Archrock Inc (AROC) 2003 Q4 法說會逐字稿

Good morning. Welcome to the Hanover Compressor Company fourth quarter and year end 2003 financial results conference call. With us this morning are Chad Deaton, President and Chief Executive Officer; John Jackson, Senior Vice President and Chief Financial Officer; and 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 it's financial results for the fourth quarter and year ended December 31, 2003. By now, you should have all received a copy by fax or e-mail. If you have not received a copy, you can find the information on the Hanover website, www.Hanover-Co.com. I want to remind listeners that the news release Hanover issued this morning, the company's prepared remarks on this conference 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 it's forward-looking statements. Information concerning the factors which could cause hanover's actual results to differ materially from those in its forward-looking statements can be found in the earnings press release, as well as the company's SEC form 10-K for the year ended December 31, 2002, the company's SEC form 10-Q for the quarter ended September 30, 2003, and the company's other SEC filings. All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer period. If you would like to ask a question, during that time, simply press star, then the number one on your telephone key pad. And questions will be taken in the order they are received. If you would like to withdraw your question, you may do so by pressing star, then the number two. As a reminder, if you are on a speaker phone, please pick up your hand set before presenting your question. I would now like to turn the call over to our host Mr. Chad Deaton. Mr. Deaton, you may begin your conference.

Thank you and good morning, everyone. I would like to welcome you to Hanover's fourth quarter and year end 2003 call. Today, we are going to review our fourth quarter financial results and then provide some update on our operational issues, and how we see our current business conditions as well. As we've done in our previous calls, John Jackson is going to talk about the financials in detail; and what I would like to focus on during my time for the next few minutes is to talk about some of Hanover's key accomplishments that we achieved in 2003, and particularly since our last call, as well as to discuss the current business conditions, and to also outline some of the key objectives that we agreed to as a board for 2004. As we stated on the previous calls, 2003 has been a real transition year for us, the company and it's employees have had to deal with a lot of different issues throughout the year. Many of these issues you already know of, but the -- they include the renegotiation and marketing of the Schlumberger seller note, the completion of the P gap project financing Venezuela, the settlement of the outstanding of the outstanding securities litigation, the completion of the SEC investigation, and the completion of the public notes offering and execution of the new revolver senior credit facility. And of course, one of the big things is the ongoing change in the company and it's culture. Clearly all of these issues took a significant part of our time, but I'm happy to report that for the most part, these issues are now cleaned up.

The fourth quarter was especially busy for us but, as well, extremely rewarding considering what we accomplished since the last time we talked to you on our call. In October of this last year, the P gap project financing in Venezuela was completed. And we utilized the distributions from that financing to repay the P gap note of some $60 million to Schlumberger. In November, we marketed the zero coupon note to the institutional investors, and in December we completed the public offering in $200 million in senior notes and about $144 million in the senior convertible notes; and then used these proceeds to refinance debt that was coming due in June of '04, and also to reduce some outstandings under our senior credit facility. We also at that time executed a new revolver of $350 million credit facility and extended that maturity out until December of 2006. Also in December, after a very long process, we did receive the final resolution on the SEC investigation; with the company not being required to pay any monetary fines or to perform any additional financially restatement.

And earlier this month, in February, we announced that we had received a court approval for a global settlement of outstanding shareholder litigation. And I know that we talked a lot about this over the last several months or last year, but unless you're actually involved in a lot of this, I think it really is hard to appreciate the time and effort that we required to get all these issues behind us. And I do want to take this time to thank the Hanover's board, the management team, that's here with me today, and that has worked so hard, including all the other management team and all of our employees; as well as our shareholders for the effort and understanding and cooperation that they gave us in 2003, in order to finalize these issues, and of course, now it clearly allows us to put more emphasis on the operations of the company. In addition to some of these nonoperational or these other issues that I just talked about, we also took on several initiatives that we felt were needed in order to ultimately improve the financial performance of Hanover. In July, we began the implementation of the new information and financial reporting system, ERP; and by year-end, we had brought on our domestic rental and parts and service businesses online, and we started the implementation of the international and fabrication business lines. We had a review yesterday, and as of right now, we have approximately 70% of our total applications online in the company. And we are still on track to complete most of this process by mid-2004.

