Tetra Technologies Inc (TTI) 2015 Q3 法說會逐字稿

Good morning, and welcome to TETRA Technologies third quarter 2015 results conference call.

(Operator Instructions)

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

Thank you, Andrew, and welcome to the TETRA Technologies third quarter 2015 results conference call. Elijio Serrano, our Chief Financial Officer is also in attendance and will give a brief update. In addition, Joseph Elkhoury, our Chief Operating Officer, is with me and will help us in answering the calls. I will provide a brief overview of our third quarter results, then turn it over to Elijio for additional details, which will, in turn, be followed by your questions.

I must first remind you that this conference call may contain statements that are, or may be deemed to be, forward-looking statements. These statements are based on certain assumptions and analyses made by TETRA and are based on a number of factors. These statements are subject to a number of risks and uncertainties; many of which are beyond the control of the Company. You are cautioned that such statements are not guarantees of future performance and that actual results may differ materially from those projected in the forward-looking statements.

In addition, in the course of the call, we may refer to net debt, free cash flow, revenues, gross profit, profit before tax, or earnings per share excluding the Maritech segment, or other non-GAAP financial measures. Please refer to this morning's press release or to our public website for reconciliations of non-GAAP financial measures to the nearest GAAP measures. These reconciliations are not a substitute for financial information prepared in accordance with GAAP and should be considered within the context of our complete financial results for the period.

In my remarks, I would like to cover a review of the third quarter, a brief outlook into the next several quarters and the associated market assumptions, and finally, a summary of the refinancing that we announced earlier today. Our third quarter adjusted results, excluding Maritech and unusual items, were $0.17 per share. This significantly exceeds the guidance we provided on our second quarter call and is the second consecutive quarter when we have reached the levels of performance. Some of the key highlights of the quarter include record quarterly adjusted EBITDA in operating income for the Fluids division, another very strong quarter of free cash flow with $30 million in the quarter, excluding the impact of Maritech.

Based on our year-to-date results and our outlook, we have line of sight to free cash flow for the full year about $80 million. Our third quarter performance enabled a net debt reduction of $57 million for the year. This is the fourth consecutive quarter that our leverage ratio continued to trend down. It's now right at 2.02 debt-to-EBITDA. Continued success of our new zinc-free heavy completion fluid in the Gulf of Mexico, earnings in our offshore services business in increasingly challenging market, and modest losses on an adjusted basis for our testing business, also in an increasingly challenging market.

The consistent theme across all of our business is a focus on expanding and diversifying our customer base and continuing to manage our costs very aggressively. Similar to the second quarter, our Fluids division's third quarter performance was positively impacted by several major projects. Several of these were continuations of existing projects, as well as acceleration of projects from the fourth quarter into the third quarter. A continued expansion of our customer base in Fluids and the introduction of our new product contributed positively to the third quarter results.

I would want to emphasize the performance of the Fluids division as broader than just the offshore fluids, as we have seen continued strength in our global chemicals business and our international fluids business. As I'll talk about later, we see the next couple of quarters as much being lighter in major projects with an expectation that these projects will develop in the second quarter of 2016. The Production Testing division recorded an adjusted pre-tax loss of $1.4 million for the third quarter. We continue to see very challenging markets domestically and in certain international regions. Through aggressive cost cutting and expansion of our customer base, we were able to deliver a modest loss for the quarter.

CSI Compressco EBITDA increased 2% compared to the second quarter of this year and significantly higher than third quarter of last year. This was driven by a full quarter of inclusion of CSI in the 2015 period, as well as continued strength in our high horsepower compression service business and revenue strength and equipment sales. As we look at the trends in this business, we see continued reductions in the utilization of our fleet, particularly in the lower horsepower applications. In addition, the backlog of equipment sales continued to decline as our Midstream customers delay new projects.

We continue to be aggressive in cost cutting and are responding to market changes very proactively. During the quarter, we increased CCLP's distribution to $0.5025 per LP unit, which represents a 9.2% increase over the third quarter of 2014. This is also the ninth consecutive quarter of increased distributions for CCLP. As we look at this business, we'll continue to assess the distributions going forward as we look at maintaining a conservative leverage ratio and looking at investment opportunities in low-risk projects, particularly focused on expanding our high horsepower fleet. Our Offshore Services segment had an adjusted pre-tax profit of $5.1 million for the third quarter.

The sequential improvement is expected through the third quarter historically being our best quarter, but I must highlight that [getting] that magnitude of profit in the current market environment, where our customers' spending is continually being delayed and postponed, is very impressive. Our team continues to generate profits in this business, based on our focus on cost and continuing diversifying the customer base to enable utilization of our major assets. During the third quarter, we spent $800,000 on Maritech's abandonment and decommissioning. We continue to work through these obligations with the expectation that the majority will be completed by the end of 2016.

