Archrock Inc (AROC) 2002 Q4 法說會逐字稿

Good morning and welcome to the Hanover Compressor fourth quarter 2002 year-end and 2002 conference call for Tuesday March 4th, 2003. With us today are Chad Deaton President and Chief Executive Officer. Mr. John Jackson Senior Vice President and Chief Financial Officer and Mr. Mark Berg Senior Vice President and General Counsel. All participants are in a listen-only mode. Today's call is being recorded. If you do not wish to participate, please disconnect at this time.

Earlier today Hanover released its earnings release for fourth quarter and year-ending December 31st 2002. By now you should have received a copy by fax or e-mail. If you have not received a copy you may find the information on the Hanover web site www. hanover-co.com. Again it's www. hanover-co.com. I'd like to remind you the news release issued this morning and the company's prepared remarks on this call and the related question and answer session include forward-looking statements. These forward-looking statements include projections and expectations of the company and represent the company's current beliefs.

Various factors could cause Hanover's results to differ materially from those projected in the forward-looking statements. Additional information concerning the factors which could cause Hanover's actual results to differ materially from those in the forward-looking statements can be found on the company's SEC Form 10-K for the year-ending December 31st 2001. It's SEC form 10-Qs the first three-quarters of 2002 and the company's SEC Form 8-K filings and other SEC filings. I will now turn the call over to Mr. Chad Deaton. Please go ahead, sir.

Thank you. Good morning, ladies and gentlemen. I'd like to welcome everyone to Hanover's fourth quarter conference call. During the fourth quarter 2002, the company reviewed its business lines and we made the decision to exit several non-core businesses. These being the California power generation, the used equipment business and our pump division. In addition to that, we recorded several million dollars in write downs and other impairment charges which John Jackson is going to review later in the call.

Also during the fourth quarter we made numerous operational changes to Hanover from an organizational standpoint in December we named the new senior management team that's going to lead this company as we go into 2003. As part of naming this team, I at that time took the chance to reduce my direct reports from 23 to nine by naming a new Vice President of U.S. Operations and a Vice President of International Operations. And of course the reason behind this is that this is going to ensure more guidance and support to our field management. During the year, Hanover also added much needed management oversight in order to enhance its corporate controls and of course that's in the way of CFO John Jackson and Mark Berg, General Counsel. And again later we added additional people in the fourth quarter in the areas of human resources and health, safety and environment.

The makeup of this senior Hanover team is now what I call a balanced or abundant group of talent that comes outside the organization and is nicely balanced with a group of industry veterans from Hanover and from some of the acquired companies such as Dressler(ph) RAND. In the area of operational efficiency and infrastructure improvements we announced in December we would consolidate manufacturing facilities and take them down from 13 to 9 and reduce our overall head count by some plus or minus 500 people. This consolidation we believe will be implemented over the first nine months of 2003 and we should see an annualized cost savings of around $20m . If you look at prorated savings in 2003 we should see between $10m and $12m of savings.

I would add we're on schedule with the consolidation have released approximately 135 personnel to date. Our ERPM implementation plan as we mentioned in the last call is on plan and budget. We expect full domestic systems will be on line by the end of 2003 and international we expect to be up and running by mid 2004. On a capital discipline standpoint, we have reduced our capital commitments and will limit our capital spending in 2003 to within our operating cash flow. For the near term, we changed the focus of the company from an emphasis on rental contracts to one on sales equipment. And this does not mean that we do not believe in the [inaudible] Rent lease model. But in our current situation it's extremely important we limit our capital spending to those contracts that are going to result in maximizing our return on investment.

Before I do turn this over to John I want to give you a quick summary on the area we're watching close that's our situation in Venezuela.. We've pulled all the X [inaudible] personnel out of the country and at year-end we're operating with about 300 Venezuelans are working today. We have approximately 70% of our units are online and this is up from 50% in February and 30% from the low point that we experienced in December. We continue to build a basis and we're active dialogue on payment terms and timing. We've reached negotiated stand by rates for our other customers and we are receiving payments from those people. And I'd now like to turn it over to John.

Thanks, Chad. I want to step through some of the highlights on the income statement and talk a little bit about our liquidity and a little bit about '03 before I turn it back to Chad he can give you some perspective operationally. But from our income statement perspective, there's a lot of moving parts in this year's year-end release. And the discontinued ops we have two main components of that the California power and used equipment.

On the used equipment piece that's largely the goodwill write off from the acquisition of these companies. We believe we'll be able to recover our carrying value of the underlying property in those but we did write the goodwill off from that. One other thing I wanted to point out on the discontinued operations embedded in that number is the operating results for the fourth quarter which were fairly negligible and the prior period results have been moved down to discontinued operations to reflect the ongoing business on a comparative basis. So as we move forward the operating results from these lines until they are sold will appear down at discontinued operations.

Secondly in the write down area of the $56m in write downs, there's some detail in the press release about our depression, $34.5m our goodwill write off in the pump division of a little over four. We had the severance costs associated with the reduction in force that Chad touched on briefly earlier about $ 2.7m. Then we had some non-strategic investments and non-core business bad debts that we've written down for the balance of that for about $14.5m. Stepping through the rest of the income statement, at high level, before we talk about some of the business lines in detail, we did take a $2.7m reduction in anticipated revenue in December for Venezuela.