During the year, we also implemented the rationalization of our fabrication business, ultimately leading to the closing of six of our fabrication facilities, and reducing our fabrication head count by some 500 employees. This consolidation process did take longer than what we really wanted or that we anticipated. It did lead to some disruptions in the management, marketing and operations of this business segment. And it did have a negative impact on the fabrications operating performance during the course of the year. I mentioned in the last call that we were taking another look at fabrication and we did spend a considerable amount of time and effort in the fourth quarter focusing on what we needed to do, and even improve where we were in this business line even more, and we took some additional action in the fourth quarter; and I think that we're going to start seeing, or you will see some improvements in the first quarter of that business, and I'm going to give you some more details in a minute. Also in 2003, we implemented a training and development program for our employees. This is not something that the company had done in the past. In total, with we had over 17,000 man days of training and we primarily focused in the areas of finance, ethics and leadership. This is training that was definitely necessary, and it was done in order to make sure that, you know, some of the mistakes, in the past, are not to be repeated and put us on solid ground going forward in 2004.

Through all of this, the company's financial performance did suffer 2003, as the cost of cleanup a lot of these outstanding issues was significant; but without a doubt, it was necessary for the ongoing viability of the company. Operationally, there were several positive highlights during the year, and I just would like to touch briefly on those. One of the key objectives in 2003 was to improve our domestic rental fleet utilization and pricing, and I think we made some positive strides in both of these areas. For the year, through a selective price increase initiative that we implemented in the first half of last year, we were able to achieve about a 2% overall price increase across the domestic fleet. As far as utilization goes for the year, we were able to increase our horsepower under contract in the U.S. by approximately 49,000 horsepower. And this was above the some 85,000 horsepower that had come back into our yard from the loss of alliances the year before. It resulted in our domestic utilization improving from a 72% at year-end of '02 to 76% at year-end 2003.

Domestically in the fourth quarter, we have seen a pickup in inquiries in all of our geographical regions, both for rental as well as service, and also as well as equipment sales. Due to the increasing demand internationally, we were able to increase the contracted horsepower overseas by about 50,000 horsepower during the year. The vast majority of this horsepower came from the idle equipment that is in the U.S., and that was refurbished and moved internationally. In the first quarter of 2004, we have approximately 6,000 horsepower that is already in place that we moved into Mexico will which be coming online under a long term contract, and also under another long term contract another 22,000 horsepower that will be coming online in Brazil towards the end of the first quarter. In the second half of 2003, we were able to successfully market and put into operation two integrated solutions gas plant facilities, one in Reynoso, Mexico and one in Brazil. And in the first quarter of this year we will have another integrated solutions project starting up in Brazil.

Today, at Hanover, we now have over a dozen integrated solutions plants that we own and operate, again mostly in Latin America; and we have a significant number of plants that we've constructed and sold to producers throughout the world. We look now, shift over to 2004, and going into 2004, Hanover now is focused on improving our operating results. In fact, if you look this year, instead of our key objectives being based on such things as SEC settlements, shareholder litigation, refinancing issues, or facility consolidations; our key objectives are now concentrated around improving the operational performance of the company. For example, first, we want to reduce our leverage. Our debt levels are not where we want them to be, and as stated previously in other calls, we are committed to underspending cash flow over the next three years in order to pay down debt by a minimum of $180 million; and of course that excludes the accretion of the zero coupon note that we just marketed.

Second, we are committed to improving our fabrication facilities. We believe in our operations, we believe we have right-sized this business to match the market opportunities, and we're watching it closely; and we have improved our cost structure in order to be more competitive in the marketplace. In addition, we've sharpened our focus, marketing, and bidding side of the business to be much more competitive; and we're more aggressively pursuing new opportunities as they present themselves. I think this renewed focus and effort, we're beginning to pay off, as we've seen our backlog increase; this excludes Belleli, but has increased from $46 million at the end of 2003, to one month later at the end of January, to approximately $78 million dollars. Internationally, while Latin America still offers substantial growth for the company, we are excited about some of the new emerging markets in Russia, the Middle East, and west Africa. And another one of our key objectives in 2004 is to begin to penetrate these markets.

