Archrock Inc (AROC) 2011 Q2 法說會逐字稿

Good morning. Welcome to the Exterran Holdings Inc. and Exterran Partners LP second-quarter 2011 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 second quarter ended June 30 of 2011. If you have not received a copy, you can find the information on the Company's website at www.exterran.com.

During this call, the Companies will discuss 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 definitions and a reconciliation of these measures to GAAP measures in the summary pages of their earnings release, and on the Company's website at www.exterran.com.

During today's call, Exterran Holdings may be referred to as Exterran or EXH, and Exterran Partners as either Exterran Partners or EXLP. Because EXLP's financial results and position are consolidated into Exterran, the discussion of Exterran will include Exterran Partners unless otherwise noted. Also, the term international will be used to refer to Exterran's operations outside of the US and Canada. And the combination of US and Canada will be referred to as North America.

I want to remind listeners that the news release issued this morning by Exterran Holdings and Exterran Partners, the Companies' 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 Companies' performance, and represent the Companies' 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 actual results to differ materially from those in the forward-looking statements can be found in the Companies' press release, as well as in the Exterran Holdings' annual report on Form 10-K for the year ended December 31, 2010, Exterran Partners' annual report on Form 10-K for the year ended December 31, 2010, 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.

Your host for this morning's call is Ernie Danner, President and Chief Executive Officer of both Exterran Holdings and Exterran Partners. I would now like to turn the call over to him. Mr. Danner, you may begin your conference.

Thanks, Ingra. And good morning, and welcome to the second-quarter 2011 earnings call for Exterran Holdings and Exterran Partners. As usual, joining me on the call today is Michael Anderson, who is the CFO at the Holdings level, and Michael Aaronson, who is the CFO at the Partners level. We'll discuss, in our typical format, the earnings for the second quarter, and our outlook going forward. First me, and then Michael Anderson. But first I want to start and address the announcement regarding the upcoming change in the Chief Executive Officer. And this will be brief.

So, in October of 2008, I had the great pleasure of rejoining Exterran. And as a result, I've had the opportunity to spend 3 terrific years working alongside our 10,000 dedicated employees. And together we've accomplished a lot of things over these 3 years. And particularly, I just want to point to a couple. Stabilization of our organization following the 2007 merger. The navigation of some really difficult times around the economic downturn, and the retrenchment in the oil and gas sector. And through that period, our employees have upgraded the level of service they provided to our customers, we've grown Exterran Partners through this period, and we've improved Holdings' balance sheet by repaying an excess of $900 million of debt. These are no small accomplishments.

But despite them, from my perspective, our financial performance has been unsatisfactory. And as I outlined at the beginning of the year, I felt like this was the year we could return to growing both revenue and EBITDA. And we were targeting growth in EBITDA of at least 5% for 2011. And while we described this target as a goal that we did not intend to update throughout the year, it's clear today that we do not expect to meet this objective.

However, I would point out that, as we stated in our press release earlier today, we expect gross margin in the third and fourth quarter to be improvements over this second quarter performance. For the full year though, we believe EBITDA will come in below 2010 levels for the 2011 period, and therefore, well below our original target. The principal drivers of this are underperformance of our fabrication segment, and to a lesser extent our after-market services business outside the US.

And given this performance, and most importantly, I think, because we just haven't generated value for our shareholders consistent with my expectation, I have agreed to step down as CEO upon the naming of a new CEO, which we would expect to happen later this year. And until that time, I will continue to serve in my current role as CEO of both Exterran Holdings and Exterran Partners. And I'll continue to make what I believe are the right decisions, and drive the appropriate actions to generate increased shareholder value during my remaining time with the Company, and strive to set the Company up for success under new leadership.

And I continue to believe that our unique combination of products and services that we offer to our customers, the speed with which we can meet our customers' requirements, and our overall strength in the compression market on a worldwide basis, these attributes position our Company well as the energy infrastructure is built out across the globe. We have such a great base of dedicated and experienced employees, that I'm sure they will be able to capitalize on this great position in the future.

So with those preliminary remarks, I'll change gears and talk about the performance in the quarter, and the outlook going forward. And I'll start in North America. So from an overall basis in North America, our growth is still driven, like much of the industry, by shale and liquids-rich plays. Operating horsepower in the United States for us has ramped up a bit slower than we expected. However, based on inquiry levels, customer inquiry levels, overall activity levels, we continue to expect operating horsepower to increase by 50,000 horsepower during 2011. And our fabrication business continues to be strong across all our product lines in North America.

