Tetra Technologies Inc (TTI) 2016 Q4 法說會逐字稿

Good morning and welcome to the TETRA Technologies fourth-quarter and full-year 2016 results conference call.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the call over to Stuart Brightman, TETRA's President and CEO. Mr. Brightman, please go ahead.

Thank you, Stephen, and welcome to the TETRA Technologies fourth-quarter and full-year 2016 earnings conference call. Elijio Serrano, our Chief Financial Officer, is also in attendance this morning and will be available to address any of your questions, as well as Joseph Elkhoury, our Chief Operating Officer. I will provide a brief overview of the fourth-quarter and full-year results, then turn it over to Elijio for some additional details, which in turn, will be followed by your questions.

I must first remind you that this conference call may contain certain 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, on the course of the call, we may refer to net debt, free cash flow, adjusted EBITDA, adjusted profit before tax, or adjusted earnings per share, 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 an overview of the fourth-quarter and full-year, the current market and our thoughts as we look at 2017. In the fourth quarter, we saw several favorable trends, and those have continued into the first-quarter of 2017.

Our fluids business had sequential revenue increase by 2%, the second consecutive quarterly sequential improvement, this despite a delay in a TETRA CS Neptune project from the fourth quarter that has moved to the first half of 2017. When we normalize for CS Neptune, our fluids business grew materially, led primarily by significant improvement in US onshore activity, driven by organic water management and land completion fluids mixing plant investments, and we'll talk about in more detail in addition to year-end strong international fluids sales offshore. Even with our major CS Neptune project, we generated and adjusted EBITDA margins of over 13% in fluids. At the low point of the cycle, we continue to get double-digit EBITDA margins.

In our US onshore fluids business, we continue to allocate growth capital to additional equipment and anticipate this continuing through the year to take advantage of the strong water management opportunities. Overall in fluids, our manufacturing footprint is fully invested and has significant capacity to take advantage of the improving markets onshore, as well as those offshore when that market recovers.

Part of our strategy is expanding distribution points onshore in high activity regions. Our focus in this business will be to continue to differentiate our products, which includes expanding the capabilities of TETRA CS Neptune, as well as continuing to build out our technological position in water management solutions in the US.

During the quarter we saw a positive signs in our compression business. The two most significant signs of improvement being for the first time since the first quarter of 2015, we experienced quarter-over-quarter improvement and utilized horsepower in our compression services fleet that resulted in incremental compression service utilization of 76.4%, up 1.2% sequentially.

In addition, we received new orders in the fourth quarter of $20 million, gets us to a year-end backlog of 21.6%. This represent the largest intake of new quarters since the fourth-quarter of 2014. We continue to see a strong sales pipeline and believe the level of orders reflects signs of a recovering compression market, as well as ongoing demand for large horsepower compression services opportunities in most of the active basins.

Our production testing business was fairly flat sequentially, indicating the continued challenges in pricing in the US, as well as pricing challenges internationally. As we look at 2017, we expect activity in US onshore to increase and pricing to improve both domestically and internationally, as we move into the second half of the year. Internationally, we will continue to focus in the major active markets, particularly in Saudi Arabia and Canada.

Our Offshore Services business had a challenging fourth quarter, driven by seasonality at this time of the year. We continue to take cost out of this business. One positive move is we continue to see during the first quarter that our backlog, as we speak, is substantially higher than it was 12 months ago, and the sales pipeline is significantly more robust. Overall, we believe our customers are in a healthier financial position than they were a year ago, and expect they will be able to spend their allocated budgets.

TETRA-only free cash flow for the fourth quarter was $16.2 million that resulted in a full year of TETRA-only free cash flow of $11.5 million. Even at a low point in the cycle, we remain both free-cash-flow and EBITDA positive.

As we look at 2017, we expect several of these trends to continue. We continue to see growth in activity and pricing improvements in our US onshore fluids. We have visibility into two TETRA CS Neptune projects that we believe should start in the first half of this year, and other opportunities in the sales pipeline that Joseph will talk about.

Continue to deploy opportunistic new capital and US onshore fluids, both water management and product distribution channels. Expect demand and compression business to continue, resulting in equivalent sales and increased utilization on our compression services, initially led by our large horsepower, followed by smaller horsepower segments.

