Archrock Inc (AROC) 2008 Q1 法說會逐字稿

Good morning. Welcome to the Exterran Holdings Incorporated and Exterran Partners LP first quarter 2008 earnings conference call. At this time, I would like to inform you that 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 first quarter ended March 31st, 2008. If you have not received a copy, you can find the information on the company's website at www.exterran.com. During it call, the companies will discuss some non-GAAP measures in reviewing their performance, such as EBITDA as adjusted EBITDA as further adjusted, gross margin, gross margin as adjusted and distributable cash flow. You will find a 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 will 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 that could cause results to differ materially from those in the forward-looking statements can be found in the Company's press release, as well as in the Company's annual report on Form 10-K for the year ended December 31st, 2007, and those set forth from time to time in Exterran Holdings, and Exterran Partners' filings with the security and exchanges commission, which are currently available at www.exterran.com. Except as required by law, the Company has expressly disclaimed 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 Steve Snider, President and Chief Executive Officer of Exterran Holdings and also President and Chief Executive Officer and Chairman of Exterran Partners. I would now like to turn the call over to Mr. Steve Snider. Mr. Snider, you may begin your conference.

Thank you, and good morning, everyone. Welcome to the first quarter 2008 earnings call for Exterran Holdings and Exterran Partners. Joining me today are 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 will refer to Exterran holding as Exterran and Exterran Partners as either Exterran Partners or EXLP. Because we consolidated EXLP's financial results and positions into Exterran, the discussion of Exterran will include EXLP unless otherwise noted. I'd like to start out today's call with an update of four key points that i made to conclude our last call almost ten weeks ago. As a reminder, I talked about our optimism around our North American business, our MLP and drop-down strategy, our exciting international business, and the fact that we are proceeding well in integration of the merger. Now, let me cover each of these points.

First, I noted that the North American compression market was growing and that we have the size, position, and capability to recapture our market share and restart our growth trend. We still believe all of this to be true. Although merger integration challenges have led to worse than expected first quarter performance in our North American business, we are addressing these issues and expect to deliver improvements in revenues and margins in this business, but it is likely to take most of 2008 to sort through. To this end, in recent weeks we added key management team members to our North American organization, bringing valuable additional resources and experience to help us complete the integration of our field operations, continue our service excellence initiative and resume growth in our North American business. And with this change, we now have a very strong North American management team with additional sales, operations, and financial expertise. We remain confident that we will get our North American business back on track. Exterran is comprised of people would have been very successful in this business and there's every reason to believe that we will be successful going forward.

The second key point I mentioned in our last call was that our MLP strategy continues to mature, and we had begun embarking on a new drop-down transaction. This also continues to be true and we are pleased that we have completed a key step in our activities in contemplation of such a transaction. Over the past several weeks, we have been working diligently obtain the necessary third-party debt financing to complete the potential drop-down. To that end, we are pleased to announce that Exterran Partners recently obtained sufficient financing commitments to expand its senior secured debt facility to fund the contemplated drop-down transaction. This is a key milestone and demonstrates our continued commitment to growing Exterran Partners through drop-downs.

Third, I previously said that our international activity is robust and we are succeeding in identifying and capturing opportunities in several international markets. Again, we continue to be very optimistic on this front. Project volume and momentum in our international markets continues to be one of the positive surprises of the merger. We also continue to be very encouraged about the progress we have made in converting our international and Total Solutions businesses into contract operations business. During the first quarter, we commenced several new international contract operations projects and have several additional projects that we expect will begin generating revenue throughout the balance of this year.

Lastly, I previously reported that our merger integration is largely behind us. With this process now substantially completed, we believe we have the opportunity to focus all of the resources of Exterran externally instead of internally and ramp up our growth strategies and get more active in all of our markets. Even though the integration has gone quite well and we have taken advantage of reduced head count to service a more densely concentrated compression fleet, not all of these savings are yet evident in our North America contract operations margins, as they have been more than offset by incremental operating costs in the field. In retrospect, attempting to integrate two large companies, implement a new service delivery model, and migrate our North American contract operations onto one ERP system was likely too much to ask our employees to accomplish in a six-month period. Additionally, all of these initiatives were undertaken at a time during which we needed to provide more focus on our customers, since they were nervous about the mergers of the two largest contract compression service providers in the U.S.

In hindsight, I think we now realize that a period of operating performance that did not reach our expected standards was very difficult to avoid, given this backdrop. Nevertheless, we firmly believe that all of the initiatives we have undertaken were the right things to do and we remain committed to each. Although we feel confident that all of this will allow to us provide superior customer service while lowering operating costs, it is also likely to take most of this year to work through.

