Tetra Technologies Inc (TTI) 2015 Q2 法說會逐字稿

Good morning, and welcome to the Tetra Technologies, Inc second-quarter 2015 results conference call.

(Operator Instructions)

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

Thank you, Emily, and welcome to the Tetra Technologies second-quarter 2015 earnings conference call. Elijio Serrano, our Chief Financial Officer; and Joseph Elkhoury, our Chief Operating Officer, are also in attendance this morning, and will be available to address any of your questions. I will provide a brief overview of the second-quarter results, then turn it over to Elijio for 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, or earnings per share, excluding the Maritech segment, adjusted EBITDA, 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.

I would first like to start with an overview of the second quarter, then give a brief outlook of our market assumptions, which will also cover some of the rationale behind the third-quarter guidance included in this morning's press release. While it is very unusual to give guidance in this market, given our strong performance in the second quarter, we do want to provide you with some clarity regarding our near-term outlook. With that, our second-quarter 2015 adjusted earnings, excluding Maritech and unusual items, was $0.16 per share. Some of the key highlights of the quarter include record quarterly revenues, adjusted EBITDA, and operating income for the fluids division. Continued strength in our free cash flow was $43 million in the quarter, excluding the impact of Maritech. We believe we continue to have line of sight to the cash flow objectives that we set out earlier this year. As a result of our strong free cash flow, a $38 million reduction in Tetra net debt, compared to the end of the first quarter, with Tetra's debt leverage continuing to trend down for the third consecutive quarter, to 2.38 times. The very successful introduction of a new completion fluid in the Gulf of Mexico.

All divisions were profitable on the basis of operating income in the second quarter, excluding reserve for bad debts for our production testing business. A record DSO improvement of 13 days, from previous 68 days at the end of the first quarter. All this is being driven by continued reductions in operating expenses and efficiencies across the Company, and expansion of our customer base. Obviously, the record performance of our fluids division is driven by multiple factors. First, we had several major projects take place in the second quarter that generated significant revenue and profitability. A portion of this was accelerated from the third quarter, and pulled into the second quarter. The introduction of a new completion fluid was a positive contributor to the second quarter, along with continued strength in our international fluids business, and continued strength in our chemicals business, including the normal favorable impact of the summer season in Europe for the second quarter. And finally, we were the beneficiary of a $2.6 million credit associated with an insurance settlement in the fluids division. Overall, an extremely strong quarter for this division, which we are obviously very pleased with.

Our production testing division reported an adjusted pre-tax loss of $425,000. Excluding the impact of the reserve for bad debts, the production testing segment generated a profit of $575,000, a sequential improvement over the first quarter of this year. We continue to be very aggressive in cost management, and equally important, we continue to expand our customer base. With about half of the division's business in international areas, we continue to see strength in those markets, and believe the combination of the cost actions, taken domestically, the expansion of the customer base, and the international strength will allow us to break even, in this division, at the operating income level.

EBITDA for CSI Compressco was essentially flat from the first quarter to the second quarter, and significantly higher than the second quarter of 2014, due to the CSI acquisition last August. This week, we celebrated our one-year anniversary of the acquisition. Several trends are notable in this market that were touched on yesterday, during the CSI Compressco call. First, we've saw a slight deterioration in utilization in our compression services business, driven primarily by the impact of some of the liquid-related applications. We are seeing modest pricing pressure, as we see on other onshore service businesses, but not nearly to the same extent. However, we continue to progress very tactically in this business, and invest in the higher horsepower compression, where our utilization continues to be in the mid-90%s.

During the second quarter, our equipment and part sale revenue increased by $30.8 million over the first quarter, as we were able to accelerate certain deliveries based on the existing backlog. Also during the quarter, we increased our distribution to $0.50 per unit, which represents a 10.5% increase versus the second quarter of 2014. Overall, we see this business bottoming as we approach the end of the year, and believe that they will continue to have investment opportunities in the larger horsepower, in the short term. Our offshore services segment achieved an adjusted pre-tax profit of $2 million for the second quarter of 2015. This sequential improvement was expected, due to the seasonal element of this business. But more importantly, was driven by very aggressive cost actions that allowed us to generate profit in an environment where our second-quarter revenue, compared to 2014, went from $56 million to $36 million.

Our ability to continue to be profitable for the full year in this business will be driven by our focus in cost, and our ability to keep our major assets utilized in a very challenging market. During the second quarter, we spent $4 million on Maritech's abandonment decommissioning. We expect to finish the work that was budgeted early this year during 2015, with the objective of completing the obligations in 2016. Free cash flow for the quarter was $43 million. This was due to a combination of our improved cash earnings, continued reductions in capital expenditures, and the aggressive management of our working capital, as reflected in our reduced DSO metrics.