In '03, we opened the offices in Legos Nigeria and Moscow. In Nigeria we anticipate bringing an integrated total solutions barge online in the second quarter, and we are actively working on two other projects in the country that we hope to have online by the end of the year. In Russia, we believe the long-term prospects for the total range of our products is strong, but at the same time, we realize that the road to get there is not going to be without its challenges. We are going to have be patient and we are going to have to watch our costs, but we need to be in Russia as we go forward. In the Middle East, we see good opportunity. Mostly for the production and processing side of the business, not so much on compression. And for Belleli, we particularly see a strong business in it's desalination business line. The Belleli backlog has increased from $65 million to $104 million over the last three months. And in fact, if you look at the combined backlog for compression, production processing, and Belleli; our backlog has gone from $127 million at the end of Q3, to about $180 million at the end of January.

During 2004, we also want to improve our operating margins for both our rental and fabrication business lines. Therefore, a key focus during the year, key objective will be on controlling costs and improving operating efficiencies in the field. And finally, before I turn this over to John, I just want to say that we will continue to be committed to the process we began putting in place in 2003 to ensure that the company maintains proper governance and internal control procedures. We will continue to move forward on finalizing the implementation of our new information and financial reporting system; and as I said earlier, with the goal of having it implemented in the majority of our operations by the middle of the year. As well as putting in the effort now in order to complete the Sarbanes-Oxley 404 implementation requirements by year end. With that, John, I will turn it over to you.

Thanks, Chad. I'm going to just touch briefly on a few of the unusuals, give a little more color on that; and then move to the rest of the financials as we move along. To start with the Belleli goodwill, I wanted to focus on that. We wrote off the $38.8 million in the quarter, and one of the questions that might come up is you just spent $15 million dollars buying off your partner and you wrote off the goodwill. Our partner was not of financial strength that allowed us to really grow Belleli the way we thought Belleli was capable of so we thought the purchase of our partner's interest in allowing us to control 100%, really positioned us where we wanted to to be figure out what we wanted to do with Belleli. And as you can see from the quarter we've just gone through of being able to give them bonding and financial support, their backlog's grown rather dramatically and as you look at the prospects in '04, as they move ahead, one of the things that is really strong in the Middle East right now is desal plants. There will be at least six plants let this coming 12 months or so, and we think we are positioned well to participate in that activity; and as a result we think Belleli has an upside as we go ahead. You have to look backwards, and as you look forward on a goodwill valuation, you have to discount future cash flows and that led us to the conclusion of writing off the goodwill at this time.

As we move to the securities related settlement, we had a $4.6 million dollars dollar charge in the quarter. That was really comprised of two components. That was the mark-to-market we've been having over the last few quarters on the stock contribution that will be a part of the settlement. That was offset by a $2.5 million benefit that we recognizes because of a contingent note that we described earlier in our settlement last year, that will come into play as the settlement goes effective; hopefully by the end of the first quarter here, and there -- as a result of that note being contingent, there is an embedded derivative which is driven by the stock price that can make the note go away. We have to value that derivative in mark-to-market as we go forward to forward. So one thing I wanted to point out on this is that prior to filing the 10-K, and it is noted in our press release, the settlement may become effective; and if it does we will mark one more time and our financials would change prior to filing the K. In addition to that as we go through 2004, until the note is extinguished we would then mark-to-market this embedded derivative.

As we turn to the deferred tax valuation allowance, we had a $26 million charge in the quarter for valuation allowancing our U.S. deferred tax benefits. What's happened here is in the U.S. jurisdiction, we've used up our deferred tax liability and have now begun creating a deferred tax asset. As a result, we have to be able to show that we're going to use that asset up very quickly, and at this time, we can't show that. We believe we will use that asset over time, but we can't show that in the near term. So as a result, we have to put a reserve against that. It does not affect our NOLs and our ability to use them or the time line we use them, and it does not affect cash payments, making them or not making them. This is strictly an entry to reserve tax benefits unless such time as we can predict with more certainty that we will utilize them. The other thing to note on that is that that could have an effect on our '04 rate as we move into '04 and project our tax valuation allowance that we might have to provide in '04 and, at this time, we do not have a good estimate of that. We will provide that on our first quarter call when we have been able to analyze really what we believe jurisdiction by jurisdiction our tax benefits and assets will be. From an earnings per share perspective, we reported an 88 cent per share loss.