We have the ongoing cost associated with the S 4 and the SEC investigation that ran about $3.5m in the quarter. We'll talk about kind of where that stands going into the second quarter in a minute. We had a benefit in the tax rate area of the tax area of approximately $6.7m. We'll talk about that briefly. And then we had a translation hit that was largely in [inaudible] based on the disruption that's gone on down there. The other thing that's unusual for this quarter and we've been telling everyone about this is that [inaudible] became a fully consolidated entity this quarter after we took over 51%.

As a result you had gross up of revenue and costs so forth in those line items. Let's move to the income statement by business line, talk about that briefly. In the domestic rental business, our gross margins were down in the quarter from 62% to 59% . However, there were two fairly significant items in there. We talked on the last call about an Advalorem(ph) accrual catch up we've been focused on we've done some work in our add Advalorem area we finished the catch up in that quarter. That cost us about a percent and a half in the gross margins. You shouldn't see it going forward in 2003. We took physical inventory in the United States and we have some inventory adjustments of $1.2m in the quarter. That also cost us about 150 basis points. So that would put you back up on a run rate of around 62%.

Internationally we had increase in revenues but we did have the hair cut for Venezuela we took in December of $2.7m. We also took inventories internationally and took a round a $2m charge overall for that. If you take those out just to see what the core business was doing, that put you closer to a 69% gross margin internationally. The parts and service business continues to be softened on the underlying market. We did have some used equipment sales in the quarter that actually came in about the same gross profit margins, parts and services. Sometimes in the past we've had fairly low gross profit margins on asset sales and distorts our gross profit percentage but it's fairly on line with what we did in the core after market business there.

Looking at fabrication, compression fabrication continues to remain relatively flat and static, but in the production of processing equipment, although it was down year-over-year if you exclude [inaudible] the activity is picking up. Chad will touch on that a little bit more in his remaining comments. But we do see some good news there and the profile from the beginning of the fourth quarter to where we're headed in the first quarter is picking up. And the consolidation of facilities has really not yet occurred. We've let some G&A people go but the facility consolidation will begin to take place in the second and third quarters. That's when you'll begin to see the effect in gross margin and just overall cost.

Looking at G&A. G&A has the S 4 and SEC investigation costs in there at least from a printing and audit perspective. Those costs diminish a little bit in the first quarter, although we do still have the ongoing SEC investigation. When you look at the interest costs associated with the penalty, that will go away here in March, as we have gone effective with our registration statement and we plan to complete that exchange this month. So as we move into the second quarter, that $15,000 day penalty will be gone. We will be adding some infrastructure build. We have been adding that over the last few months, but I think overall we're anticipating our G&A to begin to trend down in the second half this year ever so slightly as we begin to become more efficient with the infrastructure we are putting in place and letting some people go.

On the tax front, we had a fairly significant benefit in the quarter and that was largely due to deductible foreign exchange losses in local jurisdictions. That's primarily in Argentina and Venezuela as you had the exchange rate in the local country weakening against the dollar, we were able to deduct locally those losses and as a result have income from a book perspective but loss from a tax perspective which drove our rate down considerably in the quarter. On a go forward basis we would still anticipate our effective rate for '03 to be somewhere around 40%. On the CAPEX front we spent about $60m in the quarter. Put us at $242m for the year which is a little under what we had talked about last time.

We did have asset sales in the year of about $74m. We ended up self funded for the year but that included the asset sales, as we've talked about a little bit going into '03 that we plan to be cash flow neutral on a CAPEX level in '03 and I'm going to talk about guidance for next year on the CAPEX front here in just a minute. From a cash flow perspective, in the liquidity front, as we've previously announced we did process a bank amendment that gave us covenant relief for the balance of '03. Technically under our revolver we would have availability of $140m covenant constrained as we've noted in the press release, we have about $120m.

One thing to note is that while we plan to be cash flow neutral in '03, the first quarter, we have a very uneven interest payment profile in the first quarter. We'll pay somewhere around $45m to $50m in interest payments whereas the second quarter it drops off dramatically. The third quarter picks back up. I would expect us to see a higher revolver balance at the end of the first quarter than year-end by $20m to $30m. That's not a reflection we're overspending our cash flow it's the timing of the cash flow payments that come into the company and that would indicate we're kind of on track if we're somewhere in that kind of balance at the end of the quarter.

I want to shift to utilization for a minute, capital discipline. You've noted we've written off 217 units and we're in the process of disposing of those or selling those. And this is part of our process of where we're really looking at where we want to spend our capital going forward. Most of these units were small horsepower units and we have plenty in the fleet to still access any of our, not access, but deal with any of our independent customer needs from a horsepower need level from 0 to 500 horsepower on those smaller units. These units will take more significant work. We decided with our limited capital it was best to go ahead and monetize these as best we could and move them out of the fleet and focus on those units that were going to use to service our customer base.

The utilization methodology that we're going to use now going forward is more -- is going to be on a total fleet basis. So in the past, where we've used the GCA standard of gas compressor association standard which is not up to our standard we exclude, we are going to now just quote utilization based on total horsepower that's where the 78 %comes from. On a going forward basis that will be the marker you'll compare to. In the third quarter it was around 80%. In fourth quarter we did have a slight decline in that utilization. Jumping to P GAAP. We have as you have seen put P GAAP to Slumber J (ph) and entered into an active dialogue with Schlumberger to negotiate something not to put P GAAP and come out to some other resolution that dialog is ongoing we have extended the time frame with which we have to close with Schlumberger to put itself. So we're continuing that dialog, when we have news we'll inform the market.

