Archrock Inc (AROC) 2012 Q3 法說會逐字稿

Good morning. Welcome to the Exterran Holdings, Inc., and Exterran Partners, L.P., third-quarter 2012 earnings conference call. At this time, I'd like to inform you this conference is being recorded and that all participants are in a listen-only mode. We will open the conference for questions after the presentation.

Earlier today, both Exterran Holdings and Exterran Partners released their financial results for the third quarter ended September 30, 2012. If you have not received copies, you can find the information on the Company's website at exterran.com.

During this 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 definitions and a reconciliation of these measures to GAAP measures in the summary pages of the earnings release and on the Company's website at 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.

I want to remind listeners that the news releases issued this morning by Exterran Holdings and Exterran Partners, the Company's prepared remarks on this conference call, and the related question-and-answer session include forward looking statements. These forward-looking statements include projections and expectations of the Company's performance and represent the Company's current beliefs. Various factors could cause results to differ materially from those projected in the forward-looking statements.

Information concerning the risk factors, challenges and uncertainties that could cause actual results to differ materially from those in the forward-looking statements can be found in the Company's press release, as well as in the Exterran Holdings annual report on Form 10-K for the year ended December 31, 2011; Exterran Partners' annual report on Form 10-K for the year ended December 31, 2011; 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 on 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 Brad Childers, President and Chief Executive Officer of Exterran Holdings and Exterran Partners. I would now like to turn the call over to Brad. Mr. Childers, you may begin.

Great. Thank you and good morning, everyone. First, I'd like to begin by expressing our concern to everyone affected by the devastation caused by Hurricane Sandy. Our thoughts and prayers are with all of you, and we wish you the best possible recovery for your families, your homes, and your communities.

With me today is Bill Austin, CFO of Exterran Holdings, and David Miller, CFO of Exterran Partners.

On today's call, I will review our third-quarter results and provide an update on our performance initiatives.

Overall, we delivered another good quarter. Our focus on operational improvements has led to continued strengthening in our financial results. Let me highlight what we have accomplished.

At Exterran Holdings, EBITDA as adjusted was $126 million in the third quarter, which is 28% better than the year-ago period and 25% higher than last quarter. Our third-quarter EBITDA is our highest level of quarterly EBITDA in over two years.

At Exterran Partners, distributable cash flow was $29.5 million in the third quarter, which is an increase of 15% over the year-ago period and 8% over the prior quarter.

As in previous calls, I am going to discuss our results in the context of our four priorities for 2012.

First, we continue to work on improving the profitability of our core businesses through better pricing and cost management. In our fabrication business, we achieved our highest level of gross margin dollars in three years. This improvement results from three factors -- first, solid market demand for our compression, production and processing equipment; two, reduced costs as a result of better performance in our fabrication facilities, coupled with sourcing initiatives that reduced our material costs; and three, improved pricing through centralization of pricing decisions. As a result for the quarter, we achieved a 14% gross margin, 5 percentage points higher than the 9% gross margin recorded in the prior-year period.

In our AMS business, another quarter of improved performance is attributable to continued solid demand for our products and services, and improved pricing and cost discipline. I am excited about the progress we've made in our Aftermarket Services business, which is on track to record our most profitable year in this business in over five years.

In North America Contract Operations, margins declined, as expected, from the prior-quarter level, which benefited from a tax adjustment. And we were impacted by higher maintenance and callout expenses. But by and large, we maintained the margin improvement from the first quarter, and we are continuing our cost reduction efforts to drive long-term and sustainable improvement to our operating costs in North America Contract Operations.

Second, let me talk about our disciplined growth. In the third quarter, we grew our North America operating horsepower by 38,000, and start activity was at its highest level in over four years, and stop activity declined from the first half of 2012. Behind this aggregate growth was an increase of about 51,000 horsepower in rich gas, liquids-prone, and shale plays. This more than offset a decline -- the 51,000 more than offset the decline of about 14,000 in the conventional dry gas areas.