Now I'm going to turn to detail about the North America contract operations business. So, we continue to see robust contract operations activity in key growth markets, including the Marcellus, Eagle Ford, Barnett, the Granite Wash, and the Avalon plays. So these are our growing markets. And these markets, as I said before, they just are generating, or benefiting from the shift and drilling in shale plays and other liquids-rich focus. And if you look at these growing markets, and the quarter we just finished, our operating horsepower grew by about 30,000 horsepower in these growth markets in the quarter. And over the last 12 months, if you just focus, again, on these growing markets, we're up about 110,000 horsepower.

However, if you then factor in where we're not growing, our contracting markets, these offset these gains. And we continue to see horsepower declines in these more mature and predominantly conventional markets, which are east Texas, Louisiana, the Rockies. And we've had negative performance in the Gulf of Mexico from a horsepower standpoint, as a result of the fallout from the 2010 oil spill.

So if you look at these declining markets in total in the quarter, they went down by 30,000 horsepower. And over the past 12 months, they're down by 90,000 horsepower. So that's the look at the declining.

So overall in the US, when you combine all of this, what we saw in the most recent quarter was that our working horsepower declined by about 10,000 horsepower, driven by the sale of some horsepower that we had in Canada. And pricing in this quarter, like many of the prior quarters, was relatively flat as compared to the first quarter. If you look at the operating costs for the second quarter, they decreased markedly. As we noted in our prior quarter earnings call held in early May, our North America team is putting in place plans to reduce our operating costs and enhance overall efficiencies.

And partly due to these costs, our total operating costs per average working horsepower, they dropped from $28.34 per average working horsepower in the first quarter, to $26.60 for the second quarter, a reduction of about 6%. And this improvement was achieved despite ongoing cost pressures, particularly in the area of wage expense for our field service personnel. And with higher oil prices, our costs for lube oil for our compression units, and fuel for our field service trucks, has gone up. Even with that, we got the 6% reduction. And we expect to continue to see additional improvements in our costs in the second half of 2011.

So turning to our fleet for a minute, we have begun building new units to meet the demand for certain classes of equipment in North America in which we are currently at or near full utilization. And at this point, we've committed to build 95,000 new horsepower for our North America fleet at an estimated cost of $67 million. And we would expect to begin deploying these units starting in the third quarter and going into 2012.

So now I'm going to talk about Exterran Partners real quickly, which is a subset of that North America contract ops business, and it's easily discussed here. So results at Partners were generally in line with our expectations, and reflect the positive overall market conditions I just spoke about relating to our overall North America business. And some of the new units that I mentioned that we're building will meet market demand in North America, therefore Exterran Partners. And this program will help drive growth at EXLP going forward.

For the quarter, we increased our distribution by $0.005 per unit for the 4th consecutive quarter. And Exterran Partners further strengthened its leading market position in the contract ops business, and enhanced its distributable cash flow with the acquisition of compression and processing assets from Exterran Holdings in June. So in summary on Partners, we remain optimistic about the growth outlook, and committed to continuing to increase distribution to unit holders over time.

So now I'll switch back to Exterran Holdings, and talk about the North America fabrication business, where the trends continue to be very favorable. Our bookings in the first half of 2011 more than doubled as compared to the first half of 2010 levels. And in the second quarter, we enjoyed strong overall demand for our compression, fabrication, our production equipment fabrication, and our process and treating fabrication product line. And we expect that to continue into the second half of 2011. And again, this demand is principally driven by infrastructure buildout in the shale plays and other oilier basins throughout the country.

So now I'll switch to our international markets, and focus on Latin America first. Our performance in Latin America, our operating performance was lower than expected. In our Latin America contract operations business, our gross margins were negatively impacted by demobilization expenses. And some of this effect may continue into the third quarter.

Revenues from international contract ops in the second quarter benefited from the contribution of a major process and treating project that we started up in Mexico late in the first quarter. So we had a full quarter of revenue for this processing facility. The quarter also included some new bookings of additional contract operation business in Mexico and Argentina that will help us in the second half of the year.

Switching to the eastern hemisphere, we underperformed our expectations, primarily due to higher than expected expenses on a particular project that reduced fabrication margins in the quarter by $8 million, and AMS margins in the quarter by $3 million. This is a project that we're in the process of completing. And we'll transition this project in the second half of the year from a fabrication project into a longer-term O&M contract. But that $11 million was a big effect in the second quarter.

Looking at our EH fabrication business, our bookings were low, as the expected rebound in activity outside the US has generally remained elusive for our business. International bookings for the second quarter totaled about $100 million versus international fabrication revenues for the quarter of about $150 million. So our international backlog came in.

And I know it sounds old, but we continue to aggressively pursue attractive new business opportunities in the eastern hemisphere, and we believe we're well positioned to win some of these opportunities. They just haven't happened yet.

So now I'm going to turn it over to Michael, and then I'll come back for some closing comments.