From the 2003 perspective, we believe that our capital budget will be -- we will spend somewhere in the $175m to $200m range for capital. We believe revenues will be up at least 10 % and EBITDA will be up 5% to 15%, excluding the write downs in unusual and excluding Villaly (ph). So as we go forward that's kind of the profile we're going to talk about as far as '03's expectations not from an EPS but from EBITDA revenue and CAPEX. That's what we expect. I'll turn it back over to Chad to give you comments and flavor around '03.

In our last earnings call and some follow-up meetings with investors, analysts and other people, we made out several short and long-term strategies and objectives. And I'd like to just take a minute to update you as to where we stand on several of these. One of the points we've been talking about over the last couple of months is we've been mentioning we would very much like a way to increase the prices in selective areas for the domestic fleet. And this has been no small task considering it's a very soft market. But we turn this over to the salespeople, asked them to come up with a strategy and go forward with it. And I'll have to hand it to them. I think they've done an exceptional job considering the situation.

What they did is they broke down the areas into three main areas. They looked and found where there were instances where prices for services provided in many cases have not been adjusted for four to five years. They also found some contracts that have been inherited from previous acquisitions that were not in line with current market conditions. And the third area is they looked at each of the pieces of equipment from 7,000 pieces of equipment out there and targeted those what they might call, as they fondly call prime B that they said these are the pieces of equipment we could take and put to work in market conditions anywhere. And so they sat down one-on-one with the clients and asked to bring these units up into current market rates.

It's still very early in this process, but so far we're excited about the success rate we're having and if you projected this over the year, on average across the fleet, we are expecting to see about a 2% to 3% overall effective price increase for the entire fleet and the U.S.

Another area that we have targeted and we want to make sure that we continue to work with our U.S. independent client base because it is core to Hanover, but at the same time we've also said we'll be targeting the majors and the national oil companies. As I mentioned earlier it's not just going to be a focus on rental but we want to focus more right now on increased equipment sales and services. From a sales standpoint, during the latter half of the fourth quarter so far in the first quarter we've been awarded work, new work, in Africa of $3.8m, Russia $5m, the Far East $2.4m. The middle east $5.1m and Latin America including Mexico $27m. Domestically for the third party sales for the same time period we've been awarded contracts amounting to about $45m which brings us a total of $88m in third party sales.

During the same period if we looked at it from the rental side what we've been awarded it amounts to just under $1m of monthly rental income, this new business to Hanover. A significant part of the sales income is coming from our production and processing side of the business. We've actually seen I guess you would call it a surge in this area. In fact, if we sit down and compare the first two months of this year with the first two months of 2002, we see orders for standard production equipment and orders for our high spec production equipment up quite sharply. And now this is a very short window we're looking at here, but it is something that we're watching closely.

On the other hand, compression cash sales for this same time period remains flat. A third area we've talked about and is one of our long-term objectives is to become the total solutions provider for the surface related needs of our customers. And in order to do that, this means that we need to strengthen our engineering base and in this quarter we're going to open the Hanover integrated solution center of which we call HISC and what we're doing is we're centralizing much our engineering talent throughout the company in order to handle these better large integrated projects. This is an enhancement what we call Hanover HT square which is our management group we're expanding. They've identified multi million dollar projects that we'll be targeting in 2003.

Fourth is part of our strategic plan that identified in the last call was to identify and pursue market opportunities that fit Hanover's strengths and capabilities. Part of our core business. In order to help achieve this goal, we're going to complete the opening of the Hanover Moscow office in March and a new office in Nigeria in the second quarter of 2003. And finally a fifth key strategy and one that I feel is extremely important, if we're going to be successful in the areas I've talked about integrated solutions and global business expansion is the development of our people. In the last three months we have enhanced the HR Department in Hanover significantly. We've introduced or are introducing the appraisal process, objective setting, succession planning and other such HR Programs. And over the next several months we'll be introducing the Hanover management training program that's going to consistent of three modules. They will include ethics, financial training, and leadership and people management.

In summary, it is no doubt that 2002 has been an extremely challenging year for this company. We had to overcome numerous hurdles such as restatements, reorganization, consolidation and of course the rationalization of our businesses. And even more than that I have no doubt in my mind the people in this company is determined and ready to go forward and we've entered into the next phase of '03 and that's one focused on execution. With that I'd like to now turn it back and open it up for questions.

Today's question and answer session will be handled electronically. If you would like to ask a question please press the star key followed by the digit one on your touchtone telephone. If your on speaker phone telephone be sure that your mute function is disengaged so that your signal may reach our equipment. Again it is star 1 for questions. We'll take our first question from Yves Siegel with Wachovia Securities.

Thanks. Good morning. Just a couple of quick ones. Could you describe the business environment as you see it right now, primarily from -- looks like you lost a little bit on the market share on the rental side. Is the rental, domestic rental business declining a bit or where do you see that going?