We have a table that provides 86 cents or so of unusuals, four or five items, some some of which I have just touched on. The other thing I wanted to point out, that would imply a two cent loss for the quarter; but the other thing I wanted to point out is that we did have an effective rate estimate throughout the year, as all companies do. As we trued up our foreign tax jurisdictions we were able to realize additional benefit in the quarter, as we trued those rates up to more appropriate rates. As a result, that ended up being about six to seven cents worth of benefit in the quarter. Which gets you, if you took that benefit out, you would have kind of a run rate of around nine cent loss for the quarter.

Turning to just the overall earnings profile, quarter on quarter, third quarter to fourth quarter, I'm not really going to spend a lot of time here; but on rentals, our margins are lower than what we would like them to be. I'm going to give some guidance in a minute relative to margin percentages that we would hope to see beginning in '04 as we move through the year, but it is primarily on the rental side driven by costs. We think our revenue slate is moving in the right direction. It has been growing. Our utilization has been increasing. The area that we will see margin improvement on the rental side is cost, and that was what really affected us in the fourth quarter. The fabrication side again it is really both ends. Revenue and cost. With our backlog growing, and our focus on generating additional revenue and the further consolidation we experienced in the fourth quarter, we had cost impact with not the revenue side of the business that we would expect to see in '04. Again, we will talk about that a little bit more in a minute.

And the parts and service business has been relatively steady and we would expect it to maintain that steadiness and perhaps -- perhaps a little bit of growth as we move through next year but in essence those margins and those revenue streams we would anticipate maintaining their current levels. Turning to liquidity for a minute one of the things, as Chad mentioned, that were able to accomplish in the quarter was improving our liquidity position with some offerings and a new revolver. At year end, we have $27 million drawn on our revolver. As of today, we have zero drawn on the revolver. It is totally undrawn. From an availability perspective, we have a number of LCs outstanding on under it, so our theoretical availability on the revolver would be $246 million at year end. That includes our cash and LCs. On a covenant constrained perspective, we could access at least $223 million of it. So we have a minor covenant constraint, but we have access of over $200 million; and with our stated debt reduction goals this year we think we have very adequate liquidity at this point.

Moving to guidance for a few minutes then. From the debt perspective, as Chad mentioned, we anticipate paying down $60 million of cash debt this year. That would be offset by the $21 million or so that we would anticipate the paid in kind accrual adding on the Schlumberger note. That timing won't be ratable, necessarily. We have heavy interest burden payments in the first and third quarters. So we would anticipate the first quarter to be relatively flat, and in the second and fourth quarters to be really what would get most of that debt reduction, sans some unusual item, like an asset sale or so forth. So just so that you have that timing stream as you move ahead. Revenues, we've stated a 5 to 10% growth, and that gets us our EBITDA of $280 to $315; that's a 5 to 18% growth over 2003, in that range. If you look at our full year of $266, and our fourth quarter run rate of really $260, we think that is an achievable range by being able to focus on the business, and focused on cost initiatives.

From the margin perspective, domestic rentals we would anticipate to be in the 61 to 62% range through '04. Gradually improving as we move through the year. On the international front, this is where we think we have an opportunity to make some more progress, versus the last two quarters moving more in the 65 to 68% range during the year. Fabrication, we would hope to return to the 10 to 12% kind of margin range, versus the 8 or 9%, 7 to 8 to 9% we've been experiencing the last couple of quarters; both from a consolidation effect, as well as the higher revenue effect of spreading fixed costs over a larger workload. The parts and service margins we would anticipate to continue in the 25 to 27% range on the base business. Utilization, we're anticipating a 2 to 3% growth during the year on our fleet worldwide. With international maintaining relatively steady in that growth coming in the U.S. From a capital spending perspective, we've given a fairly wide margin of guidance, $100 to $150 million. That will be governed by cash flow, we have a fairly wide guidance range on EBITDA.