Okay. Thanks a lot, Ernie. Good morning, everybody. I know that you've had a chance to look at our press release that we issued earlier in the morning. Overall, second quarter performance fell short of our guidance, as continuing good performance in North America failed to offset cost increases in international fabrication and AMS.

Let's look first of all at the second quarter results for Exterran Holdings. In the North America contract operations, segment revenue was $151 million in the second quarter, and that was in line with our guidance range. Operating horsepower decreased by 10,000 during the quarter. That was a little bit below our guidance, driven largely by that sale of some horsepower in Canada. With what we believe are improving market conditions in North America, as Ernie mentioned, we continue to expect that operating horsepower in North America will increase by 50,000 horsepower for the full-year 2011. And if you look back, as a reminder, through the first 6 months, we're basically flat in North America, so we're clearly expecting a better second half of the year for horsepower growth.

Gross margin increased sequentially by several percentage points during the quarter to 50%. That was driven by lower operating cost due to the efficiency initiative efforts currently ongoing in our North American business. Maintenance capital was $22 million in North America during the second quarter, and that compares to $17 million that we had in the first quarter.

Stepping back at the North American fleet, and looking at that, 3.7 million horsepower at June 30, fleet utilization was 77%. And now looking ahead at the third quarter, we do expect North America contract operations revenues of, again, around $151 million. That is in line with second quarter levels. The third quarter revenue level would equate to relatively flat to modestly positive operating horsepower levels compared to the second quarter. We expect margins to be flat to up slightly sequentially, with the benefit of the efficiency initiatives that will, in our expectation, continue to offset ongoing cost pressures.

Shifting over to international contract operations, the revenue for the quarter was $111 million. That was towards the upper end of our guidance range, and it was up from $106 million in the first quarter. The results, as Ernie mentioned, benefited from the contribution of the new gas processing project in Mexico.

Gross margin of 55% was in line with our guidance range. But it was somewhat lower than the first quarter levels due to labor cost pressures in Argentina, and also the cost for demobilization that we had cited last quarter and related to de-mob and shipment of units from Brazil. The international fleet stood at 1.2 million horsepower at June 30, and had a utilization rate of 82%. Operating horsepower was relatively flat compared to the first quarter levels.

As we look ahead to the third quarter for international contract ops, we expect revenues to, again, be in the $111 million range. It's about flat with second quarter levels. We do expect margins to increase a bit, closer to our 60% level, although we still expect some additional de-mob cost in the quarter that will likely keep us just a little bit below this level.

Moving over to fabrication, we generated revenues of $302 million in the second quarter. Gross margins of 11%. Now, revenue was a bit higher than expected due to solid activity levels in North America. Margins were somewhat lower than expected due primarily to higher than expected international project expenses.

Fabrication revenues during the quarter, when you look at the breakout there, consisted of about 40% compression product line, 40% production and processing, and about 20% Belleli. If you look at this, then, geographically, about 0.5 of the revenues were in North America, and as we look forward the backlog is about 45% North American fab work and 55% international. This backlog position is significantly different than what we had a year ago when North America comprised just about 20% of the fabrication backlog.

For the third quarter, looking forward for fabrication, we expect revenues of the $300 million to $320 million, and margins of about 10%. That is going to reflect changing mix, with a lower mix of international business that typically has higher margins than North America. We expect that North America in the third quarter should represent something closer to 60% of our fabrication revenues during the third quarter.

Shifting over to after-market services, second quarter revenue was $94 million. That's a little bit higher than expected, driven by increased activity levels in North America, and also incremental new O&M contracts related to operating international compression and gas processing facilities. The gross margin was 80%, and that was lower than expected, driven largely by the project start-up costs related to 1 of these international O&M contracts. And also some labor cost pressures that we saw in Argentina. While North American AMS revenues did increase, margins in the region continued to be pretty competitive there.

As we look forward to the third quarter, we expect AMS revenues to be in the $90 million to $95 million range. Margins improving a bit to the low to mid teens. And for the quarter, as you know, we generated EBITDA of about $87 million.

Last month, Exterran Holdings did obtain a new $1.1 billion senior secured revolving credit facility. The new facility matures in July 2016. It does replace the old senior secured facility that we had. The new credit facility has covenants that are very similar to our former facility, and an initial borrowing cost of LIBOR plus 1.75%.

Moving further down the income statement, interest expense totaled $35 million in the second quarter. And that was about $24 million in cash interest and $11 million in non-cash. So with the slightly higher interest rate associated with the new credit facility, we expect cash interest expense to tick up just a bit. Should be about $26 million for the third quarter. Non-cash interest for the next several quarters should be about $11 million a quarter. But that will be closer to $13 million in Q3 due to the write-off of unamortized debt issuance cost associated with the refinancing that we just did.