Looking forward, we see attractive opportunities in the marketplace for operating horsepower growth, both near and long term. This positive market outlook supports our plan to continue to invest in new equipment in order to improve the competitiveness of our fleet, further standardize our equipment, and improve our operating cost structure.

Furthermore, our backlog for Contract Operations remains strong. And as a result, I expect that we will increase North America working horsepower in the fourth quarter and for the full year, which was one of our key goals for 2012.

In addition to investing in our fleets, we continue to make investments in parts of our fabrication business where we see good returns. The most significant is our previously announced production equipment fabrication facility in Ohio, which we expect to open in the first quarter of 2013. And we're also investing in expanding our capacity in our existing production equipment and processing and treating fabrication facilities to meet market demand.

In our International Contract Operations business, third-quarter revenues were somewhat lower than expected, driven by slippage in project installations and delays in renewing a couple of our key contracts in Latin America. Our backlog of new business remains solid, however, and includes new projects starting in Latin America and Asia in the fourth quarter. Barring any further unexpected delays, I continue to expect fourth-quarter revenues in our International Contract Operations business to increase sequentially and be above year-ago levels.

Finally, our Fabrication business backlog was over $1.2 billion, up 107% over the prior-year level, as we continue to see strong demand for our products throughout the world. We expect this solid level of backlog will result in significant year-over-year revenue and gross margin growth in 2013.

Third, with respect to the actions we've taken in managing our portfolio, we are now in execution mode. We remain committed to executing the sales of our Contract Operations and AMS business in Canada and our production equipment fabrication facility in the UK, as we have discussed in previous earnings calls.

Finally, we remain committed to reducing leverage at Exterran Holdings, which was one of our major goals as we entered 2012. Our covenant total leverage ratio has improved from 4.3 times at year-end 2011 to 3 times as of September 30, 2012. I'm pleased we have performed better than our target for the year and that we have done this ahead of schedule. We will continue to actively manage our capital and reduce leverage at Exterran Holdings over the long run.

In addition to the operational achievements, as previously announced, in August we completed the sale of our wholly owned assets in Venezuela. The net proceeds from the sale, when combined from the net proceeds from the March sale of our Venezuelan joint venture assets, total about $504 million. To date, we have received $174 million of the net proceeds from these sales and are due to receive the remaining $330 million in quarterly cash payments through the third quarter of 2016. These proceeds greatly enhance our financial flexibility now and in the future.

In summary, I continue to be excited about the positive developments at Exterran. We've made good progress in improving our performance in 2012. And with continuing initiatives focused on improving our costs, a solid backlog of business, and some encouraging market trends, I'm optimistic about our opportunities to further improve our performance in 2013.

I look forward to discussing our continuing progress with you next quarter. Now I'd like to turn the call over to Bill for a review of our financial results at Exterran Holdings. Bill?

Thanks, Brad, and good morning. Overall, Exterran Holdings had a much-improved financial performance in the third quarter as we're starting to see a more significant impact from performance initiatives, including pricing, commenced earlier this year.

As a reminder, due to the nature of our business, our results move around a bit from segment to segment and quarter to quarter. But importantly, I believe the progress we've made this year and our plans for future improvement should set us well as we exit this year and enter 2013.

Now I will provide a summary of the results for Exterran Holdings. As Brad said, we generated EBITDA as adjusted of $126.4 million for the third quarter as compared to $101.5 million in the second quarter of 2012. During the third quarter, we received our second installment of $4.8 million from the sale of our joint venture assets in Venezuela. But I will remind you, the cash payments from the sale of our Venezuelan assets are not included in that calculation of EBITDA that I referred to before.

Before I discuss the segment results and give guidance for the fourth quarter, I think it is worth noting that we reported positive, albeit modest, earnings per share from continuing operations, excluding charges of $0.02 per share in the third quarter. This is our first such positive performance in three years.

Now turning to our segment results, our North American Contract Operations revenue came in at $152 million in the third quarter, somewhat above our guidance range, driven by growth in our working horsepower. Gross margin was 50% in the third quarter as compared to 53% in the second quarter and 51% in the first quarter.