Free cash flow was $30 million for the quarter. As we have noted in prior quarters, this was due primarily to our cash earnings, continued tight control on discretionary capital spending, and aggressive management of our working capital. As a result, during the quarter, TETRA's net debt was reduced to $324 million and our leverage ratio decreased to 2.02. Kind of looking out over the next several quarters, there are a few trends to highlight. The next two quarters are typically seasonally slow for our Offshore Services business. We expect activity on shore in the US to slow down during the remainder of the fourth quarter and pick up early in the first quarter of next year.

Overall, we've seen a continued decline in customer activity in our North American markets and increased competition in several of our international markets. As noted in this morning's press release, the net result of this will be a slight GAAP loss in the fourth quarter of this year and we anticipate similar in the first quarter of next year. We'll continue to mitigate this through aggressive cost reductions and we expect to maintain strong free cash flow in the fourth quarter. One final topic to cover is this morning's press release announcing our $125 million unsecured notes with GSO. We continue to be extremely confident in our ability to manage our balance sheet through an extended downturn.

We have demonstrated, over the last four quarters, our ability to de-lever and believe we'll continue to de-lever even in a worsening market condition. However, being very conservative by nature, we've decided to add liquidity with the intention of paying down $90 million of notes due in April of 2016 and tendering up to $25 million for notes that mature in 2017 and 2020. At the same time, we've moved out our maturity on our $50 million secured note from April 2017 to April 2019. The net result of all this is that we now have approximately $50 million of debt maturing prior to 2019.

This additional liquidity positions us well to look at opportunities that we expect will manifest themselves during the continued market downturn. In summary, we've been very conservative and at the same time, very proactive in giving ourselves additional capability. With that, I'll turn the call over to Elijio.

Thank you, Stu. TETRA's revenue of $305 million, was equal to the third quarter of last year, despite a 58% decline in the North America rig count. Compared to a year ago, higher revenue from the CSI acquisition and strong fluid results offset declines in production testing and offshore services. Sequentially, revenue was down only 4% from the second quarter as a result of a seasonal decline in our Europe Fluids business. Fluid segment revenue increased 5% from last year, on strong Gulf of Mexico activity levels, but declined $12 million in the second quarter, almost entirely due to the seasonality of our Europe Chemicals business.

Adjusted pre-tax margins improved to 30.4% on revenue, up 370 basis points from the second quarter of this year, reflecting the leverage in our Fluids franchise from higher volumes in the Gulf of Mexico. We continue to benefit from the diversity of our revenue mix and the ability to execute on large projects, some of which were accelerated into the third quarter from the fourth quarter, as customers focused on completions activity. Our ability to secure and deliver on very large offshore projects will result in some lumpiness in our revenue.

Production testing revenue of $29 million was down 42% from a year ago on the 58% decline in the North America rig count. Sequentially, revenue was down 17% due to the decline in activity levels. In the third quarter, we booked $3.1 million of reserves for bad debts, reserves for VAT expenses in Latin America, and a small amount of severance expenses. Only the severance was a cash expense of $154,000 in the quarter. Excluding these charges, adjusted EBITDA margins in the second quarter were 15.9%, which compared to 21.7% in the same period a year ago.

We believe that achieving positive EBITDA and almost 16% EBITDA margins when the rig count has declined 58% in North America is a reflection of our management team's ability to proactively reduce costs and reflects a diverse revenue mix between the US and international operations. Most of our competitors and peers in the industry are seeing negative EBITDAs in this environment from well site services, while we're attaining mid-teens EBITDA margins. In addition to generating such EBITDA margins, we have also been able to significantly reduce capital expenditures.

In the third quarter, production testing capital expenditures were only $0.5 million. With adjusted EBITDA of $4.6 million, we are generating free cash flow at the production testing segment level. At the operating income level, our loss of $4.5 million, including all charges, and a loss of $1.4 [million] excluding the previously mentioned charges. Depreciation and amortization for production testing is $6 million in the quarter.

The Compression Services segment revenue increased $32 million from a year ago, reflecting the CSI acquisition that we completed last August. Sequentially, revenue increased 2%, primarily on the stronger aftermarket sales and sales of new equipment. Total gross profits, excluding depreciation of $43 million increased 2.3% from the second quarter on improved profits from Compression Services and aftermarket services. As a percent of revenue, Compression Services gross margins increased 200 basis points from 48.5% in the second quarter of this year to 50.5% in the third quarter. Backlog of new equipment sales declined to $46 million at the end of September. The downturn clearly is impacting orders for new equipment.