Net capital expenditures were $51 million in the second quarter. If we look at total CapEx, it included about $22 million in growth capital, primarily for new projects in North America and Latin America. As we look forward for capital expenditures, we continue to believe that net capital expenditures for the full year will be in the $225 million to $275 million range. That's unchanged. Including maintenance capital in the $85 million to $95 million range. Again, that is unchanged.

Growth capital, which is expected to be in the $100 million to $140 million range for the year, is going to be heavily weighted towards North America at this point, which should comprise about 80% or more of our growth capital during the full year. And if you look at our growth capital thus far in the year, it's held true as well. About 80% of the growth capital we've spent for the year has been focused on North America.

On the balance sheet, total consolidated debt declined by $35 million during the quarter. Went from $1.74 billion to $1.70 billion. Exterran Partners' debt increased during the quarter to $540 million. That was the result of funding the drop down transaction. While Exterran Holdings' debt declined to $1.16 billion. We have now reduced Exterran Holdings' debt, which is exclusive of Partners' debt by $283 million during the first 6 months of 2011. In terms of available but undrawn debt capacity at June 30, it was $366 million in total, including $161 million at Partners.

Now, looking specifically at Partners, as you know, on June 10, Partners completed the purchase of compression and processing assets from Exterran Holdings. EXLP today has 1,905,000 horsepower, and that is about 53% of the combined Exterran Holdings' and Exterran Partners' US contract operations business. Last week, Partners did announce an increased distribution for the second quarter, another $0.005 to $0.4825. And on an annualized basis, that works out to be $1.93. When you look at this distribution for the quarter, it is $0.005 higher than the first quarter, and it's $0.02 higher than the year-ago period in 2010.

The total cash distributions that Partners will pay for the second quarter are $19 million. And of this amount, Exterran Holdings will receive about $7.1 million. Specifically the general partner owned by Exterran Holdings will get about $1.1 million of the distribution. So if you look at the GP today, it's got an annualized cash flow of about $4.4 million.

EXLP, in terms of its performance, EBITDA was $32 million, and distributable cash flow was $19 million in the second quarter. So we had coverage of distributions of right at 1.0 times. It is worth a reminder that we did pay a full quarter's worth of distributions on the units that we issued in connection with the June drop down, but had the benefit of these assets for only about 3 weeks. So we estimate that EXLP's coverage would have been closer to 1.2 times had Partners owned the drop down assets for the entire quarter. Distributable cash flow during the quarter benefited not only from the drop down, but also by the organic growth of about 11,000 horsepower within Exterran Partners in 2Q.

Taking into account the June 2011 drop down, we expect Partners' maintenance capital now will be in the $26.5 million to $30.5 million range in 2011. And that's up by about $4 million from our previous guidance, which was $22 million to $26 million. So, in summary, if you look at Partners, highlights included a drop down transaction during the quarter, sale of equity, and also an increase in its quarterly distribution. So we believe that all of these factors, combined with our outlook for North America, positions Partners very well for future growth. And lastly, we do expect to file the Exterran and Exterran Partners' 10-Qs within the next couple of days.

So before we get to questions, I would like to turn the call back over to Ernie for some further comments.

Thanks, Michael. So, again, I think the Exterran team has accomplished a lot over the last 3 years. And I'm really proud and feel privileged to have worked alongside them as they've gone through that. The next CEO will inherit a very talented management team, and an exceptional group of employees that are dedicated to operating safely, and delivering great customer service. And I have every confidence that this team and the new CEO will create improving stockholder value going forward.

So operator, we'll turn it now over to Q&A.

(Operator Instructions) Brad Handler from Credit Suisse.

Could we please spend a little more time on that business development outlook internationally? I understand your comments, Ernie, that presumably there is a slate of projects that you have bid on already for some time. And now you keep working those but they're not happening. But maybe you can give us a sense of how much is out there, put a dollar on that and maybe how that's fluctuated or grown. And then secondly, help us understand or develop a conviction that you're not losing market share; that projects are not going to others.

So to try to give size to it, it's just a huge market and the opportunities are there. And they are in the normal places we've been talking about and in the normal areas. Clearly we have not been, on your market share question, we have not been successful in Australia. And that's an area where we didn't have a big market share. But we clearly aren't getting our share of the fabrication business for the projects that have been announced yet. There are still a couple more. I think Origin -- you saw recently where Origin is moving forward with their coalbed methane stuff there. And we'll be aggressively looking at that to get a big part of that.

When you go to the Middle East, those projects continue to move out and to the right. And at this point, when we look at projects that have been signed up, we haven't missed but 1. There are some others that we may miss as we go forward, but so far we're only down 1 that was material and in our deal. Everything else is still just going out.