At a result of this free cash flow generation, our net debt was reduced to $349 million, and our debt leverage ratio was reduced to 2.38 times. The singular focus of our entire management organization is to generate free cash flow during this challenging market. We are very pleased with earnings for the quarter, driven by the strength of our fluids division, and we are very pleased with our cash flow, driven by those earnings, as well as this ongoing focus on cost and working capital. The actions we have taken in headcount, cost, customer diversification, all fall under the common umbrella of controlling those elements that we are able to control, in a time when predicting future activity continues to be a challenge to all of us.

The last area I would like to comment on is the guidance outlined in our press release for the third quarter. While we did not give guidance earlier this year, I feel the need to give it strictly for the third quarter, given the very strong results we reported for the second quarter. As I noted, there are several factors in our fluids division that were exceptional, and should not be viewed as the ongoing run rate. For example, the $2.6 million insurance settlement clearly is a second-quarter event only. The timing of major projects in the Gulf of Mexico included the acceleration of several projects. Also, as a reminder, our calcium chloride business has its seasonal peak in the second quarter. However, we expect that our successful launch of our new product, and other products, into the fluids division will continue to create opportunities as we go forward. Overall, we expect the fluids division to be strong in the third quarter, but not at the level of what we achieved in the second. As noted earlier, we expect our full-year results for production testing and offshore services, at the operating income level, to be at break-even. We expect our offshore services business to experience the typical seasonal progression, which would anticipate the third quarter being stronger than the second quarter.

And we expect production testing's third quarter to be similar to what we reported, on an adjusted basis, for the second quarter. For CSI Compressco, we expect to see utilization of our fleet to continue to move down modestly through the end of the year, and we expect that our existing backlog will continue to support strong equipment sales through the end of these years. All of these items allow us to be confident in the third-quarter guidance we provided this morning. At this stage, I will hand it over to Elijio.

Thanks, Stu. Tetra revenue of $316 million increased 31% introduced over the second quarter of last year, reflecting the acquisition of CSI Compressco on August 4 of 2014, and the strong fluids results. Sequentially, revenue increased 27% from the first quarter, with the fluids division up 24%. Offshore services up 203%, due to the seasonality of that business. And CSI Compressco up 23%, on strong equipment sales.

This more than offset a modest reduction of 6% in production testing revenue, which compares favorably to a decline in the North America average rig count of 40% in the second quarter, compared to the first quarter of this year. Fluids segment revenue increased 5% from last year, to a record high of $123 million, and increased 24% sequentially for the items Stu mentioned earlier. Adjusted pre-tax margins improved to 26.6%, up 860 basis points sequentially, with (technical difficulty) leverage available in our fluids franchise. The fall-through percent, or incremental margins from the incremental revenue, was 63%, partially aided by the benefit of an insurance settlement in our favor of $2.6 million, the seasonally strong Europe fluids business, offshore shipments to the Gulf of Mexico and internationally, in addition to strong sales of calcium chloride to the non-oil and gas sector. We clearly benefited in the second quarter from the industry and geographic diversification of our fluids business. These results were achieved despite a slowdown in our water management business that was expected, given the decline in North America onshore rig count.

Production testing rating of 35% was down 18% from a year ago, and down 6% sequentially. In the second quarter, we took a $1 million charge for bad debt expense. Excluding this charge, adjusted EBITDA margins in the second quarter were 19.4%, up 140 basis points, sequentially, in a very challenging environment. These 19.4% adjusted EBITDA margins compared to 16.1% in the second quarter of last year. The improved margins reflect the strength of our international business, diversification of our customer base, and a 21% reduction in costs from the same period a year ago.

The compression segment revenue increased $94 million from a year ago, reflecting the CSI acquisition. Sequentially, revenue increased 23% on stronger sales of new equipment, some that had been previously delayed. Backlog of new equipment sales was $87 million at the end of June. CSI Compressco indicated, in their earnings conference call yesterday, that they were starting to see an increase in bidding and quoting activity for new equipment sales. Adjusted EBITDA margins were 24.4%, down sequentially, reflecting the higher mix of equipment sales in total revenue. Utilization of our compression fleet was 83.6%, down from 86.4% in the first quarter of this year. This is consistent with our expectations coming into the year, as a majority of the reductions in utilization, [as we are] smaller sized equipment. CSI Compressco has converted over 60% of their contracts to be MLP compliant.