However, I would like to point out that gross profits from Compression Services represent the vast majority of our total gross profits. For the third quarter, Compression Services gross profits were 86% of total gross profits for CSI Compressco. Gross profits of equipment sales represented only 10% of CSI Compressco's total gross profits. As the manufacturing and sale of new equipment declines, we have plans in place to adjust the cost structure or fabrication or [simplify] operations to mitigate this decline. We'll reduce our cost structure accordingly to minimize the impact of this decline.

In fact, from the beginning of this year, we have already reduced head count by 50% in our Oklahoma City facility, where we're fabricating and assembling the smaller size horsepower equipment. We also have other cost initiatives in place to reduce our field service and G&A costs. CSI Compressco's third quarter adjusted EBITDA of $31 million was 24.4% of revenue, consistent with the second quarter of this year. Distributable cash flow of $22 million increased sequentially by 6%. CSI Compressco's third quarter coverage ratio was a solid 1.25 times, a slight improvement over the second quarter, achieved in a very challenging environment.

Offshore Services revenue increased sequentially by $2 million in the third quarter from the second quarter of this year, as the traditional ramp up in the summer volumes was very modest. Compared to a year ago, revenue was down 38% as customers continued to defer work on their decommissioning obligations. Despite a $24 million decline in revenue from a year ago, operating income improved by $4.5 million, to $5.1 million, excluding the impact of $0.5 million of reserves for bad debts. We believe that our Offshore division's ability to achieve 13.4% adjusted operating margins and adjusted EBITDA margins of 21% are significant accomplishments by our Management team when our Gulf of Mexico competitors are shutting down operations, selling assets, and materially downsizing their business.

We, too, have aggressively been managing our costs, which is reflected in our ability to generate such margins on materially lower revenues with significant pricing pressure. For total TETRA on a GAAP basis earnings per share were $0.12 in a quarter. On an adjusted basis, excluding the $2.6 million reserve for potential bad debts, $1.1 million reserve for potential settlement of the Latin America VAT audit, and $375,000 of cash severance and to assume a 30% tax rate, adjusted earnings per share were $0.17 compared to $0.16 in the second quarter of last year -- of this year, and $0.13 in the same quarter of last year, also excluding unusual items.

During the quarter, capital expenditures for TETRA, excluding CSI Compressco were reduced significantly from $13 million a year ago to $3 million in the third quarter, net of proceeds from the sale of assets. We believe capital expenditures for TETRA will be approximately $21 million this year compared to $65 million in 2014 and compared to $75 million in 2013. For CSI Compressco, capital expenditures were $19 million, targeted to expand our fleet with medium and large-sized compressors being deployed on gathering systems, central delivery systems, and large oil production requirements with the emphasis on production targeted for south and west Texas where CSI Compressco has a strong market position.

And as a reminder, the capital expenditures for CSI Compressco are being wholly funded by CSI Compressco capital structure without any support from TETRA or without accessing TETRA's revolver. During the quarter, TETRA received distributions from CSI Compressco of $7.7 million, up 30% 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 and as a General Partner, we were only receiving 2% of the distributions for the GP.

As the distributions have been gradually increasing, we have surpassed a 15% IDR and late last year after the CSI acquisition, we reached a 25% IDR. At the current annualized distribution of $2.01 per unit, we're only 14% 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 9% with a coverage ratio of 1.25. As of yesterday's closing price of the units of CCLP, we are trading at a yield of 14%.

As a result of all these initiatives, on lower capital expenditures, lower Maritech ARO work, improved working capital management, and a stronger earnings, free cash flow for TETRA was $30 million, excluding Maritech's ARO, or $29.4 million after spending $800,000 on Maritech in the quarter. The $30 million of free cash flow allowed us once again, to reduce debt. Through nine months, we have generated free cash flow for TETRA of $62 million, after spending $5 million for Maritech.

For TETRA, excluding CSI Compressco, we also believe that the $29.4 million of free cash flow after Maritech when compared to adjusted EBITDA for TETRA only of $43 million is a reflection of the quality of the earnings in the quarter for TETRA. I would also like to remind our listeners that past Maritech losses have created a tax loss carry-forward for TETRA and we are not paying taxes in the United States, despite generating year-to-date pre-tax profits of over $21 million. We are only paying taxes on our international profits. 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 2.02 times debt to EBITDA. This leverage ratio, as defined in our TETRA debt agreement, is the fourth consecutive quarter where we have improved our leverage ratio, having reducing it from a high of 3.38 12 months ago; a reduction of 1.6 times in a very challenging environment. Stu also mentioned in the -- we issued the press release earlier announcing that we had secured $125 million for a seven-year unsecured note. In addition, we announced that we were extending by two years the maturity of our $50 million secured notes.