And then the second part is for John, in terms of the guidance, you've got a question on this, the EBITDA range of growth of 5% to 15 % and the revenue growth of 10%, what type of assumptions are you making there? Are you assuming that the 2%-3% effective price increases for the full year, do you have any sort of utilization targets there or also on where you see the profit margins going through the year? Thank you

On the business side, we -- on the production and processing side, as I mentioned we were actually seeing some increase on purchase orders for that side of the business. I believe that we have lost some market share on the domestic rental side and that is primarily as a result of losing two contracts last July and August, alliance contracts. All that equipment had not been pulled off. It's continuing over a six-month period to be replaced. We continue to, on a couple of those volumes, have had equipment up and running. And as we remove those and we will be putting that equipment to work for other clients.

Inquiries, and this is kind of, we have three phases, we have inquiries we have purchase orders and actually have the manufacturing on some of the equipment. On inquiries for both rentals, on compression as well as on the production of processing equipment, we are seeing a lot more inquiries coming in, which, again, we feel confident that or feel comfortable that we're starting to see some activity increase going forward. Internationally, we continue to see really more projects than what we can really take on right now.

Jumping to your guidance question on the assumption front from a utilization perspective, we're not assuming much change in utilization frankly from where we are today. So we're kind of trying to take the world we live in and see what we can control. So that's where we're going through the cost cutting phase, the reduction in force phase, we're really trying to look at running our facilities more efficiently. From a gross profit percentage we bring it up back up to 62 % in this quarter I would anticipate it to be between 62% and 65% domestically but somewhere in that range, in the upper 60s internationally like it's been but I would say somewhere in that kind of range. So we're not anticipating a big change.

Although, there is a little bit of pick up in the production equipment that we're seeing that we believe is going to continue to ramp up in the second half of the year. So we do assume that there is some ongoing activity in the cash sales side of the business. It's more focused on the production equipment than compression fabrication we're not assuming much change from where we are really today on the fabrication of compression equipment. If that does pick up there's more opportunity there.

What about the pricing, we're assuming that you do get that?

We’re assuming we get a 1%-2% price increase done. And for a full year perspective we'd assume that's all rolled in by about say the middle of the year. It's against the later couple of quarters and it's there going into the third quarter and on.

Last one I this, Chad, what have you done in terms of providing for a management incentive program? If it's not too complicated in terms of what is the management team going to be held accountable for and how are they going to be rewarded?

We established objectives which have not been part of the company in the past. I established my objectives with the board. These objectives are focused around better than 50 % on the financial performance of the company and EBITDA and EPS and things. And these objectives are being trickled down through the top three layers of the organization.

Okay. Thank you very much.

We'll take our next question from Justin Tugman (ph) with Simmons and company.

Good morning. Chad and John I wanted to talk a little bit about Venezuela.. Can you give us an update on your current status in regards to accounts receivable, when is the last time you were paid there, particularly by [Pet of ASAP] (ph) what's your exposure on the accounts receivable side?

Chad talked about some rates some from our non-paid to pay basis. Different contracts have different terms. Some of our non-paid of base contracts have payment terms where we get paid in dollar outside the country. That's continuing to go occur on whatever basis we're working with each customer on.

We've continued to receive some payments there. I do want to stress that we put no money in the country. So from a cash flow perspective, even though it has ramped significantly down near term, we are still seeing some payments in the U.S. and are not injecting money in the country. We're operating with what we can generate there. So it's certainly not a negative EBITDA. From a pay to of basis prospective they've made a couple of payments this year. They've made a series of payments to us in [Bolavars] (ph) in the country that's what we're operating on. They paid us $3.5m in equivalent Bolavars so far this year in January and February. They continue to have an active dialog with us about paying us our balance.

From a receivable perspective, we had from pay to pay to basis alone somewhere around $15m due from pay to base at the end of the year. They paid us $3.5m of that. We do have some of that accrued in our bad debt reserve as far as what we took a hair cut on at the end of the year. Our net exposure from a P&L perspective as of right now is probably under a little $10m from pay to base. We continue to have a active dialog. That's for work done through December. That doesn't reflect any work done in January and February but they continue to say us they'll pay us for all of our machines for the entire time.

Where would you say you're at the end of February in terms of receivables outstanding from pay to base.

If you want to go back to what they owe us every month pay to base it's about two thirds of our revenue down there. I'll give you round numbers if our revenue base on average is around $7m and they're about two-thirds of that you could add about two-thirds of $7m for two months. And that would give you a ballpark, because they haven't paid any of that.

And Chad let me ask you one more question on Venezuela, can you give us a sense in terms of your market share there and what are the longer term implications of the strike in Venezuela in terms of are you going to see some local kind of mom-and-pop operations go out of business and then you have a chance at increasing market share? How do you think the future plays out there?

Off the top of my head I'd have to find it for you. I can't tell you what the market share is down there. There's not a significant number of what you call mom-and-pop compression or production processing equipment people down there. Our main competitor down there is universal. So I don't think we would gain much by seeing somewhat few people down there going out of business.

Okay. Turning to P GAAP 2 you mentioned you extended the time line. What is the new deadline there?

I'm going to let Mark Berg address that he's on the call with us.

We agreed to an outside closing date of April 30th. No later than that.

One final question for you. We've seen a series of write offs and asset impairments, et cetera. Are we complete with those or should we plan on seeing more charges down the road?

I think we've done as thorough a job as we can of scrubbing the balance sheet at this point. I think from an investment, from a non-core business perspective, from where do we want to be, what do we want to be in, what do we want to exit, I think we've made those decisions and you're seeing that effect in this income statement from the standpoint of constantly assessing our fleet and addressing the business environment, could there be a charge in the future relative to that? There could always be that charge but it's nothing we anticipate any time in the near future. We think we've positioned ourselves where we want to be.

