TETRA Technologies' (TTI) CEO Stuart Brightman on Q1 2014 Results - Earnings Call Transcript

May. 9.14 | About: Tetra Technologies (TTI)

TETRA Technologies, Inc. (NYSE:TTI)

Q1 2014 Earnings Conference Call

May 9, 2014 10:30 ET

Executives

Stuart Brightman - President and Chief Executive Officer

Elijio Serrano - Chief Financial Officer

Analysts

Sean Meakim - Barclays

Mike Harrison - First Analysis

Jason Wangler - Wunderlich Securities

Jim Rollyson - Raymond James

Blake Hutchinson - Howard Weil

Martin Malloy - Johnson Rice

Marc Bianchi - Cowen

Doug Dyer - Heartland Advisors

Bill Dezellem - Titan Capital Management

Operator

Good morning. And welcome to the TETRA Technologies’ First Quarter 2014 Results Conference Call. All participants will be in a listen-only mode. (Operator Instructions) After today’s presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.

Now, I’d like to turn the conference over to Stuart Brightman. Mr. Brightman, please go ahead.

Stuart Brightman - President and Chief Executive Officer

Thank you, Keith and welcome to the TETRA Technologies’ first quarter 2014 earnings conference call. Elijio Serrano, our Chief Financial Officer is also in attendance this morning and will be available to address any of your questions. I’ll provide a brief overview of our first quarter results then turn it over to Elijio for some additional details which will in turn be followed by your questions.

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

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

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

In our Fluids Division, after adjusting for a net favorable impact of $2.4 million related to unusual items, our earnings were down slightly versus the prior year’s quarter and up sequentially. Overall we continue to see good demand in our water management and chemicals businesses and during the quarter a delay of certain fluids projects in the Gulf of Mexico was more than offset by strong international activity. We expect Gulf of Mexico activity to pickup as we go through the year and we expect to see strength in all of our other businesses in the fluids division.

I’m pleased to report that the integration of our previously announced TD Water Transfer acquisition is going well and we expect both this and the acquisition of the remaining ownership interest in our Saudi joint venture to yield anticipated results for 2014 and beyond. For the Production Testing segment after adjusting for 1. million of unusual charges we report a slight loss for the quarter. Clearly this was disappointing and below the expectations we conveyed in our 2014 guidance release on February 10.

In additional to a larger negative weather impact it was modeled in our forecast we simply have not seen the expected increase in revenues in the U.S. despite several new customer rewards. The aggregate impact of delays and scheduled work and a longer lead time to bring the new customer work on stream negatively impacted results for the quarter. In addition the lack of drilling and completion activity onshore in Mexico is contributing to a very weak market for this segment.

We continue to expect the results for international testing other than Mexico will be consistent with our plan for the year and that the second quarter will begin to demonstrate the anticipated revenue increase. We continue to aggressively manage cost during the first quarter and we believe that we’re in appropriate cost run rate for the current activity levels. Our Compressco segment reported flat profits for the first quarter of 2014 compared to the prior year. Overall the decline in activity in Mexico has been offset for the Compressco segment by increased activity in the U.S. In the U.S. we continue to see growth from liquids related activity and vapor recovery services had been the largest contributed to this increase.

We also continue to benefit from an ongoing cost reduction program that drives supply chain and operational savings. Compressco recently announced a quarterly distribution increase of $0.75 per unit which represents our sixth quarterly distribution increase over the past seven quarters. This increase moves us to the threshold of the 15% target distribution level at which TETRA will receive incentive distribution rights.

In the Offshore Services segment, we reported loss of $8 million in the first quarter. This compares slightly unfavorably to adjusted pre-tax earnings of $5.2 million in the first quarter of 2013, this was due primarily to the fact that both of our heavy lift barges and owned dive support vessel or in planned dry-dock during the first quarter. The work on these vessels has been completed and all three have been working since the beginning of the second quarter. We have a solid backlog and we continue to believe that this segment’s full year 2014 performance will be consistent with our February 2010 guidance. This expectation includes a significant sequential improvement in the second quarter typical of the segment’s seasonal pattern.