As we look back at 2016, we took the proactive steps necessary to fortify our balance sheet in both the TETRA and CCLP capital structures. During the fourth quarter, TETRA completed an equity offering that resulted in gross proceeds of $115 million. This allowed us to reduce our net debt to $111 million at year end. This was further improved by cash proceeds received in January 2017 of $12.8 million related to a previous claim associated with our El Dorado manufacturing plant.

With our current balance sheet, we are very confident that we have the capability to reinvest into the improving market. With that, I will hand the call over to Elijio.

Thank you, Stu. TETRA revenue of $173 million decreased sequentially by 2%, reflecting the seasonality of our offshore decommissioning business. Revenue for this division was down $17 million, as very little work is done between late Q4 and late Q1, reflecting the Gulf of Mexico weather conditions as it impacts diving platform [removals] and P&AA activity.

Revenue increased sequentially for the other three divisions, with compression increasing by 17% on higher equipment sales; fluids increasing by 2%, led by strong US onshore water management activity and international offshore fluid sales; and production testing increasing 2%, led by strong international activity. The 2% sequential improvement in fluids is notable, as the fourth quarter did not include any CS Neptune projects compared to the third quarter when we completed our third CS Neptune project.

We had previously communicated in early December that this fourth scheduled project was being pushed from the fourth quarter until the first half of 2017. And despite the lack of CS Neptune revenue, we were able to improves fluids revenue sequentially, led by water management product sales, onshore -- and product sales onshore. The increased drilling and fracking activity is having a meaningful impact on our water management business, prompting us to make incremental equipment investments to take advantage of this uptrend, which is also being impacted by better pricing.

On a consolidated basis, adjusted EBITDA excluding Maritech and unusual charges, was $15 million, with adjusted EBITDA margins of 8.6%. We have remained adjusted EBITDA positive in every single quarter of this downturn, reflecting the strong positions we have with fluids; our very stable revenue stream from compression services; and our ability to aggressively manage costs in production testing, Offshore Services, and with overhead expense. Even in course what Offshore Services is down seasonally, and we have not completed a major CS Neptune project, our consolidated adjusted EBITDA margins have remained in the high single digits.

We continue to aggressively manage our costs, even as we begin to see signs of an upturn. SG&A costs declined sequentially by $2 million, or 7%, from the third quarter, and are down 40% from the fourth quarter of a year ago. This compares to revenue being down 33% in the fourth-quarter of 2016, when compared to the fourth-quarter of 2015.

Free cash flow in the fourth quarter for TETRA and excluding CSI Compressco and including the distributions we've seen by TETRA from CSI Compressco was $16 million. We have previously mentioned this activity levels toward the end of the year decline for Offshore Services. We are able to monetize those receivables and generate cash.

That, in addition to continuing to be EBITDA positive, allowed us to generate $16 million of TETRA free cash flow. For the year, free cash flow in the same basis was $12 million, which was at the upper end of the $5 million to $15 million guidance we provided when we reported third-quarter earnings in early November.

In the press release we issued this morning, we provided 2017 total year free-cash-flow guidance for TETRA on the same basis as a $12 million achieved in 2016 to be between $30 million and $50 million. We believe we will continue with a challenging pricing environment with production testing and Offshore Services; our modest recovery of the compression utilization and pricing, but with strong water management activity; partially offset by a subdued recovery in the Gulf of Mexico. The combination of growth with continued focus on good capital investments in growth areas, lower interest expense, and a lean cost structure should allow us to improve free cash flow by $18 million to $38 million in 2017 over 2016.

TETRA-only debt at the end of the year includes $125 million from our long-term bonds that mature year in the year 2022, and only $3 million outstanding on our $200-million revolver that matures in late 2019. The $150 million equity offering completed in December, when combined with the $16 million of free cash flow that we generated in the fourth quarter, has allowed us to significantly reduce our debt, improve our balance sheet, and provide us with the borrowing capacity to make opportunistic organic capital investments in those areas where activity and pricing are improving, such as what we're seeing with the US onshore water management and fluids.

And finally, in this morning's press release, we announced that in December an arbitration panel ruled in TETRA's favor on a long-standing claim we have had against an engineering firm that did design and construction oversight of our El Dorado calcium chloride manufacturing facility in Arkansas. In January, we received $12.8 million in net cash proceeds from this ruling that was in our favor, and brought to conclusion this long-standing claim we have had. This cash will be reflected in our first-quarter results. And with that, let me turn it back over to Stu.