Profitability in our third quarter was slightly negatively impacted by a relatively high maintenance expense and callout activity.

North American operating horsepower increased by 38,000 during the third quarter as growth in the liquids-rich and shale plays offset declines in the conventional dry gas area. Looking ahead at the fourth quarter, we expect slightly increased North American Contract Operations revenues in that $152 million to $153 million range, helped by the deployment of our newbuild horsepower, as we modernize our fleet. And we expect modestly higher margins in the fourth quarter.

Maintenance capital decreased to $23 million in North America during the third quarter as compared to $24 million in the second quarter of 2012. Maintenance capital spending in the fourth quarter is expected to be flat to slightly lower from those third-quarter levels.

Now moving on to International Contract Operations, our revenue came in at $111 million for the third quarter. This is somewhat below our guidance and is somewhat below the second-quarter revenue of $113 million, due to some delays in the timing of certain project installations and some renewals of contracts.

Our third-quarter results included a full-quarter contribution from a large compression project in the Middle East, which started operations in that second quarter. Importantly, our current backlog for International Contract Operations work is in excess of $50 million of annualized revenues and includes new business in Mexico, Brazil, Colombia, and Indonesia.

Looking at the fourth quarter, we expect International Contract Operation revenues in the $116 million to $118 million range and margin percentage to be similar to the third-quarter levels. It will benefit from the full-quarter contribution of that project in Mexico that we've referred to and the recent startup of a project in Colombia.

We do remain optimistic about growth opportunities in our International Contract Operations business, and we do expect increased operating horsepower at the end of 2012 as compared to the year-end 2011.

Now moving on, our fabrication operations, again, as Brad said, has a solid performance in the third quarter, not only meeting our target for improved profitability, but beating it handily. Fabrication revenue was $361 million, somewhat about our guidance range and up from the $268 million in the second quarter. Gross margins came in at around 14%, again somewhat higher than our guidance and up from 10% in the second quarter.

Third-quarter results included the benefit from higher margins realized in a couple of projects in our Eastern Hemisphere, but basically, our profitability benefited from healthy backlog levels and improved pricing embedded in that backlog.

Our Fabrication backlog was $1.24 billion at the end of the third quarter, again an increase of some 107% over prior-year levels. Strong demand in that liquids-rich and shale plays in North America continue to be the primary driver for our increased Fabrication backlog.

I'll break down the Fabrication revenue a little bit more. It was comprised of about 36% compression, 55% production and processing, and 9% Belleli Energy. It was roughly three-quarters in North America and one-quarter from international.

Further, as we look at bookings for the third quarter, they were roughly equally mixed between North America and international markets. And then the backlog is roughly two-thirds North America and one-third international.

Now, for the fourth quarter, we expect Fabrication revenues in that $350 million to $370 million range, with margins slightly lower than second quarter, in the 12% to 13% range.

Moving on to our Aftermarket Services business in the third quarter, revenue came in at $96 million and gross margins, again, about 20%; it actually came in at 21%, both in line with expectations.

Looking at the fourth quarter, we expect our Aftermarket Services revenues to be in the $85 million to $90 million range and margins, again, above 20%.

Although AMS revenues are expected to be down somewhat sequentially, as we expect a little seasonality in North America activity, our AMS business continues to perform well, with good margins.

Moving on, our SG&A expenses came in at $86 million in the third quarter, down from $94 million in the second quarter. And that second quarter included a charge of some $7.6 million related to sales tax audits associated with prior years. In the fourth quarter, we expect SG&A expenses to move slightly higher, in that high-$80 million range.

Net capital expenditures came in at $99 million for the third quarter. Growth capital within that was about $56 million, including some $34 million in North America, primarily from our previously announced fleet build program. Maintenance capital spending for the quarter was $30 million.

Again, we continue to see good opportunities to deploy growth capital in the United States and in international markets. For 2012, we now expect our net capital expenditures after sale proceeds of some $375 million to $400 million, and that's up from our previous guidance of $350 million to $375 million. This is driven by attractive investment opportunities, primarily in the United States.