Our Maritech segment recorded a net adjustment to its abandonment and decommissioning liabilities of $7.9 million in the first quarter of 2014. This related to challenges encountered in two of our remaining wells. We expect to complete the work on these wells during the second quarter and anticipate that the majority of the remaining abandonment and decommissioning work on operated properties will be completed by the end of the third quarter. During the quarter we generated free cash flow excluding Maritech and acquisitions of $20.5 million. This was consistent with our stated expectation of generating $80 million of free cash flow during 2014.

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

We believe our Offshore Division with an asset base of slightly over $150 million and significantly outperforming its peers. Getting Maritech done and behind us and accelerating this work during the last two winters was another significant tactical initiative. 18 months ago we had over 10 operated properties that need to be addressed, it’s been a painful and costly process, but we’re now down to four operated properties, two with challenging wells with formation pressure and two that just simply require a good weather window to execute. We’re inside the 20 yard line, the red zone in getting this behind us. It’s possible that the two properties that have wells with formation pressure might cost us slightly more to complete, but we do believe those will be done with this in the next quarter.

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

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

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

The sixth tactical initiative was to strengthen our salesforce particularly in the North American footprint and reduce our dependence on several anchor accounts. While we’ve made progress in this area the results are not as evident as the actions than the other five, but we continue to be confident we’re seeing progress in that area.

With that I’ll turn the call over to Elijio.

Elijio Serrano - Chief Financial Officer

Thank you, Stu. TETRA revenue up ($211) million decreased 6% sequentially reflecting the traditionally weak first quarter in Offshore Services which was down $23 million compared to a total decline from Q4 to Q1 up $12.6 million for all of TETRA. Production testing was down 6% from the fourth quarter due to the challenging weather conditions that extended into February. We’re gaining traction by adding new accounts and diversifying our revenue base following (shale) sufficient of activity in South Texas.

However while we’re seeing good progress with the addition of new accounts as Stu mentioned they’re taking longer to ramp-up versus what we anticipated. New wins in some areas such as the Permian Basin have been slow to ramp-up as some of our customers are waiting for the availability of frac crews. In other areas we’re picking up business from regional competitors that are going out of business or consolidating to other areas as they’re financially challenged. We anticipate that we’ll continue to see a difficult environment for production testing in the U.S. for the next two quarters as the new wins will take time to evolve into making a significant impact on the revenue.

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

Overall we continue to believe we have a strong position in the U.S. production testing market, we continue to diversify our account base to reduce reliance on significant anchor accounts, drilling and fracking activity remains robust for our flowback testing services. The number of new entrants into our space appears to have come to a stop and we’re seeing signs that some of the recent entrants are not being able to remain in business under the existing conditions.

As Stu mentioned the new accounts we’re winning are simply taking longer to transition to meaningful revenue levels versus our expectation. Compressco revenue was down 8% sequentially as the fourth quarter of last year included significant one-off sales of compressors in the United States. Compared to a year ago revenue was down 3% as the steep decline in Mexico was almost completely offset by strong (reais) activity primarily with the vapor recovery units.

Fluids increased by 18% to a record high of $105 million with the addition of the revenue from the Saudi Arabia joint venture, the incremental water management revenue from the acquisition we announced in January and strong fluid sales in South America and the Middle East. These were partially offset by weaker activity in the Gulf of Mexico cost by project being delayed in the second half of the year. Operating income of $18.4 million included a net favorable impact of $2.4 million on a purchase price adjustment following the acquisition of the joint venture in Saudi. This record revenue include despite weaker Gulf of Mexico activity reflects our strategy of continuing to invest in the business where we believe we have a competitive advantage in the robust market.

Offshore Services operating loss of $8 million is consistent with our expectation that we – as we have three of our five barges going through a dry-dock inspection during the first quarter. We expect our ramp-up in activity as we begin executing on the meaningful backlog that we have build for the year. Maritech incurred an operating loss of $6.5 million during the quarter reflecting work done on the one property with two wells with formation pressure. As our barges are undergoing dry-docks in the first quarter is traditionally a challenging weather period we did not work on the other three remaining operated properties. We expect to resume work on these three operated properties during the second quarter.

