Archrock Inc (AROC) 2007 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Universal Compression Holdings, Inc. and Universal Compression Partners LP earnings conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded today, May 9, 2007.

I would like to introduce Mr. David Oatman, Vice President Investor Relations of Universal Compression.

Good morning, everyone, and welcome to the Universal Compression Holdings and Universal Compression Partners earnings conference call for the three months ended March 31, 2007. We prepared summary pages of financial and statistical data about the quarter in our earnings release, which are posted to our UniversalCompression.com website in the Investor Relations sections for both Universal Compression Holdings and Universal Compression Partners.

As we have in the past, during this call, we will discuss some non-GAAP measures in reviewing our performance, such as EBITDA as adjusted, gross margin and distributable cash flow. You'll find a reconciliation of these measures to GAAP measures in the summary pages of the earnings release.

As a reminder, in addition to providing statements of historical facts, today's conference call will include certain comments that constitute forward-looking statements including statements regarding the proposed merger with Hanover Compressor Company, our expected second-quarter 2007 financial results and other future results. Investors are cautioned that there are risks, uncertainties and other factors that may cause the Company's actual performance to be significantly different from the expectations stated or implied by any comments that we make today.

These forward-looking statements are affected by among other things the risk factors in forward-looking statements described in Universal Compression Holdings and Universal Compression Partners' Annual Reports on Form 10-K for the 12 months ended December 31, 2006 and those set forth from time to time in both entities' filings with the SEC, which are available through the Company's website and through the SEC's vector system website at www.SEC.gov. Both companies or both entities expressly disclaim any intention or obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise.

In connection with the proposed merger between Universal and Hanover, a registration statement of the new holding company has been filed with the SEC under the name Heliod Holdings. Investors and security holders are urged to carefully read the preliminary proxy statement prospectus, which is available now, and the definitive documents and other materials regarding the proposed transactions when they become available because they will contain important information.

I will now turn the call over to Mr. Steve Snider. Steve?

Good morning, everyone, and welcome to the first-quarter 2007 earnings conference call for Universal Compression Holdings and Universal Compression Partners. Joining me today is Michael Anderson, the CFO of Universal, and Daniel Schlanger, the CFO, of UCLP.

As we have done in the past during today's call, we will often refer to Universal Compression Holdings as Universal and the Universal Compression Partners as UCLP. Because we consolidate UCLP's financial position into Universal, the discussion of Universal will include UCLP unless otherwise noted.

First, I would like to provide an update regarding the previously-announced merger agreement between Hanover and Universal. On March 27th, Universal and Hanover jointly announced that we received a request for additional information from the antitrust division of the US Department of Justice regarding the proposed merger between the two companies. Universal is cooperating with the government with respect to that request and continues to expect the transaction to close in the third quarter.

We also continue to be encouraged by positive reactions from both employees and customers about the merger. We believe this merger of equals will create a global leader in natural gas compression services and production in processing equipment, which will enhance value for stockholders of both Universal and Hanover due to an expanded global market position, a larger base of first-class employees, significant operating synergies and a larger pool of domestic contract compression assets that could be offered for sale to Universal Compression Partners.

Turning now to our results, I would like to remind everyone on the call this is our first earnings call to include a full quarter's result from Universal Compression Partners, which went public and commenced operations in October 2006. As I think you know by now, UCLP is a master limited partnership owned by Universal to provide natural gas contract compression services to customers throughout the United States. Universal continues to own a 51% ownership interest including the general partner interest in UCLP. Universal intends to offer to UCLP the opportunity to purchase the remainder of its domestic contract compression business over time, providing both significant growth opportunities for UCLP and we believe substantial value to Universal's shareholders.

Now, I will provide highlights of recent financial results and other activities. For the first quarter of 2007, Universal reported income of $14 million or $0.46 per diluted share. Included in these results is approximately $1.4 million of pre-tax charges from merger-related expenses. Without these charges, earnings per diluted share would have been $0.49.

Revenue was 239 million and EBITDA as adjusted was 72 million for the quarter. Revenues in the first quarter were at the high end of our expectations and reflected the continuing strong demand for our services and products in all of our business segments, including domestic contract compression, international contract compression, fabrication and aftermarket services. With a continued strong fabrication backlog and customer inquiry levels remaining high, we believe the market for compression products and services remains positive both domestically and internationally.

Offsetting some of these strong market dynamics has been the increase in costs we have experienced over the past several quarters. The two major sources of the increase, particularly in the first quarter, were increases in SG&A and domestic contract compression operating costs. SG&A costs were up $3.2 million sequentially over the fourth-quarter period as we continued to invest in strategic initiatives designed to position our business for future success.