The other thing that could move our cap ex up or down is some purchase options that customers have from time to time during the year, they can come through and buy $10, $20, $30, $40, $50 million worth of equipment. If they do that, we might find ourselves in the situation where we've been able to pay our $60 million debt down, and have some cash from asset sales. So that's really where that range of guidance comes from. So finally, as we turn to '04, I think Chad has mentioned the internal control work on Sarbanes-Oxley 404. All companies will be facing that. That will be a focus area for us this year. Delevering will be a focused area for us, but I don't think it will impact our growth greatly. We have a lot of idle equipment. And we have the ability to sell additional product, as evidenced by our backlog growth. So we think we can deliver growth and deliver delevering simultaneously, given our slate of idle assets. And then from a cost control perspective, major initiative, detailed budgeting, accountability, and so forth; that we'll be driving this year, with the ability of the management team really to focus on running the business. We think we will allow for a slow and steady improvement as we move through '04. And with that, we'll open it up for questions.

Thank you, Mr. Deaton. I would like to remind everyone, in order to ask a question, please press star, then the number one on your telephone key pad at this time. If your question has been already been asked, and answered, you may withdraw your question by pressing star then the number two. As a reminder, if you are on a speaker phone, please pick up your hand set before presenting your question. We will pause for just a moment to compile the Q&A roster. Your first question is from Ken Sills of Credit Suisse First Boston.

Good morning, guys.

Hi, Ken.

I wanted to follow-up a little bit on the margin improvement. Particularly in the fabrication business where you guys said you're seeing some competitive pressures. But looking at, you know, if you can get back to kind of 10 to 12%, would that imply the disruption in Q4, was you know, $700,000 to $1million of impact? Or is it a little bit lighter, that is a combination of lower volumes and the disruptive impact?

It is a combination of both. But we had -- your number is a good number, but it is a combination of, again, shutting down two facilitates and not being real efficient at what we did.

And could you talk a little bit about the competitive pressures you guys cited in the press release on the fabrication side? Is that domestic, mostly domestic? I mean how is that side of the business doing and what are the competitors doing there?

Well, it is mostly domestic. Although our competitors are domestic or Canadian. If you look at on the compression side, around the world, you know we have our Canadian competitors, who have been quite aggressive on some of the international pricing in the Far East. And of course, in domestically, our main competitor, has been quite aggressive in terms of it's market share on fabrication. We're also seeing some startups come back into the market. Some ex-employees here that have started up. So we, you know, we see that we are going to protect our market as that happens.

But I think, you know, the other side of it, Ken, is also we -- we took on some more action to close another couple facilities in the fourth quarter and consolidate and business was weak. Backlog, as we said, has improved. The good news is, it is just not -- you know, when we book backlog, it is because we have the contract. We also have a lot that is pending out there that we're watching. And that looks pretty strong. In fact, it is very encouraging, the last -- the last month, month and a half. So it is not just a flash in the pan, we don't think.

And then a follow-up question on Venezuela. I saw that they devalued the bolivar. Do you have any exposure to that happening this quarter? Is that going to come into the numbers?

It shouldn't impact us in any significant way. Most of our contracts are paid in U.S. dollars and with some bolivar content, the bolivar content is largely paid to dollar equivalents to time. We do have some straight bolivars we get paid in country, but they are less than our bolivar expenses in country; so we anticipate it having negligible effect, if not a slight positive because our expenses will be lower because we have fixed bolivar expenses and they're worth less today. At this time, we have done a review of it and we don't think it will have a significant impact on us.

And finally your guidance of $280 to $315 of EBITDA, is that kind of the new reporting way where you back into it and it includes interest income and equity and nonconsolidated affiliates?

That includes the equity income and it does not include interest.

It excluding interest expense.

It excludes interest expense, but it would include equity income. It would include all activities that we report through what would be EBITDA on our financial statement, which would include equity income.

Okay. Yeah, because the only difference with the way we've been doing it, and I'm assuming other people have this issue to, is the foreign currency and other, which is now in your EBITDA numbers.

Right, it is in our EBITDA number and we don't really forecast FX being a positive or negative because it will move however it moves, so we forecast zero in essence when we give our guidance. We don't assume anything.