Thank you, Elijio, and with that, let's open the line for questions.

(Operator Instructions)

Blake Hutchinson, Howard Weil.

Just first, a point of clarification around the $30 million to $50 million of free cash flow. Elijio, I assume that includes your upstream payments from CCLP, but does not include the payment received from the El Dorado settlement.

It includes all the distributions we will be receiving from CSI Compressco, and also includes the $12.8 million that we received in January.

Okay. Got it.

All that is part of our $30 million to $50 million.

Excellent, and then maybe a question just for Joseph, as we look at the production testing business. And I think as we sat here at this time last year, you thought it was a plausible goal to work towards PBT breakeven, some time in perhaps, 2016. And understanding pricing can be a major setback, as it just falls right to the profitability line. What changed over the year, and how can some of those things, or will some of those things start to remedy themselves that give us maybe greater visibility towards improvement for that segment?

All right, thank you, Blake. In 2015, our target was to be EBITDA neutral. When we moved into 2016, as the rig counts materially decreased in the first quarter, our target became to be EBITDA neutral and try and make sure that we finished the year generating positive EBITDA, which we have achieved for total 2016. But the main reason for that has been the pricing pressure and the material decrease in activity.

As we turned from Q2 into Q3, and as we gave increased pricing concessions, we were as busy as we were in the first quarter. But then we were not generating enough revenue dollars to stay afloat, so Q3 and Q2 were EBITDA negative. In Q4, we increased our revenues and those trends have continued into Q1, but due to the pricing concessions we have given, we still struggled.

Those results do include the few hundred thousand dollars we spent in Q4 to ramp up the equipment and maintain the equipment for contract wins in Q4 and early in Q1. So we spent a few hundred thousand dollars after a miserable year to really prep and maintain and certify equipment we are currently putting to activity. So moving into 2017, we are ramping up the activity; we have good positive signals in terms of overall activity; and we, with some -- a handful of anchor customers, have been able to move our pricing a few percentage points. This is in North America.

Internationally, as Stu mentioned, we're focusing on Canada and we're focusing on Saudi. And the early indications we have in 2017 are very favorable. So we hope to come back and show, moving into 2017, that our target should be closer to PBT neutral rather than EBITDA neutral.

So the early indications are very favorable. We've put a lot of tactics. We made many changes on the sales organization. We focused on the more active basins, like the Permian, the Midcon with the scoop and stack, but we are already seeing indications and good activity and contact wins in Appalachia and in the Rockies. So we hope to continue to demonstrate that the activity is coming in, as well as the margins.

As Stu mentioned as well, we believe that we won't have really good leverage on price until the second half of 2017, because of the supply demand for this particular activity in US land. Remember that there was equipment to really go out and do frac flowbacks on over 2,000 rigs, and today, we're at 700, 800 rigs. So we have to have that calibrate before we have enough leverage on moving significantly the price for that particular segment.

Great. Thanks, Joseph, that's a great rundown. I will turn the floor back.

Praveen Narra, Raymond James.

Good morning, guys. So you guys mentioned that the Fluids segment was stronger quarter over quarter, especially normalized for Neptune. Can you think about how that margin improvement was quarter over quarter, if we normalize from Neptune?

Yes, I think what you're seeing, and again, we don't split out the sub-elements, but I think the important trends you should think about, Praveen, are we're getting a lot of traction on our water management. As Joseph said, on testing, I think the pricing recovery will lag the activity for the reasons Joseph mentioned. I think on the water, because of the niche that we have where we play the technology we have, the slope of that improvement, both in activity and margins, is moving very favorably and we anticipate that continuing.

And same thing as you look at the onshore Fluids. There is a piece of the business where we will sell our calcium chloride and calcium bromides into onshore applications. And we've accelerated some Company-owned distribution points in the active areas that we're getting good traction on that.

Overall, outside the big projects, we had some pretty good activity in the fourth quarter, both in Gulf of Mexico and internationally. So we're encouraged by the signs, the fact that we were able to maintain that without a big project shows you the trend is moving positive, and we would expect that would continue.

Right, right. So in terms of that North American pricing leverage that you might see in the Fluids side, have we started to see that in that water transfer business? Is it something that's still on the horizon?

I think we've started to see it, and we expect it to continue to ramp up.