These initiatives include items, such as UCLP, our ERP system, the BTE acquisition, our US field development and efficiency programs and the expansion of our international business development efforts. We are convinced these programs will add significant shareholder value over time despite their incremental cost and effect on our income statement today.

In addition to these incremental SG&A costs, we have also experienced increased costs in our domestic contract compression operations. Specifically, our labor and parts costs are higher than they have been historically. Some of the higher part costs are related to more rigorous focus on compressor maintenance resulting from our field reengineering program, which we believe will lower our overall costs in the future.

We also continue to experience higher labor costs, both as a result of energy sector wage inflation as well as a greater number of labor hours stemming from a less experienced workforce and higher field turnover. Members of our senior management team have been traveling extensively to our domestic locations in an effort to identify areas where we believe we can reduce costs. These measures are helping, and we believe we will be able to successfully bring costs back in line with historical norms over time.

We certainly had our share of cost issues in the past. And our operating management team was successful in getting those issues turned around. We're again confident that we will get our cost structure back in line with these new cost pressures. But as we mentioned on the call in February, there are no quick fixes.

Although they may be costly in the short-term, we remain committed to continuing the program we have started since we believe they will build better work processes and a more efficient organization over time. We anticipate that we will be able to show incremental progress on cost control through the remainder of the year, but the exact timing and scale of such progress is difficult to determine partially due to merger-related issues. Further, we believe the merger with Hanover will provide additional opportunities to reduce both SG&A and field operating costs on top of those we expect to achieve on our own. And we remain excited about that prospect as well.

In domestic contract compressions, market demand continues to be healthy. Overall, our customers have continued their efforts to offset the impact of significant decline rates in their existing production through ongoing exploration and development programs. This activity often involves developing relatively new areas like shale plays and other unconventional sources as well as infill drilling and workover programs to maximize production for more established conventional areas. As we have discussed in the last couple of calls, somewhat lower activity levels in small and medium horsepower compressors have partially offset the healthy demand for large units. Over time, we expect these smaller units will be redeployed.

Our average domestic working horsepower increased by about 6000 horsepower over the fourth quarter as new, large horsepower additions to our fleet more than offset returns. The market continues to be strong for large horsepower equipment, which we continue to build and quickly activate in our contract compression fleet.

Today, we have approximately 50% of our domestic fleet in 1000 horsepower and above units. And the utilization of that portion of our fleet is around 90%. Despite recent weakness in the lower and mid-range horsepower units, we still maintained low to mid 80% utilization rates in those equipment classes.

Our domestic fleet horsepower increased from 2,069,000 on December 31st to 2,098,000 on March 31. Domestic spot utilization was 86.7% at March 31 and is currently 85.9%.

With the continuation of higher field operating costs, our domestic contract compression gross margin dollars in the first quarter were relatively flat compared to the fourth quarter and the prior-year period. Our international contract compression segment had another strong quarter as we continued to actively work to bring contract to new projects online as well as add new business.

As compared to the prior-year period, our average working international horsepower increased by 1% despite the termination of a 25,000 horsepower project in Colombia late last year. Revenue increased by 16% on a year-over-year basis, led by new activity in both Latin America and Asia.

Our international contract compression gross margin dollars in the first quarter increased 13% compared to the prior-year period and were up 3% on a sequential basis. Our international fleet totaled 608,000 horsepower at March 31st, and international utilization was 91.3% at March 31 and is now 92%.

The strength in the international market continues to provide us attractive opportunities to grow our business. As a result of these growth opportunities, our international contract compression backlog currently stands at 50,000 horsepower. This backlog includes a number of units expected to commence operations in Latin America and Asia through the remainder of this year and early next year. Inquiry and bid activity for new international projects remain strong for both compression and processing, especially in Latin America. Summarizing our total operating statistics, our overall spot contract compression utilization including both international and domestic was 87.7% at March 31st and is currently 87.3%.

We continue to expect new fleet build activity in 2007 to be similar to 2006 level, somewhere around 200,000 horsepower. We expect about two-thirds of this amount to be utilized in the domestic market; although, we will adjust actual growth capital expenditure levels based upon specific project timing and overall market demand.

We had strong fabrication activity in the first quarter of 2007, especially when including the level of new fleet builds. We are very excited about the progress we've made in our fabrication operations that has resulted in more efficiency, lower costs and stronger quality control. These improvements have generated improved results in our fabrication segment, and the first quarter was no exception. With good execution, our fabrication gross margin percentage was better than expected for the quarter.

