Archrock Inc (AROC) 2012 Q4 法說會逐字稿

Welcome to the Exterran Holdings Incorporated and Exterran Partners LP fourth quarter 2012 earnings conference call. At this time, I'd like to inform you that this conference is being recorded and that all participants are in listen-only mode. We will open the teleconference for questions after the presentation.

Earlier today, Exterran Holdings and Exterran Partners released their financial results for the fourth quarter and full-year ended December 31, 2012. If you have not received a copy, 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 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 Exterran or EXH and Exterran Partners as either Exterran Partners or EXLP. Because of 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 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 Company's prepared remarks in 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 actual results to differ materially from those in the forward-looking statements can be found in the Company's press release as well as the Exterran Holdings annual report on Form 10K for the year-ended December 31, 2011, Exterran Partners annual report on Form 10K 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 at exterran.com. Except as required by law, the Company has expressly disclaimed any intention or obligation to revise or update any forward-looking statements.

Your host for this morning's call is Brad Childers, President and CEO. I would now like to turn the call over to him. Mr Childers, you may begin your conference.

Thank you. Good morning, everyone. With me today is Bill Austin, CFO of Exterran Holdings and David Miller, CFO of Exterran Partners.

A year-ago, we said our goal at Exterran was to make changes that will drive significant improvement in 2012 and over the long-term. Driven by the implementation of key initiatives, we believe that we've made good progress in 2012. Let me highlight a few of our accomplishments for the year.

Exterran Holdings and Exterran Partners each recorded improved operating profitability on a year-over-year basis. We did this by focusing on cost initiatives and margin improvement. We increased working horsepower in both our US and international contract operations businesses. We grew our fabrication revenue, profit and backlog.

We significantly reduced covenant leverage at the Exterran Holdings level by both reducing debt and increasing EBITDA. For the year, we set a leverage target. We beat it, we reset the target, and we beat it again.

We accomplished these goals while continuing our focus on excellent customer service and providing a safe working environment for our employees. Our equipment run times exceeded our service targets across the globe, and our overall safety performance beats our TRIR targets. While I'm pleased to say, I remain ambitious about our opportunities to continue to improve and grow our business, 2012 is a year our employees should be proud of.

In today's call, we'll provide a review of both Exterran Holdings and Exterran Partners. On the Exterran Holdings part of today's call, I'll review our operating performance, business development trends and highlight our priorities for 2013. For the fourth quarter at Exterran Holdings, EBITDA as adjusted was 20% better than the year-ago period, as we achieved our highest EBITDA level in over three years.

Net income from continuing operations before charges was $0.09 per share, our second consecutive quarter of positive earnings per share. For the full-year, we achieved an 18% increase in EBITDA as adjusted on a 7% increase in revenue, driven by the implementation of our profit improvement initiatives. Importantly, we increased revenues and the gross margin percentage in each of our four business segments on a year-over-year basis.

Looking at our operating results through each of the business segments. In North America contract operations, we made significant progress in improving performance. We increased working horsepower by 70,000 in 2012, our second consecutive year of growth. We improved operating efficiency through labor, lube oil, shop supply and other Management initiatives.

We instituted a price increase at February 2012, our first increase in over five years. We followed that up with another price increase in January this year. We also benefited from a change in tax law related to ad valorem taxes. For the North America contract operations business in 2012, revenue was up by 3% and gross margin dollars were up by 11%, as gross margin percentage improved from 48% in 2011 to 52% in 2012.

In our international contract operations business, we grew working horsepower by 47,000 in 2012, over year-end 2011 levels, led by new projects in the Middle East and Latin America. And utilizing a significant amount of idle compression units. We focused on improving profitability through lube oil management, purchasing and other operating cost initiatives, and we negotiated project contract extensions at improved rates. For the international contract operations business in 2012, revenue was up by 4% and gross margin dollars were up by 7%, as gross margin percentage increased from 59% in 2011 to 60% in 2012.

