Archrock Inc (AROC) 2007 Q4 法說會逐字稿

Good morning, welcome to the Exterran Holdings Inc. and Exterran Partners LP fourth quarter 2007 earnings conference call. At this time, I'd like to inform you this conference is being recorded, and that all participants are in a listen-only mode. We will open the teleconference for questions after the presentation. Earlier today, Exterran Holdings and Exterran Partners released their financial results for the fourth quarter ended December 31, 2007. If you have not received a copy, you can find the information on the web site at www.Exterran.com.

During this call, the company will discuss some non-GAAP measures in reviewing the performance, such as EBITDA as adjusted, EBITDA as further adjusted, gross margin, gross margin as adjusted and distributable cash flow. You will find the reconciliation of these measures to GAAP measures in the summary pages of the earnings release. I want to remind listeners that the news release issued this morning by Exterran Holdings and Exterran Partners, 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's performance and represent the company's current beliefs. Various factors could cause results to differ materially from those projected in the forward-looking statements. Information concerning the risk factors, challenges, and uncertainties which could cause actual results to differ materially from those in the forward-looking statements can be found in the company's press release, as well as in Exterran Holdings' quarterly report on Form 10-Q for the quarter ended September 30, 2007, Exterran Partners' quarterly report on Form 10-Q for the quarter ended December 30, 2007, and those set forth from time to time in Exterran Holdings and Exterran Partners' filings with the Securities and Exchange Commission which are currently available at www.Exterran.com. Except as required by law, the companies 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.

Your host for this morning's call is Mr. Steve Snider, President and Chief Executive Officer of Exterran Holdings, and also President, Chief Executive Officer and chairman of Exterran Partners. I would now like to turn the call over to Mr. Stephen Snider. Please go ahead, sir.

Thank you. Good morning, everyone, and welcome to the fourth quarter 2007 earnings call for Exterran Holdings and Exterran Partners. Joining me today is Michael Anderson, the Chief Financial Officer of Exterran Holdings, Brian Matusek, the Chief Operating Officer of Exterran Holdings, and Daniel Schlanger, the Chief Financial Officer of Exterran Partners. During today's call, we'll refer to Exterran Holdings as Exterran and to Exterran Partners as either Partners or EXLP. Because we consolidated the EXLP's financial results and position into Exterran, the discussion of Exterran will include the EXLP unless otherwise noted. Because this is our first complete quarter for Exterran, our comments will be a little longer and more detailed on this call, so please bear with us. As most of you know, the merger of Hanover Compressor Company with Universal Compression Holdings into the newly combined company, Exterran Holdings was completed on August 20, 2007. I'd like first to thank again all of our employees for their hard work and integrating these two companies. As a result of all that work, I believe we made excellent progress with the integration as we will detail in today's call. In operating today as one company, we see good prospects for the future. As demonstrated by our strong backlog of fabrication and contract operations of business, as well as by our growing opportunities for additional capital investment throughout the world. This outlook combined with the positive global fundamentals we see for natural gas and crude oil infrastructure development contributes to our expectation for continued overall growth for Exterran in 2008 and beyond.

Before I get to the quarterly results we announced earlier today, I want to give you an update on some of the things we've been working on recently. We're now six months into our merger and we've completed much, almost I'd say most of the hard work required to integrate the two companies. We have an outstanding group of employees that have been working together over the past several months and we've completed our worldwide strategic operating plan for 2008. We've worked hard at educating our customers about the new and expanded capabilities at Exterran and assuring them that the merger of the industry's two leading competitors can pay benefits to them through our expanded service base and enhanced abilities. Earlier this month, a U.S. field operations were converted onto a single ERP system. And that work has gone better than expected. We've completed over 75% of our back office consolidation related to the merger and we are working vigorously with regard to saving the U.S. field operations. With the recent conversion to one ERP system in the U.S., we are focusing on facilities consolidation and rationalization in the field. That although may take us until late this year to complete, should allow us to achieve slightly more than our targeted $50 million in synergies by the middle of this year. We ask you to keep in mind that over 75% of our merger savings will be embedded in our cost of sales with about $10 to $15 million of savings reflected in SG&A. We expect some of the cost of goods sold savings will be reflected in better margins, while other savings may be used to win additional revenue business. Further, as we continue to see significant international growth opportunities, we expect to add to our infrastructure to accommodate that anticipated growth.

Earlier this month, we announced the acquisition of GLR Solutions Limited, a manufacturer and supplier of water treatment products for the international oil and gas industry. Based in Calgary, Alberta, GLR has developed, patented and field proven technologies used for efficient treating of produced water that is associated with almost all oil and gas operations. Although this was a relatively small acquisition, we are very excited about this opportunity as it enhances Exterran's production and processing technology portfolio. GLRs innovative, cost-effective water treatment product line is an attractive addition to Exterran's total solutions offering, particularly in remote international and offshore markets where customers demand integrated solutions to oil and gas production and processing needs. This acquisition is consistent with our strategy of expanding our product and service offerings to provide production solutions involving any hydrocarbon stream.