I would also like to highlight a significant fabrication project that we're currently completing and should benefit our second-quarter results. This project, a large natural gas storage project in Mississippi, includes over 10,000 horsepower of large compressor units and involves significant installation activity. Our project team, which successfully executed the design and construction of this project over a 12-month period, has received well-deserved compliments from our customer. Michael will discuss the impact of this project on our second-quarter results later in the call.

As you will recall from our press release back in January, to further expand our fabrication capabilities, we acquired Singapore-based BT Engineering. With this acquisition, we can now meet a wider range of customer needs due to BTE's FPSO module expertise and other production and processing-related capabilities. Through this acquisition, we entered a fabrication facility in the Asia-Pacific region, which is a key step in our plans to increase activity in the Eastern Hemisphere. For example, we have a contract to build several compressor units at our Singapore facility during 2007 for installation in offshore Thailand, where we will have ongoing operations and maintenance contracts for these units.

Our compressor fabrication backlog including compressor units to be fabricated in Singapore was $228 million at March 31, '06, $289 million at December 31, '06 and $280 million at March 31st of this year. Our fabrication backlog for compression is currently at $263 million, down a bit as a result of project completions during April and reduced activity in Canada and is about 80% domestic and 20% international.

We believe our significant backlog reflects continuing strong overall demand in customer commitments well into late 2007 and early 2008. Given the high level and type of fabrication backlog, we expect this segment to continue to perform well during 2007.

Our aftermarket services segment had another good quarter as revenue was at the high end of our expectations and gross margins remained consistent at 22%. We continue to see strong domestic and international activity, and our margins have been bolstered by price increases made toward the end of 2006.

I'll now turn the call over to Michael for more financial details. Michael?

Good morning, everyone. I'm sure by now, you've had a chance to look at our press release that we issued earlier this morning. As we go through the financial summary for Universal Compression Holdings, we will do that first. And then, we will discuss the financial performance for Universal Compression Partners.

In the summary of Universal's financial results for the first quarter, the primary comparison period will be the fourth quarter of 2006, where we will focus on sequential changes as well as the guidance we provided in February of 2007. Overall first-quarter segment performance was really right in line with the guidance we provided during February. That was in terms of both revenues and gross margins.

Total revenue was $239 million for the quarter, and that's a 4% increase on a year-over-year basis. It is a 5% decrease sequentially, which is driven by lower fabrication sales primarily in Canada. And as expected, we also saw some somewhat lower sequential aftermarket service activity as we've been targeting some higher margin business in that segment.

In looking at our domestic contract compression business, revenue was $102 million in the first quarter. That was in the middle of our guidance range, and it also represents an 8% increase compared to the year-ago quarter. Revenue was flat on a sequential basis as working horsepower increased by about 6000 horsepower during the quarter and pricing was flat.

In the first quarter, gross margin percentage in the domestic segment was 60%. And that was unchanged on a sequential basis, but it was down from the 65% we posted in the year-ago period.

Domestic contract compression gross margin dollars were relatively unchanged, both on a sequential and a year-over-year basis. As Steve mentioned, we expect our gross margin percentage to improve modestly over the next several quarters but certainly don't expect to see any kind of big jump in any single quarter.

The international contract compression business revenues $38.5 million in the first quarter, and that was also in line with our guidance. This revenue level is an increase of 2% on a sequential basis. It's driven by sequential horsepower growth that more than offset what we lost in Colombia back in the fall.

International revenue was up 16% compared to the prior-year period. International contract compression gross margin percentage was 73% in the first quarter and that was generally in line with our guidance. We did see some somewhat higher repair and maintenance expenses in Argentina. But currently, we do expect margin to move up a point or two in the second quarter back to that mid-70% range.

In our fabrication operations, first-quarter revenue was $55 million. That was at the high end of our guidance. And gross margin was 14% and that was a bit above our guidance. As expected, revenues were somewhat below the strong fourth-quarter levels that we had posted that were $63 million in the fourth quarter of 2006. Fabrication operations continued to perform very well due to strong market conditions and also very good execution behind the fabrication team.

In the aftermarket services business segment, first-quarter revenue was $44 million. That was towards the high end of our guidance, and gross margin was a very strong 22%. That's a bit above our expectations. We have continued to focus on improving profitability this segment by being a bit more selective in the business that we do. And this focus may result in lower domestic growth over time but should also result in improved gross margins as we focus on providing value-added services for our customers.