Free cash flow despite the weak first quarter profitability we generated slightly over $20 million of free cash flow by aggressively managing working capital. We improved days sales outstanding by seven days which contributed to the $25 million of free cash flow. As a reminder we have targeted $80 million free cash flow goal with free cash flow being defined as cash flow from operations excluding Maritech less capital expenditures. We believe that as activity ramps up and profitability improves, we will consume some amount of the working capital gains achieved in the first quarter but remain comfortable that the $80 million goal is attainable despite the weak production testing results.

We expect that capital expenditures will come down materially in the remaining quarters of the year, as the first quarter was front-end loaded with some of the dry-docks capital. The result of the tactical initiatives that Stu mentioned has allowed us to improve free cash flow. In 2011 we generated $20 million of free cash flow excluding Maritech. In 2012 we generated $5 million on the same basis. Last year we generated $62 million. Clearly we’re on the path toward our goal of $80 million. The first quarter free cash flow of $20.5 million further signifies that we can manage working capital even when earnings are temporarily weak. The impact of those tactical initiatives is putting us in a position to evaluate the use of cash post Maritech.

We expect to recommend to the board later this year the best use of cash be it a dividend program, share repurchase, debt reduction or acquisitions to our businesses that are performing consistent with our expectations. Additionally we have indicated that we will evaluate and execute on acquisition opportunities to grow Compressco, water handling, and fluids. Other than production testing we believe the progress on our tactical initiatives has positioned us to begin fully the strategically verse that will reposition TETRA to generate improved cash flows and consistent earnings. We’re focused on gaining traction with production testing, sales initiatives as it is the remaining tactical initiative that needs to gain traction. The other five significant initiatives that Stu mentioned have progressed consistent with our expectations.

With that let me turn it back to Stu.

Stuart Brightman - President and Chief Executive Officer

And we’ll open the lines for questions now, Keith.

Question-and-Answer Session

Operator

Yes. Thank you. At this time we will begin the question-and-answer session. (Operator Instructions) And the first question comes from Sean Meakim with Barclays.

Sean Meakim - Barclays

Hey good morning gentlemen.

Stuart Brightman

Good morning, Sean.

Sean Meakim - Barclays

So starting off with production testing. It sounds like the challenges that you’re seeing are not a function of getting traction with the customers so much as – the transition is taking place but the ramp-up with those customers is taking a bit longer. So does that mean that you still think you have a pretty good confidence that you’re going to be able to get to something like the good run rate on the fourth quarter that would lead us to leave 2015 to look not too different than maybe how we’re envisioning at previously?

Stuart Brightman

I think our exit rate this year will end up being consistent with what we outlined. I think what is going to be a little bit different clearly is the sequencing and timing to get to that run rate has taken us longer I mean you’ve seen that obviously in the first quarter. And I think that – it will make second quarter a little bit lighter than we would have thought previously. I think if I was kind of to characterize my view testing business it’s going to take us a little longer in the U.S. I think we’re doing all the right things in terms of from a sales point of view, in terms of deployment of assets moving equipment.

Certainly we’ve sized the organization what is absolutely the low point of the revenue cycle. So that’s all behind us. And I think it’s going to take us a little longer, I think Mexico is going to be slower than we envisioned this year on testing. And again I make sure I differentiate testing in Compressco because the market in Mexico although off where it was five, six quarters ago it’s still relatively strong for end-of-life production enhancement in the areas we operate.

And then I think the rest of our markets clearly Canada is stronger than it was few quarters ago and again we’ll have the seasonal impact in the second quarter but on a full year basis Canada should be stronger in our international markets other than Mexico should be consistent. And one thing I should mention is we’ve done the acquisition in Saudi and we’ve recently had our contracts extended, given us very good visibility of that over the next two to three years or something we expected but that positive news recently came in which again gives us confidence in the strategy we did to invest further in that business.