On the balance sheet, total consolidated debt decreased by $98 million in the quarter and came from $1.8 billion at June 30 to $1.71 billion at September 30. Debt declined some $119 million at the parent level and increased slightly by $21 million at the partnership level. And this was to help fund organic growth opportunities in the MLP. And David will talk a little bit more about that in his section.

Our working capital levels are still a bit higher than we would like, and I think you will see, and we expect to see, some near-term improvement this quarter in that area.

Available but undrawn debt capacity at September 30 was approximately $705 million, including some $236 million at the MLP. As of September 30, Exterran Holdings had a total leverage ratio that is up from a covenant debt, total debt to adjusted EBITDA, of some 3.0 as compared to 3.7 at June 30, 2012.

Just as a reminder, our leverage ratio was 4.3 at the end of 2011. And as Brad said, one of our key goals entering this year was to reduce our leverage ratio at the Exterran Holdings levels. Initially, we said we would bring it down to 4.0 by the end of 2012. In the second quarter, we raised our target to 3.0, and clearly we have met that goal. We will show continued improvement in the fourth quarter and further reduce our leverage.

As Brad discussed earlier, we completed the sale of our Venezuela wholly owned assets in August 2012 and received $127 million in net cash proceeds at closing. In addition, in the third quarter we also received the second quarterly payment from the sale of our Venezuelan joined assets, which was completed earlier this year. We have not recognized the remaining amounts payable to us as a receivable, and therefore we intend to recognize the payments in the period such payments are received.

These two transactions have significantly increased our financial flexibility and are expected to generate cash payments to us of approximately $20 million per quarter into 2016.

Income from discontinued operations for the third quarter included the benefit from the sale of these wholly owned assets in Venezuela, but it also included the impairment of long-lived assets in inventory that total some $28 million related our plan to sell our contract operations and Aftermarket Services business in Canada. This charge is in addition to the one we took in the prior quarter related to this planned sale.

Now we will move on to Exterran Partners. Earlier today, Exterran Partners issued a separate earnings release. And continuing the practice initiated last quarter, we plan to have a separate discussion of Partnership financial performance. So I will now turn the call over to David for a review of the financial results of Exterran Partners.

Thanks, Bill. Exterran Partners had another good quarter of performance, with significant year-over-year growth in EBITDA and distributable cash flow, driven primarily by our drop-down strategy.

In the third quarter, Exterran Partners' operating horsepower increased by 33,000 to approximately 1.94 million operating horsepower, driven by organic growth in liquids-rich plays.

Revenue grew to $99.3 million in the third quarter as compared to $97.2 million in the second quarter, largely due to our growth in operating horsepower.

Exterran Partners generated EBITDA as further adjusted of $46.2 million in the third quarter as compared to $45 million in the second quarter. Distributable cash flow was $29.5 million in the third quarter, up from $27.3 million in the second quarter. Distributable cash flow coverage in the third quarter was 1.3 times.

Cost of sales per average operating horsepower was $25.29 in the third quarter, up 7% from the second quarter 2012, due to the higher maintenance and callout activity in North America contract operations referenced by Bill earlier and slightly lower benefits from ad valorem taxes in the third quarter.

Q3 2012 costs per horsepower were down modestly from Q3 2011 levels. Over the longer term, Exterran Partners expects to benefit from the cost reduction initiatives at Exterran's North American operations, as mentioned earlier by Brad.

Last week, Exterran Partners announced a quarterly distribution increase for the third quarter 2012, and its distribution is now $2.03 on an annualized basis. This distribution is $0.005 higher than the second-quarter 2012 distribution and $0.02 higher than the third-quarter 2011 distribution.

On the balance sheet, total debt increased by $21 million during the quarter, from $644 million at June 30 to $665 million at September 30, as capital was deployed to fund internal growth opportunities.

Available undrawn debt capacity at September 30 was approximately $235 million. We believe that our debt capacity provides us with the financial flexibility to finance the organic growth of Exterran Partners' compression services business and positions the partnership for future acquisitions.