SG&A expenses increased from 32.6 million in the fourth quarter to 35.7 million in the first quarter. And that was due to items including revenue taxes on new international projects, our UCLP costs, continuation of ERP costs and of course the newly-acquired BTE business. As a reminder, we talked a bit about this in our last call.

We have been incurring BTE's total SG&A cost structure from the date of acquisition in early January. Although as expected, we have been slow to recognize any revenues from BTE because we account for fabrication on a completed contract basis. As a result, the BTE acquisition was actually dilutive to us in the first quarter. But we do remain excited about the business itself and expect for it to be accretive in the first year of operations.

Additionally, we've also had SG&A expense increase related to our field re-engineering and employee development programs to position our business for future growth and profitability. Now importantly, we believe all of these additional costs remained excellent investments for Universal. And as we have completed a lot of the buildup for these items, we also anticipate that SG&A that is outside of merger-related cost should moderate over the next several quarters.

Speaking of merger-related cost, we did incur $1.4 million of these kind of expenses in the first quarter, largely related to legal and accounting fees that are not capitalizable for Universal as we are the target for accounting purposes. So we will be expensing most of these items as we incur them as we move along. And we obviously will be incurring some of these merger-related expenses going forward through -- done things such as higher merger consultant. And we're undertaking a lot of other activities in preparation for the transaction. In fact, as we look forward to the second quarter, we expect merger-related costs will be in the range of 5 to $7 million.

EBITDA as adjusted was $72.3 million in the first quarter. That is a decrease of 6% on a sequential basis. It's a decrease of 5% on a year-over-year basis and is primarily associated with the increase in SG&A that we just spoke about.

Interest expense was $14 million in the first quarter; that is up somewhat sequentially. It's flat as compared to the prior-year period.

A bit about our common share repurchase program that we had initiated during the fourth quarter of last year, we did not have any additional share repurchases so far in 2007.

With regard to income tax expense, we had a 33% effective rate in the first quarter. That's a little bit up from the 31% we had in the fourth quarter. Still, it's pretty good. And as we look out, we still think that around 35% is being a good, normalized effective tax rate for the Company as we move forward.

In the first quarter, we generated diluted earnings per share of $0.46 including the $1.4 million of merger-related expenses. And without these charges, EPS would have been $0.49 for the quarter. In the fourth quarter of last year, we reported diluted earnings per share of $0.64 and that did include $1.1 million of charges related to refinancing activities. If you take out those charges, EPS in the fourth quarter would've been $0.67.

Earnings for the first quarter included a full-quarter impact of UCLP, which we expect will be mildly dilutive to Universal on an ongoing basis. Most of the dilution is related to the additional $3 million or so of public company expenses associated with the MLP each year. Future asset drop-downs will also likely be dilutive transactions for UCO. This dilution and the importance of MLP cash flow measurement continue to be reasons why we believe cash flow will become an increasingly important valuation metric for Universal moving forward.

Net capital expenditures were $56 million in the first quarter; that compares to $61 million we had in the fourth quarter. CapEx during the first quarter included $41 million of growth CapEx, $13 million in maintenance overall and $6 million of other miscellaneous expenditures which includes trucks and equipment.

Growth capital spending in the first quarter was weighted about 70% towards the domestic market. And it also included about $4 million that we had for repackaging existing units. Debt to capitalization was about 48% at March 31; that is relatively unchanged versus December. And of course, it's down from the year-ago level due in large part to the debt reduction we had associated with the IPO of UCLP.

Total debt, it increased from $831 million on December 31 to $857 million on March 31. That was due to the fleet unit CapEx we had as well as the BT acquisition. The $500 million UCO credit facility at March 31 had $376 million drawn against it.

Working capital investment, which we calculate as excluding cash and debt, was $153 million at March 31st. That's up just a bit from the $149 million we had at December 31. The cash position at the end of the quarter was $43 million. We expect to file the Universal Compression Holdings Form 10-Q for the three months ended March 31 later today or tomorrow. Now, let me go through some segment guidance for the second quarter ending June 30th.

Revenue for the second quarter is expected to be between 300 million and $315 million. That would be a new record for quarterly revenues for Universal. Specifically, if we look at the segments, domestic contract compression revenue is expected to be flat sequentially. That would be in the 101 to $103 million for the second quarter. International contract compression revenue is expected to be in the 38 to $39 million level.

Gross margin percentages expected to be again in the low 60s for the domestic business and in the mid 70s for the international contract compression segment. Now driven by the completion of some significant fabrication projects, including the large storage project that Steve talked about, our fabrication revenue is expected to increase significantly in the second quarter. We expect it to be between 120 and $130 million in 2Q. And that's also with the strong gross margin percentage of about 15%, so should be a good quarter for the fabrication operations.