Offshore services revenue increased from $12 million in the first quarter to $36 million in the second quarter of this year, following the seasonality of our decommissioning business. Compared to a year ago, revenue was down 36%. However, despite a $21 million decline in revenue from a year ago, operating income was down only $1.8 million, as we have aggressively right-sized this business to match the current market environment, as customers delay doing decommissioning work to protect their balance sheets. Generating a 6% operating margin and a 14% adjusted EBITDA margin in this market reflects the aggressive efforts by our Management team to control costs. On a GAAP basis, earnings per share were $0.19 in the quarter. In the quarter, we incurred a small amount of severance expense of $320,000. On an adjusted basis, to exclude the severance, and to reflect our traditional 30% tax rate, earnings per share were $0.16.

Since June of last year, we have reduced headcount, outside of CSI Compressco, by 24%, to reflect the reduced activity levels and pricing pressures we are seeing. Our tax rate in the second quarter was 15%. If we continue to benefit from the deferred tax asset allowance we recorded last year, for our US tax loss carry-forwards, we expect our effective tax rate, on a normalized basis, to be approximately 30%. The difference between our expected 30% tax rate, on a go-forward basis, and the 15% reported tax rate reflected in our GAAP results, is a reflection of a drop in earnings per share by $0.03. We have a US tax loss carry-forward, generated mainly from historical Maritech losses, as well as a tax credits, which represent a tax benefit of approximately $85 million as of the end of last year, which will reduce -- significantly reduce future tax liabilities. The $85 million of tax loss carry-forwards can offset over $240 million of taxable income in the United States. Therefore, we are not currently paying taxes in the United States, as we utilize our tax loss carry -forward.

On a go-forward basis, as the economics of our industry improve, and our Maritech losses are behind us, the ability to generate cash earnings are enhanced, as we utilize this tax loss carry-forward and the tax credits for all our US businesses, including Tetra's earnings from CSI Compressco. To summarize, the difference between our GAAP earnings of $0.19 and our adjusted earnings of $0.16, is to normalize our low 15% tax rate to an expected 30%, on a go-forward basis. We did not record, in the second quarter, a tax charge for deferred taxes that needs to be normalized for; we are simply indicating how our future expected tax rate will impact EPS.

During the quarter, capital expenditures for Tetra, excluding CSI Compressco, were significantly reduced, from $18 million a year ago to $3 million in the second quarter, net of proceeds from the sale of assets. We believe capital expenditures for Tetra will be closer to $25 million this year, compared to $65 million in 2014 and $75 million in 2013. For CSI Compressco, capital expenditures are targeted to expand our fleet with mid- and larger-sized compression being deployed on gathering systems, central delivery systems, and large well production requirements, with the emphasis on production. Utilization levels for this type of units are higher than the overall average of the segment. As a reminder, the capital expenditures for CSI Compressco are being wholly funded by the CSI Compressco's capital structure, without any support from Tetra. During the quarter, Tetra received distributions from CSI Compressco of $7.7 million, up 26% from a year ago. This represents the distributions to Tetra for the 42% of the outstanding units that we own, and our 2% general partner interest. As you recall, when we did the IPO of Compressco in 2011 as a GP, we were only receiving 2% of the distributions for the general partnership.

As our distribution have been gradually increasing, we have surpassed the [50%] incentive distribution rights threshold. In late last year, after the CSI acquisition, we reached a 25% IDR. At our current annualized distribution of $2 per unit, we are only 16.5% away from reaching the 50% IDR threshold that will significantly accelerate the distributions to Tetra, as a general partner of CSI Compressco. The year-over-year increase in distributions for CSI Compressco was 10.5%, with a coverage ratio of 1.19. As of yesterday, the units of CCLP were trading at a yield of 14.1%. Days sales outstanding improved by 13 days from the end of March this year, to 55 days at the end of June. This improvement, when our customers are focused on preserving cash, reflects the quality of our customer base. The focus by the organization on timely invoicing collections, the favorable mix of equipment sales by CSI Compressco, where we advance bill for equipment, and our ERP system initiative to automate the invoicing process by doing electronic invoicing to our customers.

As a result of all these initiatives, our lower expenditures, reduced Maritech decommissioning work, improved working capital management, and stronger earnings, free cash flow for Tetra was $43 million, excluding Maritech's ARO -- or $39 million, after spending $3.8 million on Maritech. The [$39] million of free cash flow allowed us to reduce net debt by $38 million. Through six months, we have generated free cash flow for Tetra of $33 million, after expending $4.4 million for Maritech. We expect Maritech ARO expenditures this year to be approximately $9 million. Therefore, we believe we are well on our way towards our goal of generating more than $50 million of free cash flow for Tetra in 2015.