We also announced that we are -- we'll offer to retire up to $25 million of our existing private placement notes. Without the strong financial results we have been posting recently, we do not believe we would have been able to refinance and extend the maturity of $165 million of maturing debt. This clearly not only prepares us for the long -- lower for longer sentiment in the industry, but this also provides us the capital to opportunistically execute on growth initiatives. This also affords the opportunity to support CSI Compressco with their growth and expansion opportunities.

After these series of transactions, between now and the first quarter of 2019, only about $50 million of debt matures. Also, after these transactions, our average cost of debt is only 6.9% and only $50 million of our debt is secured, while $290 million, including our bank revolver, is unsecured. Our revolver does not mature until late 2019. In summary, the key points of the quarter, strong results, strong free cash flow, and lower debt levels with an improvement -- with an additional improvement in our leverage ratio. We expect whole year TETRA free cash flow to be approximately $80 million or $1 per share with yesterday's stock closing price at $6.89. This represents a free cash flow yield of 14.5%.

We expect activity to slow down in the next two quarters before additional Gulf of Mexico projects resume in the second quarter of next year. And our refinancing of our short-term maturities with only approximately $50 million due between now and the first quarter of 2019. Overall, not a bad quarter for TETRA in one of the most challenging environments we have experienced. Lastly, we look forward to seeing many of you at our first-ever investor and analyst conference that we'll be hosting here in Houston on November 12. With that, let me turn it back over to Stu.

Great. Thank you. At this point, we'll open up the lines for any questions.

(Operator Instructions)

The first question comes from Praveen Narra of Raymond James.

Good morning, guys. A really impressive quarter again. Congratulations.

Thank you very much.

We think about the Fluids division, obviously it is more than just Gulf of Mexico, but certainly, Gulf of Mexico has been a boon for 2015. When we think about the slight pause until 2Q 2016, can the middle 2016 resemble what 2015 looked like from an activity standpoint or does it resume and what magnitude will it resume at?

I think overall we view that the deepwater Gulf of Mexico will be down slightly next year. There's still a lot of completions out there. Our customers have specific projects that are timed out there, so directionally we're expecting a very good period as those projects pick up again.

I'd also go back to your first point that I want to make sure we emphasize the strength of the Fluids is much deeper and broader than some markets. We have seen continued strength in our Chemicals business, good activity internationally and even in market like the water, which is very, very difficult, we have seen some improvements because of new contracts we've been rewarded and some of the technology the team has introduced. So while the Gulf of Mexico is lumpy, it's much broader than just one sub-market.

With regards to water, would you expect any improvement in 2016? Obviously, it's going to be a weak environment, but can TETRA's water improve year over year?

I'll let Joseph handle that one.

In Q3, Praveen, especially in US land, we were able to achieve a sequential 30% improvement in revenues during this quarter, which noticeably improved the overall margins after the difficult second quarter for water. This was in spite of the additional drop of almost 100 rigs in Q3 over the last 10 weeks.

This was really driven by our ability to win some business using our automated blender. We capitalized on the introduction of also some innovative water treatment products. Overall, we believe that this will continue into Q4.

We see the US customers may be curtailing some of the spend during the holiday season. As a disclaimer, we've already seen a little bit of impact in Texas, mainly south Texas, during Hurricane Patricia and some of the weather fronts we have experienced in the last few weeks.

But moving into Q1, specifically for water, we believe we have a very competitive position. We'll maintain and aggressively target new share, but we believe that as you move into maybe reloading budgets with our customers, maybe addressing some of the these drilled but uncompleted wells, we can continue to deliver a similar performance in the next two or three quarters.

Perfect. About working capital, you guys have done a really good job so far. As we move through 2016, is there more to be squeezed out? If you have an idea of magnitude, that would be helpful.

I would say that through the first nine months of this year, only a small amount of our free cash flow has come from working capital. We expect that we'll benefit in the fourth quarter as the revenue slows down and we catch up on our receivables.

Comparing 2016 to 2015, we do not think there's going to be a meaningful impact from being able to generate cash from working capital. We think it's going to be generated with cash earnings.

One thing I would like to add to that because I don't know that we emphasized this as loud as we should, when we look at working capital and some of the improvements, a lot of that is driven by process improvements that the operating guys and the financial team are putting in place, looking at speed and cycle time and accomplishing that and that's a continuous process that will evolve. But a lot of the success we have had this year on working capital has been process-driven.