Sean Meakim - Barclays

Right. So maybe these next couple of quarters looks a bit choppier, but the long-term outlook ends up being not that different?

Stuart Brightman

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

Sean Meakim - Barclays

And just a quick clarification on the model. For G&A we came in a little bit heavier than expected this quarter you outlined there is just one last piece to get completed. Is that still – is that kind of $31 million run rate for 2Q still a good number then?

Elijio Serrano

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

Sean Meakim - Barclays

Great. That’s very helpful. And just one last one. On Compressco are you seeing any incremental demand in the U.S. given where gas prices are, anything kind of incrementally beneficial for Compressco?

Stuart Brightman

I think we’ve seen a little bit of a positive on the gas side as the price point has been higher I think more importantly we continue to see strong demand in the areas that we’ve invested in vapor recovery and liquids related. And the Compressco management team is very encouraged by the reception that we’re receiving four mid-size investment that we’ve done over the last couple of quarters. So I think the strategy of diversifying beyond our legacy natural gas both in liquids in larger size and internationally has allowed us to kind of offset that decrease in Mexico and position us really well, obviously we feel good about the business given the decision we recently announced on the distribution increase.

Sean Meakim - Barclays

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

Operator

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

Mike Harrison - First Analysis

Hi, good morning.

Stuart Brightman

Good morning, Mike.

Mike Harrison - First Analysis

You had kind of guided Q1 to the $0.03 to $0.06 range positive and then you reported the $0.04 loss. Is that delta you called out $0.01 to $0.02 of weather related headwind. But is that delta versus your expectations exclusively testing or if I look at some of the other segments, were there other areas they fell a little bit short and contributed to that $0.07 to $0.10 shortfall?

Stuart Brightman

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

Mike Harrison - First Analysis

Alright. And.

Elijio Serrano

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

Mike Harrison - First Analysis

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

Elijio Serrano

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

Mike Harrison - First Analysis

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

Elijio Serrano

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

Stuart Brightman

Yes. And I would kind of also think of it, Mike is in the short term we’re going to continue to focus in the countries we already have strong footprint existing relations and that’s what the investments going to be for testing.

Elijio Serrano

Our tolerance level for underperforming districts is non-existent at this point and rather than give more runway, that runway is very short now.

Mike Harrison - First Analysis

Got it. And then I was just wondering on the fluids business, we had been seeing margins if we look kind of first half of last year, margins up in the high teens, now we’ve had a couple of quarters here that are more mid teens. Is there really just the impact of timing of Deep Water activity in the Gulf or are we may be seeing some cost related to expanding the water handling business, what else is contributing there?

Stuart Brightman

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

Mike Harrison - First Analysis

Alright. Thanks very much.

Operator

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

Jason Wangler - Wunderlich Securities

Good morning guys. Just curious I could on – Compressco with the VRU work you said it was – it’s been a pretty big driver. Could you just comment on the size of the horsepower of those units are and then just kind of maybe even where throughout the business you’re seeing those units go?

Stuart Brightman

Yes. Most of it’s going to be the similar horsepower as we have on our standard GasJack, so it’s going to be the small wellhead type horsepower. And geographically the application is predominantly on the tank batteries and collecting some of the vapor recycling it and we’ve got a nice base kind of going through multiple districts clearly South Texas, Mid-Con probably big two of the better performing districts, (Rockies) for vapor recovery.

Jason Wangler - Wunderlich Securities

Okay.

Stuart Brightman

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

Jason Wangler - Wunderlich Securities

That’s helpful. Thank you. And then just curious now that call it almost halfway through the quarter, how the weather has been out in the Gulf, if you’ve been able to kind of get back to quarter “business” as usual I guess at least just from an activity and just being able to move assets around the standpoint?

Stuart Brightman

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

Jason Wangler - Wunderlich Securities

That’s helpful. Thank you.

Operator

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

Jim Rollyson - Raymond James

Good morning guys.

Stuart Brightman

Good morning, Jim.