Our aftermarket service revenue in the second quarter is expected to be in the 42 to $46 million range with a gross margin percentage in the low 20s. We expect that net capital expenditures after sales of any PP&E including fleet units that for the full year, it should be 225 to $250 million. That is unchanged from our earlier guidance, and it also includes about 50 to $55 million of maintenance capital expenditures. So if you look at it and tear those numbers apart, new growth CapEx for the year is expected to be between 125 and $150 million and about 65 to 75% of that growth CapEx is expected to be slated for the domestic markets.

Let's look a little bit now at Universal Compression Partners. Of course, as UCLP went public on October 20th back in the fall, first-quarter results for UCLP this quarter were its first full quarter of operations. And obviously since Universal provides the operational activity through UCLP, UCLP is seeing many of the same cost pressures that UCO has.

Now although the costs have been higher than we expected, [beyond] the disagreement between Universal and UCLP caps UCLP's operating costs at $16.95 per horsepower per quarter and its SG&A costs at $2.5 million per quarter. Now these cost caps were enacted to protect UCLP against unexpected increases in costs, such as the ones that we've recently experienced.

Now with the cost caps, UCLP generated EBITDA as further adjusted of $9.5 million in distributable cash flow of $6 million in the first quarter. Now this distributable cash flow was sufficient to cover the $0.35 per unit distribution we declared by a ratio of 1.3 times. Now by comparison in the first quarter with the cost caps, EBITDA as further adjusted was $7.3 million and distributable cash flow was $5.2 million.

In the first quarter, UCLP's fleet average operating horsepower, it was 331,000. That was up just a bit from the 330,000 horsepower number in the fourth quarter. At March 31, UCLP had 358,000 of total available horsepower and the spot utilization rate was 93%.

About 1.15 million horsepower of the combined Universal Compression and UCLP domestic contract compression fleet is now covered by contracts converted to service agreements. That's a little bit of growth from what we last reported to you.

The contract conversion process continues to go well. Although, the pace of conversions on a total horsepower basis has slowed somewhat because we're now dealing mostly with contracts representing smaller amounts of horsepower. The total horsepower that has now been converted to the new contract form represents about 55% of Universal's total available domestic horsepower. And it's about 63% of our domestic working horsepower.

UCLP's debt ratios, they continue to be within our target ranges. Total debt to annualized EBITDA was 3.3 times and EBITDA covered interest expense by 4.4 times.

As we discussed in our previous call, the proposed merger with Hanover obviously provides a significantly larger pool of contract compression assets that can be offered to UCLP over time. We see this as a great opportunity for UCLP, and we're excited about the prospects of the merger and the positive impact it should have on UCLP.

Let me go ahead and address a question that's always popular for us about the future of asset drop-downs to UCLP and say that we will be absolutely consistent with our historical pattern. That is, we're providing no comments about the likelihood or timing of prospective drop-downs to the MLP. Lastly with regard to UCLP, we do expect to file the 10-Q on that entity within the next day or two as well.

That now concludes the prepared remarks that we have for our conference call. And operator, we would now like to open up the call for questions.

(OPERATOR INSTRUCTIONS). James West, Lehman Brothers.

Stephen, the domestic market, you have had a couple of quarters of weaker than -- at least my expectations -- on the margin side. I know you guys are doing a lot operationally to get your cost structure down. But have you considered just raising pricing?

Of course we have. Raising pricing in this market I'm not sure would help the utilization side. I don't know that it's a pricing issue as much as it is a cost control issue. And I think that's where we have focused our efforts on taking more care of our cost control. I think that would be a short-term solution that probably would not do well for us in the longer term if we did a price change at this point.

A question on the second request from the government. At this point, have you guys provided all of the information, the data, the documentation they have requested, or are you still hunting for or looking for additional information?

Well, it's a big project. We are still digging up from the long list of information they have requested. It just takes time to get it all gathered. We're continually shipping information to them, and we're still on path to get the rest of it sent to them timely.

Then one last question. Are you precluded from doing additional drop-downs into UCLP during the process with the Hanover merger?

No, we're not precluded from that.

Geoff Kieburtz, Citigroup.

This is Ed [Musfiger] for Geoff Kieburtz. Just a couple of quick questions. One, can you just talk in relation to the utilization rate, which was down a little bit in the domestic fleet? Is some of that still related to the price increases that you had had back in -- I think it was the spring of last year that I know you guys noted in the fourth quarter had some negative effect? And then, just in terms of that going forward, if that has been the case, can we sort of look for that to abate and look for utilization to come back up?