We believe also that the $39 million of free cash flow, after Maritech expenditures, is a reflection of the quality of the earnings for Tetra in the quarter. With respect to the balance sheet, we previously mentioned that Tetra and CSI Compressco's debt are distinct and separate from one another. Tetra improved our leverage ratio to 2.38 times debt to EBITDA. The 2.38 times leverage ratio is as defining the Tetra debt agreements. This is the third consecutive quarter where we have improved our leverage ratio, a significant accomplishment for a small cap oil field services company, when the North America rig count is down 55% from the high of last year.

Tetra's liquidity at the end of June was $130 million, with liquidity being the finance availability on our revolver, plus cash on hand. CSI Compressco's liquidity at the end of June was $194 million. We believe we are in a good position to manage through this downturn with adequate liquidity, plus Tetra generating free cash flow. With that, I will turn it back to Stu.

At this point, we will take some questions.

(Operator Instructions)

Marshall Adkins, Raymond James.

Morning, guys. I guess there is more to Tetra than just part ownership in a compression company.

I think that hasn't changed, Marshall.

You are, I think, probably the only company in our service company universe that actually posted meaningful sequential improvement here. I want to try to understand better exactly what is going on, and how repeatable it is. On the fluids side, I understand the insurance thing, and the calcium chloride. But it sounds like the Gulf of Mexico is still fairly healthy, and you expect that to continue to be relatively healthy, going forward. Could you give us a little more color on that? And maybe, are there are any product line issues, outside of the geographical issues, that are driving the fluids to do so well?

Great question, and I anticipate there's going to be a lot of questions around the fluid sustainability. Let me let Joseph give you a little bit more color on that, because I do think it is very important.

Good morning, guys; hello, Marshall. Just to give you a little bit of color, moving forward.

Of course, Q2 was exceptional with our fluids, and Stu covered the reasons. Moving into the next half of the year, we are, like we said in the previous two quarters, very comfortable with our Q3 backlog. It's going to be consistent with our backlog in the last two quarters, excluding a couple of projects that did move into Q2.

We have been in touch with every single customer, on every single project that we have, moving into the second half of 2015. And we believe our customers seem to want to continue the current projects. In addition to the offshore projects that we have, most of the US land performance has been due to an expanded market share in general, and the increased use of our completion fluids used -- visible use of these disposable composite plugs, which is really reducing the cost to our customers by eliminating some of the coil tubing costs in completing these wells.

On the topic of the fluid strength and the new products, I will mention several points here. My intention is to really talk about the multitude of why the fluids backlog is strong. In the Gulf of Mexico, we did complete 11 projects in Q2. We saw the benefit of our ultra deepwater filtration unit that we introduced in the second half of 2014, and we also introduced a new product that is zinc free and heavy fluid, and we are working with one of the main customers, major customers, in the Gulf of Mexico. In land, we introduced the automated blender to help our customers save money on water management and water transfer by mixing produced water and fresh water, and really reducing the money they are spending on water disposal.

Internationally, we have several firsts. We completed the first successful pay zone [clean and steel] in the UK; the first oil fix additives in sale in the West Africa market. We saw an improvement in mixing [fracker] fluids on deep gas wells in Saudi, and we gained an important environmental approval for a series of our additives in that space. We also had good performance overall in land.

Looking further out, in the next two or three quarters, the last few weeks, the deteriorating market environment has really pushed us to really think about what we consider the backlog moving beyond 2015, well into 2016. We will definitely see an impact on main off-shore heavy projects, if the oil price stays below $50. We have modeled that rig count, and we believe that, with the introduction of the new product that I mentioned, and with our current market share, we can tell you that, in the second half, we feel comfortable moving into the beginning -- or the first part of 2016, we are comfortable. And hopefully, the next two to three months will provide us with a better visibility to these offshore projects, international projects, and the land activity overall.

I hope this answers the questions for everybody. I prepared these notes to make sure we anticipated the strength in our fluids division.

That is very helpful. So it sounds like it is not just the Gulf of Mexico that is strong, but it's US land that actually performed well, despite relatively crappy US land market, and international as well? Did I hear that correctly?

Yes, I think our on-shore fluids, as well as our international fluids, continue to be strong. The area that is the one weakness, the toughest part of the fluid segment, is water; and we talked about that last quarter. That has continued. The water transfer is certainly, activity-wise and pricing-wise, under a lot of pressure. And we expect that to continue.

There weren't any specific -- one customer? This was broad based, correct?