Next, I want to talk about our total solutions project because they represent an area where we expect the most significant growth over the next several years. For clarification purposes, the total solutions project bundles two or more of our product and service offerings. As has been our experience over the past few years, we anticipate that our extensive product and service platform and proven success in bundling these offering together into total solutions will allow us to capture many of the growing opportunities to supply energy infrastructure throughout the world. We have been awarded several total solutions projects since the merger was completed and will give more detail on these later in the call as we go through our regional discussion. Currently, we are pursuing more new business opportunities for total solution projects worldwide than we ever have in the past. Several of these new potential projects are contract operation opportunities which would allow us to invest our capital in these attractive projects. In early February, we were awarded a total solution contract to own and operate a large gas treatment project with associated compression in Brazil. This contract, which is not scheduled to generate revenues until 2009, represents almost $1 million in monthly revenue. We are currently pursuing over 20 additional total solutions contract operations projects that could in total generate over $10 million in monthly revenue. Although the timing of securing new contracts is hard to predict and there are no guarantees that we will win any of these specific projects, winning even just a few would represent a significant increase in our international contract operations business. Please keep in mind that we are providing this level of detail about our total solutions bidding activity to give our investors a glimpse of the significant potential in this area. We are not planning to provide this type of detail on prospects in the future. However, we do expect to announce further progress in our total solutions area throughout 2008 and update you on our ongoing international contract operations backlog.

Turning now to Exterran Partners and our U.S. strategy, our plan continues to be to drop down the remainder of the U.S. contract operations business of Exterran Holdings into Exterran Partners over time. EXLP currently has approximately 720,000 horsepower or about 16% of the combined U.S. fleet. The fleet of additional compression assets in the United States that Exterran plans to offer for sale over time to EXLP is over 3.5 million horsepower. Exterran owns a 51% ownership interest including all of the general partner interest in EXLP. One of the goals is to drop down assets into the Exterran Partners is to provide EXLP unit holder with attractive total returns. Specifically, we have recently begun to discuss and pursue a drop-down transaction. Although we'd like to get something done as quickly as we can, we are not in a position to give a specific timeframe for when we will announce or consummate any such transaction due to several factors, including one, we're just now winding down efforts to file our two 10-Ks, one of which is for the first combined Exterran. Two, we recently combined our two ERP systems into one, which causes some challenges with respect to drop-downs and back office accounting. Three, we need to negotiate a transaction between Exterran and Exterran Partners. And four, market conditions are always unpredictable. With respect to that last point, although MLRP debt and equity markets are not as robust as they were early last year. We do believe Partners would be able to raise sufficient capital at attractive prices to accomplish a drop-down. So although we are not announcing a drop-down transaction at this time, we are keenly focused on providing EXLP limited partners with increasing returns and will work to effect a drop-down.

One factor we considered when analyzing potential drop-downs is the amount of horsepower subject to contracts that we have converted to our service contract format which is necessary for inclusion in the MLP. During the fourth quarter, we converted approximately 90,000 additional horsepower to the service contract form. Given the distractions of the merger and the integration process, we really began to focus on contract conversions in the fourth quarter. We are now dedicating significant additional resources to the process and believe that we will continue to make steady progress. As a result, we do not believe the pace of contract conversions will impact our drop-down strategy in the foreseeable future. As today, we possess sufficient converted contracts to almost double EXLPs existing contract operations fleet.

With all of that as a preamble, now I'll go into the fourth-quarter results, which is Exterran's first quarterly period to include a full quarter of results for both predecessor companies. In the quarter, Exterran reported revenues of $853 million and EBITDA as adjusted of $212 million. Net income for the quarter was $58 million or $0.87 per diluted share, including merger and integration charges of $9 million or approximately $0.08 per share. At Exterran Partners, we reported revenue of $36.6 million and net income of $7.3 million in the fourth quarter. EBITDA is further adjusted, totaled $20.1 million in the fourth quarter compared to $19.1 million in the third quarter. Earlier this month, EXLP made a cash distribution of $0.425 per unit related to the fourth quarter, which is an increase of 6.25% compared to the third quarter distribution of $0.40. We continue to be very pleased with the performance of the EXLP and will talk more about it later.

In the fourth quarter and year-end earnings press release, we have modified and consolidated our accounting presentation for how we plan to present Exterran financial information going forward. We have presented results of operations across the following four segments: North America contract operations, international contract operations, after-market services and fabrication. We have changed the names of some of our segments to more accurately reflect the nature of our business operations. Our newly named North America contract operation segment comprises contract operations businesses in the United States and Canada. We move Canada into North American operations to better reflect the way we manage our business. Our international contract operations segment now includes contract operation businesses outside the U.S. and Canada. Our contract operations segment includes both contract compression, as well as contracted operation of other production and processing equipment. We combined fabrication segments in large part to track the way we follow our total solutions business. Since total solutions projects involve multiple products combined into a single package, we believe that looking at fabrication in totality is more reflective of our business than attempting to break out the fab indication work by product line such as compression, processing or installation work. The fabrication segment also includes our Belleli operation. Although the fabrication segment is now combined, we expect to continue to provide discussion along product lines, including backlog along those product lines to explain performance and trend in the business. One other small accounting note is that our after-market service segment no longer includes installation activities which we now include in our fabrication segment, nor does it include used unit sales which we will reflect on a net basis in "Other income." A bit later, Michael will cover our activities in each of these areas.

Now I'll provide an update of Exterran's operations by the three geographic regions we focused on, North America, Latin America, and eastern hemisphere. Today, North America comprises about 55% of our gross margin. Our North American operations consists primarily of contract compression, where we have a fleet of about 4.5 million horsepower, as well as compressor sales, production and processing sales and after-market services activity. As we have discussed in the past, most of our operating cost savings from the merger have come and are expected to continue to come from our North American business as the legacy companies have field offices and operations in the same general areas. As I mentioned earlier, the legacy companies' two separate information systems for U.S. operations were converted into one system earlier this month, ahead of schedule. I would like to congratulate all of our business technology staff for a job well done in this difficult project. With a system conversion, we are now positioned to capture the balance of expected U.S. operational savings related to the merger.