Thank you very much.

We'll take our next question from Geoff Kieburtz (ph) with Salomon Smith Barney.

If I understand your characterization of the U.S. market you seem to stabilize we've seen fourth quarter utilization come down to newly defined 78%. Your forecast is for that to continue and on that with some of the initiative you got underway, maybe get an effective price improvement by sifting through the kind of stale contracts and so on. Is that fairly accurate?

Yeah, I think that's fair, Jeff. As I mentioned, we are on this inquiry side. The inquiries are increasing. That's not just for production and processing, but we are seeing some inquiries for third party sales of compression.

But you're just not counting those chickens just quite yet?

Exactly.

On the utilization, given that you're adopting a new definition, can you, with the new measurement, sort of tell us what your historic kind of high in terms of utilization just to get an idea where we are relative to that high point?

I don't have it off the top of my head here, Jeff, but it would be significantly higher than where we are. Whether that's mid 80s or upper 80s, I don't know, because I think what happened really is the reason we had such a disparity now versus maybe say four years ago is with all the roll offs and buying other people's fleets we found their fleet needed work to bring it up to standard. We weren't doing any of that work until we needed to. So I think if you go back you might get back four to five years ago the numbers that were being quoted were very similar to the total fleet. We'll have to do a little bit of work on that for you.

If you look at the old system at the high we were about 94 % in 2001 and we probably reached a low of 86%, dropped eight to nine points.

I think we were eight to nine points always that was in fabrication or needed work. But I don't have a good answer for you right now. I'll do some work on that and get back with you.

Okay. Just in terms of physical horsepower, given the write offs and that you've taken in the quarter and so on, what do you actually have in working condition on the ground not currently active?

I'm not sure -- what do we have as far as?

Idle capacity.

400,000.

About 400,000? And is that all in the U.S.?

Yeah, mostly. I'd have to look and see. We have about 35,000 of [EL Pa Trone] (ph) that hasn't started up. I'm not sure where it's sitting. That's going to be ramping most of that is the U.S. We don't have much that much idle internationally.

Idle internationally is less than 50,000 horsepower, that 400,000 horsepower that was really the piece that was in fabrication. If you look at our total fleet it's more like 650 to 700,000 of idle capacity domestically and a little less than -- certainly less than 50,000 internationally.

Okay. And of that say 650,000 or so that is idle in the U.S., what percentage would you consider readily deployable to international markets?

Probably half of it if you had the right use for it. Probably what happens internationally is we have some of these larger jobs that –

Larger horsepower.

Larger horsepower that we don't have sitting around idle. If you had the application, you could probably move half of it easily. But I'm not sure that's the case.

Okay. I think I understand what you're saying. In terms of the emphasis on cash sales of equipment versus rental, could you just maybe elaborate a little bit on that. I'm having a little difficulty understanding whether that is a, sort of a longer term structural decision or whether that's more responsive to current liquidity and financial conditions?

Well, it's definitely the latter, no doubt. We have projects out there where our clients may be talking to us about us using our capital and they lease from us. And if the return is not there, then we've instructed our salespeople to talk to the clients about buying the equipment. As I said earlier, we still believe in the right conditions of the own and rent type model. And we don't want to abandon that. We are determined, Jeff, that we are going to live within our capital and operating cash flow and that means that the emphasis needs to shift to, we want to keep these facilities busy manufacturing this equipment and we want to shift to sales for at least the next year or two.

Okay. John, in your guidance you gave a fairly point estimate of 10% revenue growth. You gave a range of 5% to 15 % EBITDA growth. Could you point to the one or two most important variables that would push us to the low end or the high end of that EBITDA range?

Yeah. I'd say the production equipment sales, you know, how quickly that ramps up will certainly generate 15%, 17%, 18% margins. Whereas, if you actually have -- you could have a pick up on the other side of the rental business that has higher gross margins and would actually provide higher EBITDA. I would say if we tend to be more sales focused, we would probably be a little bit on the lower end of the EBITDA spectrum. And if we are able to put idle equipment to work, versus spending a lot of new capital and generate revenue growth that way, then you would be at the higher end of the EBITDA range. That's kind of the balance we're trying to walk is a fine line with the company here is where is the market going to be and we want to be there for it. But it could move the EBITDA up and down depending on whether it's sale or rental.

Last question. Can you update us on a per horsepower basis, what you estimate to be your new equipment manufacturing costs?

That's somewhat of a hyperbolic curve there, depending on what you're building But if you look at what we're going to build going forward, we'll probably build very little small horsepower. So if we're talking thousand horsepower units and up -- we're kind of talking probably in the $450- $500 range, depending. Because your basic cost to build a compression are still there between the skid and so forth. Depends on how much horsepower you're putting on that could drive the cost down to the larger unit you build the less horsepower it is. But $450 to $500, based to where we're going to be focused.

What do you estimate the secondhand market value is presumably that's -- I'm looking at apples and oranges because you don't have a secondhand market for thousand horsepower units.

As far as selling it?

Yeah. Not new equipment sales, but used equipment, where is the market today, if you were to go out and, say, sell a 500 horsepower unit?