I will now summarize the first quarter financial results for both Exterran and EXLP and provide some operating highlights for the period. In the first quarter for Exterran Holdings, revenue is $740.1 million, and EBITDA as adjusted was $211.2 million. Net income was $49.4 million or $0.73 per diluted share, including merger integration costs of $4.4 million or $0.05 per share. We are pleased with another solid performance by Exterran Partners in the first quarter. As a reminder, Exterran Holdings owns 51% of Exterran Partners LP, a master limited partnership, which provides natural gas contract compression services throughout the United States. In the first quarter Exterran Partners recorded revenue of $35.3 million, with EBITDA as further adjusted of $19.2 million and net income of $6.5 million. Late last month, Exterran Partners announced the distribution of $0.425 per limited partner unit, unchanged from the last quarter and up 21% compared to a distribution of $0.35 per limited partner in Q1 '07. Our distribution coverage ratio remains very strong and especially with an anticipated drop-down transaction on the near term horizon, we will strive to continue to provide strong distribution growth to our MLP investors.

Now, let's discuss operations. North American working horsepower declined 97,000 horsepower during the quarter. At March 31st, we had a total North American contract compression fleet of 4.5 million horsepower. This fleet utilization was 79%. somewhat lower as compared to the 80% at December 31st, 2007. As stated at the beginning of the call, we are disappointed with this reduction in working horsepower in the quarter, and believe we have taken aggressive steps to improve performance. But let me again caution that there are no quick fixes and it will take sometime to address operating and sales issues. In international contract operations, we continue to see strong demand for contract operations in Latin America and are excited about market opportunities in the eastern hemisphere. These projects include both compression projects and our bundled Total Solutions projects. In the first quarter we commenced projects in Brazil and Argentina which totaled $2 million in monthly revenues. Largely as a result of these projects, our international fleet utilization was 92% at March 31st, compared to 90% at December 31st, 2007 on a base of 1.5 million horsepower.

The worldwide fleet totaled 5.9 million horsepower at March 31st, with worldwide generation of 82%, compared to 83% at December 31st. In addition, we have several projects in Latin America, the Middle East, and Africa that we expect to begin generating revenue within the next two quarters. Our current backlog of international contract operations business represents combined revenues of approximately $60 million per year, with about two thirds in Latin America, and one third in eastern hemisphere. As I'm sure most of you know, much of our international work includes the bundling of our extensive product lines and service platforms to provide integrated total solutions for our customers oil and gas production and processing needs. Our strategy continues to be the movement of more of this activity from sales to higher margin contract operations over time. We continue to see this strategy succeeding as we are negotiating several very exciting projects, including some with major oil companies looking to us for contract operations. We believe our ability to work closely with majors throughout the world highlights our ability to provide value to our customers by combining a wide range of production, processing and compression equipment and services into one total solution.

Demand for our fabrication services continues to be strong as reflected by brisk inquiry and bid levels and our healthy level of fabrication backlog. Total backlog increased from $1.11 billion at December 31st to $1.27 billion at March 31st. Both compression fabrication and Belleli backlog increased during the quarter. I will now turn the call over to Michael to review our financial performance. Michael.

Thanks a lot, Steve, and good morning, everyone. I'm sure that by now you have all had a chance to look at our press release that we issued early this morning. As is typical during my discussion, I will review the first quarter financial performance for both Exterran Holdings and Exterran partners and also discuss our earnings outlook for the second quarter and for full year 2008. Of course, due to the August 2007 merger, our year-over-year comparisons are still not especially meaningful. And as a result, most of my comparisons this quarter will be against the fourth quarter as well as the guidance that was provided during our last earnings call. If we look at our North American contract operations business, revenue was $199 million in the first quarter. That was a little bit below our expectations and it was down about $4 million sequentially from the fourth quarter. As Steve mentioned, we saw greater than expected operating horsepower declines in North America.

In the first quarter, gross margin percentage in the North American contract operations segment of about 56% was below our guidance, where we expected first quarter margins to be slightly higher than the fourth quarter margins that we had turned in that were about 57%. As Steve mentioned, we are certainly disappointed with the performance and believe that we are aggressively attacking the issues. Our international contract operations revenue was $120 million in the quarter. That was a bit higher than our guidance range, as we started up over 40,000 horsepower in the quarter, and that was slightly ahead of schedule. International contract operations gross margin was approximately 67% in the quarter. That's up from about 64% in the fourth quarter, and it's also a little bit higher than our guidance. Our international contract operations business continues to perform extremely well and we are very excited about the prospects for this business for 2008 and beyond.

Shifting over to fabrication, we generated revenue of $337 million compared to guidance of $370 million to $390 million. Revenue was lower than expected due to delays and the start-up of certain production and processing jobs, but the gross margin was 22%. That was above our margin guidance of mid to high teens. Segment margin outperformance was the result of strong execution, especially in our production and processing segment, and the fact that we had fewer installation revenues during the quarter, which are typically a little bit lower than our other gross margins. As a result of the strong performance in our fabrication operations, the total gross margin dollar contribution of this segment is at the high end of expectations, as the lower than expected revenue levels were more than made up for with higher margins.