With respect to operating horsepower in North America, we did experience further erosion in the fourth quarter. We had a 40,000 horsepower long-term project that completed its term early in the fourth quarter, which we discussed in last quarter's call. And operating horsepower declined by an additional 47,000 horsepower during the quarter. We are clearly disappointed with this reduction in operating horsepower, but continue to see the same trends we've seen over the past year, including stronger markets for large horsepower applications, offset by weakness in the smaller horsepower segment. We believe the U.S. market is still a healthy and growing market, and expect to continue and add to our large horsepower fleet during 2008.

At the end of 2007, our total North American fleet of horsepower was 4.514 million horsepower. The North American spot utilization rate was 80.5% at December 31 compared to 83.1% at September 30. Despite near-term challenges, I believe we are making progress in our North American operations. We have final eyed and stabilized our organization. Service excellence is beginning to redefine the way we deliver our service. While the service excellence initiative is in its early stages for the combined new organization, I believe we are seeing some signs in improvement in operational efficiencies and reductions in operating costs as a result of this program. I continue to expect that our gross margin percentage will slowly improve over the year as we expect to get these initiatives more fully implemented and ingrained in the way we do business in North America. The complexities of pulling this merger together have allowed our competition in the U.S. to take aim at Exterran's business and customer base over the last 12 months. This is, after all, a good industry with attractive growth prospects and worthy competitors. We have lost market share in the smaller horsepower segment, and we've consolidated operations and sorted through our operations team and sales force. We've now completed much of these efforts. We're in the process of adding additional resources to our operating team. And we believe Exterran is again rightly focused on growing the business, fighting hard for market share and providing unparalleled service for our customers. With our efficient service platform, experienced work force and solid customer relationship, we believe no one can provide better service with more efficiency. I continue to expect to see improvement in business throughout 2008.

Now let me discuss our business outside North America starting with Latin America. Latin America currently represents about 25% of our gross margin. The business in Latin America consists of a maturing contract compression market where we currently utilizes a fleet of approximately 1.3 million horsepower and a production and processing market where we continue to see very strong growth prospects. Business in Latin America continues to go very well. We commenced operations on projects representing monthly revenues of over $3 million per month during the fourth quarter, as well as additional projects which will represent another $1 million per month in revenue during the first two months of 2008. Although the environment in Latin America has been favorable for some time, we're excited about the increasing number of infrastructure projects that are being discussed and/or let forbid through the region and believe we will continue to add more projects to the backlog during the year. Currently, we are actively pursuing a greater number of projects in Latin America than ever before and believe the majority of these will be total solutions contracts operations projects. Latin America has eagerly adopted the outsourcing model for many years and the coupling of production and processing with a more traditional compression application seems to be a natural progression. We are looking at the several projects that include a combination of compression and processing needs with contract operations revenue potential of $500,000 to $1 million per month each. Activity levels throughout the region are robust. And we hope to be able to give you more color in our success in this market during the next earnings call.

Now, let's move to the eastern hemisphere, which continues to be a significant growth market for Exterran. The eastern hemisphere currently generates approximately 20% of our gross margin. Our business in the eastern hemisphere currently centers on sales of total solution projects throughout the region, as well as our Belleli operations. We support these activities with our fabrication facilities in Dubai, Singapore, [then to] Italy and outer England. We continue to see strong fabrication demand if eastern Europe, the Middle East and Asia-Pacific. And although our intention is to significantly increase the amount of contract operations we have in the eastern hemisphere, our compression fleet totals only approximately 130,000 horsepower in the region at this point in contract operations revenues are approximately $4 million per month. As we had discussed in the past, the buildout of natural gas infrastructure throughout the eastern hemisphere continues to provide us with significant opportunities for all our products and services. The activity levels remain very strong. We were awarded our first two new production and processing and fabrication projects in Kazakhstan in the fourth quarter.

In addition, we continue to see high levels of new fabrication bid and inquiry activity. We believe that we can achieve a greater portion of significant sales activity in this region in the form of long-term contract operation relationships. This process will take some time as our startup strategy often is to sell first, follow up with parts and service work, and then over time add contract operations. However, we have had some improvements in this area with promising discussions taking place on large contract operations project. One way to scale our opportunity is to look at the amount of sales we currently make in the eastern hemisphere. We currently generate approximately $500 to $600 million per year in eastern hemisphere, non-Belleli fabrication revenues. Our goal is to convert a greater portion of this opportunity to contract operations over time. We believe that total solutions contract operations' interest is strongest in the Middle East and other areas where we have been active in the past. We have new contract operations in Oman in Egypt, together representing $1 million in monthly revenue, which are expected to begin generating revenue later this year. We believe we secured this new business based upon our solid reputation in these markets and our ability to move quickly to meet the needs of our customers and n these regions. We see increasing activity levels in eastern Europe and Russia as we were recently awarded those first two projects in Kazakhstan. We anticipate we can build on the success we've had in these regions much like we've been able to do in the Middle East. We expect to report our progress on eastern hemisphere growth throughout the year. With increased activity levels in many parts of the world, demand for our Belleli products, including critical process equipment for refineries, drying heaters for plants and tank farms for the energy industry remain strong.

Our Belleli operations have recently received two sizable, new contracts. In December, Belleli received a $55 million order to supply highly engineered equipment for a [thin] gas, clean-coal power plant in the midwestern United States. This project is the first commercial scale coal gasification power plant to be built in the U.S. in the last 10 years. Belleli has been working closely with the customer to design a sophisticated equipment and is now set to begin manufacturing that equipment which is anticipated to take place over a two-year period. In addition, earlier this month, Belleli received a $230 million contract to supply nine refinery reactors over a two-year period to a customer in Kuwait. We believe that Belleli's excellent reputation and its history of performance with this key customer were prime factors in winning the significant new business.