Jim Rollyson - Raymond James

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

Stuart Brightman

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

It’s the first time we’ve seen that and why we’ve been able to step in and pickup some of that work. So again I think given that we’ve done – we’ve seen the pace of that translate to longer – translate to revenue that’s why I would kind of categorize it is probably a bigger step up in the third quarter. And also recognize when you look at it sequentially you’ve got the seasonality of Canada which works against us a little bit in the second quarter. Obviously it’s a big positive for us as we move into the third quarter.

Jim Rollyson - Raymond James

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

Stuart Brightman

I think if you look at most of the headcount and structural issues we’ve got that behind us Jim and we’ll get a full quarter benefit in the second quarter of that. And I think that will help kind of the margin versus the revenue count being a little bit slow to ramp-up as I described. And some of the equipment re-distribution I think we’ve got most of that behind us too. So I think that piece of it gets less as we move into the second quarter. And so again I think the margin progression will be slow but I think third quarter is probably the biggest step up of both revenue and margin from sequentially. And again reality is that’s slower than we talked about in February for the reasons I mentioned.

Jim Rollyson - Raymond James

Yes. Alright. Last thing from me I guess. Good news is despite the challenges you had in production testing, you’re still on track on your free cash flow generation. So Elijio once you get things ironed out and back to work in production testing, let’s say going into next year. Where do you think I mean I’d guess and it implies free cash flow actually has upward bias from your $80 million number as we get into 2015?

Elijio Serrano

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

Jim Rollyson - Raymond James

Understood. Thank you guys. I appreciate it.

Stuart Brightman

Thanks, Jim.

Operator

Thank you. And the next question comes from Blake Hutchinson with Howard Weil.

Blake Hutchinson - Howard Weil

Good morning guys.

Stuart Brightman

Good morning, Blake.

Blake Hutchinson - Howard Weil

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

Stuart Brightman

Yes. I would say if you look at kind of putting some meat on the bones on the question, our two direct barges are very well backlogged through the third quarter into the fourth quarter. I would expect will fill any shortfall with spot business we’re kind of – I would say we’re kind of in that mix of having a little bit of availability. But a very full backlog and very much third-party customer-driven. We’ve only got one or two platforms with Maritech, it’s a small number this year, we’ll get that done, but I think the team has done a really good job of transitioning to virtually a full third-party backlog which is really important to that business as we go forward.

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

Elijio Serrano

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

Blake Hutchinson - Howard Weil

Great. It sounds like good visibility versus previous – last couple of years here. So some points of clarification on what’s been as so far. Within the fluids business as we see WIT and the Saudi consolidation. Should we assume from a mix standpoint that those are – those margins are more on par with your onshore U.S. business?

Stuart Brightman

I would say that that’s probably the case, that’s the case on the water and I would expect the international piece like most of our international business to probably be a little bit above the average.

Blake Hutchinson - Howard Weil

Okay, great. And then Elijio can you refresh us or give us some sort of parameter for where we started the year here with regard to Mexico in production testing at this point? Are we certainly sub 10% maybe some 5% of overall mix to production testing?

Elijio Serrano

I would say the production testing in Mexico revenue is minimal.

Blake Hutchinson - Howard Weil

Okay. Got it. And then again the $2 million you mentioned in is hitting just to be precise here on that. That was hitting the corporate line and was separate from the $1.9 million charge you absorbed in production testing?

Elijio Serrano

So good question, let me give you clarity on that. So production testing incurred cost as we were shutting down offices, moving equipment around, laying off people, severance related cost, losses in the countries that we pulled out of $2 million. And that one was probably equally split between G&A and operating expenses with the production testing.

Blake Hutchinson - Howard Weil

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

Operator

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

Martin Malloy - Johnson Rice

Good morning.

Stuart Brightman

Good morning.

Martin Malloy - Johnson Rice

If you – on the production testing side if you’ve got the contracts with the customers. Can you help us with why it’s taking longer than expected to displace the incumbent?