Okay, okay. And then if I could just squeeze one more in, in terms of just the CS Neptune project timing. It sounds like we're building in two for 2017. One is that what's built into the $30 million to $50 million of free cash flow, are two projects built into that? And then how do we get a sense of the firmness of those dates? Obviously it's what the customer wants to do, but how do we think about that first-half 2017 date?

Again, I'll answer the first part of the question and let Joseph give you a little bit more granularity on the opportunity set. And I think we do have those two built into that range. I think the timing, as we said, is going to be the first half of the year. And certainly on one, and the second one, first half of the year, may go into early in the third quarter, but the middle of the year on the second one. But I think more importantly than that is some of the sales pipeline that the guys have been developing. I will let Joseph talk about that.

Yes, in terms of the backlog, Praveen, for your model, we did mention in the press release that one is partial. It is going back to complete what we -- the project we were on in Q3. So it's really not two full-blown backlog projects at this stage. But in terms of opportunity, we have been having more success in confirming through tests to our customers that this is beyond just a niche project or a niche product that they can use.

I think with improving market dynamics and with improving commodity prices, some of our customers are showing high confidence that they would like to utilize this environmentally friendly, zinc-free heavy brine fluid as an alternative, because it helps them with the completion efficiency. It does help them with many other aspects of completing the well.

So we have two opportunities where we have done many tests, and we feel that the confidence level is high. On one of the projects, this is a later-in-the-year completion project, because the well will spud here in the first half for Q3. We have not put it in the backlog because we're not certain that we can execute on the sale before year end.

On the second project, we basically are going through the logistics, the MSA, and the actual pretest or lab test of the fluid, and we've completed about 85% of the lab tests. And this, if it were to happen and the customer is willing to spend the dollars on, will be in the second half of 2017. So we didn't want to be overly optimistic in our guidance, but these are two high-confidence projects, if you will, for TETRA CS Neptune.

All right. That's very helpful, thank you very much, guys.

Stephen Gengaro, Loop Capital Markets.

Thanks, good morning, guys. Do you mind, as we look at the pretax profits by segment and the margins having -- obviously moving around a lot here over the last couple of quarters, can you give us a sense for how you see this unfolding over the next several quarters? Without getting specific, what the drivers are, and how we should think about margin progression over the next couple of quarters? It's real hard to [temper], so even if you point to some pieces, just to help us calibrate 2017 as we go forward here.

Yes, I'll go through that. In the Fluids, I think one prior question noted that we are seeing the margin improvement onshore US, so we expect that to continue sequentially throughout the year. I think on our normal offshore Fluids business, we have seen those flattish, strong, flat. I think those held up very well during the last couple of years.

Neptune, obviously a little bit lumpier, a little bit higher margin, as we've noted historically. I think Joseph laid out that landscape very well. North Sea, flattish. Hopefully some opportunities on Neptune, as Joseph mentioned. So I think the big pieces of that and then our industrial piece, up a little bit, very steady, very comfortable with that. So when you look at it overall, those are all positive trends that we see margin-wise on Fluids as we look at 2017.

Testing, I think Joseph answered that, that we've seen, in all the North American businesses each service line that's out there moves at different recovery rates, both in activity and in price. I think we've indicated Fluids, we're very happy with the rate of that. Testing is going to be a little stickier on the pricing second half of the year, so that will come up later on.

Internationally, I think we've highlighted a couple of the areas. There's been some price pressure last year. We think that's going to move in the right direction as we go forward, so I would think margins and profitability on testing trend up.

On Compression, if you go back to the comments we made and the detailed comments the guys made on the CCLP call yesterday, we're seeing less price demands, that the new demands are flattened. Utilization went up 1.2%. We expect that's going to continue. We have got very high utilization on our 800 horsepower and above. We expect to see the smaller horsepower pick up as we go through the year, that will lag a little bit, but we've seen some positive trends there.

And on the equipment sales, I think margins will be similar to last year. I think activity, new orders, and sales pipelines picked up. Again, there's a manufacturing lead time. We typically won't see that convert to revenue, probably towards the middle of the year, but the sales pipeline and the indication from our customers all positive.

And then the last one, Offshore Services, again, if you look at the fourth quarter versus the prior-year fourth quarter, it was down. But we stated last year, it was an exceptional fourth quarter in 2015, where several of our customers pulled forward work when they had an opportunity. This fourth quarter was a more typical historical activity.