In our fabrication business, we increased bookings in 2012, which improved our backlog by 45% over year-end 2011 levels. We improved pricing through the centralization of pricing decisions. We implemented sourcing initiatives that reduced our cost of materials, including insourcing key processing and treating components. We expanded capacity without significant additions to our footprint by improving shop floor productivity. So our fabrication revenue was up by 10% and gross margin dollars were up by 27% in 2012, as gross margin percentage improved from 10% in 2011 to 12% in 2012.

In our after market services business, we recorded the highest levels of revenue and profitability in the business & Company history, driven primarily by better pricing and cost discipline. Each of our three geographic regions achieved improved profitability. So after market services revenue was up by 4%, but gross margin dollars were up by 38%, as gross margin percentage increased from 16% in 2011 to 21% in 2012. So those are some of our accomplishments for 2012.

Now, let me turn to a discussion of our markets and our business development activity. Focusing first on North America, we expect North America markets will continue to have strong demand for all of our products and services, driven by the growing need for infrastructure development in the liquids rich and shale plays.

For our North America contract operations, we expect to continue to have opportunities to grow our working horsepower in 2013 and beyond. The growth in the first half of the year is expected to be modest. As in 2012, we will see some of our growth offset by declines in conventional dry gas plays. Now what this looked like in 2012 was, an increase of about 220,000-horsepower in liquids rich and shale growth areas, partially offset by a decline of about 150,000-horsepower in conventional dry gas areas.

Importantly, we also expect a continuing growth market in gas lift applications focused on secondary oil production. These applications were part of the reason we were able to grow our working horsepower by 51,000 in the fourth quarter of 2012. We expect to see this market continue to be active in the future.

To meet this demand for compression, we're investing in new fleet units to modernize our fleet. In 2013, we plan to add approximately 170,000-horsepower of new fleet units in the United States, including larger units for gathering applications as well as smaller units used in gas lift.

For our fabricated products in North America, we are entering 2013 with a solid backlog and opportunity set. In particular, orders for our production equipment and processing and treating products were at record levels in the US in 2012. We continue to expect good bookings from these product lines. To meet a portion of that increased demand, we're adding a production equipment fabrication facility in Northeast Ohio, which is scheduled to open within the next month or two to serve the growing Marcellus and Utica markets. We have also expanded our capacity in our existing production equipment and processing and treating fabrication facilities through increased workforce productivity and modest capital expenditures.

Now, turning to international. We continue to believe that we are on the front end of a recovery in international markets, where we have an improved set of attractive opportunities currently. Although these markets can be slow to turnaround, we see improved demand for our products and services in Latin America, the former Soviet States and in the Middle East. In our international contract operations business, we have a strong current backlog of contracted horsepower. This backlog has remained steady for a couple of quarters, as we've started up projects in Mexico, Brazil and the Middle East, while at the same time, we've continued to book new opportunities. With the new business opportunity set, we are working on currently, we expect to book new projects in 2013 that will continue to drive growth in our international compression horsepower.

In our fabricated products in international, we've seen activity levels steadily increase throughout all of 2012 and into the first quarter of 2013. International has traditionally been a key growth market for us. We're excited to see the activity levels picking up again. But, do keep in mind that, our fabrication business particularly in the international side has been somewhat lumpy on a quarter-to-quarter bookings basis in the past. We expect that to continue in 2013.

As I wrap up the Exterran Holdings part of my comments, let me highlight our strategy and focus for 2013 and beyond. Our strategy is to leverage our deep industry experience and extensive expertise to bring value adding solutions to our customers and improved returns to our stockholders. We will accomplish this by focusing on our core businesses and leveraging our global leadership position in compression to drive growth and by focusing on efficiency gains and cost reductions throughout our operations to drive profit improvement. We enter 2013 with really good momentum. We're going to continue to build on that momentum over the course of 2013 and beyond, on two fronts.