Providing some detail on fabrication for the quarter, compressor fabrication represented about 44% of fab revenue for the quarter. Belleli was about 30% and other production and processing equipment made up most of the remainder. If we look at after-market services, first quarter revenue was $84 million. That was below our guidance of $90 million to $95 million. There in that segment, we saw lower revenues in North America, while international was largely on track. Gross margin percentage was 20% and that was in line with what we had for guidance in the low 20s. SG&A expenses were $90 million in the first quarter. That was on track with expectations and also consistent with the fourth quarter. We generated $211 million in the first quarter EBITDA. That excluded $4 million of merger costs. The merger-related costs, which came in as expected, consisted primarily of severance expense, amortization, and retention payments and some real estate consolidation costs. We do expect another few million dollars or so in merger-related items over the next one to two quarters.

Interest expense was $33 million in the first quarter. That was somewhat higher than our guidance, due to really our mistake in forecasting when we would benefit from lower market rates as some fixed rate debt tranches came up for repricing. So as we have now repriced into those lower rates we expect that interest rates will be, in fact, a bit lower in the second quarter, somewhere in the $30 million to $31 million range which was, in fact, our guidance figure that we had for -- originally had for the first quarter. We had $6 million in equity income from joint venture investments in the first quarter. That was in line with expectations. Also it was up just a little bit from $5.5 million in the fourth quarter. We anticipate that this income item will continue around these levels throughout 2008. We also had $13 million in other income. That was largely related to currency translations that benefited us, due in part to the continued weakness of the dollar and that number is down just a little bit from $15 million in the fourth quarter, but as we said then and as we still say now, we expect this other income item to be considerably less going forward.

The effective tax rate for the quarter was 37%. That compares to 24% in the fourth quarter. The fourth quarter rate was a little better than we had expected due to some international tax benefits that lowered that effective tax rate. As we look forward, we do expect to continue to see a tax rate somewhere in the mid-30s during 2008. We put all of this together. The diluted net income per share was $0.73 in the first quarter, adding back the merger costs it would increase first quarter performance by about $0.05 per share. If we look at CapEx, net capital expenditures for the first quarter were $100 million. Total CapEx included about $63 million in growth capital, and $22 million in fleet maintenance capital. Looking at some of the balance sheet items, total debt was $2.3 billion, basically unchanged at March 31. Debt-to-capitalization was 42% and debt to annualized first quarter EBITDA was about 2.75 times.

We did not purchase any of our stock under our repurchase program during first quarter. Now, given the prices that historically we purchased stock at, especially in the fourth quarter, however, we obviously believe that today's stock price is an attractive level to purchase. But, we are also operating in a credit market today, where our attractive debt facilities can't necessarily be replicated with the same cost. So we are therefor a bit more cautious in evaluating the ability of capital, looking at stock repurchases, et cetera, as we believe we have a solid balance sheet, credit ability and these things can be a distinct advantage for us in pursuing growth opportunities. If you look back on stock repurchases since the merger closing date in August, we have repurchased 1.26 million shares at an average price of $79 a share, and that equates to a total of $100 million, leaving us still with $100 million left on a previously announced share repurchase program. The Exterran Holdings revolving credit facilities had $365 million drawn against it at March 31, as we used about $200 million of this facility to redeem the convertible notes that came due during the quarter. Exterran had $328 million of undrawn debt capacity, including capacity under our ABS facility. Exterran Partners had $98 million of capacity under its credit facility at March 31.

I would like to now talk just a little bit about guidance for the second quarter. We continue to expect revenues and working horsepower in our North America contract operations business to be relatively flat for 2008, as compared to basically where we finished 2007. We expect horsepower and revenue to grow during the second half of the year to make up for some of the losses we have experienced thus far in this year. Additionally, we continue to expect slightly improving margins during the year, as a result of benefits from the merger and from our service excellence program. If we look specifically at the second quarter, we expect revenues and working horsepower to be slightly below our first quarter results with margins to be slightly improved over the first quarter. In international contract operations, we continue to expect revenues of over $500 million for 2008. That would represent growth of around 15 to 20% over our 2007 combined international contract operations revenues. We expect this business to generate margins in the mid to high 60% range and for the second quarter, we expect international contract operations revenues of $124 million to $127 million with margins in the mid 60s.