Stuart Brightman

Well I think there are two elements of it. One it’s taking longer to get the awards and second once we get the awards you need to then go out, usually these aren’t just an award that goes to one service company, you usually have a couple of folks that are awarded that, you then go out and start the work and get more than your fair market shares as you go forward. So I think it’s a combination of the two. I think the biggest part to-date is it is just taking a lot longer to convert to the new customers and get the award. I think the timing of starting is less the problem than the timing of getting the award. And if it’s work that you’re taking away from somebody else which is the case, there’s a conversion time that it takes to go through the process of the MSA and the negotiation in the pricing and qualifying etcetera. And I think that’s just taken a little bit longer.

Elijio Serrano

So Martin if you go through the sequence you get on the business then qualify through procurement you agree terms and conditions then you agree pricing. Then they award you and qualify you as an approved supplier or service provider. No one customer has only one service provider for this kind of service, they’ll have one to three. So then once you are qualified they tell all their rig superintendents here is what you’re using, here is your approved list of suppliers and then on a well-by-well basis they start calling you every fifth opportunity than every fourth opportunity, than every third opportunity. Then you become all of a sudden their primary service provider as they get comfortable with you. So right now we’re progressing to where we’ve got the work awarded we’re in the approved service supplier list, we’re getting the fourth or third call-out and now progresses to their gradually we become the primary service provider.

Martin Malloy - Johnson Rice

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

Elijio Serrano

Right.

Martin Malloy - Johnson Rice

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

Elijio Serrano

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

Martin Malloy - Johnson Rice

Okay. Thank you.

Operator

Thank you. And the next question comes from Marc Bianchi from Cowen.

Marc Bianchi - Cowen

Hi guys. On the fluids performance in the first quarter there was some impact from delays in the Gulf of Mexico and some weather impacts. If we were to normalize that where would margins have been?

Stuart Brightman

I think margins are going to be just about what we’ve got at the guidance. I think with our view of the fluids business for the quarter and the full year is both from our revenue and margin we should be certainly above where we’re within the guidance range.

Marc Bianchi - Cowen

Okay. And you would say that, that would be the case equally through the quarters here, we don’t really need to see a ramp-up per se from second quarter through the end of the year and those have been pretty consistent?

Stuart Brightman

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

Marc Bianchi - Cowen

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

Stuart Brightman

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

Marc Bianchi - Cowen

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

Operator

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

Doug Dyer - Heartland Advisors

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

Stuart Brightman

No, we just think it’s a sequencing timing at our customers, we expect to continue to be busy and we should see that pickup as we go through the year, we don’t see anything that’s changing in our view of the opportunity sets there.

Doug Dyer - Heartland Advisors

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

Elijio Serrano

So capital expenditures in the first quarter were at about $29 million and I would say that it’s at least $10 million higher than what we think the immediate quarters are going to be. We’ve got quite a bit of items that were related to the dry-docks in the Offshore Services side. So that worked against us, but expect that the full year guidance that we gave it’s about $120 million, we’re going to be significantly below that number, given where the production testing business is. Then in terms of working capital from managing our payables, receivables. The seven day improvement in DSO gave us about a $20 million favorable impact. That clearly that’s not going to repeat into the quarters as business ramps up. So we assume some of it will be consumed but it tells you that we can aggressively manage our working capital during periods where profitability is challenged.

Doug Dyer - Heartland Advisors

Alright. Thank you very much.

Operator

(Operator Instructions) And we do have another question from Bill Dezellem from Titan Capital Management.

Bill Dezellem - Titan Capital Management

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

Stuart Brightman

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

Bill Dezellem - Titan Capital Management

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

Stuart Brightman

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

Bill Dezellem - Titan Capital Management

And that change of mix to more third-party business. How does that translate from an earnings standpoint from a shareholders perspective?

Stuart Brightman

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

Bill Dezellem - Titan Capital Management

Great. Thank you.

Stuart Brightman

Thanks, Bill.

Operator

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

Stuart Brightman - President and Chief Executive Officer

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

Operator

Thank you. The conference is now concluded. Thank you for (attending) today’s presentation. You may now disconnect. Have a nice day.

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