And then the other big market for us that we've been focused on is the FPSO market in Brazil. We're still very optimistic about it. We've leased land that is very good land in Brazil, that is coast land; that will set up well for us to deliver on those FPSO projects. And then those grants will come the second half of this year.

Brad, in general, it's hard for me to give you a dollar size. I think we can go back to growing in the international markets on all these projects. So I'm not going to go into the dollar size. On the market share, Australia is really the only place we really lost it.

We've focused on those geographies, like you've said. Have there been smaller jobs in Australia and elsewhere that -- when you say you've lost 1 job, for example, is it just we're talking about a certain size and above?

Yes. Certain size and above. We continue to -- we booked business in Australia this quarter on a compressor fab. We booked business all through the Far East this quarter. So I don't mean that they're not important, but we're continuing to book business, and that's what goes into those bookings we talk about. It's just the big projects we aren't landing. They continue to move out.

Do you have a sense of your share or the competitive landscape on the smaller work and how you're faring there?

Yes, that feels solid to me. I don't think we're missing or losing market share there at all. And the fact that we can fabricate in Singapore and do on the compressor side helps us get that market. And we're providing good service to our customers through there. So that part feels absolutely fine. And we've booked a lot of business in China. Not the small stuff where we're not meeting expectations. It's on the bigger things.

If I may now, and I'll stick with 1 line of questioning and then I'll get off the phone. But on the margin side of your international contract operations, I understand you attributed some cost to demobilization and to the labor struggles in Argentina, and you're obviously not alone with Argentina. But can you strip those out for us, first of all, and give us a feel for the margin? And then, second, what else is underway, perhaps, to help lift the margins in the international markets more broadly?

Brad, the first part of the question I will take. As we've indicated in our guidance as we look forward to 3Q, and I think we've stated in prior quarters, a 60% margin level for the base of international contract operations business that we have is about right. So we said a quarter ago that we would fall below that for 2Q due to some of these de-mob costs. Saw a little bit more inflation pressure on some costs than we had expected. And I think we see a little bit of that in 3Q. We think we'll be closer to 60%, maybe not quite there. But still think that that's a pretty good baseline number to be looking at for what we have on international contract ops.

Yes. And the margin expansion opportunity there really is not so much -- well, you always have to fight the cost side of it. And we have the headwind you cited in Argentina. The opportunity for us to enhance those margins a lot of times, now, is we have renewing business that we are being successful and I believe will continue to be successful over the second half of the year. And getting renewal rates up so that the contracted rates going forward are higher than the rate rolling off. And that's just attributed in China to the maturity of the business. These projects tend to be longer term. And so when they come up, we take some inflation risk. And, say, if you do a 5-year contract, in year 3, 4 and 5 in a lot of these. And then when the renewal comes up, we have a chance to expand that margin and recapture that. And that's where we are. So I think the margin expansion will come. We'll continue to attack costs, but it should come from renewal rates there.

Got it. All right. Thanks for the answers.

Jim Rollyson from Raymond James.

Ernie, you spent some time detailing cost and margins at Holdings. I wondered if I could spend a minute on Partners. Your cost per horsepower or margin slipped just a little bit in that business quarter-over-quarter. I was wondering maybe what some of the drivers there have been, and if it's some of the same issues you guys have had historically in the last few quarters at Holdings. But how things you think trend going forward on the cost front, or can you get margins to start to move back up or what is going on there?

Yes, Jim, I'll take the first part of that. And actually in Q3, we had a couple million of cost. $2 million in cost for Partners that were really from prior period expenses. And so that artificially made Partners, I think, look a little bit worse in Q3. It ended up not having much of an effect in terms of cash flow or distributable cash flow or anything on that for the quarter. I think, further, we do expect to see, as we've talked about in North America contract operations, cost efficiencies for the whole business and we expect that to continue to benefit both the whole Company, as well as Partners, as we drive forward.

Yes, and just to be clear on that, so there was $2 million roughly of expenses in the first quarter that flipped into the second quarter at the Partners level. And that's what made the second quarter look down from a margin percent standpoint. And in the third and fourth quarter, all of the initiatives we talked about at the consolidated level, they should benefit Partners just like they do Exterran Holdings.

Got you. That makes prefect sense. On the utilization factor for Partners also, you slipped quarter-to-quarter after picking up in 1Q. Was that partly related to the initial drop down or is that just some weather issues or how do you see that going forward?

Yes, I think certainly the drop down has some effect on it. And from our standpoint, there is very little change with regard to the utilization. Partners, we think, continues to do well. We would expect to see continuing progress as we go forward on the operating horsepower basis. We talked about an increase of 50,000 horsepower for North America that's really going to take place over the last half of the year. And Partners with 53% of the business is certainly going to get its share of that.