In our after market service segment, we expect to generate revenues after proximately $90 million to $95 million in the second quarter with margins in the low 20s. If we look at fabrication for the second quarter, we expect fabrication revenues of $340 million to $360 million with margins in the mid to high teens. With some of the delays from the first quarter carrying over into our production plans for the entire year, we now expect fabrication revenues will be in the $1.5 billion to $1.6 billion of revenues in 2008, and that's at the lower end of what we had originally anticipated. We do expect this segment to continue to generate margins in the mid to high teens. If we look at SG&A expenses, we expect merger-related savings will begin to be offset by costs associated with expanding our international operations, and also the initiation of noncash amortization expense associated with Exterran's long-term incentive plan. We expect that second-quarter SG&A will be up a little bit in the mid $90 million range, that's per quarter, with the increase driven by about an additional $3 million or so related to the long-term incentive amortization expense.

We expect second quarter depreciation to be in the mid $90 million range, with the increase driven by some of the newly started international projects and, again, repeating myself here, we expect interest expense for the quarter to be around $30 million to $31 million. We expect net CapEx for the full year to continue to be in the $400 million to $500 million range. That is unchanged from our earlier guidance, and it does include fleet maintenance CapEx of $110 million to $120 million. New growth capital would be between $250 million and $300 million, with about 60% of that growth slated to be for international operations.

Let's look for a minute now at Exterran Partners. Of course, as we discussed in previous calls, the operating costs for EXLP are capped at $18 per operating horsepower per quarter. SG&A expenses are capped at $4.75 million per quarter. During the first quarter, the SG&A cost caps were not exceeded. The operating cost caps were exceeded by $3.6 million. This number was slightly higher due to the higher costs that were associated with the North America contract operations businesses at Exterran. With the benefit of the cost caps, EXLP generated EBITDA of $19.1 million, and distributable cash flow of $14 million. This distributable cash flow was sufficient to cover the $0.425 per unit distribution that we declared for the first quarter, and that coverage ratio ended up being 1.9 times. Even without the benefit of the cost caps, EXLP generated distributable cash flow to cover the distribution by 1.4 times. If we look at that by comparison in the fourth quarter, with the cost caps, EBITDA was $20 million, distributable cash flow was $14 million and coverage in the fourth quarter was also 1.9 times.

In the first quarter, Exterran Partners fleet average operating horsepower was 659,000, that compares to 667,000 in the fourth quarter. That equates to a decline of about 8,000 horsepower, as EXLP was also affected by some of the same declining horsepower trends in North America that we saw for all of Exterran. At March 31, EXLP had total available horsepower of 720,000. Spot utilization rate was 91%. Now, about 1.3 million horsepower of Exterran Holdings and EXLP combined contract fleet is now covered by contracts converted to service agreements. This total equates to about 29% of the combined U.S. contract compression horsepower for both companies. Now, as we had mentioned previously, the merger slowed us down a bit with regard to contract conversions, but we have actually made very good progress since the end of March as we have added over 110,000 converted horsepower since the end of the quarter with contracts that we have converted in April and May. So we think this process is now going pretty well. The EXLP debt ratios continue to be at the low end of our target ranges. Total debt to annualized first quarter EBITDA was about 2.8 times and while EBITDA also covered interest expense by about 5 times. Lastly, we expect to file the Exterran Holdings' and Exterran Partners' 10-Qs within the next couple of days. At this point, operator, we would like to turn the call over to questions.

(OPERATOR INSTRUCTIONS) We'll go first to Kevin Pollard with JPMorgan.

Thanks. Good morning, guys.

Good morning.

I was hoping, Steve, you could maybe give us a little more color on what changed with regard to the costs. I know you've got a lot of cost pressures in the field in the North American business and the margins didn't increase slightly like you thought. I was wondering specifically what kind of costs -- where you are seeing the cost. Is it diesel or lube oil or what seems to be driving that the most versus your prior expectation?

Your guess is good, Kevin. You got the big three off the top. Labor costs obviously continue to be an issue for everyone in this industry. But in addition, the lube oil costs are beginning to creep up, as you can appreciate with the price of oil, so is diesel fuel for our vehicles. And some of that tends to mask some of the cost reductions we have gotten through the synergies we have taken out for the merger. So we have had cost pressure that continues on cost of our components and maintenance of our equipment continues to be higher than we had anticipated. So that's one of the projects we are working on.

Okay. As we sort of balance these rising costs with your desire, at least in the short term, to not try and really push pricing, can you talk about sort of how you think about balancing keeping pricing current -- at the current levels versus passing some of these costs on to some of your customers. And have you seen some of your smaller competitors start try to pass this on that might give you a little cover to work with there?

So far we haven't seen anybody trying to pass the costs on which keeps the pressure on us, of course. And with some declining horsepower, it just doesn't seem like the time to go back to our customers with a change in the cost of the service that we are providing. I would like to be able to recapture, let's say, some of the costs that are particularly oil price related at some point in time as Exterran, but I think it is going to be late in the year before we are ready to go talk to customers about our lube oil costs and our fuel costs. They have the same pressures. So they will understand, but I think we need to get more stability in North America first.