With respect to our operating metrics in our international market, operating horsepower grew modestly to $1.306 million at December 31, 2007 compared to $1.290 million at September 30. International spot utilization was 90% at December 31 compared to 89% at September 30. Summarizing our total operating staff, our overall spot contract utilization which includes both North America and international was 83% at December 31 as compared 85% at September 30. One statistic we believe is important in providing a picture of the growth prospects for international contract operations business is what we call international contract operations backlog. Which we define as future monthly revenues from booked, but not currently operating projects.

Presently, our international contract operations backlog represents approximately $6 million in monthly revenue associated with projects expected to begin over the next two years. We will continue to provide an update of this backlog figure each quarter to give investors a measure of how quickly our international contract operations business is growing. Our total fabrication backlog was $1.1 billion at the end of 2007, which consisted of approximately $300 million of compressor fabrication and $800 million of production and processing equipment. Approximately $500 million of which was related to Belleli. One important fact to note is that of our non-Belleli backlog, total solutions projects represented about 40% or approximately $250 million which is double the total solutions backlog as of a year ago. Given the outlook for infrastructure buildout in the international markets, we see this trend continuing into the future. To supply the required equipment for that growth, we expect that Exterran will add approximately $250 million to $300 million in growth capital in 2008. Importantly, almost 60% of our growth capital has been designated for international businesses, demonstrating an increasing international focus to our company and the size of the opportunity throughout the world. During 2008, we plan to continue to build out our international infrastructure as we expect to leverage our manufacturing capabilities on a global scale, expand our country coverage, and enhance the capabilities and scope of our eastern hemisphere headquarters in Dubai. Now, I'll turn the call over to Michael for a more wholesome discussion to our financial results.

All right. Thanks a lot, Steve, and good morning, everyone. I'm sure that by now you've all had a chance to review our press release that we issued earlier this morning. During my discussion, I'm going to discuss the financial performance for both Exterran Holdings and Exterran Partners and also discuss our earnings outlook for the first quarter and full-year 2008. And of course as we look at Exterran Holding results, it's important to remember that the merger was completed August 20. The fourth quarter is the first to include a full period of operations for the combined companies. And as a result, both sequential and year-over-year comparisons are not especially meaningful. Therefore, most of my comparisons this quarter will be against the guidance that was provided during our last earnings call.

If you looking at our North American contract operations business, revenue in the fourth quarter was $203 million. Now, with the change in our segment definitions, fourth quarter results this time included Canada. And this inclusion added about $6 million of revenues. If we look at only the U.S. revenues, we fell short of guidance by about $3 million, due largely to reduced working horsepower. Now, in the fourth quarter, gross margin percentage in the North American contract operations segment of 57.5% was consistent with guidance of slightly improved over third quarter results. We continue to expect improving margins during the year due to anticipated realization of merger synergies and anticipated capture of operating efficiencies from our service excellence initiative.

Looking at international contract operations, revenue there was $111 million in the quarter. That was actually consistent with our guidance range once you adjust for the Canadian change. Even despite being on target with guidance, we were a little bit late in starting up a large, high-margin job in Latin America and that actually caused overall gross margins to be a bit below our guidance. And this job started earning revenue late in the quarter, it's going well. But the delay in startup actually negatively impacted our forecasted margins for the quarter. If you look at those margins for the quarter, it was 64%. That's up 60% from the third quarter. But as I mentioned, it's still a bit below our guidance. We do still have concerns on costs in Argentina, recent startup expansions in the Middle East. But we do expect to see margin improvement in the segment for next quarter and also for full-year 2008.

Shifting over to fabrication operations, we generated revenues of $437 million. That was compared guidance of $350 to $370 million. Gross margin was 17%, and that was on track with our guidance of the mid-to high teens. Segment outperformance was the result of strong compressor and production and processing activity in the quarter, as well as some greater installation revenue. The installation projects increased reported segment revenues, but they reduced margins slightly in the segment.

Let me break down the fabrication performance just a bit. If you look at compressor fabrication, we had revenues of $215 million and gross margins of 20% during the quarter. That compares to our guidance which was $190 to $200 million and revenues in the high teens. If you look at production and processing fabrication, revenues there were $183 million. And that was with margins of 18%, and again, that was a bit better than guidance which was $160 to $170 million in revenues and margins in the mid-to high teens.

If you look at after-market services, fourth-quarter revenue was $102 million. That was above our guidance of $85 to $90 million. Gross margin percentage was around 19%. That was a bit below what we said in terms of expectations in the low 20's. The higher revenue mainly came from the U.S. region. SG&A expenses, $90 million in the fourth quarter. That was generally in line with our expectations.