As of September 30, 2012, Exterran Partners had a total leverage ratio, covenant debt to adjusted EBITDA, of 3.7 times, up slightly from 3.6 times at the end of the second quarter.

Gross capital expenditures for the third quarter 2012 were $40.2 million, consisting of $29.9 million for fleet growth capital and $10.3 million for compression maintenance activities.

We continue to have attractive organic growth opportunities, primarily in liquids-rich and shale plays, including projects coming online in the fourth quarter of 2012. We expect total fleet growth capital expenditures to be in the $100 million range for the full year 2012, and maintenance capital expenditures are expected to be in the $40 million range for 2012.

In summary, Exterran Partners had a solid third quarter, highlighted by intrinsic growth of 33,000 operating horsepower and 8% sequential growth in quarterly distributable cash flow.

Thanks, David. Christine, at this point, if you'd like to turn the call open for Q&A.

(Operator Instructions). Mike Urban, Deutsche Bank.

Thanks. Good morning, guys. Good quarter; nice to see the profitability coming back. Starting out in North America and the US, in other parts of the industry we've seen a slowdown of operators reducing some spending. I guess I would expect your business to move with a bit of a lag, just given the nature of a more production-oriented business.

Is there, one, I guess, enough pent-up demand work to do to catch up from an infrastructure standpoint or from a production standpoint, and also, again, the dry gas plays kind of bottoming out, to continue to drive growth in your North American business? Sounds like you've got some near-term visibility there; just trying to think a little bit beyond that, given the slowdown that we've seen elsewhere in the industry.

Sure. Mike, you really kind of got, I think, the main part of the story already, which is we do participate as a later participant in the cycle. So however the cycles move, we find the impact on our business succumbs somewhat later. And to be honest, it's also somewhat flatter, as our business is much more driven by growth in production than it is by upstream drilling activity.

So we expect the current downturn right now to be not as impactful to our business, and if it is impactful, it will hit us a little bit later, as later production growth may slow due to the activity levels at the current time.

The other part is, with the slight movement and modest improvement in gas pricing, we are seeing less stop activity, not so much growth, but just less stop activity in some of the dry and conventional gas plays. And so the combination of those two things, one, catching up with some of the production capacity expansion that's already taken place as we're now setting equipment to help with that production, as well as the impact in the conventional areas of slight improvement in the gas prices, is really making it for a better current performance feeding us in the market right now.

That makes sense. And sticking with North America, I believe you have at this point rolled out the new service delivery model in North America. I was wondering if you could spend a little bit of time talking about how you expect that to help you, the timeframe during which we should expect to see improvement there, and if you can, what the expectations there or the order of magnitude might be in terms of what you're expecting from a profitability standpoint.

Well, I'll talk about the efforts first and the timeframe a little bit. What we're doing in the North America business is a long-term change, structural change, to how we run the business. We're looking at simplifying and standardizing the platform that we use to operate that business. And this is not a short-term, quick-hit, quick-fix effort.

What we've done is to look at the fundamentals of the business, how we manage our labor, how we manage our equipment, how the back office organizes and dispatches the labor and supports it through parts sourcing. It's really a kind of a top-to-bottom review of how we operate.

And as we've pulled those apart, we are putting in place separate initiatives staged over the right -- over a good period of time to be effective in how we drive this. So these are permanent, sustainable levels of cost improvement and management in the system.

And when we started that effort in 2012, we expect to be working all year long through 2013 as well to drive improvement in our cost structure, which will impact our margin positively over the course of the next really five and six quarters. And that's what I think I would look for, is that level of sustained improvement in our cost structure and gross margin.

And I'll also point out that not every quarter is necessarily going to show that same impact. Our business has some seasonality to it. And some activity levels can come and hit us in a disproportionate way quarter over quarter. So I am more interested in the impact. And we're driving toward an impact on a year-over-year basis. But you should see continuous improvement in those gross margins over the next five and six quarters, is the way I would look at it.