Okay. And the last question for me, distributions stepped up again this quarter, like you've been doing. Should we expect to see similar continued steady increases in distributions going forward? Or, like you used to do, should we expect some maybe bigger 1-time step up related to the drop down? Or what do you think?

No. We've indicated that our plan should be the measured increases quarter-on-quarter as the direction we want to go. And we're committed to trying to do that.

All right. Thanks.

Joe Gibney from Capital One.

Just a question on after-market margin progression. Getting back to this low- to mid-teens run rate is certainly another step up again, beyond what we've seen here initially in '11. Can you speak to what dynamics have to happen to get back to that level here in the third quarter? Is it project specific? Just a little color there.

I think the big thing is, we highlighted a couple of things that pushed down margins in the second quarter. And 1 of the big ones was this international startup that we had that pushed down margins in AMS by about $3 million. So I think some of these things are things that just aren't going to recur in the third quarter. So that is a big part of the margin tick up. I think we do see continued good activity with regard to North America. And while the conditions continue to be competitive, I think we'll expect to see a little bit of progress on that front in North America.

And then, back on international -- I'm going to flip back and forth here for you, on a second -- but back on international, the project that we talked about in terms of startup, not only will we be able to avoid the startup expenses, but actually that's going to be a profitable business as we add it into the mix. So those are some of the drivers that we have that we expect third quarter to be a better quarter for AMS.

Ernie, I'm wondering if you can speak to North America margin outlook within the fabrication side of the business? I know this is weighing on the broader mix just as lower margin work in general in eastern hemisphere wobble aside for margin within fab. Are North America margins in line with your expectation on the fabrication side? I know the mix, again, is lower margin work but is the price competition heightening? Just curious. I know the demand is there and we're seeing that in bookings and its component weight within your backlog. But could you talk about pricing and margin expectations within North America fab? Is it in line or is it getting a little more price competitive?

I think we have the ability to do better in terms of our North America fab margin business than we are today. The compression side of that remains very competitive. And that's where the lower margin comes. As the infrastructure build out continues in North America, and as we look at our process and treating, and that becomes an increasingly larger part of our backlog, I would expect that mix to benefit our margin. But in terms of just our operating performance within that segment, and cost control, our people are doing a pretty good job in terms of controlling that. We've challenged them to drive some costs out of that and get better as we go through that. But right now it feels like they're doing a good job. Pushing them to do better.

And just a couple more quick mechanical questions, Michael. You went through your interest expense guidance pretty quickly. Can you just repeat that for me? And then was curious what the LP ownership position is percentage in the EXLP as it stands today.

Sure. In terms of interest expense, basically what we said was cash interest expense should be up $2 million sequentially going from $24 million to $26 million. That's the result of higher borrowing cost on the new facility. And then we basically said that the non-cash component would be up $2 million on a temporary basis for Q3 related to the write-off of deferred financing cost again related to the refinancing. But non-cash as we go forward should be closer to that $11 million a quarter. And in terms of our ownership to date, it's 32%.

35% all-inclusive of the GP.

Okay. Thanks.

Sharon Lui from Wells Fargo.

Michael, maybe if you could just talk about what growth CapEx was at partnership and what you anticipate for the balance of the year.

You bet. So in terms of growth capital for partners in 2Q, we ended up about $8 million. And as we look forward, Ernie highlighted the fact that we were going to spend something in the order of $67 million of growth capital on new units for North America. Not all of that will hit 2011 CapEx, but it will be certainly the majority of that. And of that, I think the best guess at this point is going to be probably just a little bit more than half that ends up hitting EXLP. Not hitting -- I'm going to say benefiting. We're excited about the opportunity to be building new units in North America and that is going to help the business grow.

Okay, great. And then maybe if you could just touch on the Board's thoughts in terms of whether they remain committed to the drop down strategy for the Partnership.

Yes. I think the Board's thoughts, clearly at both the Holdings level and at the LP level, everybody believes, because I think it's just fundamentally true, that doing drop downs is a solid -- puts the business where it is valued the most and benefits both Holdings and the LP. And so we remain committed to it.

Yes. And I think both Boards are certainly optimistic, as we are, about what is going to happen to the North American business as we go forward.

Okay, great. Thank you.

Blake Hutchinson from Howard Weil.

First question, you mentioned some new bookings in both Mexico and Argentina. Can you help us a little bit in terms of timing of those coming on and sizing; if you care to size those for us a bit.

Yes. Blake, those aren't material enough to move the needle. They're just good, solid bookings and they just go to where we are operating.

Is the turn time then fairly short, or is that something we need to be thinking about having a 6-month window before those are operational?