If you look at SG&A on a pro forma base, it was actually down sequentially by a million or two, due largely to realization of merger synergies. We do expect SG&A expenses to grow throughout the year as we build out our international infrastructure. Which does include things like taxes on new projects, which will be offset or actually will offset somewhat the success on our merger synergy front. We generated $212 million in fourth quarter EBITDA. That excludes $9 million of merger costs. Merger costs consisted primarily of things like severance expense, amortization of employee retention payments and also real estate consolidation costs. We do expect to have another $7 to $10 million or so in merger-related items over the next two or three quarters. Interest expense was $35 million in the fourth quarter. That was in line with our guidance. We also had $5.5 million in equity income from joint venture investments in the quarter. We anticipate that this item will continue around these levels throughout 2008. We did also have $15 million of other income, that's largely related to currency translations and movements, asset sales, interest income and the like. Now, this number was higher than normal during the fourth quarter, and we expect this number to be considerably less as we look forward. Effective tax rate was 24% in the fourth quarter, that compares to expectations of around 35%. Fourth quarter was lower due to several international tax benefits that we had during the period. Most of which will not have an ongoing benefit. So as we look forward, we do expect a tax rate in the mid-30's during 2008. If we put all this together, diluted net income per share was $0.87 in the quarter, adding back that merger costs would increase the performance by about $0.08 per share. Net CapEx for the quarter, $113 million, that included about $71 million in growth capital and also $33 million in fleet maintenance capital.

If we look at the balance sheet, total debt ended at $2.3 billion at December 31, debt to capitalization 42.5% and debt to annualized fourth quarter EBITDA was about 2.7 times. And we did add some fixed rate swaps during the early part of the first quarter. We locked in about $300 million of debt all in rate, but actually around 4%. So, this will help replace the 4.75% convertible debt that matures March 15. So we do not anticipate being negatively impacted by the redemption of that low-cost convertible debt.

If we look at our debt structure today, we're actually about 77% fixed rate. And we have an all-in weighted average cost of debt around 5.25%. Regarding the stock buy-back program we purchased about 617,000 shares of Exterran stock during the quarter. Average price was $81 a share. So total repurchases for the quarter were $50 million. And if you look at what we've done since the merger closed, we bought back 1.26 million shares at an average price of $79 per share. Total cost was $100 million. And those shares amount to about 2% of our outstanding shares. We still have $100 million left on the previously announced share repurchase program. And obviously given the prices at which we've already repurchased shares, we certainly believe that Exterran's current share price represents an attractive repurchase opportunity. If we look at the specifics on the debt, Exterran revolving credit facility had $180 million drawn against it at December 31. And that left about $350 million of available liquidity after you deduct letter of credit usage. We also had another $200 million of undrawn capacity at the ABS facility. And then if you look at Exterran Partners, it had $98 million of capacity under its credit facility.

Let's talk a little bit about guidance now for both the first quarter and the full year. If you look at North America contract ops, we expect relatively flat revenues and flat working horsepower during the year. Now, with this assumption, revenues for the year should equate to something in the range of our annualized fourth quarter 2007 revenues. We expect slightly improving margins during the year. That's going to come as a result of merger savings and the service excellence program. For the first quarter, this means that we expect revenues of just about $200 million. And margins a little higher than we saw in the fourth quarter. We do expect that working horsepower may be down a bit again in the first quarter, but we do expect to reverse this trend and be at or above year-end 2007 working horsepower levels by the end of 2008.

In international contract ops we expect revenues to be over $500 million during 2008. And that would represent growth of around 15% to 20% compared to 2007 combined pro forma revenues. We expect the segment to generate margins in the mid to upper 60% range for the year. Now, with our existing backlog due to come on line throughout the year, we do expect our growth to occur ratably over the course of the year. For the first quarter, we expect international contract ops revenues of $116 to $119 million and margins in the mid-60's.

In the after-market service segment, we expect to generate revenues of about $400 million during 2008. We expect that margins in this business will be in the low 20's. And for the first quarter, we expect revenues of $90 to $95 million, again with margins in the low 20s.

If we look at fabrication, we expect that for the year, we'll generate $1.6 to $1.7 billion of revenues. About $425 to $450 million of this is anticipated to be related to Belleli. We expect 2008 margins to be relatively consistent with current margins, and that's in the mid-to high teens. For the fabrication segment revenues in 2008, we expect production and processing, which includes the Belleli, to be up nicely, while we expect compressor fabrication to be relatively flat. Now, part of the reason for this flatness in compression revenues will be a concerted effort to move more of our business into contract operations. If we are unable to do so, we do believe that we're going to have some potential upside to sell more compression units to third parties, and that could result in slightly higher compressor fabrication revenues. If we look at first quarter guidance, we expect fabrication revenues of $370 to $390 million, and margins in the mid-to high teens.

When we look at SG&A expenses, we expect merger-related savings to be offset again by costs associated with the expansion of our international operations. In addition, we do expect that the non-cash amortization expense associated with Exterran's new long-term incentive plan to begin in the second quarter. So in total, we expect that SG&A expenses will be approximately $370 to $380 million during the full year 2008. First-quarter SG&A should be fairly consistent with our fourth-quarter levels which is around $90 million. Some detail on depreciation, we expect depreciation of $390 to $400 million of depreciation expense in 2008. First-quarter depreciation will likely be in the low $90 million range. That's a little higher than the fourth-quarter number. And that is due to international projects which are starting up.

With lower market rates and the swap activity we undertook earlier in the quarter, we do expect further interest savings and interest expense for the quarter should be closer to the $30 million range. And that's down about $5 million sequentially from the fourth quarter number. Regarding CapEx for the year, we expect that we'll spend about $400 to $500 million of net CapEx. If we break that down, that includes growth CapEx of $250 to $300 million. And maintenance overhauls for the fleet of $110 to $120 million. The other capital spending would include things like vehicles, facility consolidation and as well as facility expansions. Growth CapEx, when we look at it should be about 60% international, 40% North America. So that's it for guidance.