First, by capturing part of the substantial growth opportunities we see in our markets for our products and services. Second, by maintaining our focus on improving the profitability of our businesses to become more competitive.

To that end, in 2013, we're implementing significant process-driven initiatives to improve the efficiency of both our field service and fabrication operations. These efforts build on and take further, the improvements we achieved in 2012 and are focused on increasing the standardization of our work and improving our processes. We expect these efforts will deliver continuous improvement and results in 2013, but are really excited about the potential impact they could have in our business in 2014 and beyond.

Let me close by summarizing the key take-aways from our 2012 performance and our 2013 expectations. We made good progress improving performance at Exterran Holdings in 2012, driven both by improving markets and our focus on improving our profitability. We have good end-use markets for our products and services globally to allow us to grow. We are continuing to focus on improving our business and our performance. I believe this will allow us to generate improving financial results in 2013 while setting us up for even better performance in future years.

Now turning to Exterran Partners. In the fourth quarter, Exterran Partners had another solid performance. Our increase in operating horsepower represented a record level of quarterly organic growth for the Partnership. Distributable cash flow was also a record for the Partnership and 16% higher on a sequential basis. Net income per diluted Partner unit increased significantly over prior-quarter and prior-year levels. Looking at our annual performance for the year, Exterran Partners achieved a 31% increase in distributable cash flow on a 26% increase in revenue.

Drivers for our improved performance in 2012 included the completion of a drop down transaction with Exterran Holdings in March 2012 and our investment in new fleet units which will improve the competitiveness of our fleet, further standardize our equipment and improve our operating cost structure. In addition, Exterran Partners benefited from the implementation of the profit improvement initiatives by Exterran Holdings, including operating cost reductions and the price increases in 2012 that I discussed earlier. Exterran Partners' gross margin percentage increased from 47% in 2011 to 53% in 2012 helped by the contribution from these activities as well as the ad valorem tax benefit I referred to earlier.

Looking ahead, we expect to benefit from the key initiatives in our North America contract operations business throughout 2013 to improve the efficiency of our field service operations and the price increase we instituted in January 2013. Though, as I discussed earlier for Holdings, organic growth in the first half of the year is expected to be modest.

Exterran Holdings is making cost cap payments to Exterran Partners on to this agreement between the two entities. Our goal is to reduce and eventually eliminate the need for these payments through our performance improvement initiatives.

We intend to grow the Partnership through organic growth related to the strong market fundamentals in the US, further execution of our drop down strategy with Exterran Holdings and third-party acquisitions. With a leading market position, encouraging energy trends in the United States and ongoing activities to improve our performance, we are optimistic about the outlook for Exterran Partners in 2013 and beyond. Now, moving to the financial section of today's call. I'd like to turn the call over to Bill for a review of the financial results for Exterran Holdings and quarterly trends and guidance for 2013.

Thanks, Brad. As Brad said, this year we implemented a number of initiatives and have had some good results. But moving forward, we are rolling out more initiatives that we believe will result in sustainable improvements in our core operations, as we continue to maintain a sharp focus on results and profitability, but at the same time, actively manage our capital. Now, I'll provide a summary of the results for Exterran Holdings and provide some guidance for the first quarter.

In the fourth quarter, we generated EBITDA as adjusted of $141 million, that's up 11% compared to the third quarter of 2012 and up 20% over prior-year levels. We also reported positive earnings per share from continuing operations before charges of some $0.09 per share in the fourth quarter, that's up from $0.02 per share in the third quarter and a loss last year of $0.16 per share.

Moving quickly to our segment results. In North America, our contract operations revenue was $155 million in the fourth quarter, that's somewhat above our guidance range. But this is driven by increased working horsepower of some 51,000-horsepower in the quarter.