We have sales all the time where people are exercising purchase options or we're selling a piece of equipment somebody wants and we don't have an application for right now. And we traditionally get above $500 dollars. $500, $600, depends on how scarce it is. It's typical supply and demand. It's above our cost of manufacturing by a good 10%, even on the used equipment side. Tends to hold the value on the larger end stuff.

I think also, this is also tied to what activity is out there. Six months from there gas is still $8 per thousand this equipment is going to be a lot more valuable than it is today.

That's what I was looking for, is sort of how that's translating to secondhand values in today's market conditions. But that's very helpful. Thank you very much.

We go next to Bruce Wilcox (ph), Cumberland Associates.

I want to clarify, make sure I understand. The EBITDA in the range you gave, is this EBITDA or EBITDAR.

EBITDAR.

Just to make sure we got apples and apples. What do you think your exclusive S4, and SEC, G&A items what would you consider to be a normal run rate for G&A.

Excluding the S 4 and the SEC costs, we're probably looking in today we're probably looking 37ish. And I'd say the second half of the year we're trying to bring that down a million to two. More in the 35 range.

After the sort of the accelerated or the charges you took on equipment that may not be, have the use you thought it once was. What would be your guesstimate for D and A as a run rate for 2003?

Probably some of that will be driven by capital. But I'd say a run rate on D and A going forward is going to be in the 35 range.

Per quarter?

Per quarter.

Thanks a lot.

Bruce, I would add on that, on the SG&A, we still have some initiatives as John referred to that we'll be finishing up in Q1, Q2, some of these are these HR initiatives and other programs. And then as John said, second half will be ramping that down.

That's helpful. Thank you very much.

We'll go next to Terry Darling with Goldman Sachs.

I wanted to start with a capital spending range and wondered if you could talk to us about where that is headed domestic, international compression other as well as what is the evenly fairly balanced over the quarters or do you see it more being lumpy?

I'll give you the math if Chad wants to expand on anything, we can go from there. But I'm going to say we'll be spending some dollars on our ORACLE system probably in the $15m range. And then we have our maintenance capital which we think will be $50m to $55m for the year. If you take what you call your gross capital. That's probably in the 60%, 70%,30%, maybe even 80/20 internationally that will be dependent on opportunities.

But probably at a minimum 60% internationally then it could go up from there and that's going to be opportunity driven I would say be a little front end loaded for some projects we know are going on right now. What we're really going to try to do is temper our spending relative to the Venezuela situation to make sure we don't run over on spending until we know how that's being resolved from a cash flow perspective.

I agree with that. I think it's probably in the 70/30 range domestic versus international. 70 on the international. John gave a range of 175 to 200. We're going to be more down on the lower range side of that, the 175 side.

Okay. And shifting back to a couple other points. John, you put some qualifiers around the EBITDAR guidance. I want to make sure we're all on the same page here. What are we talking about as the number that you're starting here with for 2002?

We're using, when I said 5 to 15, we're using kind of our adjusted EBITDAR projective that includes the write down so let's call it 290.

On the SEC review do we have any visibility at this point on timing of resolution there? Do we feel we're getting closer there or is it still very cloudy on that front.

We'll let Mark Berg address that.

I can't predict the timing at this point, but I can tell you we're continue to go make good progress and the feedback from the SEC in terms of their satisfaction with our cooperation is positive. But I can't put an end date on it for you right now.

And then on the asset sales here in 2003, wondering if we can get a range around what that number might look like.

From a proceeds perspective we're targeting $50m. We think it will be somewhere around that number.

Lastly, on Venezuela, John, sequentially, you're going to have some kind of an impact. I'm wondering if you can quantify it either at the EBITDA line or the EPS line for us.

Well, we’re talking first quarter now? It's difficult to predict at this point because we haven't been paid by Venezuela in mass quantities of what we're due for last year. However, as Chad indicated, our units are coming more and more on line each day. And most things are running now down there. So we would anticipate, instead of -- we took $2.7m hair cut in December. We would anticipate it to be, assuming we start getting paid significantly less than that, coming into the first quarter, maybe a $1m or $1.5m a month of revenue hair cut. But that is all predicated on starting to get paid.

If we don't, by the time we close the first quarter, we're going to have to really assess how much revenue we think we can really recognize from a collectibility standpoint. So I'd say the jury is still way out what we're really going to reflect in the first quarter if we don't get paid by the end of April.

Worst case scenario if you're not getting paid as I think you said earlier about 70 % or so your total revenues down there are pay of base .

$4.5m, $4m - $5m a month paid of base, that’s right. The other thing you need to keep in mind because our units weren't running for a while so forth our costs have come down in country but as these things start coming back up at some point our costs are going to start coming back up. Things are going to start to break. You're going to need to put parts in. You're going to be needing to do work. I think it will come to a head at some point that we're not getting paid we can't certainly service the units. So I guess I'm kind of not answering your question real clearly. I'm giving a perspective where we are right now. Until I see dollars being paid, it's difficult for us to make a judgment on that.

I know a lot of moving pieces but that's always helpful. Lastly, on the charge the $56.3m piece, is there an after tax number you can give us on that piece?

Total after tax was $77m so you take $37m off of that so it's $40m.

Thanks.

We'll take our next question with Ken Cillit(ph) with Credit Suisse First Boston.

Just a couple of things to clarify some points. One, on the rental revenue, you guys were talking about U.S. and international I guess being flat Q1 or down slightly as you got some of these contracts rolling off. Is that correct for the first quarter?