It will roll through in the shorter term of that. So -- modest. But I don't want you upgrading your numbers big on that. They're just nice, modest, solid increases in the third and fourth quarter.

And then the opposite side of that -- is there anything in the back half of the year, potential asset sale to customers or options like that, that would suggest that stability around this $110 million or $111 million run rate internationally wouldn't be a good way to look at the business?

There is nothing that is imminent enough to put in there. Things can happen but we're certainly expecting it to stay in that neighborhood.

And then just a point of clarification, Michael, on the fab margins. There is nothing rolling into 3Q with regard to the adjustments on this major project that you took hits to in both fab and AMS?

That's right. The fabrication margin guidance coming down a little bit is really just the result of mix, which is heavier on North America. And actually within -- certainly for the third quarter -- within North America, we're actually a little bit heavier on compression, as well. So that is just going to drive that mix down a little bit to our 10% guidance level.

And then just from a North America contract compression top line perspective, can you refresh us, is there anything coming on in the second half on the non-contract compression side? In other words, the processing plant side? And what would the timing of that be, if so?

Yes. So the deal we announced before with the 2 plants, 1 of them started at the end of the first quarter, beginning of the second quarter. And the second plant will start end of third, beginning fourth as we go through that. So it has yet to come on.

Great. And then finally just, Ernie, on a personal note. I appreciate the fortitude of sticking around and guiding the Company here through the transition. And at least from the investment community perspective you've certainly had a tenure here where your business has been profoundly changed fundamentally, and we all appreciate that.

Thanks for the comment, Blake.

Mike Urban from Deutsche Bank.

I just wanted to echo those comments, as well. Ernie, I've enjoyed talking to you over the years and wish you the best of luck going forward. And this may be a question for the Board, but would you anticipate the CEO search would be entirely external or are you also looking at internal candidates?

We're looking at everything. The Board, I know, we've had this conversation, will look for the best possible candidate. And that includes internal as well as external.

And I would certainly assume that any major strategic changes would be a function of that new CEO. But in the meantime, are you continuing with the current major initiatives that you have ongoing -- the efficiency initiative, operating the fleet in North America through larger units, pursuing large projects international. Things like that. Should we expect those to continue? Or are there any major initiatives out there that may be delayed or put on hold as we're making this transition?

My conversations with our Board about this interim period is that I need to run the business and I need to do what is right for it. And I think where that puts us is that we need to be aggressive at appropriately sizing our business for wherever the revenue. And since we've been disappointed in the growth for the year, we'll be looking hard to further improve performance. There won't be any just sitting around waiting for the new CEO to come in and change. We're going to continue to work to improve the business.

And last question, you talked about the 2 processing plants that you're already booked on an operating basis. And I know you found some stuff on a turnkey or fabrication basis. But is there opportunity to do more stuff like that? Are you seeing anything else like that out there, just given the shift that we're seeing towards some of these liquids-rich plays? And are you satisfied with where you are? Are you maximizing the opportunity in those plays, vis-a-vis some of the capabilities that are, I would say, somewhat unique to Exterran?

We continue to work on that. And as I said when we booked those 2, I think we'll opportunistically find niches that fit. Where we're not taking commodity risk and we're not the gatherer, if you will. But where we can provide our capabilities to get a plant up and running quickly, and then operate it and are willing to put our capital at work. When all the stars align, and we remain optimistic that those will come up on a 1 or 2 a year standpoint. And we're pursuing them. We ramped up our business development efforts in North America well to chase those projects. And so, yes, we're going after them.

And are there opportunities, given especially relevant to some of the smaller compression-only players, are there opportunities to pick up the compression work in some of these plays because you're able to offer that? Or are we not at that stage of development in liquids-rich markets?

I didn't quite follow the question. Why don't you ask that 1 more time.

I think some of the processing capability you have would make you somewhat unique relative to some of your compression-only peers. Are we at a point where you're able to bundle those or win compression opportunities in the liquids-rich plays because you're able to offer that? Or is that something you looked at? Is that not something that customers are asking for? I'm just trying to get a sense.

I think clearly this is where our ability to have production equipment and processing and treating capabilities, and then compression combined with all of that helps. It just doesn't always come in the contract ops form. Each 1 of those areas builds off of each other, and our salesmen are developing the contacts and know. So it is helping us, but it doesn't drive, necessarily, contract ops or fab business. It is delivering for the customer, in a controlled good way, quality service.

Got you. That's all for me, thank you.

Daniel Burke from Johnson Rice.

I wanted to think about the visibility of international contract compression revenue trends into 2012. I know that's a tough 1 to answer. So maybe to think about 2 different things. Number 1, what would repricings and/or inflation provide for you in terms of year-over-year upside on the base of business? And then maybe, secondly, are there any chunky projects within the current international contract compression backlog that are at risk of not being renewed during 2012?