Right. Perfect. Great job on the quarter, guys. Thank you.

Thanks.

The next question is from Kurt Hallead of RBC. Please go ahead.

Hello. Good morning.

Good morning, Kurt.

I was just kind of curious, you guys continued to do extremely well in the completion fluids part of the business. I was just curious how sustainable you think that is heading out in 2016, given reduced expectation for reduced [B] spending budgets?

I think, as we talked about on the call earlier and hopefully, give some clarity to is there's a lumpy part of it, there's no doubt about it. We've always said there's going to be timing on which projects work is done. This time we benefited from several projects being pulled forward.

As we look at the results for the third and fourth quarter, we've looked at it at the second half of the year and some of the timing in pulling it forward. But we think as we get towards the second quarter, middle of next year, some of these very visible projects that we expect to be successful on, again, are manifesting themselves and we'll benefit. Is it at the exact level? Directionally, it should be similar.

Our challenge is to, in addition to that, diversify the customer base so that we see the successes we've had in the Gulf of Mexico with new customers has been instrumental in the results, continue to take advantage of our chemical footprint, which has developed new opportunities for us this year and others we expect will come in next year.

So, again, it's the intersection of a very long-term strategy that we've had that we're executing combined with some tactical execution that is delivering diversification, cost improvements, safety improvements, and a lot of the things that Joseph's guys have been driving this year.

Got it. Now, on the flip side of that, I'm just curious what you think you can do for production testing to try to minimize or offset those same impacts? Because it looks likes production testing is more vulnerable to these spending cut-backs.

I'll take this question. The Q3 performance for production testing was slightly below our objective of being profit before tax neutral. But we are still laser focused and expect to achieve this goal for the full year 2015. The Q3 results were impacted by some unusual items like you mentioned Stu and Elijio mentioned and other charges for bad debt and back taxes in Brazil.

In North America we continue to capitalize on our cost actions, aggressively diversifying our customer base. We see a slight deterioration or we saw a slight deterioration in the revenues, in spite of experiencing a drop of almost 100 rigs, like I mentioned, in the last few weeks.

We were able to replace the activity drop with new business to protect our margins, but one project that pushed into Q4 for us was an international project with early production facility. If that closed on time, which was supposed to be the end of September, we would have delivered the similar basic performance for production testing like we did in H1. But we expect, like I mentioned, to achieve our PVT-neutral position by full-year 2015.

Internationally, we have seen a flattish demand in Latin America. We continue to see the delayed recovery in Mexico.

I don't know whether this will happen in H1 or H2 2016. In Brazil and Argentina, we have continued to manage the price. We are continuing to manage costs to make sure that we protect our margins, as well.

The big difference in Q3 moving into Q4 will be our ability to protect and aggressively go back and reclaim some of the share or the rig assignments in Saudi. This, hopefully, will impact, also positively, our Q4 moving into 2016.

That's great. Appreciate that color. Thanks a lot.

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

Thank you. Good morning, gentlemen, two things I want to focus on. The first, when you look at 4Q versus 3Q, and obviously you gave some general guidance, if I look at the different segments, it sounds like because the timing issue that -- and I'm talking about sort of dollar terms of operating income -- that Fluids is probably the biggest change along with offshore services. Is that fair?

Yes. I think Fluids is clearly going to be the biggest change, much more so even than offshore services because of some of the project timing, et cetera. I think that's fair.

As Joseph said, we're going to be close to breakeven on testing and that will continue to be there. Sequentially, offshores services will be down from the third quarter seasonal and fluids will be down and with the compression business, we're holding up reasonably well, as it's done for the first three quarters.

That production testing comment, was that a full year breakeven comment or a fourth quarter breakeven comment?

Full year breakeven inclusive of the fourth quarter improvement over Q3.

Thank you. The second question maybe for Elijio, you obviously laid out some of the changes that you've made with the new debt offering on the call. As we look at the fourth quarter and going forward, and I'm trying to figure out the timing of some of these things, what should the interest expense look like in 4Q and into 1Q?

The funding of the transaction will probably close within the next 10 to 14 days and at that point, you can assume that we'll have half a quarter impact from this transaction and assume that between $125 million of debt that we absorbed and debt that we're retiring, that the delta in interest expense is about 6%.

Okay. That's helpful. Thank you, gentlemen.

Thank you.

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

Good morning, guys.

Good morning, Blake.