Yes, we have a magnitude of customers that cut across the revenue and the results for the quarter.

Last one for me.

Baker Hughes-Halliburton merger -- will that have any impact on that fluids business at all?

It is hard to say. It might, certainly. We are very focused on continuing to introduce technology, to be a very valuable player in that space. And the more we can step in to fill any void that is created, that would be great. So we are not modeling, projecting it, but we're certainly doing everything within our control to better position ourselves.

Thank you, Stu. Thanks, guys.

Our next is from Sean Meakim of JPMorgan. Please go ahead.

Well done on the quarter.

Thank you.

I want to talk a little bit about compression. From the Tetra perspective, what is your view on distribution growth for CCLP, from here? Trying to balance the desire to show the market some form of consistent growth in the distribution, but also managing cash in what could be a more challenging downturn here?

Yes, I think those are the variables that, as we get together as a Board every quarter, we review the outbound forecast view of the assumptions, the predictabilities. To be conservative on the coverage ratio, make certain we don't get ahead of our ourselves, look at the capital and target it. I think the thing you heard on the call yesterday we tried to reiterate today is, we are still putting growth capital into that business, and continue to. And it is very, very targeted. And the areas we are putting it in are in areas where we continue to have utilization in the mid-90s. So we balance the balance sheet, the leverage, the distribution expectations, the returns on individual capital, and we try to take as balanced approach as we can. And we have a great debate internally of what that needs to look like.

Thank you for that.

And then, thinking about on the cost side, you guys have done a great job managing the cost structure, but it's been an ongoing process for over two years now. And so if the downturn proves to be more protracted, which seems like the base outlook at the moment, I guess it would be helpful to see what other leverage you can pull. Other things that Joseph and Elijio are working on, to maintain profitability, even if the downturn stays more protracted?

Yes. I will let each of those guys give their perspective of what they are working on within their responsibility.

All right. So this is Joseph. Thank you for the question.

It is very important that we give a little bit of color to the tactical execution, and the cost actions, that we have done. As a disclaimer, I always tell the division heads that you will never be able to cut costs [superfect] So part of our tactical execution is to diversify our customer base. And like Elijio mentioned in his prepared remarks, we need to make sure that we diversify towards more stable, lower risked, and highly active customers. And that part of our tactical execution has paid dividends.

In addition to that, talking about the costs, in the first half of 2015, we have achieved around $30 million from headcount reductions and multiple other cost management initiatives. That includes supplier cost management, market pricing on fuel and lubricant negotiations, the consolidation of several of our suppliers so we can get better pricing and better quality and delivery. Also, fleet consolidations with regard to our vehicles, aggressively consolidating what we need and what we don't; and basically monitoring all discretionary spend on hotels, rental cars, travels, and so on.

So that gives you enough, I guess, for some of the H1 2015, the first half of the year. And we see that benefit carrying with us into the second half.

And Sean, the only other significant initiative that remains, other than just adjusting this activity moves between locations, is the implementation into the acquired Company, CSI, of our ERP system. That will allow us to leverage the support structure that we have in Houston, and be able to bring synergies for both entities. So that is the next significant initiative, but any benefit from that will not be realized until next year.

Got it. Okay. Very helpful. Thank you, guys.

Thanks, Sean.

Our next question is from Stephen Gengaro of Sterne, Agee CRT. Please go ahead.

Thanks, good morning, guys.

One more question on the fluids side. I think, traditionally, the European calcium chloride business adds $7 million to $10 million, sequentially. And I wanted to get a sense for if that number is about correct? And then also, can you give us any more detail on how much got pulled from the third quarter to the second quarter? I.e., how we should think about the base of 2Q numbers, going into 3Q, on fluids?

The first part of the question I will address, and then I will turn it over to Stu.

So you are right. The peak of our Europe business is the second quarter, and we traditionally see a $10 million sequential improvement.

And then on the acceleration -- Joseph, you may correct me if my numbers are wrong -- there were a couple of projects that came through faster. And when you aggregate those two, they probably add up to $10 million of revenue, in round numbers.

Okay. So that is a $20 million aggregate. The margin profile of those two businesses, relative to the rest of fluids -- you say the Gulf of Mexico and the European calcium chloride versus the rest of fluids -- is that much different?

We've always said that the Gulf of Mexico has a little bit higher margin profile than the average for the overall fluids division. And that the chemicals business, in general, is pretty consistent with the overall average. And the seasonal element of the business is not positive or negative to what a full 12-month margin would be on that type of business.

Great. Thank you. And then one other, as a general question.