Okay. And then if -- your guidance for slightly lower revenue in North America kind of suggests that you would -- you are expecting lower utilization or lower average working horsepower, is that just sort of a function of the exit rate in Q1 or do you think you are still going to see further declines in utilization there before it stabilizes?

A lot of that is the exit rate in Q1 coming into a full quarter of fruition, with 97,000 horsepower coming out of North America throughout the quarter, some of that will be an entire quarter in the second quarter will see a reduction, balanced out with some equipment going back to work in Q2, I think that we're -- our plan is for Q2 to have a much reduced erosion in the fleet in Q2 on our way to turning it around the last half of the year, as Michael said in his comments.

Okay. One last quick question, Michael, could you give us any more color on the size of the new facility at EXLP?

At this point, you know, we have provided some guidance, but we expected the drop-down to be a little bit bigger than the last. But I mean, we wanted to work within our existing credit facility. We think that's the best way about going about that. But the size of the transaction right now is basically still in negotiation between the two parties. So other than providing a little bit of color in what I just did, we are not going to provide more specific guidance about the size.

Okay. Is it -- you know, is it more than just the sort of accordion feature you had on the existing facility?

No.

Okay. Thanks a lot, guys.

Thanks, Kevin.

We'll take the next question from Mike Urban with Deutsche Bank.

Thanks. Good morning.

Good morning.

Sticking with the U.S. here for a little while, clearly some further erosion than the first quarter and then too soon to really talk about anything showing up in the numbers across the board. Are there any -- with the initiatives you put in place so far, is there anecdotal evidence that suggests that you are having an impact in terms of the -- getting customers back, keeping existing customers who might have been jumping during the merger process, anything that you can -- that's fueling your optimism, I guess, that you'll get this fixed?

Well, I guess, Mike, I'm a little stunned by the optimism I showed last quarter and I got surprised. It's easy to see that there are contracts, new contracts. Backlog is building in North America. What we don't see quite often and get surprised by are releases of equipment that offset that. That's why we kind of guided for lower erosion in the second quarter, and then buildup in the second half of the year. We think we have the team in place. The first quarter was definitely confused in operations in the field by the ERP conversion, which drew a lot of attention back internally trying to get that in place. And now that's been implemented and functioning well. So hopefully we can get that turned around in the second quarter and prepare ourselves for a good second half. Does that answer your question?

Yes, yes it does. And on the demand side, clearly a lot of increased interest and more drilling activity, most of that being unconventional, obviously there's a lag before that hits your business. Would you see that positively impacting business, is that part of the second half optimism or is that almost -- entirely driven by what you are trying to do with your existing customer base?

It's really more driven by what we are trying to do with our existing base. Because we have kind of continuous demand for unconventional growth plays that have been going on for quite a while. There's more coming, no doubt, and hopefully we'll see a ramp up in the fall as some of the new plays begin to evolve a little bit more and some of the increased drilling programs evolve. Right now, I think the focus on this is execution for Exterran.

Good. I will turn it back. Thank you.

We'll go next to Bill Herbert with Simmons & Company.

Thanks, good morning.

Good morning.

A couple of questions here to follow on, on the -- on the rather oblique guidance for the drop-down. Now, I guess you guys have been consistently saying up until today, that the next drop-down was going to be considerably smaller than the last one. Now we are saying it's going to be a bit larger?

No, the only drop-down that we did, Bill, was $230 million and that was in the universal --

Right, 270,000 horsepower, right?

Yes.

And my understanding was because of the catharsis in the credit markets that you guys were likely to do something smaller. Now that you have procured this facility, if you will, it sounds like you are going to do something a bit bigger than that first one?

I think we were always pretty consistent with doing something bigger than that drop-down. I think as we looked at the credit markets, obviously, they are more difficult than they were last summer and so I think how much bigger it was, I think perhaps that has come down a little bit. If you look at what was -- what is available under our facility, just to spell it out, credit availability under the existing revolver, about $98 million.

Right.

And an accordion feature to expand that of about $135 million. We are saying that we are going to work within that framework of those debt resources.

So you haven't necessarily established a new facility for EXLP?

We basically added on through accordion, through the existing facility.

To ramp it up to 450, right?

We have added on to it, yes.

Okay. Fine not to belabor the point, but I will. We expect then that the drop-down is going to be greater than the 270,000 horsepower and greater than the $230 million?

All of that is subject to negotiation and that is between Partners and EXH and it is probably too preliminary for me to say exactly what it is going to be because I'm not the one that will be able to drive everything with the partners board.

Right.

It is up for negotiation and debate.

Okay.

That's exactly what it's going to be.