I just wanted to understand within the fluids business, Stu, obviously a pretty strong quarter on a broad basis, but you do mention, I think for the first time, being happy with where you are from a manufacturing standpoint. And is this more than just the benefits of operating at high utilization and throughput or have there been more permanent changes that are more permanent to the model, in your view, from a margin perspective brought on by changes in manufacturing?

That's a great question. Our manufacturing business, we've always have several variables going on and certainly, we've continued to improve the throughput in our big plans. For example, we put some capital into a European calcium chloride plant recently to improve on the operations and we're already seeing the benefit of that. So it's a specific investment with very specific expectation that we're seeing and we continue to evolve the productivity of elbow on an ongoing basis.

In addition to that, we've got other smaller plants that, as we go through the process, depending on the relative cost of the raw materials going into those plants, we have the ability to shift material and optimize points of production. So, again, one of the things we always try to highlight on our manufacturing business, we've been doing this for 30 years. This has been part of the strategy of the Company. It's been a consistent theme for over 30 years. The footprint we have, the supply chain, the flexibility, those all help us as we go through changing markets. Now, that business providing chemicals, clearly there's an oil and gas component of it.

When demand is down and pricing is getting more challenging and the team needs to offset that with customer expansion in non-energy markets. That's a big focus of the operating guise as we go forward but, again, we referenced the analyst day coming up. That's one of the real themes the team's going to lay out there in a little bit more granularity is just some of these very specific areas we do have differentiation, both from a footprint, both from a technology that we think is sustainable. There's a piece that is sustainable versus the market's conditions and a portion of that's lumpy and it's going to be lumpy over quarters, and part of it's a pretty good base to build on.

Great. That's helpful, Stu. In terms of a modeling perspective, it looked like the offshore services business maintained at least a pretty good utilization base load. You mentioned kind of in the color commentary just kind of a slow operating environment.

From a modeling perspective, should we be thinking worse than slow where we see a significant amount of idle time for most of your assets? Or is it really just pricing that's been a shock year over year and you're still kind of getting a decent base load on your assets (multiple speakers).

Again, I'll quickly answer and Joseph may choose to expand. I think we have pretty good visibility that our major assets are going to work well into the fourth quarter. Typically, they don't work all the way through December.

Pricing is tough and that's the case -- we highlight internally the results we made with the revenue degradation versus prior quarters and years. To be honest, we've taken large amounts of cost out of toss for several years and I continue to be impressed by the team's ability to squeeze out in buckets of $50,000, $100,000, opportunities that aren't real visible.

It's very, very tactical and granular and the team has absolutely adopted the understanding that the market's not going to help us in that business. It's not going to be market-led in the short-term, but there's still a big backlog of work for the intermediate term where predicting the timing of it's very difficult.

Let me just add to Stu a few things, Indeed, the Q3 the division performance was very much exceptional. I'm very proud of everyone on the TOS team, but like Stu mentioned, this was really mainly driven by a lot of small, aggressive cost managements and a very disciplined approach to where the money is spent. But we have also succeeded in getting more of what I consider as a fair share of this depressed spend in the Gulf of Mexico, in Q3 moving into Q4. We have tried to push the envelope on the utilization and the loading of assets way into Q4. In some cases, we've benefited from that approach.

In other cases, like I mentioned the weather impact in Q4, we've not benefited so much. But [to say] (inaudible) [teams] are working together on a daily basis to not only improve the utilization and loading of the vessels and the crews and who actually is on board of these vessels, but also to manage the selection process of each of these projects from a profitability perspective. As we move into the fourth quarter, we'll see the impact of the weather, like I mentioned, but we'll also see maybe a positive impact of the extension of the loading and utilization of our assets way into the end, beginning part of December.

That's great, Joseph. Thank you so much. We'll look forward to the run-down next week and I'll turn it back.

Thanks.

The next question comes from Jason Wangler of Wunderlich Securities. Please go ahead.

Hello, guys. Good morning. It's kind of been hit a couple of different ways, but just for my edification on the Fluids side and the declines you see the next couple quarters, you don't necessarily see it becoming a seasonal business, so to speak. Is it just how the timing's shaking out the next few quarters? Is that fair to say?

Yes. The areas where the next few quarters are impacted is not tied to seasonality. We're always going to have, as we've said before, that second quarter impact of European chemicals business, but some of the lumpier projects we have are really just the timing of when the work takes place.

Okay. I appreciate it. On the GSO note, is there any prepayment ability or is there penalties on that? Just kind of curious as you guys continue to generate a lot of cash flow if there's an option on that side?