Gross margin came in at 55%, as compared to 50% in the third quarter and 49% in the fourth quarter of 2011. Profitability in the fourth quarter was positively impacted by lower maintenance expense and call-out activity due to holidays and vacations and ongoing performance improvement initiatives. Now, looking forward at the first quarter, we expect increased North America contract operations revenues in the $157 million to $158 million range. This is driven by the deployment of new build horsepower and our January 2013 price increase.

Gross margins are expected to be in the low 50% range due to higher maintenance levels and overall field activities compared to the fourth quarter period. Maintenance capital was $16 million in North America during the fourth quarter, unchanged as compared to year-ago levels and down as compared to the $23 million in the third quarter of 2012. Maintenance capital spending in the first quarter is expected to be slightly higher than the fourth quarter levels.

Now, moving on to the international contract operations. Our revenue came in at $128 million in the fourth quarter, that's above our guidance and above our third quarter revenue of $111 million. Now, this was due to retroactive rate increases in Argentina and settlements related to projects in Mexico and Brazil. Our fourth quarter results, also included the benefit from increased activity levels in Mexico and Colombia.

Gross margin came in at 63% in the fourth quarter, as compared to 58% in the third quarter and 60% in the fourth quarter of last year. Profitability in the fourth quarter was positively impacted by what I mentioned above, which is the retroactive payments and settlements in Latin America. Our gross margin percentage would have been similar to the third quarter levels without the benefit of these events. The timing of settlements, retroactive rate increases and periodic demobilization costs drive some of the lumpiness that you see in the results of the international contract operations business. Now our current backlog for international contract operations work is in excess of $50 million of annualized revenue and includes new business in Brazil, Mexico, Iraq and Indonesia.

Looking at the first quarter, we expect international contract operation revenues somewhat above the third quarter 2012 levels and gross margin as a percentage to be in the low to mid 50s range. This reduced level of profitability reflects the lack of the retroactive rate increases and settlements received in the fourth quarter as well as some demobilization expense expected to be incurred in Brazil in the first quarter. Based on the start up schedule of projects in our backlog; however, we expect international contract operations quarterly revenues and gross margin percentage to increase during the course of 2013. Overall, our annual revenues will increase over the 2012 levels.

In our international contract operations business, operating horsepower did increase from some 960,000-horsepower at the end of year 2011 to some 1,007,000-horsepower at the end of 2012. We remain optimistic about growth opportunities in our operations business and expect increased operating horsepower in 2013 compared to the year-end 2012. Now moving on to the fabrications. Our fabrications operations had another solid performance in the fourth quarter, recording its highest level of gross margin dollars in over three years. Fabrication revenue came in at $458 million, well above our guidance range, driven by the higher than expected installation activity. This was up from the $361 million, I recorded in the third quarter. Gross margins came in at 12% which is in line with our guidance, but down a little bit from the 14% in the third quarter, which did include the benefit from higher gross margins realized in our Eastern Hemisphere on a couple of projects.

Again, gross margin dollars increased from $50 million in the third quarter to some $54 million in the fourth quarter. Now, our fabrication backlog came in at $1.07 billion at the end of the quarter, as compared to $1.24 billion at the end of the third quarter and up significantly from the $735 million at year-end 2011. While backlog declined a little bit more than expected in the fourth quarter, due in part to the higher than expected installation activity, as I previously discussed.

With a solid backlog coming into 2013, we do expect a record level of fabrication revenues in 2013. Fabrication revenues in the fourth quarter were comprised of about 28% compression, 62% production and processing and 10% Belleli Energy. Now, this was roughly 70% from North America and 30% from international. Moving on to bookings, during the fourth quarter, were roughly equally mixed between North America and international markets such that backlog now is roughly 60% North America and about 40% international.

Looking at the first quarter, we expect fabrication revenues in the $375 million to $425 million range with gross margins slightly higher than the fourth quarter, more in the 13% to 14% range. In our after market services business, as the fourth quarter revenue came in at $98 million and gross margins were 20%. Looking at the first quarter, we expect after market service revenues in the $85 million to $90 million range. Gross margins again in the low 20% range. So we expect the AMS revenues to be down sequentially in the first quarter. We've experienced this in four of the last five years, driven by some seasonality in our business. Overall, our AMS business is performing well. We expect another solid performance in 2013.