Great. That's all for me. Thank you.

Joe Gibney, Capital One.

Thank you. Good morning. Just a question related to the modest boost in CapEx orienting around the US side. I think, Bill, you referenced slightly higher than where we were before. Is most of that simply directed around plussing up the contract fleet a little bit? I think there was some reference to increasing capacity a little bit on the P&T side. I was just curious if you could provide a little color there.

Joe, most of what we are seeing in that plus-up is coming in North America, is in the fleet, and it's in the compression fleet. So we have seen that increased demand. And as we tried to indicate for the fourth quarter, you're going to see some slightly higher revenues and better performance. And a lot of that is deploying a newbuild, more modern fleet. So -- and we see that demand coming in strong for next year.

So we really have to take a look at what that is going to mean for next year as well. And we're in that planning process. We are not there, but we are seeing good demand in North America, and we see good demand in international as well.

Okay. And just a couple questions around Fabrication. Just curious about the nature of some of the bids now within North America. Is it becoming a little more dominated by smaller cryogenic processing plant demand? Are you still seeing a fair amount of indicators for larger plants? And it looks like you obviously had a little more balanced inbound mix between NAM and international this quarter. Just kind of curious about the bidding trends and outlook on the international side. Quarter over quarter getting a little bit better? Just curious for some color there. Appreciate it.

Sure. So, Joe, you're right, actually. We have seen a growing trend on the cryo side towards some smaller plants. But the demand remains pretty good across the board. I think that there has been a little bit of not a slowdown, but I think things have tempered a little bit from the high levels of activity we saw in prior quarters, as some of the NGL pricing and bottlenecking in NGLs has impacted some of the thinking and spend on the producer side.

So we have seen a move in our opportunity portfolio to include more on the smaller side on the cryo business. So, yes, that is a trend that we've seen.

As far as the mix and outlook in international, we have seen an improvement of both the opportunity set and the quality of the opportunity set in international as that market is recovering. And we are seeing the opportunity to capture more in future quarters. And we think we are still on the front end of that recovery in our business for international bookings. So we are seeing a growing trend there that's going to help the backlog mix.

Fair enough. I appreciate it. Nice quarter. I'll turn it back.

(Operator Instructions). Tom Curran, Wells Fargo.

Good morning. This is [Tom Reid] filling in for Tom Curran. When do you think you might be ready to consider meaningful acquisitions where you would focus businesswise and/or geographically? And also. have you guys participated in the auction of Thomas Russell, which Honeywell ultimately emerged as the victorious suitor?

Tom, just a request. So, number one, we are not going to comment on acquisition and divestiture activity. So, appreciate the question, but it's not one we're going to comment on. But I would ask, if you could, give us the front part of that question again, just to make sure we got it?

Sure. When do you think you might be ready to consider meaningful acquisitions where you would focus businesswise and/or geographically? Any insights on that?

Sure. Look, we are in the market, and we will consider acquisitions that fit with us strategically and what we're trying to accomplish in our business today. So it's not that we are averse to it.

However, I will tell you that right now we are much more focused on what we can do to focus on our current operations, improve the profitability of our existing businesses. That is the focus of our time and attention right now. And so it's going to have to be a very strategic and well-priced transaction for us to want to contemplate a step out. It's not that we aren't going to look, and it's not that we won't take advantage of good opportunities that present themselves. But right now, we are very focused on the self-help and turning this operation around with the operations that we have and driving profitability into the current portfolio.

And if I could top that up, I would also say we do have the financial flexibility now to look at this. So, just to add to Brad's comments.

Great. Thanks. That's all for me.

At this time, there are no additional questions. I'll now turn the call back to Mr. Childers for final remarks.

Okay. Great. Thanks, everyone. We appreciate your time and attention this morning, and we look forward to talking to you again next quarter. Thanks very much.

Thank you for participating in the Exterran Holdings, Inc., and Exterran Partners, L.P., third-quarter 2012 earnings conference call. This concludes the conference for today. You may all disconnect at this time.