Yes, there's your typical components where if we wanted to pre-pay, it's going to cost some money. So I think the way you should look at that is -- and why we get to expand this a little bit more -- is we've thought through the capital structure all year, as most companies do in this environment. As we've thought through it, we progressively have continued to feel better about where we are based on the year-to-date results. So every time we update the analysis in our thoughts, as a Management team, we're feeling better about it. We're not certain where the bottom is, how long it's going to be.

But under every scenario we look at, we're in good shape with our balance sheet through those stress-testing actions. So clearly this is a positive proactive -- two elements, we want to be conservative and we want visibility of paying down the $90 million. We want visibility to extending maturities and the headline of having about $50 million due in 2017 and nothing else until 2019, you will delay that balance sheet metric with our operating performance.

I challenge the audience to give us other companies that sit in that position. We think there's going to be opportunities next year. We want to continue to build out the areas that we've highlighted as being strategically important. This gives us more capability to do that.

It makes sense. I appreciate it.

Our next question is from Martin Malloy of Johnson Rice. Please go ahead.

Good morning. Just following up on that last answer, could you maybe talk a little bit more about the areas that you might look to put some capital to work?

Well, again, we've got two different capital structures and clearly, on the TETRA side, the area we've invested the last several years has been tied to Fluids and I think that would be the most logical. Anything that leverages our technology expands our technology, gives us more regions, Joseph and his team have a nice long list of ideas that they're running through a process to validate and quantify and that's an ongoing process, not an annual event only. That's the area that we would focus.

On the TETRA side, we've the CCLP balance sheet and currency and we'll continue to look for opportunities there, realizing we want to be conservative on the leverage. We'll look at the balance between reinvesting and the balance sheet and the distribution and the yield that we're getting on our distributions and as we always do, have a good discussion at the Board level of how to integrate those thoughts.

Okay. And you mentioned new products in your press release on the Fluids side. Outside of Neptune, are there any other new products that maybe you wanted to highlight? Maybe you could give us an update in terms of adoption in the market for Neptune?

I'm very pleased that you asked that question. We're prepared for the response.

All right. We had several questions around the lumpiness. So if we think in halves rather than quarters, I think would be able to replicate what we did in halves versus H1, H2 of 2015 moving into 2016. But to give you a flavor of the CS Neptune adoption, we have continued the successful implementation of the large project we have in the Gulf of Mexico. Some of it will continue into next year.

In the previous call, I provided colors to saying, okay, look, guys we'll explain to you when we start signing additional customers. We have signed another customer. We should start preparing for what I call the qualification process and the accessibility testing for CS Neptune for the project for the second customer.

We have met with a dozen customers in North America and a little bit less than a dozen customers in Europe, as well, in the last quarter. We feel confident that we'll be able to continue growing and developing the pipeline to really replicate what we have done in 2015 next year.

With regards to other products, I mentioned the automated blender with water. I also mentioned some innovative water treatment products that have allowed us to grow in Q3 versus Q2, our top line by almost 30%.

We continue to hope that we're somewhere at the bottom of the rig cycle. We can't control that. We control the costs associated with that, but we focus, laser focus, on gaining market share.

With regards to the international fluids and US land fluids, we were able to repeat our Q2 performance. We had a solid performance in Africa, the North Sea and the Middle East and we hope to continue to do that moving into Q4 and Q1 of 2016.

We did benefit also from the introduction of the additives I mentioned in the second quarter. We are very pleased with that momentum, especially with products like (inaudible) clean, our bio (inaudible) products and other interesting clean-up chemicals.

In the Gulf of Mexico, beyond the big projects, like I mentioned, we signed one. But as Stu mentioned in his remarks, we also benefited this quarter from two large projects that were supposed to be slotted in Q4 and they closed in Q3. As we continue looking at differentiated solutions, I am pleased with the team and the investments we made in what I call the ultra-deepwater filtration units.

We have seen growth in that particular application. Moving into Q4, we'll see the same type achievements and we have had, due to the success of those filtration units, we have seen and had several requests from our customers to go beyond what we do today and try to customize those filtration units to our specific solutions in the deepwater, whether it's in the North Sea or the Gulf of Mexico. That gives you maybe a summary of the additional products that we introduced.

Great. Thank you. I look forward to catching up with you all next week.

Thanks.

The next question comes from Sean Meakim of JPMorgan. Please go ahead.

Good morning.

Good morning, Sean.

Just a follow-up on the Neptune discussion, can you give us a sense of is that type of product accretive to margins today? Does it need more scale to get there and what type of adoption rates? Just a little bit more of a sense of trajectory and how it can impact results over time?

Sean, we prefer not to talk about margins specific to any product or any project.