Now moving on to the SG&A expenses. They came in at $102 million in the fourth quarter. This is higher than guidance, which we gave in the high $80 million range and is higher than the $86 million in the third quarter.

Fourth quarter SG&A expenses though did include some bad debt reserves of approximately $6 million on a couple of projects outside the US, some revenue taxes of $2 million primarily in Latin America and other costs including higher incentive comp and professional fees.

Now, moving on to the first quarter, we expect SG&A to move back to the $90 million range, which we look at it as much more of a normalized run rate. Our depreciation expense was $92 million in the fourth quarter, somewhat higher than expected due to accelerated depreciation associated with the project terminations in Brazil. We expect depreciation expense in the low to mid $80 million range in the first quarter.

The tax rate -- again, looking forward, the tax rate -- we expect a full tax rate of approximately 38% in 2013. As part of our continuing review of our businesses, we have taken a charge of approximately $47 million related to our contract order treatment business in the fourth quarter of 2012. Net capital expenditures were $92 million in the fourth quarter.

Growth capital spending was about $62 million, comprised of $43 million in North America, primarily for our previously announced fleet build program. Maintenance capital spending for the quarter was $19 million. The net capital spending was $393 million in 2012. This was in line with our guidance of $375 million to $400 million.

Now, looking at 2013, we continue to see good opportunities to deploy growth capital in the United States as well as international markets. Looking forward, we expect that net capital expenditures for 2013 will be in the $425 million to $450 million range including maintenance capital of $105 million to $115 million. We expect to spend about $250 million to $265 million in net fleet growth capital and about $70 million for other expenditures.

Currently, we expect the fleet growth capital will be split approximately 75/25 between North America and international. But in North America, we expect about 70% of these units will be for EXLP customers and will be funded at EXLP. Now, during the fourth quarter, we received our third net installment payment of $4.6 million from the sale of our joint venture assets in Venezuela and the first installment of $16.8 million from the sale of our wholly-owned assets in Venezuela. The cash payments and the sale of these assets are not included in EBITDA as adjusted and are not included in net income from continuing operations attributable to the Exterran stockholders excluding charges.

Moving on to the balance sheet, available but undrawn debt capacity at December 31 was approximately $646 million. That's at the Exterran Holdings level. Almost $200 million at Partners level. One of our key goals entering 2012 is to reduce debt and covenant leverage.

Total consolidated debt decreased by $141 million in the fourth quarter from $1.71 billion at September 30 to $1.56 billion at December 31. Debt declined by $157 million at the Exterran Holdings level and slightly increased by $16 million at the Partnership level, which was to help fund the organic growth opportunity. For the year, consolidated debt declined by $208 million and Exterran Holdings total leverage ratio which is total debt to adjusted EBITDA as defined in our credit agreement decreased to 2.4 times at December 31, 2012. That's down from 4.3 times at December 31, 2011.

Now, we did say at our last call that working capital levels were a little bit higher than we would like and that we expected some near-term improvement in this area. A reduction in working capital levels helped drive the substantial reduction in debt levels in the fourth quarter.

Another indication of our improved financial flexibility. In January 2013, Exterran Holdings completed the redemption of all $143 million -- almost $144 million principal amount outstanding that was 4.75% convertible senior notes that are due in 2014. We did this with available funds and our credit facility.

In summary, we had an improved overall financial performance in 2012. We believe, we've got a number of initiatives that are going to drive improvement. We believe, that this is solid year-over-year growth projected for 2013.

With that, I'll turn the conversation over to David Miller to talk about our EXLP numbers.

Thanks, Bill. Exterran Partners had another solid quarter.