All right. Thanks.

Okay.

Your next question is from Terry Darling of Goldman Sachs.

Thanks. A couple of follow-up questions on the margin side for the rental business. First, on the domestic side, just trying to understand better what happened in the fourth quarter. I think you're indicating from a guidance standpoint 61, 62%, and that's been sort of the level you've been at, I think, for the last couple of quarters; and you slipped down below 60% this quarter. I wondered if you can fill us in there. It looked like pricing was off a little bit.

Yeah, I don't think pricing was off Terry. I think what we had in the fourth quarter, which, you know, goes back to the point when I was saying that we had 17,000 man days of training and everything else that we did, and really mostly in the third and -- second and third and early part of the fourth quarter. I think it was a matter of getting all those things cleaned up and issues done, and you know, we put training on hold, as we go into the first half of this year, we will start it up again in the second half, as we see the business and the other things picking up. But I think it is not so much pricing, it is just a matter of cleaning up to finish the year. We had a very good budgeting exercise in the fourth quarter. Really focusing on saying come January 1, you know, now we're really focusing on the operations and the company; so I think we had some cleanup numbers thrown in the fourth quarter.

Okay. And presumably your guidance going forward assumes no price improvement as well? Is that correct?

It does not assume price improvement. We are looking domestically at some areas where we, you know, equipment is short for some of the particular horsepower levels, and there, we will have a little bit of price increase.

And is that assumed in your guidance at this point?

No.

So there is some upside there. And across the whole fleet, what is the potential for that? Is that a percent, or 2%, something in that range?

Yeah, I would say 1 to 2% is a possibility.

Okay. And then on the international side of the business, same sort of question there. On the margin side there, you slipped a little bit.

Yes.

I guess I recall you were pretty firm in the third quarter call thinking that number was going to move back up.

Yeah, we really did, Terry. We thought -- we had taken a number of our inventories, in some of our larger locations, we thought we had a -- you know, a good plan to kind of get through the fourth quarter here; but in some of the other countries, we took some inventory, and in our base countries, we still had some issues, I think, that were associated with focused on '04 and really trying to set the -- set the stage right. And we had a little bit of operational disruption on a couple of units. So all that kind of hit us. And the margins just didn't come through as quickly as we had hoped. I mean we all sit around and talk about this is where we are, this is what we're going to do, this is how things are going to work now, and we think we are on a good path to succeed, and I think we are for the long term. It just doesn't happen as quick as having a meeting and walking out and saying now this is how it is going to work. Distilling it down to the organization has taken some time.

And just to give you a perspective of that, over the last year, not only have we had some layoffs, but we had 3,300 people in the U.S., and about a thousand of them over the course of the last year have either left the company or been laid off. We hired a few back, but we've had a 30% turnover in the U.S. overall. And that's pretty heavy to deal with. So throughout this process, and the accountability of going into '04, there has been a lot of work I think done to position the company to be at a little bit steadier state as we move into '04. So some unpredictable items came through in the fourth quarter. We're not aware of any at this time as we move into '04. You are always going to have something break down from time to time, but as we move ahead, I think we will have a little bit more stable environment.

I think we can appreciate that. But I guess your guidance, 65 to 68%, you've been up in the 71% range in the first half of '03; you know, why can we not get back to that level, I guess, is where I would take the question next.

Well, I guess we would like to -- we would like to give guidance on numbers we think we can deliver and given the fact that we have been at 64% internationally the last two quarter, we think 65 to 68% is something we can achieve this year. Could we get higher over a longer period of time? Potentially. But the other thing that is going on too, as Chad mentioned, is we're entering Moscow Russia, the West Coast of Africa with some overhead and some cost of trying to position people there for the longer haul; so I think we're investing a little bit today for the future, so that is also putting some pressure on margins.

Okay. Last question. A bit more of a strategic one. You've got the tensions here of trying to grow, trying to pay down debt and obviously a variable in the mix there is your outlook for asset sales. You've got some small things, I think you've talked about there would be some other larger things, if you wanted it to be more aggressive with that. Can you share with us where your thought process is on asset sales, you know, across the board at this point?