But as I mentioned in my points, the backlog is strong where the customer spending appears to be up at this stage. Again mid-late February is fairly early in the year, but we're certainly ahead of where we expected and where we have been in the last couple of years. And the pipeline looks good and we will pick up points to try to form up pricing.

And I would also add, in my opinion, we're probably, on a relative basis, very strong financially compared to some of the fragmented elements of the competition we have in that business. So I think we feel very good about our ability to execute and hopefully take some share in that business as demonstrated by our existing backlog.

Great, no, that's a great rundown, Stu. The only follow-up I have is, in Compression, the revenues sequentially went up pretty nicely; I think it was about 17%. But the [pretax] I think it went from 5.3% to 12.1%, both losses. And I know you had the $2.5 million-ish charge in there or unusual costs. What else was behind that? I would've expected that to go the other way.

Yes, those were certainly that the inventory write-off that we had as well as the manufacturing cost overrun, that's over $3 million. And then after that, that was the main element. Any other details you guys want to add to that?

In 2016, we've had to give many pricing concessions. And since these contracts are months at a time, the pricing concession impact has impact us some in Q4 and here in the beginning of 2017. As those concession demands subside, we'd be able to start inching away at price and improving the top line, with the same or increasing horsepower utilization.

So with utilization up and then maybe a little bit of pricing, by the third quarter, can that business be pretax breakeven?

We're very optimistic on the second half of the year for Compression, as we increase fleet utilization and recover from a big pricing loss in 2016.

Great. Thank you very much, that's helpful.

(Operator Instructions)

Connor Lynagh, Morgan Stanley.

Just wondering, given how open the capital markets seem to be these days, have you guys been considering any further moves to either deleverage CCLP or replace some of your higher-cost debt, or anything along those lines?

I think as you will have seen, the last 12 months was a fairly active time period in the capital markets for us. I know the two gentlemen in the room with me would agree with me. And I think we did what we needed to do in an efficient manner. And just like I think we have been very proactive dealing with whatever challenges there and fixing it and being in a great position to recover.

Same thing on an upcycle, we are very plugged in to sources of capital, cost of capital, across both companies. And we are always looking at where the opportunity is to further strengthen what we have, and that's an ongoing iterative process. And something that, as the markets continue to evolve, if there's opportunity for us to bolster strength, then we will do that.

Fair enough. You were talking a lot about how much the Offshore Services backlog was up. Can you give us a feel for how much we're talking on a year-over-year sense, or just what exactly that translates to? And as a follow-up, does that mean that we're moving closer to the potential sale of this business that you guys have been talking about, or is that on the back burner for now?

Without getting into the specific number that's up there, it's up materially, and I would say we have a very large portion of our internal revenue plan in backlog currently. And if you go back to prior years, we always say it's early in the year now, but ask that question on the early May when we do the first quarter and if the backlog is not there by then, that's a good barometer.

We are very pleased with where we are, the indications we are having, and we will continue to evaluate our portfolio, of which that's one of them. And the guys are very focused in improving the business, getting the profitability. And quite honestly, not focused on other issues, other than making money. But we will always look at the opportunities for the various businesses.

Got it, thanks a lot.

Jon Hunter, Cowen.

Hi, guys, this is Jon on for Mark. So just a clarification one on the CS Neptune project that was pushed from the fourth quarter to the first half. Should we be getting that project fully in the first quarter, or is it something that maybe starts up mid-quarter and flows into 2Q?

Yes, I think we have been very clear, the first half is different than first quarter. So again, one of the things we try to reinforce on Neptune, it's very important, we're spending a lot of time on it, but not try to be pinned down to a specific month or quarter and think of it in broader strokes of we've got one full that's going to happen, and one that partially started last year. And equally as importantly, as Joseph referenced, a growing sales pipeline that we feel good about.

Okay. Great. Thank you for the clarification. That's it for me.

And this concludes our question-and-answer session for today. I would now like to turn the conference back over to Stuart Brightman for any closing remarks.

Yes, thank you very much and as always great questions. I appreciate the interest, and the team looks forward to updating everyone early May on the first quarter. So thank you very much.

This concludes our conference for today. Thank you, everyone, for attending today's presentation. You may now disconnect and have a wonderful day.