I'll add to this. Over the short term, we can't really tell you whether you can sustain some of the margins or actually predict some of the margins moving into what I call the adoption and the expansion phase. We're still -- with one customer, we want to see more of the application so that we can maybe predict a little bit the margins in the future and our ability to really move into this niche application. It is still a niche application.

We have done this from several customers, but as we develop the pipeline, we learn a lot more about our own cost structure, the security of supply, the cost of that supply, and the application of that for different customized solutions for different well applications. They are all valuable that today, with one specific project, you can't really address or you can't say, you know, this is the margin I can retain or predict for the next year. But on the top line, we hope to repeat what we have seen in the first application in the second and third quarter of this year.

That's all. That makes a lot of sense. That's fair. Shifting to CCLP a little bit, the backlog on the equipment side was cut just about in half sequentially. I was curious if you had more color on what was driving that? Is it just a function of customer budgets running out as we get into year end, kind of exhaustion? Could we see perhaps some improvement in the first quarter as budgets reload or is it more a function of just kind of folks looking to reduce capital spending where they can and perhaps going forward, the outlook should be just a bit more conservative?

Sean, we've seen building and quoting activity remain attractive, but we're also seeing customers reluctant to pull the trigger and actually issue purchase orders. We think that the bookings that we had in the third quarter are going to be a low point and we expect that there's some opportunities to close on some of those open bids and proposals that are out there. But again I'll go back to my earlier comments in that only 10% of our margins or our gross profits are coming from equipment sales and we have the ability to flex the cost structure just like we've done in every other division in TETRA out of our Compressco business.

I think as a tangent to that, we want to emphasize there are parts of our compression services business that continue to be very strong on the large horsepower and the team is focused on how we invest in there and how we continue to grow. So we're very cautious on the capital, but the capital that we deploy is very high return and we'll continue to do that.

Just to add one more comment, yesterday Tim and Elijio covered this in the CCLP earnings call. We are looking at opportunities to help some of our customers where they may be interested in selling some of their compressors that they have and maybe large, more attractive segment, so that we can lease it back to them. So it can be a purchase lease-back for us and an opportunity for them to have access to some cash to continue to deploy. So we're looking at many growth opportunities, but to touch on what Elijio mentioned with regards to the pipeline.

In terms of quotes activity, we have seen that drop 20% to 30%, but we what we have seen drop significantly is actually pulling the trigger on that quotation, whether it is with us or our competitors. So when you look at win rates versus the large quotation, it's really impacted by the customer pulling the trigger and wanting to spend that money.

The last comment, Sean, is that Tim has mentioned in the past that when he went through this downturn in 2008/2009, it's the exact same pattern that he's seeing right now. So this is consistent with what we expected coming into this downturn.

Got it. That's very helpful. Thank you.

(Operator Instructions)

The next question is a follow-up from Stephen Gengaro of Sterne, Agee CRT. Please go ahead.

Thank you. Two quick ones, gentlemen. First, can you give us a rough estimate, on the production testing business, how much is outside of the US?

It's about half and half.

Okay. Okay. Thank you. Secondly, I don't want to read into this too much, but this comment you made sort of stood out to me when you talked about the new financing. I think Elijio made a comment that it affords us the opportunity to support CSI Compressco on the growth and expansion opportunities. Is there something there that I should be more aware of? Because I thought CSI Compressco was completely funding itself?

It is. That's the way you should think about it. We've got more liquidity for general investment on high return projects and the question we always get is, as the GP of the sponsor, TETRA, investing in CCLP and our answer is always the same. It's a function of the project and the ability of CCLP to fund it on its own and we looked at that through the eyes of all of our alternative investments. But I wouldn't read into it that the reason, the driver, the catalyst, for doing it was to greater focus on that issue. That's not the intent.

And I'll add that we talked about CSI Compressco looking at buying assets of operators or midstream companies that might want to divest all those assets and then we come in and back-fill it with a long-term contract. If a scenario like that presented itself and CSI Compressco needed incremental capital to do it, we'll be available to support them in that respect. But from an organic growth, running the business month to month, quarter to quarter, they've got more than adequate liquidity to do that.

Great. I appreciate you clarifying that. Thank you very much.

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

Thank you. As always, great questions, appreciate the following. Obviously, we're really pleased with the quarter. We're very pleased with our new financing with CSO and look forward to a long and strong relationship.

As I said, after the second quarter, I'd be remiss if I think thank all of our team for delivering. They've worked hard, made tough decisions, executed excellently and it was a great effort. We'll look forward to catching up in early 2016 to review the fourth quarter and talk about 2016. So, thank you.

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