deliver is the areas where we continue to invest, both organically and through acquisition, fluids testing and compression. We think we are continuing to perform well. Fix the areas where we've needed to in testing. Demonstrate that the margin improvement there, continue to do well in fluids. We have done a transformational acquisition during the third quarter on compression. That lets us be one of the largest players in that space. We think we've got $90 million of growth capital that's incredibly actionable next year. That translates to a range of distributable cash flow improvements that maps over to the Tetra shareholders. That pushes us through the IDR into the value of the GP.

So, we think we've got a very clear line of sight on that. Line of sight on improvement on testing. Continued strong performance on fluids, despite some of the choppiness in the Gulf of Mexico that everybody has seen this year. And, that, those are the businesses we've invested in. And, you know, offshore services in the short term is a business that we need to tactically go in; improve in a tough market.

As we get that improvement, which Elijio referenced, should be somewhere between where we've been this year and where we hope to be this year. As we walked through that improvement and demonstrated, that gives us at least the opportunity to evaluate range of options. Today, our focus is in improving that business and taking the actions to do that. Management group is 100% focused on short-term performance improvement in offshore services. It's not any more complicated than that.

Okay. Thanks, guys.

The next question comes from Bill Dezellem at Tieton Capital management.

Thank you, I for -- I'm just not, simply, not clear. The falloff that you experienced in the P&A and diving demand in August and September. You referenced that it was a couple of customers. But, I don't think we understand, really, why? What is it that's behind that? And, I guess, from a bigger picture perspective. We have the regulatory issues that are supposed to be driving demand. And, one of the things I'm also inclined to do is take your experience with Ameritech and overlay that with your customers. And, there -- shouldn't they be having the same challenges. And, so, your business should be booming as a result.

Yes, I mean, all good questions and I'll deal with the macro. Then, I'll deal with the micro. In my opinion, you are seeing areas where there's -- there are challenging wells. And, we participate in some of that. Others participate in some of that.

I think, from an overall oversight point of view, I do think some of the guidelines have come out several years ago have been helpful over the last several years in stabilizing demand. And, you've seen some of that. But, I do think there's been a lot of industry consolidation this year. I think one of the things that's unique is there's been a lot of industry consolidation on the shelf that I think has correlated to a deferral of demand of some of the activity. So, again, I'm not going to get into specific customers, specific companies. That's not the purpose of this call.

But, I think that trend has been part of the explanation. We've had a couple of customers that have just made a decision to change the timing of projects they previously committed. They've come with very, very short lead times and said we don't want to do the work in the third quarter. We're pushing it out to next year for internal reasons. Period. And, we've seen that affect us on some of the diving projects. And, we've seen that affect us on some of the P&A.

And, I think you overlay that with the fact that, if you study the dynamics of the competitive landscape in this space, there is certainly continued pricing pressure that's driven by consolidation and competitive landscape. So, you've got -- those are the things that have come together. And, we know the utilization of the P&A spreads is down materially from what it typically is during the peak part of the season. We went through on the P&A spreads and we just saw a very rapid decline against our historical demand during the peak months. Related to those areas that I referenced. So, it's a three or four things, that obviously, that add up to that magnitude and we really saw that in August and September. We didn't see that to the same degree in June and July.

Thanks for letting me beat the dead horse. And, a more positive note, the fluids gross margin was up sequentially and that was up sequentially on lower sequential revenues, which is a little counterintuitive. Would you please address what led to that success?

Well, Bill, remember that in the second quarter, that's our peak season of revenue out of Northern Europe for industrial sales. So that one increased in the second quarter and then dropped to normal run rates in the third quarter. Then at the same time, we saw an increase in calcium chloride sales into the shale play markets. We saw some of the smaller Gulf of Mexico projects come online that took shipment of product. And, the mix of those two margins, versus the mix of the Europe margins, are more in our favor. And that resulted in higher operating margins for fluids.

Great. Thank you, both.

And we have one last question from Jason Wangler at Wunderlich Securities.

Hey, good morning, guys. Just had a quick one on the CSI acquisition. How far along are you with switching those contracts over? And, with the timeline as far as getting that all completed?

Yes, I mean, we're in the initial stages of getting the format, talking to customers, getting the sales force focused, and we're making good progress on that. We've said we think it's a 12 to 18 month process. And, also recognize that, through the mechanism that we acquired the Company we've got some good favorable tax treatment that enables us to defer some of the cash taxes, regardless of the pace of that. So, we've got that as a benefit. But, at the same time, I think we're making good progress. And, I would expect to see an acceleration of those conversions in the short term.

Great. I appreciate it.

This concludes our question and answer session. I would like to turn the conference back over to Stu Brightman for closing remarks.

Thank you. And, again, I appreciate all the questions, as always. We try to be extremely transparent and we're very focused on the two areas that we've been challenged in offshore services and Ameritech. And, I think we explained our game plan. And, I think we tried to also highlight the positives. Of which, I thought there were many. Continued progress in some of the businesses that we've been more investment-focused. Compression testing, fluids, and continued expansion in the margins on testing, customers, etc. And, we'll update all the areas where we get together earlier in the year to talk about the fourth quarter as well is the 2015 guidance. So, thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.