First question was on the pricing impacting our utilization. Our sales team indicates that pricing is not a terrific issue. It's more I think depletion of small wells and smaller systems that have caused them to reduce the amount of horsepower they need.

Now having said that, I believe there has to be some correlation to our price increase that we had about a year ago and the fact that utilization is a little bit lower now. I would think it's probably a combination of the two things that got us there. And we certainly have been through this, particularly in small horsepower before. If you look back over the years, you can see that every few years -- several years, smaller horsepower gets a little bit weaker as the market gets shaky the last couple quarters or a year or maybe a little bit longer. And then, it all goes back to work.

So we're going through that kind of adjustment right now. We are completely confident it will get back to work. But right now, the high horsepower is what is in demand and the lower horsepower is just kind of sitting flat.

Just one follow-up if I could -- or not a follow-up but an additional question. Just kind of looking back at sort of the cost per horsepower if you would in the domestic fleet, that's been going up for probably five or six quarters now somewhere around maybe like a 20% average-type run rate. Can you maybe delineate a little bit better in terms of -- I know labor is an issue there. Can you talk about it? Is there pressure from fluids pricing from other things going on there that maybe we could look to see it increase or update a little bit going forward?

In a multi-quarter increase that you talked about there over the last year or so, initially, we saw some increases in oil and fuel that we used for our vehicles. We have oil for our compressors as we ran out of old contracts and got our new contracts, kind of like everybody that is dealing with petroleum-based products these days so our costs went up. That was more in the first part of last year. Then, that kind of steadied itself and leveled out a little bit. It still has some pressure in that area, but it's more level than it has been.

Our issue now is mostly labor driven. It's the number of people that we have to have to do the job today, the availability of people, the quality of people. But I think with our internal programs, we mentioned the field employee development program, the field re-engineering program. We are re-orienting the way we train our employees. We're re-thinking the way we actually maintain our equipment in trying to come up with a more efficient process for that.

It's not a quick fix as we keep telling you. It's going to take a while. But certainly over 2007, we think we will be getting a lot closer back to the numbers we used to produce. So we certainly have focused a lot of resources on it. So, we're working at it.

Terese Fabian, Sidoti.

I have a question on the fabrication guidance that you gave for revenue. What are the implications of that number for subsequent periods?

The 120 to $130 million that we have for the second quarter, it's obviously a big quarter for us. We talked earlier about fabrication for an entire year being north of $300 million and the majority of that being in the second and third quarters. So we will provide more specific guidance on a segment basis when we look out in the third quarter 90 days from now. But second quarter is certainly going to be an awfully big quarter for us with regard to some of the projects and also bringing the BT acquisition a little bit online.

Can you say what proportion of that will be from the BTE work?

We have gotten lots of questions with regard to how big BTE is. And when we talk about that if you look at just sheer fabrication footage that they have added to our business, it's 15 to 20% in terms of what we currently have in both Houston and Calgary. And that's probably a decent ballpark number for people to be looking at in terms of total revenues.

One other question in terms of your income statement. Can you tell me what went into that 1.7 million other income number?

Sure. We had -- it was actually a lot of fleet unit sales we had in there. There's a few other items, but it was mainly unit sales really across the globe. We had some in domestic Canada and other international locations as well.

Would they have been the smaller and midsize units?

It was really across the board. There certainly was very little in the way of large horsepower in the domestic market.

Mike Urban, Deutsche Bank.

I wanted to dig into the cost issue a little more. I'm sure you're sick of talking about it. But obviously, I need to understand it. You talked about some of the issues and how you plan to address them. One of them I guess was efficiency and then workforce and experience as you've had some turnover. Has your turnover rate been consistent or come down or what are you seeing on a leading-edge basis there?

Well, it's reducing now. Our turnover rate is somewhat reducing. But as the business has leveled out a little bit, that's kind of I think leveled out the turnover rate. So we're dealing with people now that have been through some trainings and have some improved skills. We are also in the field re-engineering part of our business. I can't emphasize enough we're trying to change the process we go through to give a better service result to our customers. And it's like any process change; it takes time.

And that's maybe actually been costing us some money in the beginning. As we get better at service and go out and do some maybe overdue repairs in some equipment, you get some spikes in your cost for a while.

All of this comes together to tell us that we think we're going to get it all back together and closer to our original operating performance over the course of '07. But like I said in February, it's not going to be quick.

Does that answer your question or give you some color, Mike?