The last few comments here with regard to EXLP. Obviously, as we have discussed in the past, EXLPs operating costs, trend have been similar to what we see in Exterran's North America contract ops segment. And although costs have been higher, the omnibus agreement between the two entities have capped EXLPs operating costs at $18 per operating horsepower per quarter and also capped the SG&A at $4.75 million. During the fourth quarter, SG&A cost caps were not exceeded. Operating cost caps were -- sorry, operating costs exceeded the caps by about $2.7 million. So if you look at EXLP performance with the benefit of the caps, EBITDA was $20 million and distributable cash flow was $14 million. If you look at coverage, distributable cash flow was sufficient to cover the distribution by about 1.9 times. And even without the benefit of the caps, that distribution coverage was about 1.6 times.

In the fourth quarter, Exterran Partners' average operating horsepower was 667,000. And that's up about 35,000 horsepower from the third quarter. It's due to the addition of new customers at the EXLP level. Continuing demand for compression and also a full quarter of contribution versus the drop-down transaction that took place in early July. At the end of the year, EXLP had a total available horsepower of 723,000, spot utilization rate of 95%. And about 1.3 million horsepower of the total combined Exterran and EXLP contract fleet are now covered by service agreements. And this equates to about 30% of the combined compression horsepower. Debt ratios at EXLP, they continued to be near the low end of our target ranges. Debt-to-annualized EBITDA was about 2.7 times. And EBITDA coming from interest was about five times.

As you also obviously know, EXLP announced a cash distribution increase to $0.425 per unit in the fourth quarter. That was about a 6% increase over the prior $0.40 rate. We certainly continue to be excited about growth prospects for EXLP, from our business strategy foreseeing organic growth, acquisition within the industry and also additional asset drop-downs from Exterran Holdings over time. We do expect to file the Holdings and Partners' 10-Ks tomorrow. So in summarizing, we are so pleased with our fourth quarter, solid performance. We've now reported a clean and full quarter of combined results that will provide a baseline of segment performance from which we can grow. We have certainly provided a lot of detail about first quarter expectations and our longer term views about growth rates and margins for our business lines. We've continued to make good progress on merger synergies. We've captured further interest savings by locking in today's lower market rates. And we've provided further clarity about our drop-down strategy that described details about our strong international contract operations backlog and current project deals as well. We're certainly excited about our prospects going forward and we're now ready to open up the call for some questions. So operator, could you do so?

Thank you. The question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS) We'll go first to Mike Urban with Deutsche Bank.

Thanks, good morning, guys.

Good morning.

In the U.S. business, you obviously expressed some displeasure there, Steve. And you noted that you do expect to try and reverse that trend over the course of the year. What -- how do you think you can do that? I mean, is that a function of just having the merger behind the organization place or do you feel like you, at some level, have to step in and stop the share loss in the small horsepower market and how do you do that other than with price?

Actually, Mike, I think that during the process of completing the merger in the last half of last year, that we had sufficient confusion internally as we tried to organize ourselves and approach the market with some customers trying to decide how the combined company would behave. That had just put us in a position of weakness. And we allowed some erosion to occur while we sorted ourselves out. Now with our strategic plan in place for '08, I think that the operating groups have a real solid plan for recovering that in 2008. It will take a little bit of time and a little bit of effort. But I think that our operating side has got its act together. Our sales side has got its act together. We said in the call there, the third part, that we are putting more resources into North America. So I think just a more aggressive approach to a market that we now know is a growing market and has some opportunities for us, so it's time for us to exercise our muscle and go to work.

So sound like it might be a little of all of the above in terms of going after that, all the things I might have mentioned?

Yes. I think it's fair to say, in different markets we're going to have to approach it differently. We'll have to feel exactly what the situation is and then react appropriately. But the team is diligently working on it as we speak.

Okay. And on the international side, obviously, there's a couple of strategies going on there. One is to try and do more total solutions work. But also where you have existing business or as you bid for new business, you've gone from two competitors essentially to one. Are you able to improve your pricing or your terms because of that, are you seeing any push back from the customers or are you able to do that successfully?

We haven't really approached it on a pricing basis. We have our expected capital returns that we generate and we have been approaching our projects along a similar line that we were before. What we're trying to do now is include month content so that larger projects and we're trying to move those that have been purchasing over to the contract operations side. That's more been the focus of us as the movement of business from a one-time sale for a long-term relationship rather than trying to use our market presence to change pricing dramatically. We think our pricing is pretty robust in international to begin with.

Okay. And then finally, just so I understand how you're thinking about it and reporting things going forward, the total solutions business is kind of going to be broken up as we look at it on a reported basis. In other words, the own and operate is going to go in contract ops and just where you're selling equipment, even if it is kind of a total solutions project. That's going to stay in fabrication. Am I understanding that right?

Yes. Basically. And remember, total solution is the concept that takes the pieces from the manufacturing division and either sells them through one of the division's revenue streams or contracts them to a division's revenue stream. So total solution is a bundling area. We report it as a separate kind of entity to get -- let you know the magnitude of the total solutions opportunity that's bringing the components and services together from all of the operating regions.

Okay. Great. Thank you.

We'll take our next question from Geoff Kieburtz with Citigroup.

Thanks. Good morning.

Geoff, good morning.

Steve, did you mentioned that in terms of understanding as we learn more about what your international contract operations are that we could look to your international fabrication sales. And that you're currently running around $500 to $600 million a year in those sales. How do we think about that? What -- if all of those equipment sales were converted into contract operations, what kind of revenue run rate would it represent?

I'm trying to think of how to answer that.

Did I understand your point correctly first?

You did. And I think our intent was simply to give you a measure of our penetration in that market from a dollar value basis as a benchmark for our opportunities to move some of that over in the contract side.