Well, I think as you said, the noncore assets that we still have remaining, we're aggressively trying to move those on, Terry. And then of course, we have the situation where the client has the right to purchase. And you know, especially on a couple of the international projects, there are a couple of plants and some things that are quite large that the client has been talking to us about possibly purchasing. You know, this could be $15, $20, $25 million. If that happens, we would go ahead and honor that, sell that; and I think this is why, as John talked about on the cap ex guidance being $100 to $150, we may want to take some of that, pay down some debt with that, and take part of it and put it back into some asset elsewhere in the world. We're not out right now looking at core business to say we have to sell something. But you know, this is an ongoing process you look at every day, and if we find something, we may decide to do it.

And on the -- you know, the noncore and some of these discrete items, you know, let's put, you know, larger -- larger things aside for a second. What kind of a number are we talking about, or a range that we're talking about on the noncore and then some of these one-off things that you just mentioned?

Well, on the noncore, we're probably talking $10 to $20. And that would include some facilities we've shut down that we're trying to sell. And they're all in various stages of either being listed, or discussions with potential purchasers and so forth. So we would hope to, over the course of this year, get $10 to $20 out of this kind of noncore.

Okay. And then perhaps roughly a double that range, you know, if you -- if you move into some of these other items, Chad, that you've just mentioned?

Yeah, I mean there's some plants, you know, a gas plant operation or an integrated solution operation here in the U.S. that a client has shown some interest in, and you know, that could be the $30 to $35 million dollar range if we decided to move on that one.

Okay. Thanks very much, guys.

You bet.

Your next question is from Justin Tugman of Simmons & Company.

Good morning.

Good morning.

Chad, I was wondering, you could elaborate a little bit further in terms of exactly how you are going to achieve some of these cost controls, particularly on the international side of the business?

Yeah, I think the first thing to say on that, Justin, is you know, one of the things that we've done over the last half of last year, is -- and really it went through all of last year, we started to replace a lot of different managers in operations, domestically, as well as internationally. We started domestically, and then as we moved through the year, went into the international side. As you put new management teams in place, they're looking for things, and I think they're cleaning up things. And that's one of the reasons why I think our margin did go from the 70s down to 67, or why we think we can get it to 68. Now part of the some of the things they're doing in there is we're looking at things like preventative maintenance or productivity improvement, remote monitoring so we have less field people necessarily having to run all around to check locations, and facilities. So I think as this management team, it is a stronger management team, as we get these people in place, domestically, as well as internationally; they're going to find ways through preventive maintenance and other things to continuously improve the margins.

Okay. And turning to the domestic business, you had mentioned that you will be looking to try to achieve some pricing improvements. In your mind, Chad, how much more do you think the market can withstand in terms of pricing improvement?

Well, you know, unless we see a significant increase in compression demand, I don't think we're going to be able to push through much more. I mean we talked just a minute ago about possibly 1to 2%. You know, I think if we could get that in 2004 domestically, I would be pretty happy with it. You know, John talked about the guidance, and saying that, you know, we're right now at about 76% utilization. If we could get up to 79%, you know, even 80% over the next year, obviously that puts us in a better position to go back and get some price improvement. But until we continue to -- both us and our main competitor, use up some of that excess horsepower out there, I think it is going to be tough to push pricing too much.

Okay. And following on with that, you have given some guidance, you know, utilization of 2 to 3% in '04. Given where we're at in terms of a fairly flattish rig count, what do you believe beyond the 2004 number, assuming a flat environment persists; what do you believe that you could get your utilization up to?

Beyond 2004?

Yes.

Well, I know where I would like to get it up to. I want to be in the mid 80s. Now, how fast we get there, just depends on you know, what the activity increase is. What our competition does, and how we perform from a service quality standpoint.

Okay. And final question, John, can you give us some insights into your outlook for the '04 SG&A and then also what type of additional costs will you incur because of Sarbanes-Oxley?

I think SG&A was $42-ish or so here in the fourth quarter. We would anticipate it to be at or below that level on a run rate as we move in. I think we're talking, you know, $40 to $42 a quarter as we go ahead. So, you know, the $160 to $165 range is kind of what we would expect to see for the year.

Okay. Thank you.