When you -- you mentioned in the release, and a couple times on the call, expansion of the customer base. And I think you are talking about that in terms of both the US land side and the production testing side, as well as the fluids side offshore? But would you just clarify and add a little color to that?

Yes. When we talk about the expansion of the customer base, that is a key metric that we have across the Company. We track, every month, the dollar revenue associated with new customers from the bottom up. And that is a very visible metric within the Company. And we are targeting, within our total revenue this year, that we expect that number is going to be over $100 million, which again offsets some of the natural volume. But that is just going out with new customers, new products, new geographies that we haven't done before. And we measure that every month. And when we talk about it, we are talking about it on a Company-wide basis.

And that would include new customers plus new product expansion?

Yes.

The $100 million number? Okay.

Yes.

Great. Thanks for the details.

Yes, but I am glad you asked that, Stephen. It is very important that we continue to emphasize that, in addition to the very aggressive cost, we are focusing on customer diversification expansion, as well as Joseph highlighted, the technology and innovation that we are investing in.

Definitely showed up well in the numbers.

Thank you.

Our next question is from Jason Wangler of Wunderlich.

Just had one.

The Neptune fluids -- where are you seeing that rolled out to, specifically? And maybe just the market that you are seeing, if it's even geographically? Or if you any color about size, I guess? Where is that really the focus early on with it? And where do you see it going, as you push it out to the market?

I will take this. Thank you for the question.

I recommend that everybody just clicks on our external website, and go through, and please read the CS Neptune data. But just to give you a bit of overview, this is a zinc-free, environmentally friendly heavy fluid. We can go up to 15.4 -- and I'm not going to bore you down with the details -- but we see the first application with a couple of our major customers in the Gulf of Mexico. We hope to go beyond a single customer, with a single first well commercial application. We are targeting many other customers in the Gulf of Mexico. We hope to win one or two additional customers moving into the second half of 2015, and the beginning of 2016.

Our secondary market for this would be a niche application in the North Sea. In the North Sea zinc is not utilized; it is prohibited. And what we feel we can do is offer our customers a cheaper alternative to the cesium formate in those markets. But again, we believe that, that is a niche application, due to the limit of the heavy brine that we have currently. We will continue to invest in this product. We will continue to make sure that we can target a larger envelope. But at this stage, it is still a niche application, with maybe three to four wells a year.

Okay. And so then it sounds like maybe we will get a little bit more information on those couple of wells that were targeting this -- call it, the next six months, as the year goes on, or maybe even early 2016? And it will go from there?

Absolutely. And we are tracking it very closely. What we would like to do, as like Stu mentioned, is continue to grow that new business, whether it is through geographical diversification or new product introductions in the markets where we actually work today.

Great. I will turn it back. Thank you.

Our next question is from Marc Bianchi of Cowen and Company. Please go ahead.

Hello, Elijio.

Apologizes if you mentioned this, when you were talking about the free cash flow. But I am curious -- how much of a working capital, either release or consumption, occurred during the quarter? And how should we be thinking about that for the third quarter, given the decline in fluids revenues that you are expecting?

Two data points, Marc. The first one is that the free cash flow was very little from working capital improvement. However, revenue increased sequentially over $60 million, yet we were able to keep, for example, receivables flat to down slightly. And therefore had no working capital burn as a result of that. So it is almost exclusively from cash earnings in the second quarter, and we think that we'll see, in the third quarter, very little from working capital improvement.

Okay. Great.

And maybe on the offshore business, because we really haven't talked about that yet -- curious how you are thinking about that, strategically? I know the interest is there to potentially exit the business, but maybe the market's not there. Any other creative ideas that are being tossed around? Maybe a sale lease-back opportunity? Is there anything that could be something additional to a sale?

Yes. We are always going to be focused on optimizing the business. The way you do that is, in the short term, with the financial results and managing the business. I think our results, compared to last year, on much lower revenue, in a market that is worse from a competitive point of view, clearly shows that we are managing it very tightly and effectively. As we continue to do that, we need to see, hopefully, some of the deferred spending by our customers will begin to reverse over a period of time. And we will get a little bit of help on the volume. But until that happens, it is just focus on the business.

But we always look at the full range of options of all our businesses. This one clearly, when you look at the capital allocation, we haven't put a lot of capital back into the business, because in the short term there is not a payback for that. But we look at all the alternatives that go with that.

Got it. Nice work, guys. I will turn it back.

Thanks, Marc.

Our next question is from Martin Malloy of Johnson Rice.

Congratulations on a good quarter in a difficult environment.

Thank you.

On the corporate overhead -- that $17.2 million run rate, would that be roughly applicable for the second half of this year?