We generated EBITDA as further adjusted of $48.9 million in the fourth quarter, as compared to $46.2 million in the third quarter. Distributable cash flow was $34.2 million in the fourth quarter, up from $29.5 million in the third quarter. Distributable cash flow coverage in the fourth quarter was 1.47 times. Net income per limited Partner unit was $0.31 in the quarter, compared to $0.21 in the third quarter 2012 and $0.10 in the year-ago period.

In the fourth quarter, Exterran Partners operating horsepower increased by 50,000 to approximately 1.99 million operating horsepower driven by organic growth in liquid rich plays. Revenue grew to $102.3 million in the fourth quarter, as compared to $99.3 million in the third quarter, largely due to this horsepower growth.

As Brad said earlier, Exterran Holdings is making cost cap contributions to Exterran Partners under the omnibus agreement. Our goal is to reduce and eventually eliminate the need for these payments through our performance improvement initiatives. Our distributable cash flow coverage increased from 1.22 times in 2011 to 1.29 times in 2012. Excluding the benefits of the cost cap payments, our distributable cash flow coverage increased from 0.78 times in 2011 to 1.02 times in 2012, which demonstrates progress towards this objective.

Late last month, Exterran Partners announced its distribution equal to $2.05 on an annualized basis. Our current quarterly distribution is $0.005 higher than the third quarter 2012 distribution and $0.02 higher than the fourth quarter 2011 distribution.

Gross margin, excluding the benefit of cost cap payments was 56% in the fourth quarter, as compared to 51% in the third quarter and 49% in Q4 2011. Cost of sales per average operating horsepower was $22.93 in the fourth quarter, down 9% from the third quarter 2012 and down 8% from prior-year levels. Profitability in the fourth quarter was positively impacted by lower maintenance expense and call-out activities due to holidays and vacations and ongoing performance improvement initiatives, as previously discussed. Over the longer term, Exterran Partners expects to benefit from further cost reduction initiatives in North Americas operations, as discussed earlier by Brad.

On the balance sheet, total debt increased by $16 million during the quarter. From $665 million at September 30 to $681 million at December 31, as capital was deployed to fund internal growth opportunities. Available but undrawn debt capacity at December 31 was approximately $200 million. We believe that our debt capacity provides us with the flexibility to finance the organic growth of Exterran Partners compression services businesses and positions the Partnership for future acquisitions. As of December 31, 2012, Exterran Partners had a total leverage ratio, covenant debt to adjusted EBITDA of 3.7 times, unchanged from the end of the third quarter.

Gross capital expenditures for the fourth quarter 2012 were $66.1 million consisting of $57.6 million for fleet growth and $8.5 million for compressor maintenance activities. Maintenance capital spending in the first quarter is expected to be slightly higher than fourth quarter levels. For full-year 2013, we expect total fleet growth capital expenditures to be in the $125 million to $150 million range and maintenance capital expenditures to be in the $45 million to $50 million range.

In summary, Exterran Partners had a solid quarter highlighted by organic growth of 50,000 operating horsepower, earnings of $0.31 per unit and 16% sequential growth in distributable -- in quarterly distributable cash flow. I'll now turn the call back over to Brad.

Great. Thanks, Bill. Thanks, David.

Operator, that concludes our prepared commentary for the quarter. We would like to turn the call over to open it up for questions.

(Operator Instructions)

Jim Rollyson Raymond James.

Nice work on the quarter and certainly the progress you guys have made in the past year, look forward to more of that. Brad, on the new capacity additions, I think this is probably more respective with Partners. You added about 50,000-horsepower last year. You mentioned the first half this year is going to be a little more modest growth. Can you talk about how you think about longer term plans? Just in terms of -- obviously the whole history of Exterran, you guys have a lot of capacity that's been around for awhile. You've been improving that I suppose, with adding new capacity to fit the market and what have you. How do you think about that going forward over the next several years in terms of adding? Then just maybe, what end of the market in terms of horsepower size are you focusing on with the new capacity adds?