And as far as Sarbanes-Oxley costs, we really haven't captured it separately. I can tell you that from an internal audit perspective, we outsource our internal audit currently, we're moving it it inhouse; but we will spend two thirds of that budget this year on that. Our external audit costs are anticipated to go up at least $1million, as a result of this; so I would say just on check writing, we're talking probably $1.5 million at a minimum. Besides the other -- the thing that really takes time and money is the internal focus. You have to have -- it is not a finance function. It is not a finance effort. This goes across the organization through all facets of what your control environment is, purchasing, operation, inventory and so forth. And to document that in an extensive manner that you feel comfortable that you understand it and you've tested it, takes not only external costs but internal focus. And that's really where I think the more expensive costs are, is the management time that you spend on this. And we will be doing that throughout this year.

Okay. Thank you very much.

Once again, I would like to remind everyone, in order to ask a question, please press star, then the number one on your telephone key pad at this time. Your next question is from Zioping Lee of Putnam Lovell.

Hi, can you talk about the working capital in 2003, in terms of --.

I'm sorry, I didn't quite hear the whole question. Working capital in 2003 in terms of -- what?

In terms of what is the net working capital number in 2003?

The net working capital that we generated in 2003 was probably I'm going to say, I'm looking at it, it's probably $20 million we generated in working capital in 2003, approximately.

That's a usage of cash or --

It is the source. The source in '03.

Okay. Excellent. And what level do you expect in 2004?

In 2004, if we're successful in growing our fabrication business and rental business, we would consider it a success, I think, if we kept working capital flat. It might be a slight draw. Depending on if we grow internationally. Because as you grow internationally, your rental receivables are typically re 60-90 day type of payment cycles; so that would actually grow our day sales outstanding a little bit. So if we keep it flat to $10 million, with the business growth that we're projecting, we would consider that our goal.

Okay. Excellent. I also wonder if you can go through the maturity of the debt that you currently have, in terms of -- in 2004, 2005, '06, '07, '08, how much of that will be due each year?

Just real briefly, in '04, we have a kind of a revolving debt facility that we have with our Belleli entity that is about $30 million or so that just terms up, it rolls over each year, so that is all that's really due this year; as I said we have nothing outstanding currently under our revolver. Our revolver goes out to '06. In 2005, we have $200 million that matures in March. It is with a group of banks. It can be called at par at any time, and it is secured by some collateral of compression assets in the U.S. We have another $173 million, same type of security with the bank groups that matures in October of '05. In '06 we have nothing that comes due other than our revolver which is currently undrawn, as I said. In 2007, we have the Schlumberger note which accretes to about $263 million at maturity. It does have a call provision on it where we could call it at $102.5 in March of '06. That's the only thing due in '07. And then in '08, we have a couple of different things due, we have a public synthetic lease that matures, and we have a convert that matures, the combination of which is approximately $500 million that matures in '08. And then there is nothing in '09.

Okay. So in 2008, you have $200 million for the lease and $200 for the convert.

Correct.

And how are you planning to pay down the debt in 2005?

In 2005, we have -- we're evaluating all of our options on what we might do there, as we always do, with everything that is outstanding. We have an outstanding shelf, so we have the flexibility at any time, if we deem that we wanted to go to market, we could. We also obviously have our cash flow that we're planning to generate over the next two years of $120 million. We have an undrawn revolver, which we could use to draw and pay that down. So we're evaluating all our options at this time and what we might do and we haven't made any public decisions on what we might do there; but we think we have a lot of alternatives to take care of that, but through cash flow, asset sales, revolver, debt access, market access, whatever we might choose to do.

We think that is manageable.

Yeah, we're very comfortable that we can manage our way through that.

Yeah, and then in terms of the revolver, is that the same as you refer to in the press release; that the $360 --

Yes, it is a $350 million dollar revolver, yes; with no outstanding.

Is it secured?

It is secured by inventory and some compression assets and so forth.

Okay. Excellent. Thank you.

Okay.

I will now turn the call back over to Mr. Chad Deaton for any closing remarks.

Okay. Well, again, we thank you for listening and attending and we look forward to talking to you in a another couple, three months. Thank you.

Thanks.