No, the second half of the year will be slightly below those numbers.

Okay. Great.

And then production testing -- you mentioned some international strength. Could you maybe talk a little bit more about that, in terms of geographies that you are seeing that in?

All right. This is Joseph again.

The last two quarters, I tried to go country by country in the international space, and give you what we believe will happen, compared to previous quarters. So let me start with Canada. There was a significant ramp up in rig count, coming out of the seasonal rig count drop in Q2, but nothing that compares to any previous record. This has been the slowest rig count recovery in the last decade in Canada. So there, our main objective is to continue to try and figure out how to be, at the operating income level, flat. So moving into Q3, we will see a very slight improvement to our Q2 performance.

In Saudi, we continue to see strong demand, but we are struggling with the rig assignments. And what we want do is make sure that we get our fair share of the business. So our Q3 performance and second-half performance will be very comparable to our first-half performance in Saudi. In Brazil, we have continued to subcontract some of our packages to one of the largest oil field services companies. And we see that continuing into the second half. So that has been our PVT or operating income level positive, as well.

That gives you an overall view of where we operate. We still have a couple of the EPF projects ongoing. We will continue to operate those into the second half of this year, and we are looking for other possible projects on the early production facilities for one or two of our existing EPS that we are currently not running in that space.

In addition to that, our Mexico business is flattish. We had believed that the second half of the year will bring us a little bit more activity in Mexico. This is still yet to come. We are still chasing it. And we hope that maybe, moving into 2016, with the new oil regulations and focus in Mexico, we might see some improvement in 2016, but not in the second half of the year.

So this gives you a little bit of color to the international space.

Thank you. Very helpful.

Our next question is from Jim Wicklund of Credit Suisse. Please go ahead.

Good morning. Impressive quarter, and impressive move in the stock.

Question -- and if you've answered this, I apologize. But you laid off 24% of your people, non-CSI, in the quarter, yet revenues were up. And you note that some of the revenues were from -- in fluids, at least -- were from accelerated activity, robbing Peter to pay Paul, third quarter into second quarter. Can you reconcile the revenue growth, and the improvement in the quarter, with the 24% reduction in workforce?

Yes. We may not have been clear in the way we described it. That 24% is looking at it versus June 30 of last year. So it is compared to where we were a year ago. But the general question, of how we are getting the through-put with the work force reduction -- it is several things. I think the team has done a really good job of not just reducing people and activity, but structurally changing significant parts of the Company, in terms of how we are organized, flattening the organization, consolidating facilities.

At the same time, from an overall back-office point of view, continuing to centralize, and really taking a lot of the support functions out of the divisions, and bringing them into a common centralized corporate pool. So those are all structural enhancements that will continue whenever the volumes pick up. I think we also benefited, on those type of metrics, by Gulf of Mexico being a significant portion of the growth. It doesn't typically have the labor intensity of some of our other businesses. And I think more importantly, it highlights our ability to really respond to market activity, because we are vertically integrated.

I think it is very important to highlight, on the fluids, that we have been building out this strategy for years and years. And when we do find a new product opportunity, a new customer opportunity, a new market expansion, our ability to respond to it is immediate.

So let me just add to Stu's comments here.

It has not been easy. This is -- I want to give kudos to all our division leaders. I want to give kudos to all our support functions. And yes, 24% is a big number. But I can tell you that everyone at Tetra today is wearing multiple hats, to make sure that we can manage this downturn. It is kudos to every single employee at Tetra that is basically coming up with ideas, where we can preserve cash, and look for opportunities to improve our financial performance.

Ability to scale, and structural improvements over just cyclical improvements, are always things that we look for.

As a follow-up, Maritech reminds me of the divorce that just never seems to close. The costs are obviously coming down. $300,000 in costs, $4 million in CapEx, and you say you will be done in 2016. Can you remind me what you expect the remaining CapEx to be? And when you say 2016, is that Q4, or by the end of the year? Q1, or by the end of the year?

Yes. I think we have got around $50 million, in round numbers, left to do as of June 30. And we will do $4 million or $5 million, the balance of the year. We are scheduled to do most of the remainder next year. There's a couple of properties we don't operate that I'm sure -- may get kicked out. And I expect the majority of the work we do will be middle to the second half of the year. We certainly don't want to be working in the first quarter, with the weather; just like everybody else defers that until they get a better weather environment. So we will be pragmatic in meeting our obligations, but also being aware of the overall market environment out there, and a continued focus on the balance sheet.

Okay. And finally, if I could, compression has always been good, because you need to compress to move product, and there is gas in all of the oil that we produce. Everybody has been bringing down natural gas prices. What is your guys' outlook for natural gas, over the next year or two?