Got you. Secondly, Steve, sort of shifting gears here a little bit. Last call, you sort of framed the international opportunity as sort of evaluating 20 separate projects sort of split evenly between Latin America and eastern hemisphere with total revenue potential of about $10 million per month. I think that's what you said. Can you update us as to sort of the opportunity landscape on that front?

I will give you half an update.

Okay.

I also said at the same call that we aren't going to update that number. That was kind of a one-time indicator.

Yes.

Keeping that too fresh would be, A, too difficult and, B, I think too descriptive for some of the competition there.

Right.

But by way of explaining maybe some progress we made since that call, which was only a few weeks ago, it seems like, we have captured one of the projects. We have lost one of the projects. And one of the projects has decided to rebid the entire job and look at it again for equipment reasons.

Right.

So the projects are moving along. Some are -- some are wins. Some are losses. Some are ties. And in addition, we have now put some new projects into the batch, so we continue to go out and find more opportunities. So we have -- I guess the best way to describe it, is we have a pretty full plate of international opportunities that are all in various stages of activity.

Yes.

And unfortunately, we don't have anything really dramatic to announce at this conference call, but we are close to several opportunities that hopefully by the time we get back here, we can talk about more fully.

Okay. And then last one, with regard to North American margins, at least in my notes here, I had sort of an expectation of a year-end exit range and kind of a low 60% range for North America. Do you think that's too aggressive now or do you think that's realistic?

I think that we've pledged to slowly maturely improve margins over 2008 and they will be certainly better than they are at this point in time. I don't think that, at this point, I'm ready to go to what the end-of-the-year margins are going to be. We need to let this new operating team get their feet on the ground and see what they can accomplish this quarter and maybe next quarter we can do a better job.

And I'm going to slip one more in here. Michael, with regard to the overall MLP financing market, which has been challenging the past few months, do you see light at the end of the tunnel with respect to things becoming a little bit more accessible?

I do. I think the market is -- is getting better and I also think that with Exterran Partners and Exterran as a parent and the way we finance things, I think we have flexibility to kind of pick our timing and our size and make sure that something is going to be successful. So I think we -- we've certainly accomplished, I think something notable on the debt side and being prepared to do that and I think we feel pretty good about the equity side at this point as well.

Great. Thanks very much.

Thanks, Bill.

We'll go next to Robert Christensen with Buckingham Research.

Thank you. On the domestic margins, how much of that loss this quarter in margins domestically may have been related to project excellence? It was always my impression that you were servicing, expensing more for a while here to establish a superior run rate so that your customers might be induced to continue to want to outsource. Can you define how much the costs might have been related to that program?

Bob, if I tried to give you the costs it would be divining. I don't think -- I think it's so blended in U.S. operations that it's hard to discern how much of it is lube oil, how much of it is labor, how much of it is parts, how much of it is increased maintenance on equipment as a part of our move to service excellence. There is no doubt it has some impact on our operating costs and continues to have some impact on our operating costs as we spend more money upgrading units in hopes that we will be able to reduce operating costs in the future. We get more much more discipline in doing preventative maintenance as opposed to repairs. I can't tell you how much of that is in our cost structure, that's bothering our cost structure. I think all of that needs to come into balance and I think we have some plans in place to do that. It's just, again, we will take some time to do.

How much of the decline in horsepower was of the sale nature of the smaller horsepower that you have been doing for a while and seems logical and how much might have related to impairment. I guess I'm working backwards to how much you might have lost in terms of market share absent that. But, for competitive reasons.

Q1, the guys looking through their books, but for Q1 there wasn't a lot of horsepower that was purchased, I don't think.

We had about 35,000 that was sold during the quarter. 35,000 horsepower.

And then you had some impaired, right?

Actually --

How much market share you might have lost from competitive reasons? I mean, it's, I guess, market share losses has it been competitive out there from who -- private firms that --

Let me answer that this way, Bob. It has been competitive out there. We certainly have got the customers' attention with the merger, and they are obviously concerned when number one and number two come together. In addition to, that or because of that, I suspect, some of our customers have opted to buy a little bit of equipment. We think that's pretty well behind us but when they did, back many, many months ago, deliveries were long and it's now being delivered, some of which has offset a little bit of our equipment. And our competition has been doing a very good job of going to our customers and suggesting that they give somebody else a try. So there's been little bits of erosions from a number of places, but the difference in the 97,000 versus and take away what was sold out of the fleet, is really utilization erosion which is why we are down another percentage point in North America.

And I guess last one, on the backlog numbers, how much was, I guess, compression in the fabrication? In fact, I will try to look for it here in the press release.

Yes -- Bob, yes, if you break out the backlog, just round numbers, about half of the backlog is related to Belleli. And then if you look at the rest of the backlog, about 60% or so of that is compression. The rest is production and processing equipment.

And of that compression, how much was U.S. and how much might have been going to international? My point is, is the fabrication requests right now, more from international or is it more from the domestic market?