Yes, I think so. I'm sure this is hard to calibrate precisely. What's the typical kind of learning curve so as you -- now that you stabilized the attrition or the turnover rate, how long would it take to get a new employee kind of to the point where he's as efficient as somebody who's been on the payroll for a while?

Well, that takes a while of course because there's multiple types of equipment they have to deal with. But employees really begin adding value to the Company somewhere between six and 12 months depending on the employee themselves. And then as the years go by, they get more proficient and can handle more large projects and more types of equipment. And certainly by five to 10 years is when you get into really the meat of the service organization.

So we're going through kind of a turnover in that process now. There is a lot of newer people in the Company that have been here less than a year or less than a couple of years. And they are coming along just fine and doing great. But there is a skill transfer we have to go through.

That's helpful. On the G&A side, your comments as to those costs moderating here. Is that a slowing in the rate of growth? Is that a flattening? Or do you actually as you move through -- and I guess this is ex the merger cost, would you actually expect those to trend down a little bit over time as some of these costs you have spoken to run off?

Yes, I guess the word moderating was chosen to perhaps encompass all of those things. But in general, I think we see a flattening really of expenses about where they are right now as we look out. And certainly, that's going to be plus or minus a little bit. But we see those relatively flat as we look out over the next couple of quarters exclusive of the merger cost.

Brad Handler, Wachovia Capital Markets.

I guess I'll just dig in at first in the same area. Is it possible to break out some of the direct expenses associated with BTE on SG&A and D&A?

Sure. We actually think it's not that material in terms of the overall context of things. But if you look at -- for instance, you look at the sequential SG&A increase that we had of about $3 million and we talked about five different kind of factors in there and they were all probably about the same amount, somewhere in the 0.5 million to $1 million a piece, which is about what the SG&A level is for something like BT.

That's helpful. On the D&A side, it's not that material just because it's the nature of that business?

That's right. There's not a lot of fixed assets that we acquired; it added depreciation a little bit. But an awful lot of the sequential depreciation increase was again building out of the fleet and overhauls and those kind of things that we continue to see.

Actually, maybe I could ask you just for a little bit more color on that. It was a larger increase than we were expecting? Was there something else involved in the D&A in the quarter?

Not especially. I think it was just a big quarter with regard to some of the builds and some of the overhauls.

I guess I'm trying to triangulate. Horsepower didn't go up that much, obviously, I guess because of net of returns. So it didn't suggest it was such a big quarter in terms of bringing on new horsepower.

There was specifically some stuff in the international area that was coming online that actually had a pretty short depreciable life that accelerated that number to be a little bit bigger. That will probably hang in there for another year or two because that's about the depreciable life for a couple of those cap adds.

One more if I may, maybe just to step back a little bit. I had been under the impression that there was a bit of weakness in the smaller horsepower in part because of maybe what I would call a structural change, perhaps larger units going in more of a gathering function versus smaller units kind of on a per-well basis? Is there some measure -- am I on target? Is that real? Is it possible to calibrate how much of that there is? And if so, does that create some concern about the pace at which how quickly the smaller units can go back to work?

Actually, Brad, that's part of the equation. But what we really have to deal with here is that actually started about 10 years ago. So it's not like it's a new phenomenon that's causing this change in small horsepower. There has not been a shift from small horsepower individual wellhead units to large gathering systems that occurred a while back, and that's been the strength of some of the large horsepower segment.

Having said that, out of the bottom end of production, there always comes stripper wells, small gas wells, and small gas systems that need small horsepower. And although that market is a little more volatile and it goes through some ups and downs, it does still exist and it's still a healthy market.

You will recall we haven't really built any small horsepower additional for our fleet in those same 10 years. We think we have a sizable enough fleet. It stays nice and busy. It makes money for us. It just moves up and down a little bit more as the market does.

So it's a story that is true. But incrementally, it's no different now than it was last year and the year before. It is still occurring.

Martin Malloy, Capital One.

Could you update us on how much horsepower you are expecting to fabricate for your own domestic and international fleets this year on a gross basis?

Yes, we talked about the fact that we see 2007 being similar to the 2006 level. And the 2006 level was around 200,000 horsepower. We see 65 to 75% of that two-thirds to three-quarters, something in that range being geared towards the domestic builds.

Then could you just talk about Canada a little bit more and what you're seeing in terms of demand up there?

Yes, we are trying to sort through Canada a little bit. Demand is down in Canada, and I would say supply is high in Canada. Canada was going at a fast clip for the last couple of years 2005 to 2006. And we were building compressors, big compressors for customers as were our competitors. Canada traditionally builds ahead of their demand, so they put compressors on order so they are ready when they have the wells drilled and they need the compression.