I think the first quarter for domestic we would anticipate to be somewhere around flat and internationally, if you factor out Venezuela, because that's going to be something we can't predict where we're going to be. We might be up a little bit internationally.

Yeah, we have fairly large contract ended in Bolivia in Q4. That equipment is now being moved within Latin America. We've got contracts for that. And also as I mentioned towards the end of the first quarter, starting in March, we will begin to start ramping up the he [Will pa Trone] projects which is 35,000 horsepower down there. $1.1m a month, when it's running.

Then the price increases you are implementing the 1%to 2%, that's what you see now. Will that be coming into the numbers as we move into Q2 or will we see some of that in the first quarter?

We will start to see a little bit of that in the first quarter in March. It's just starting in March. It starts ramping up after that. I think it's going to be in the 2% range, when you look across the board overall.

And then with respect to the P GAAP joint venture, the way it's going that will definitely be included in the results for Q1. How much did that add to the numbers in the fourth quarter?

How much did that -- I'm sorry.

What was the contribution from P GAAP in the fourth quarter?

P GAAP in the fourth quarter was about $2.8m.

Thank you.

The first quarter, when you say it would be in our results for the first quarter, that may or may not be true. We have put it but we haven't closed the transaction because we're in dialog. So we would have to work out the accounting on that. So I wouldn't reflect that that would be necessarily in earnings. It would certainly come out, if we did put it, it would come out in the wash at the end of the day. You wouldn't have it going forward. Would it come out in how we balanced the values that we exchanged with each other.

Okay. Thank you.

We'll take our next question from Louis Roth(ph) with Barrel Handley.

Good morning. Most of my questions have been answered. I was hoping you could shed some light on what you anticipate your interest expense to be by quarter in '03. You said that that was going to be kind of lumpy. What were you looking for?

I'm sorry, what I meant was our interest cash payments will be lumpy, because our notes, for example, are paid twice a year. And so you end up with a lot of cash payments in the first and third quarter. Your interest expense will be accrued ratably as it's incurred but your cash flow won't match your P&L accrual.

That makes more sense. Also on the -- and I know there were a couple of questions relating to this, to divestitures, but can you give us any insight into the status on the sale of the California power generation assets? I think in the press release you said you do expect those to finalize this year. And I guess I also have a question why you would go to take the write down now and should we infer, again there was a question earlier about this, but that there was an additional write down once that sale is finalized?

No, there's certainly not an additional sale once the write down is finalized. As far as the status where we are I'll let Mark address that.

We've been in talks at least on two of the projects, we've been in talks with our partner, who is very interested in acquiring our interest in those projects. And that's still ongoing. But we're optimistic that we'll be able to reach agreement with them.

I'd say our write down reflects the value that we think we can achieve from selling these assets. And we wouldn't -- certainly there could be a write down, if you didn't achieve that full value or you could have a slight gain if you achieved a little more on any of these. We estimate what we can get from these. So we didn't set ourselves up to take another write down.

Okay. I'll just get with you off line. I have a couple other questions around that. But on the SG&A side, can you tell us what the SG&A at Valelli (ph) is running and what you expect to achieve there? You talked earlier also about some of the head count reductions saving you. I think it was on the order of magnitude of $20m a year go forward. Is that going to be offset by increases from Valelli and some of these other HR initiatives that we're talking about?

Yes. Although, what we talked about earlier, about maybe $37m, $38m a month in the first couple of quarters and then ramping down to $35m encompasses all of that. But Valelli was about $1.2m. It's in the press release, unfortunately it's fairly lengthy it's about $1.2m we would anticipate that to kind of run that way going through this year and that will be in our G&A numbers as we go forward.

And then finally, I guess given the, and believe me it's welcome discipline, but should we expect that there won't be any spend or attempt to grow the C and G business that you guys have talked about trying to get involved in?

No, we have prices included in our overall capital program and everything else for C and G. We still believe in this business. We're going to move forward with it.

Okay. Great. Thank you very much.

Our next question is with Ashish Gupta with Banc of America Securities.

Cash went from $22.2m in the third quarter to about $19m. I was wondering if you could run through some of your cash flow numbers to explain why it went down. And in that respect I guess if you could talk about your working capital initiatives and how you're looking to improve working capital.

I'm sorry, could you run through the number there at the beginning again. What were you talking about?

Just cash flow. I'm sorry, cash on the balance sheet went down from $22.2m to $19m. I wanted to know if you could run through some of the cash flow numbers.

Other than really CAPEX, we haven't really published a balance sheet or put any information out there. I'd say if you could wait until the case file and look at that and talk about that, we can address any particular questions then. But I will say just globally we have made some progress on receivables on our days sales outstanding and our collection. From an inventory perspective, you're going to see that the balance sheet shows a fairly dramatic decrease in inventory.

Some of that is really just reclassifying the inventory that's in our discontinued operations and being held for sale. However, overall, we did have a reduction in our inventory in the fourth quarter that was the magnitude is maybe $10m to $15m of inventory quarter on quarter on the core business. So I think there's been a very big focus on being very efficient with the inventory and utilizing what we have across the company. I think that focus will continue.

So as we move into '03, we're really trying to liquidate down the excess inventory, drive our DSO down even further, and I think we've made fairly significant progress on that in the course of '02. But I'm not going to give you any metrics on the balance sheet or cash flow today. We're still putting all that together, putting it in the 10-K and we'll address it then.