Yes, it is a little bit more international.

Than it had been.

A little bit more than 50/50. I think it's more like a 60/40 mix.

I guess a final, if I may, electric compression as opposed to using a Caterpillar gas-fired engine. Are you involved in that? Because this Marcellus shale play, a number of the producers have said, hey, it's coal territory, it's cheap electricity. They are tending to think about electric compression. Are you engaged in that?

Yes. Electric compression for the reasons you have just talked about is not common in our business. And the reason it's not common is that most of our producers aren't close to a power supply. Where they are, it is fairly common an we do build electric drive compressors for the customers that have that, I guess, luxury, we will call it. And we'll be happy to do that again for folks in the Marcellus shale or wherever we are. So it's not a mystery to us. We have certainly built a lot of it over our lifetime. So it's not a big deal.

Do you have a local presence in Appalachia?

Absolutely. We have been in Appalachia for 30 years. So we are one of the larger players in that basin and have been there, as I said, a long time.

So that could be exciting a couple of years from now.

It better be, yes.

Great. That's wonderful. Thanks, guys.

Sure.

We'll take our next question from Sharon Lui with Wachovia.

Hi there. I guess in terms of the drop-downs, are you still aiming to finance at 60% equity, 40% debt?

Ultimately that is generally the ballpark of what we want to try to aim for our capital structure.

And I guess your outlook for Q2, does that also apply to the partnership in terms of margin and utilization?

Well, obviously, the utilization numbers are going to be quite different because they don't have nearly the idle fleet that's up at Exterran with 91% utilization. So I don't think that that's going to change -- or that's going to be the same. If you look at the EXLP, generally from a horsepower standpoint, it's done a little bit better. Part of that has been customer mix. Part of that has been the fact that new customers tend to gravitate towards the MLP as opposed to Exterran.

Okay. So I guess directionally, because the utilization, I think you had expected Q2 to be down, and do you expect utilization to be down at the partnership for the second quarter?

What we really talked about was working horsepower. Utilization numbers are a little bit harder to forecast because I don't know what the equipment availability is going to be. But we said that in the second quarter, for all of Exterran, we expect working horsepower to be down a little bit and I think that is probably a safe assumption with regard to the partnership, but if you look at the track record, the partnership has tended to do a little bit better than the overall company for the reasons that I mentioned.

And then I guess in terms of distribution increases, you guys had a very nice coverage ratio this quarter. Is the distribution policy going to be increasing the distribution concurrent with potential drop-downs.

I think at this point of game with regard to the partnership, so much of the distributions are based upon drop-downs, we really -- and increases. We really based future distribution increases in conjunction with those drop-downs. That's what's going to be able to drive it. But certainly being consistent with what we've said from the get-go, we believe this is a type business that can also have organic distribution increases with the growth of the business. It's just happens to be something that Exterran is not doing a great job of with regard to general horsepower growth. But as we mentioned, we believe we are going to get that turned around and back to doing what we did historically.

Thank you.

We'll go next to Geoff Kieburtz with CitiGroup.

Thanks, good morning.

Good morning.

I want to go back to a comment you made, Steve, that a lot of the erosion in domestic utilization was about not because new contracts were coming in but that returns were surprising. If we go beyond just the first quarter and look maybe over the last year or so, is there a pattern to what's behind those surprise returns?

To some extent there's a pattern. There are areas where our field service has lagged a little bit and we have been surprised to get returns and surprised by the field service lag. In some areas it has been more customer driven from the perspective of, they now had all of their equipment tied up with Exterran, where they used to have two competitors and so they would invite somebody else to come in to participate. But I think we're sorting through all of those issues, Geoff. It's kind of a blend of things and it's by customer, by geography and everyone has a different story.

All right, but in general, those returns have been replaced by a competitor?

In general, that's correct. Some of those returns, however, have just been kind of end of well life or replaced by a purchased unit when the production has stabilized and they have elected to go with permanent compression.

Right.

But it's a normal blend, I guess.

Okay. And, your comment about being reluctant to push through some of the cost increases you have experienced, it seems like it changed from historically the economics in this business, that customers do a lot of this themselves, that are exposed to all of those same cost increases and historically the contract compression would maintain pretty stable margins. What has changed? Is it really the merger and the after effects of merger or is there something else changing out there?

Well, it's the after effects of the merger, Geoff, in that as we are losing horsepower in the U.S., this does not seem to be back raising a price to a customer when we are trying to prove out our business model and trying to regain market share. So I think, as I said, that's a later in the year issue, once we have proven ourselves and we are regaining the position we had a while back, which we will. Then we can go back, I think, and make a pretty good case on the cost increases because they know exactly what the costs are. And the fact that none of our competitors seem to be doing that at this point in time does kind of limit us.