Sure. Jim, thanks for the question. So look, on the capacity, I think the best indication of our optimism for the opportunities we see in the market longer term is our new fleet build program. So we're looking at adding about 170,000-horsepower to the fleet. That's an expression of what we think we see in the marketplace for opportunities. Overall, we remain optimistic that we're going to see good growth in the market ahead as we continue to build-out the shale plays and invest in some of the liquid prone plays.

So that's, I think, the best expression on that front. As far as the mix, we're building on both ends of the spectrum. So we have a good chunk of our investment going into large horsepower, that's suitable for gathering applications. But we are also building small horsepower units that are in high demand right now in some of the gas lift driven oil production plays. So we're building from 200-horsepower all the way up to 1,700-horsepower units and a few spots in between.

Okay. That's very helpful. You mentioned the second price increase in the last 12 months in January. Can you give us a little sense of magnitude of the price increase? Is this just on new units going to work or is this across the board?

The price increase was applied to our active units that were out of primary term in their contract. So roughly half of the operating horsepower received a price increase or will receive a price increase as they come out of term. It's -- just think of low single-digits for the magnitude of the price increase overall in 2013.

Which is, if I recall correctly somewhat similar to last year?

It was. It was. Look, our plan is to allow our customers to plan their years and their budgets. So we try to be consistent in our approach and communication with them.

Great. Last question for me, just on the cost side of things. You made pretty solid improvements last year, so you're going to continue to focus on that. Any guidance or thoughts of magnitude of how much you can improve that side of the line this year?

Without getting into specific numbers -- because we're working hard to deliver it, I think that as you saw in 2012, you should expect just a steady improvement throughout the course of 2013. That's comparable in magnitude to what we accomplished in 2012. That's really what we're targeting right now.

Blake Hutchinson, Howard Weil.

Just starting on the international business. With the annual revenue run rate and execution or backlog phase of still above $50 million here, what's the delineation between putting idle horsepower back to work versus greenfield projects as we go through the year?

Brad, I think he's talking about the $50 million in annualized contract options --

Right. As we think about the incremental revenue opportunities for 2013, are we leaning more towards greenfield than what we saw in 2012, where we had the opportunity to put a lot of idle assets back to work or is that just opportunistic for the year here?

Yes. So look, in the backlog number is a good mix of both contract extensions, where we're going to keep horsepower working, that's not greenfield. But a good percentage of it is also growth horsepower. The magnitude -- we're just checking the number right now, but the magnitude, we think it's about 50,000 of horsepower that's going to be growth for international in 2013.

Okay, great. Then just, helping us -- I know it may be difficult to do, but just diagnosing some of these one-time issues, where there's contract cancellations or the opportunity for a sale to the customer. Is there anything that's notable as you look out this year or would you expect less risk to quarterly fortunes from activity like that?

Yes. What we saw in 2012 was a little more disruptive than we expect normally. We don't see the same level of stops and returns in international for that large horsepower that we experienced in 2012. So looking out, we expect it to be a steadier build.

Okay, great.

Just to add to that, I referred to -- I don't think it's going to be quite as noisy as it was in 2012.

Okay, great. Then just finally, anything that we should read into the margin mix in fab with big draw downs in production and processing and install? Is the install margin performance different than you might have anticipated or just chalk it up to the lumpiness of the quarter?

It's both. Some of it's the lumpiness of the quarter, but as we see some of the build in our international portfolio and on the install, that definitely carries a lower margin percentage, that work attracts. Something that's in the 10%, so low teens range. As we build and restore some of that backlog in international, I'm thinking also Belleli, it will be dilutive to our gross margin percentage, but an improvement to our profitability overall.

Joe Gibney, Capital One.