Jeff, it's Michael. If you want to look at that, I mean, it's basically a capital investment so you look at a $500 or $600M. and you look at it kind of our [capital] returns. You have to look at on a project-by-project basis. Giving you a rule of thumb, you may look at an annualized revenue number that would be maybe 1/3 of that amount.

Okay.

Converted it to our contract ops.

Okay. All right. That's as precise as I was looking for. Now -- and if I understood you correctly, you have within the Holdings a little over 700,000 horsepower of compressors that are on service contracts now, that is eligible to be dropped down?

Correct.

Okay. And I think you said before that we should expect the next drop-down to be larger than the last drop-down. Is that still true?

We had said that the pace that we're going at this side as drop-downs will take a long time. So we would consider larger drop-downs in the future, yes. But as to what we've come up for the next drop-down is still under consideration. So --

And Geoff, I think if you just look at that, it all kind of depends. I think we have in the past talked about the drop-down being larger than the other one that we did back in July. I would say that most of those comments were probably made during a little bit more robust financial markets. Not saying one way or the other, but we will certainly look at a variety of those conditions and issues that Steve talked about when we look at sizing and drop-down, which is one of the things we're doing right now.

Okay. And in the North American market, how would you characterize the pricing environment? Maybe you need to split that between large and small horsepower.

Yes. I think our sales force is convinced that we haven't been losing jobs on pricing. So I think the pricing is not the main issue. I think it's been focused on the customers, clearing up confusion over the merger, points of contact for customers and some pretty incessant competition driving our customers, suggesting that this would be a nice time to try somebody else. And I think it's just time for us to get back in the game and get our guys focused and that's exactly what's occurring at this point in time and get back into competitive mode. So far, we don't think it's a pricing issue.

Okay. And one last question. When we talk about total solutions, what should we expect margins to do in the international business as total solutions becomes a larger percentage?

You mean as contracted total solutions become a larger percentage?

Correct.

Yes. Well, I think it will rise. But depends how much of a percentage they become. That's a really hard question to answer, Geoff.

Okay. But it would be an upward impact.

It should be.

Okay. Thanks very much.

We'll take our next question from Kevin Pollard with JP Morgan.

Thanks. Good morning, guys.

Good morning.

I wanted to follow up on your domestic margins just a little bit. I was -- I know you've been incurring a lot of, maybe extra repair maintenance expenses associated with your service excellence initiatives. I was wondering if you could give us a feel for how that impacted margins this quarter and maybe if that's something kind of that's here to stay for good or if that's something that will taper off over the next couple of quarters?

I don't think that's really been a driver in our operating performance more than normal. I think that segment of our cost isn't really any different than we anticipated it. Part of the issue is just the fact that we hadn't combined our ERP systems. So our operating duplicate facilities in many areas which haven't allowed us to get the team together and sort out the cost reductions that we hope to see. Service excellence that we've been talking about for a while now is beginning to show some returns to us in customer satisfaction and ability to better schedule our mechanics. So I wouldn't hide behind the -- that is a cost side issue. I think that you're going to see, our margins continue to slowly improve over this year. But I remind you that we said early on that with some changes in the way we account for a few things that expectations should be that when we get this thing all lined out, we're between 61% and 62% gross margin in North America.

Right. And if I add the kind of cost savings you guys have talked about in the past to the -- and look at it on the revenue that Michael got for the year, it would kind of suggest you should be there by kind of Q4 of this year. Is there any reason to think that that's not the case?

No, not at this point.

Okay. And is there any -- you talked about the synergies potentially being greater than the $35 million of operational synergies you originally talked about. Do you care to try and put a number on that for us yet or?

No, no. It's not going to be a huge amount of difference. You're just going to be a little better than we have thought.

Okay. Fair enough. And if I could just get one last question in. On the 20 total solutions projects that you mentioned that you're pursuing, can you give us a feel for how many of those are, you know, Latin America versus eastern hemisphere.

I don't know. It's probably fairly, evenly split I would guess. Maybe up a little bit one way or the other.

A little bit more still in Latin America.

Okay. But there's at least eight to [10ish] in the eastern hemisphere that you're going after?

Yes.

Okay. All right. Thanks, guys.

(OPERATOR INSTRUCTIONS) We'll go next to Sharon Lui with Wachovia.

Hi there, good morning.

Good morning.

Just wondering if you guys have a feel for what your cost of debt would be at the partnership level if you had to issue some debt-related to a drop-down.

Well, what we can tell you what our cost of debt is within the revolving and credit facility there. We've locked in a good chunk of the debt around 6.5%. But our borrowing rate there is right now about LIBOR plus 125. To the extent that leverage from things up into that entity, that pricing could get a little bit higher. So it kind of depends on where our leverage sorts out. And whether we're going to use that credit facility. And if we go outside that credit facility, I think it's a little more uncertain what that cost of debt would be.

Okay. And also, the maintenance CapEx number that you gave for '08, what portion actually relates to your domestic compression business?

Well, Sharon, that number which we quoted was $110 to $120 million. Obviously, if we look at the fleet, it's kind of a 70/30-type mix and that should be pretty close to maintenance. A little bit higher in the US business just because of the greater age of some of the equipment. That gives you a ballpark on that. I don't have the exact number in front of me.

Okay. Terrific. Thank you.

We'll take our next question from Martin Malloy with Johnson Rice.

Good morning.

Good morning.

Could you provide us with an update in terms of discussions that you may have had purchasing third-party compression equipment domestically or the current owners of that compression equipment receptive to potentially selling?

Marty, we don't talk about anything that we might be working on in the way of an acquisition. And we're going to stick with that policy, I think, at this point in time. Not to imply that we are but there's no sense going down that path now, I don't think.