In the fall when the tax structure changed up there, the railroad train effect I think came into play. The small producers lost some of their investors, so they lost their enthusiasm for drilling. Things slowed down a little bit. The market -- even the big guys began to slow down as there was more uncertainty in the Canadian market. That has bubbled back onto all of the compression companies in Canada.

Now, our contract compression business up there, although small, has been steady. Our aftermarket service business has been reasonable, but we're seeing some signs of weakness there as now maybe some repairs are being delayed a little bit. It's not a big weakness, but it's a little less robust than it was a couple of quarters ago.

The real pinch point in Canada is fabrication. We are working off the backlog we have had. We are not booking much new business there. Our customers have gotten enough equipment on order over the last couple of years to satisfy their needs, and we're finding the competitors have the same situation and in addition have built some units on speculation as they do from time to time. So those units are now available as idle equipment sitting in inventory.

We don't have any idle equipment sitting in inventory. But the Canadian market nonetheless is much slower than it has been. And some of our softness as Michael indicated in the backlog for fabrication is that the Canadian backlog is coming down. A long answer but does that help you?

Yes, it does. Should some of your units become idle, would you look to redeploy them to other markets?

No, we keep them in Canada. The Canadian units are pretty unique because they're cold weather packages. They could come into the northern US if there was an application, but they're just too big and too expensive to move out of Canada for a West Texas kind of application. So they will stay. The utilization may move around a little bit, but they'll have homes.

(OPERATOR INSTRUCTIONS). Mark Reichman, AG Edwards.

Looking at UCLP's first-quarter CapEx as a 6.1 million, I was just wondering if the 1.4 million of maintenance CapEx is representative of future quarters absent any capital additions. And also, how much, if any, of the remaining growth CapEx was related to the modest increase in total available horsepower?

The maintenance CapEx we do think is fairly reflective as we look forward in future quarters. And with regard to the total CapEx, the thing that is a little bit odd about UCLP is the fact that it started with 100% utilization. And so in essence, that utilization number is going to come down as it has. We're at 93%. Eventually, it should somewhat come close to approximating the UCO domestic utilization. And so basically, as it builds that idle fleet on its own, that's really what it is spending for additional CapEx. Does that make sense to you, Mark?

I think so. So you are not really adding additional or--?

No, we are adding additional horsepower. Basically, the way it works is that if you've got a UCLP customer and they decide they're going to idle a unit but they want to bring in another one, the only place that UCLP is going to get that unit is going to be from UCO. So it, all of a sudden, is going to create one idle unit as that customer drops that one, which UCLP will continue to hold. Then, in essence, it has to buy another unit from UCO and that's where the new CapEx is coming in.

So then that 4.7 million was spent on 15,000 of additional horsepower basically?

Right, yes.

[Karen Blue], Wachovia.

This is for UCLP. When I look at the gross margin without the cost cap, it looks like the gross margin is about 60% versus 63% in the prior quarter. But when I look at the gross margin with the cost caps, it looks it actually increased that quarter. Can you just talk about I guess the variances?

Sure. Basically what the deal is, is the margin is kind of doing a lot of the same things that the overall Universal business has been. So around that 60% is pretty consistent with regard to the overall Universal business. The cost cap that we put in place at that 16.95 per horsepower per quarter is the thing that kicks in. And when you apply that, that's where you get the 68%. That's more reflective of in essence what our costs were back in the second and third quarter of last year.

So I guess going forward looking to the balance of the year, should I expect without the cost caps the gross margin around the 60% range?

Well we haven't provided specific guidance with regard to UCLP. It is going to mimic somewhat what you see at UCO. In general, the UCLP margins have been a little bit better than UCO. But again, kind of going back to the cost story overall at Universal, we do anticipate we are going to be able to get a little bit better. But it's going to be slow improvement for UCLP. For the most part of the short-term, it's a nonevent because of the cost caps.

I will now turn the call over to Steve Snider for closing comments.

Well thank you. In closing, I think I'd like to emphasize that we really do remain optimistic about all the key initiatives we have underway to enhance the performance of our Company in the future. We are committed to doing the right things to maximize long-term value of the business and the shareholder value.

In the past year, we have undertaken significant expansion opportunities, implemented a new North American ERP system, created the first MLP structure in the compression sector, acquired a key agent fabrication business, and agreed to merge with Hanover. So we think the culmination of all of these factors will enable us to become a much better service provider to our customers and think that we are on the right track to enhancing shareholder value.

With that, I would like to thank you all for participating in the earnings conference call today. And we will be back here in three months to tell you about the next quarter. Thank you.