We haven't typically gone out that far in terms of our guidance, Daniel, so I'm going to beg off on that. I will tell you that as we think about the pricing uptick and compression -- the contract ops market, I think modeling this where you stay in that 60% range is a fine way to do it. And we don't think you're going to see any material changes in the top line as you go through it. But that's not to be construed as guidance for 2012.

Understood. And then I thought, switching over to NACO, that the description of horsepower trends and your more conventional Gulf Coast market versus the shales was useful. Looking forward, if we remain in a sub-$5 net gas environment, do you continue to bleed horsepower in those conventional areas? Or need to overcome it? Or have you reached a baseline level in the East Texas Gulf Coast region?

It is the question of the day. And I think the underlying trends that we see is that our customers in natural gas; it's almost becoming a byproduct. And as they chase the liquids and the oilier plays, gas production continues to go up in conjunction with that. And that means the gas production is probably going to come off in those more traditional plays. And so that, in and of itself, suggests we'll continue to fight headwinds on those more conventional drier gas areas, and see our horsepower working in those contract. If you put it all together, we still think it's going to be positive for us, and that we'll grow horsepower. But we'll be fighting those headwinds for some time, just as production shifts.

Understood. Michael, maybe 1 for you. Adjusted EBITDA this quarter $87.2 million, I believe, in the press release. Is adjusted EBITDA under your new credit facility that same figure or is it calculated differently?

It's different because we basically separate what's Exterran Holdings and Exterran Partners because they have 2 different credit facilities. But basically the EBITDA definition is pretty much the same. The thing you have to do to get to EXH's is you basically subtract what belongs to EXLP, then you get to add back the distributions that EXH gets back. That is basically the calculation you have for both entities.

Maybe I'll look to follow up. I can see that gets arcane pretty quickly. Thanks, guys, and Ernie all the best.

Jack Moore from Harpswell Capital.

Can you discuss the CEO search? Has that begun or is it yet to begin? Have you met with anybody yet or is this just a very recent development?

So what we can say about that is that we expect to have the new CEO in place in the fourth quarter. So if it happen sooner than that, I'm sure the Board will do that. And the Board is very engaged in finding the next leader for Exterran. But in terms of what we have done and what we will do in the meantime I'm going to punt on that 1.

And then 2 other questions. If you can just talk about liquidity and where you expect to end up later in the year, perhaps year end. And also just from a very big picture -- are there any geographic or business lines or other areas that you've contemplated? Any strategic directions that we haven't explored that you can perhaps discuss?

So, I may need to clarify in terms of liquidity that you're talking about. We talked about undrawn debt capacity at the end of the second quarter being $366 million, including Exterran Partners at $161 million. We think that is plenty of liquidity and availability for us as we go forward. We are going to be ticking up growth capital a little bit as we talked about. But still we think the inherent cash flow generation capability of this business doesn't mean we're looking really to tap into those credit availability under either 1 of those lines, much in any material way over the last half of the year. Does that get you to what you want?

Yes, that's close.

In terms of looking at the underlying business and where it improved, it's a very fair and solid comment. And I think you'll see us take a really hard look over the second half of the year at what businesses we're in and which ones we are continuing to grow and which ones we ought to re-trench. And, as I said earlier, we won't be waiting for the new CEO to look at those. We're underperforming and we have to take a harder look at all of those things.

Great. Thank you very much.

[Lin Chen], High Hedge Asset Management

My question is, given your, for the LP, the unit price has been down a lot for this year, do you think that's going to make the drop down more difficult?

Just mathematically certainly that's the case in terms of where the LP unit price has gone. But I think we've been hit overly hard over the course of the last 6 weeks or so with the LP. I think we came out today talking pretty positively about the North American business. Organic horsepower growth opportunities and continued commitment to drop downs to the LP. So obviously, just from a mathematic standpoint, the lower the unit price, the more difficult it is to do drop downs and make all of the math work. But we're still in a range where the math works. And we think it is a very sensible way to continue to grow Exterran Partners and finance the overall North America contract operations business. And there is a lot of underlying positive fundamentals for that business right now in terms of some of the cost out initiatives we're looking at, and being able to drive profits that way. And our fairly optimistic outlook with regard to the rest of this year for North America organic horsepower growth. And quite frankly as we look beyond that in terms of what it means for liquids-rich and shale gas plays in the North American market for the next several years.

Okay. Thank you.

And I think with that, we're out of time. So we appreciate everyone for your time and your questions today. And for me, the opportunity to interact with the analyst community and with all our shareholders that are listening, I appreciate it very much. Signing off.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.