Right. And I guess making a comment that I think, Michael, you said that the new customers tend to gravitate towards the LP. Why is that?

It's just the omnibus agreement. If there is a brand new customer, in essence, to the Exterran family, it goes to the MLP.

Okay. So it is internally driven as opposed to externally driven.

That's basically the agreement between the parties in the omnibus agreement.

Okay. Thanks very much.

Thanks, Geoff.

We'll take a follow-up from Robert Christianson with Buckingham Research.

You referred to, I guess, bidding for major oil companies. Does that include national oil companies, or the reference to major oil companies always means big private companies.

No, good catch. What we talk about there is more international oil companies is what we refer to as majors. The national oil companies have been our customers for quite sometime. We are now beginning to see more activity with the international oil companies.

In Russia, they have this rule, I guess -- I don't know where it is -- but in terms of the limation, but the gas flaring has been an issue. Are you a solution there? Are you seeing inquiries there for stripping out liquids and preventing glass flaring? Are you involved in that?

Sure. That's been part of our business model for a while, as the world has been eliminating systemically flaring and also as the price of oil has come up, the liquids entrained in the gas have become more valuable. So both the compression to take the gas that couldn't be flared before and either reinject it or move it off to market and the processing equipment to strip whatever liquids might be in that gas for local markets, that's all part of the infrastructure build in international in particular that we have been referring to, that is so robust right now and driving so much of the activity that we are seeing.

I'm well aware of, that but specific to Russia, where there is still a very big presence, a domicile, if you will, by Gazprom. Could you consider doing work for Gazprom, is that a possibility given the nationalization kind of approach over there?

We have been selling equipment in Russia for the last, six, seven eight years, I guess. And I would think that probably the majority of the compression in our size has been captured by our company over the years and we have worked for Gazprom plus a lot of their sister companies. To date, we have sold equipment in country. We have elected not to contract equipment there. So we have been building and selling and working with the Russians for quite a while. And I would say that we don't know exactly when they come to us and say they need compression, what's behind it all, but it's got to be a combination of market drive in that part of the world coming from Russian gas, as well as flare elimination.

Should we look at a weaker dollar, Steve, that is transpired here in the last six months as good for business for your company? Because, you are assembling things that you buy in U.S. dollars and fabricate in U.S. dollars and then they are pushed out and sold (inaudible), is that something to think about?

Yes, it certainly helps us a little bit as opposed to maybe a European competitor that might be able to bid in an area like Russia. Other than that, most of the world's compressor supply is coming from U.S. or Canadian companies. So it probably helps us a little bit vis-a-vis the Canadians and the Europeans.

Thank you.

We have time for one last question. We'll take a follow-up from Kevin Pollard with JPMorgan.

Thanks, Steve. I had one quick follow-up. The international backlog of $60 million per year, when would the expected timetable for all of that revenue to be -- for those projects to be started up and that revenue to be realized?

That's all going to be revenue that comes on slowly but surely, quarter by quarter over the next three or four quarters. Some of that will not be started up until 2009, but you will see little bits of it coming in every quarter as we report, and then we'll be talking about the change in the backlog or what the current backlog is every quarter. So you get a feel for how much is coming after that and try to keep you posted on our activities that way.

Okay. Thanks, Steve.

Sure.

I would now like to turn the conference back over to Steve Snider for any additional or closing remarks.

Thanks and in closing, I definitely wanted to acknowledge the extraordinary efforts of our employees all over the world. We are really proud of the accomplishments we made in the last eight and a half months since the close of the merger and the talented team we have in this Company is working hard and I'm really looking forward to reporting our future success. It's not to say we are happy about some of the issues that we focused on today. We do believe we are approaching the merger integration and improved service delivery model in North America in the right way for our long-term success. We are frustrated that our North America performance has been below our own expectations to date and we are committed to turning things around in North America, if you haven't gotten that idea yet. And I'm really confident that we are making progress in that area and we'll be reporting better things to you in the future.

Despite the challenges in North America, we have a tremendous amount of good things going on today inside Exterran. We are in the midst of an unprecedented amount of global energy infrastructure buildup, some of which you just got done talking about and we believe we will provide growth opportunities for Exterran over the coming decade. We pulled together two strong companies to make one great company and we are the global market leader in many of our segments. We believe we have one of the best management and operational teams in the industry and we have an extensive service network, which we believe can provide superior customer service at attractive returns for us. Finally, strong and low-cost -- we have a strong and low-cost capital base that should give us a competitive advantage in an asset intensive industry like we are in. With all these factors, we are really excited about the future and remain confident that we will be successful as we go forward. So with those comments, I want to thank you for joining us for today's call and we will be back with you at the end of the second quarter. Thanks, everybody.

That does conclude today's presentation. We thank you for your participation and you may now disconnect.