Great. Could you maybe give us an update on your back office system implementation and is that still to track to be successfully implemented by the first quarter?

We are bringing the HR -- the HR margin will be ready to go. The general ledger, the new general ledger database is ready to go. However we're in the process right now doing conversion of data and setting all our sub systems to face back that are still going to be live and active after we made our first round of conversion. So everything is still on track to get all the domestic work done in '03. We're really staging this up to try and do a lot of sub systems and the general ledger all in kind of one big bang domestically later in this year.

So what you'll see is we're running a lot of test data through the general ledger that's really to go now. Converting data, getting our sub systems to interface. I think we'll have all of it ready to go by the beginning of the third quarter, somewhere in that kind of time frame. I think what we'll do is convert that, move to international in the fourth quarter and try and start some of the larger locations and by mid '04 as we said in the release have international on. Won't be using the new system probably in the second quarter to any great degree from a financial perspective but we will be by the third quarter.

And I guess finally housekeeping, John, you had mentioned that an effective tax rate for '03 would be around 40%. I remember in earlier conference calls you mentioned tax rate for '03 would be in the mid 40s, am I just --

The tax rate for this last year was in the mid 40s at September and we were still anticipating that except for these foreign exchange losses. But yeah, I think we still believe '03 will be somewhere around 40%. So I apologize for that.

Thank you, guys.

We'll take our next question from Tim Kosar(ph) with JP Morgan.

Can you talk a little bit, assuming that the put that you do end up putting P GAAP2 back to Schlumberger, just what type of proceeds would you get for that?

No, that's not something we can really talk about right now. We're really working with Schlumberger how we might structure something where we keep P GAAP. If we don't, we'll need to work through that with Schlumberger on how that will all come together. There's a lot of moving pieces in that. I think we have filed a document that lays out how the purchase price allocation was done. How it the put would work we're still going to work through that and we'll kind of tell everyone how that works when it's done.

Fair enough. Not to beat a dead horse but on Venezuela. Assuming you were to get paid for the services provided in the first quarter, where would first quarter EBITDAR from Venezuela stack up from the first quarter?

It would be at or above. If you got paid for all the work that's rolling, it would be at or above the fourth quarter, because we took the $2.7m hair cut in December. So we have -- we talked about the $7m of revenue and probably 70 % gross margin down there, whatever and we've got some G&A that goes with it. You can kind of run the numbers on that. That's where we would be assuming we got paid and went from there.

Fair enough. Thanks.

Due to time constraints we'll take our final question from Adam Leet (ph) from Credit Suisse First Boston.

First of all, on Venezuela, how much if any of your operations are in the AMERICOBI area that will be stalled out and may take some more time.

We have very little.

It's like five units.

Chad Deaton; Most of our operations are over in [inaudible] Eastern part of Venezuela.

Of the compressors that were written off, was any of that in any of the collateral pools, and if so kind of which ones?

We did have some in our synthetic leases they were spread across all the synthetic leases and we substituted those out of the synthetic leases what we did we identified these are not units that we were going to bring back up to the operation level. We swapped in something that was in there and we took these back into our own fleet.

Did you get any cash distributions from your equity investments in Q4?

We took a little over $20m from P GAAP in quarter 4. That's the main one we took distributions from.

That was from the refinancing?

No, they did not get the refinancing done. Because they had anticipated refinancing they had been building earnings up inside the P GAAP venture for over a year. Those earnings since the financing was being delayed to the unofficial strike of us and Williams distributed pent up earnings inside the entity. That's another reason why when we talk about what would we get in the put you've got distributed earnings, we have cash injection, you have a lot of things you have to move around on. We took $20m plus out in the fourth quarter.

On a normalized basis, I guess, hard to talk about what normalized, would you be anticipating kind of an annualized number like that as distributions? When would you expect to be getting cash if you continue to operate –

If we continued to operate were not able to put financing in place, my expectation is that we would get quarterly distributions which would be the $20m dollars did reflect some of '01. So would I say you're looking more to the three to four million a quarter that you would get distributed our share on an ongoing basis on P GAAP if we kept it and did not finance it. If we finance it you have debt service.

The used equipment and power generation, can you just remind what the full year EBITDA was from those two for 2002?

Power generation was full year EBITDA was negligible . I don't want to say it's zero but it's very small .From the used equipment business, we probably ended up with somewhere FWH the two to three million dollars in EBITDA range for the full year 2002. However, by the time you throw depreciation in and everything else, our net income from those two businesses for the full year was very small.

Last question. On that 4% 0 tax rate, what would be the cash component of that?

No higher than a quarter of the tax rate. So if you paid $40 in taxes, if you accrued $40 in taxes it wouldn't be any higher than 10. So %25 of your effective rate at most would be in cash taxes. Pretty difficult to predict because of all the foreign exchange volatility but it wouldn't be any higher than that. That's what we're using.

Excellent. Thanks very much.

Gentlemen, I'd like to turn the call back over to you for any additional or closing comments.

All right. I think that as I said earlier, I think we're entering into a phase of execution for the company and we're going to be focusing now in terms of improving our bottom line.

John Jackson. Thanks everybody.

Thank you. That does conclude today's. Thanks everybody that does conclude today's teleconference. Once again thank you for your participation. You may disconnect at this time. Call ended at 1105 a.m.)--- 0