Okay. And then as far as the gross profit margins on the domestic contract compression side, mid-to high 60%, is that what I heard?

No, no, no, no, no. 61 to 62.

61 to 62. Okay.

Yeah. Don't scare me.

Okay. Great. Thank you.

Thanks for clarifying that.

Thank you.

And we'll go next to Brad Handler with Wachovia Capital Markets.

Thanks. Hi, guys.

Good morning, Brad.

Could you just in terms of maybe -- either specifically the 20 total solutions opportunities you're pursuing or maybe speak more broadly, can just cover kind of the nature of some of the customers, the nature of some of the projects, FPSOs we've talked about kind of in the past, but does try to lock in on a couple of though kinds of drivers.

Well, start off with first of all almost all of these are on-shore kind of land-based facilities. And as you might expect, there's a combination of customers here and I would guess that probably half or more of these would be national oil companies and the balance being independents of one type, size, shape, or another. And most of them would include probably a good portion of them are going to be processing in compression. A few will just be some really big compression projects that have a few other ancillary items with them and big term parts that go with it. So, they're kind of all over the board. But there's a lot of processing activity right now, particularly with high oil prices.

Okay. Okay. That's helpful. I guess switching gears entirely, I guess it's just -- thank you for your color in terms of kind of where you're at in terms of the drop-downs and the like. Maybe I could ask you to integrate and you've obviously bought back some shares. So I guess I'm just curious as we think about the next few months, to what extent is it important that you can do the drop-down and go ahead and announce something a much more significant share buy-back as you re-up on that and use the rest of what's authorized now? I mean, to what extent is it important that you need the cash to invest in growth versus you recognize the opportunity to buy your own shares back and that could be as important a use for you in terms of the next drop-down?

Well, certainly if we can capture more of these opportunities that we talked about in Europe, referring the 20 total solutions opportunity, that will consumed some more cash, but not going to drain us of cash. What we do with the excess is up for discussion at that point in time. But the preference would be as an operating company to invest our cash in good quality projects to give us long-term returns and good cash flow streams.

And Brad, I mean, just expounding upon that just a little bit. I mean, we are certainly comfortable with our capital structure. We think we did very, very well with regard to the refinancing when we did. And over time, as we put stuff more down into the MLP, I think that the capital availability upstairs at Exterran increases a lot. As Steve mentioned, we clearly would -- our first preference is to grow the international business, and kind of the second default option is we're going to buy back shares. But we'll look at that in conjunction with what our growth opportunities are, what are the cash flows that's come in, in essence upstairs and those kind of thing. But right now, I think we're still fairly comfortable, we're actually very comfortable with regard to capital position and where we sit.

Okay. And -- right. So, is capital position a driver one way or another for the drop-downs?

No. Not really. We will look at market conditions. But as Steve mentioned although market conditions are not as robust, we still think that they are good in terms of EXLP prospects are. So, we don't think there's a big issue there. But we'll always look at the markets in terms of what the availability and pricing of capital is.

Right. Okay. Thanks for that. [Turn it back.]

And we'll take our next question from Glenn Primack with Broadview Advisors.

Hi, good morning.

Good morning.

I was wondering what kind of time to market advantage you have on delivery of systems internationally versus your nearest competitor. What kind of edge that gives you?

I'm not sure that's something I want to talk about on a public venue, explaining to our competitors how we get the advantage over them.

But you think you have a throughput in being able to deliver on time as advantage versus others out there?

Yes, let me not explain how.

Okay. You wouldn't want to explain length of time either, would you?

Better. Shorter. Faster.

Shorter, faster. Months better?

Sometimes.

Okay.

Actually, to answer that question, it really takes months better to make much difference.

Okay. Great. That's it.

And ladies and gentlemen, we have time for one final question today. It does come from Geoff Kieburtz with Citigroup.

Modelling question. You mentioned that the other income was above what you would expect as run rate. Could you maybe break that $15 million out for us a little bit in terms of how much was asset sales in the quarter and what we might use as a run rate going forward?

Yes. I mean, it's a hard one, Geoff, because there's a lot of stuff in there with regard to currency as well. It's tough, it's difficulty to predict. I mean if -- from our perspective, just having in there a couple -- a million or a couple million dollars is probably a reasonable number to model.

Okay. All right. Thank you.

That does conclude the question-and-answer session. At this time, I'd like to turn the call back over to Mr. Snider for any closing comments.

Thanks. Just a couple of comments here. I would like to congratulate the folks at Exterran. And certainly, I think we had a good fourth quarter. And we made some tremendous progress. We've also listened to our investors and the financial community that pays attention to us. And so to summarize, I hope you take away four things from this call today. One is that the North America market is growing and that we have the size, position and capability to recapture our market sharing, recapture our growth rate and we are fully focused and committed to doing that. Second would be that the MLP strategy is continuing to mature and it's significant today that we tell you that we're embarking on a drop-down. But I don't want that to be lost anywhere along the way. Third, our project activity in international is real. And we are succeeding with it, identifying and capturing opportunities, we're effectively deploying capital. So, that part of our strategy even this early in the relationship of Exterran with our customers is bearing fruit for us. Lastly, our merger integration is largely behind us. So, we finally have the opportunity to turn all of the resources of Exterran externally instead of internally and really ramp up our growth strategies and get more active in the market. So those are four key things that if you didn't get out of call, I wanted to summarize at the end just in case there's any confusion in that. And with that, we're going to let you go and we will see you in 90 days back here with the next report. Thanks all for your attention.

This does conclude today's conference call. We appreciate your participation. You may disconnect at this time.