Yes. I think we are of similar opinion to the masses; that, that is not going to be a major solution for us. We're going to have to self-help, and do all the things we talked about from a cost and customer expansion, and the guys need to invest wisely into the areas where is there is continued strength. And that is what they are doing.

I think Tim and his team over at the MLP, are very focused on leveraging our strengths. You heard Elijio mention we will have an ERP implementation over the next year, to really get the Compressco and CSI groups fully effective and efficiently on a common system, across all the functions. It will be the same system as Tetra, and it allows us another incremental piece of efficiency.

Excellent. Okay, gentlemen, thank you very much.

Thanks, Jim.

Our next question is from Blake Hutchinson, Howard Weil. Please go ahead.

Good morning, guys.

Good morning, Blake.

Joseph, in your review of the international landscape for production testing, I didn't necessarily hear anything that was a call-out of significant sequential improvement over long Q. So should we chalk up the success, on the top line, more to the efforts over the last 12 to 18 months to be the first call with significant customers? And this was really the quarter where you saw the most progress in those efforts? US land focused? Yes.

Yes. That is well said.

When I first came to Tetra with the team, we rallied around production testing, because we had lost significant accounts that were anchor accounts for us in the US land operation. And to diversify the customer base, what we really needed to do is cut down on projects that we did not make money on. So over the last year, what we have done proactively is look for the those opportunities. That is why, in the prepared remarks, and what Stu mentioned, where the customer diversification has been from money-losing contracts to profitable contracts, what we have tried to do is lower the risk of exposure with customers that we believe are highly leveraged, moving into 2015. We have successfully diversified those.

We may be working for a lot more customers, but we believe that the customers we are working for in this current environment, are the active ones, and the ones that can pay us on time. We have successfully tried to do that into the second quarter. But if you look at the 10-Q that we'll put out next week, you will see that the G&A for that division has improved significantly, through [allude to a] structural different organizational levels. We have flattened the organization, accelerated the decision-making, and increased the amount of salespeople we have to win some of those contracts.

So this summarizes our performance today in the US land onshore.

Great. That is very helpful.

And then I was hoping to just -- I don't know the best way to approach this -- but the fluids certainly stand out for the quarter. But both testing and offshore services, to eke out a profitability in this environment, is impressive. In offshore services, can you characterize the type of asset utilization that you are experiencing right now? And I say that just because I am trying to understand how low you've have actually gotten, and still remained profitable?

And then, as a follow-on to that, would you expect a normal construction season progression, positive progression, for that division? Or is what you see what you get right now?

Yes, I think if you look at the business in the second quarter, and the progression we see for the balance of the year, overall, I would characterize it as just incredibly low demand. There is just a deferral of spending by our customers that is -- as you recall, it started last summer, and accelerated as the commodity prices came down, and that has continued. So there is no increase in demand taking place at all, other than the seasonality of where we are at.

We had very good utilization through the second quarter, on our major diving and heavy lift assets. We expect that the majority of those assets will continue to work through the third quarter, into the fourth quarter. We have a couple of gaps on our barge schedule that we are working on filling, but that is reflected in the overall guidance that we talked about. On our P&A business, we have very wisely staffed that, and scaled that, at a much lower level than we had a year ago, because of the unpredictability of the demand. And I think that is -- beyond the obvious help on the cost side, I think that has helped us stabilize the business, from a labor, workforce point of view, predictability. We feel really good about that.

Our diving business has real low demand. There aren't a lot of construction projects. We had a third party that we leased through the end of last year, that we had stated we released. And we don't anticipate the need for a third-party additional asset in the near term. Hopefully, next year, we will see a couple of projects come to fruition that would give us the opportunity to match a third-party lease to that particular project.

But overall, other than the typical seasonal progression, where the first quarter is the worst, second quarter is significantly better, third quarter is a little bit better, fourth quarter comes down again. It is a tough business. And to get to breakeven or above in that business -- and again, realize we have virtually zero internal work for Maritech embedded in that business, so it is all third party, in an incredibly tough market -- is a real credit to that leadership team. It is not an easy job, and the guys have done a phenomenal job managing an incredibly difficult situation.

And -- no doubt. I will turn it back, but thanks, guys, for all the detail provided throughout the call.

Thanks.

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

Thank you for all the questions. And again, thank you to our entire team at Tetra. Everybody in the company, around the world, did a phenomenal job in a very tough market. We are all proud of the group. And we look forward to meeting our guidance for the third quarter, and talking about it in early November. So thanks.

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