Brad, just a couple questions around fabrication. You referenced a record level of revs in 2013. Certainly, your run rate you're indicating in the first quarter is indicative of that. Just trying to calibrate a little bit on expectations. Then, I know it's lumpy, but where are we on fab bookings growth year-over-year against that back drop of this elevated burn rate and pull through on revs? I know, it's lumpy international. You're coming off some pretty elevated North America bookings levels this past year. I'm just trying to get a sense of where are you on book-to-bill against a record level of revenue pull through that you're expecting this year.

Yes. So clearly, when you have a stand out quarter, on the revenue generation side and on the pull through, it can create a challenge in the lumpiness. It looks like the downside of it in the following quarter. You're seeing a bit of that now. We had such a robust quarter in Q4 in pulling through revenue and slightly less on the bookings side, that you're seeing that book-to-bill that appears to have slowed down in the quarter. I would really attribute that to lumpiness.

It's hard to make a lot of that change on a quarter-over-quarter basis. What we expect is to have a backlog level and a build, from this point forward that is positive. But we like the backlog number we have right now. We think we've generated good sales activity. We expect, based on our opportunity set, to continue to both replenish on the book-to-bill and build from here forward in 2013.

Okay, helpful. Just two quick ones. Just curious, dry gas versus liquids directed fleet mix as it stands today and maybe what you think it will be towards the end of 2013? Then Bill, I was just curious if you could remind us what the remaining PDVSA cash payments are as it stands today.

Okay, that's two questions, I'll go first. We do track and we watch this pretty carefully, what our trending is in moving the business from the dry gas plays into more of the shale and liquids rich plays. But the mix right now -- we would estimate that we are still in that 60% to 65% range of exposure to conventional plays. That number is coming down and will continue to come down incrementally. In previous periods, you may note, we articulated, we thought we were more in the 65% to 70% range for dry gas plays.

Yes, okay.

As far as the Venezuela, let me start out with the total amount that we expect to receive is well in excess -- or is in excess of $550 million. We've got about $300 million remaining to be received. That's coming at about $20 million a quarter for -- I think it's about the next 15 quarters about.

Okay. All right, gentlemen, I appreciate it. Nice quarter. I'll turn it back.

Sunil Sibal, Citigroup.

Yes, most of my questions have been answered. A couple of things I just wondered [further down]. When you look at your new build fleet program, I think you're guiding to about 170-HP versus 200-HP plus that you did last year. I was curious whether that is related to what you're seeing in the rich gas plays, especially with the pricing on the natural gas liquids being a little bit weak versus last year at this point of time.

I think the short answer, Sunil, is yes. The growth that we're seeing in the compression market is not being bolstered by a robust gas price. Where the attractiveness is, remains in the development of the plays that are more liquids rich. In some of the dry gas plays, the shale plays also can be price-competitive even in the current gas price environment. So we're seeing some growth there. But the short answer to your question is, absolutely.

Then when you look at your fleet composition at EXLP, how much of that is using the gas lifting application currently?

For EXH, the number overall is -- it's about -- as much as 15% of our fleet is in gas lift and exposed to oil production.

Okay. That's helpful. Then lastly, in terms of your fleet retirement. Where do you think you are in terms of that? What should we expect going forward in that regard?

Well, I think what you're asking about is, in the past, we've had some significant reductions to our idle fleet --

Yes. Exactly.

-- through our cold process. We're going to manage this fleet going forward with discipline. We want to make sure we're adding horsepower, which we are doing, that's going to modernize, standardize and drive the cost out in our fleet, as well as have a good market for years to come. So that's the fleet that we're building. As we do that, some of the older units will continue to drop out. I don't have an expectation. We can't really guide what the future looks like, on those expected moves, other than we're going to -- with a disciplined approach, insure that we are taking out those units that are no longer marketable or price competitive going forward. So we will be managing the fleet with great discipline. It's hard to talk about exactly what that could look like going forward.

Okay. That's very helpful. Again, congrats on a good quarter. Thanks.

Sharon Lui, Wells Fargo.

A quick question in terms of the cost caps. Do you think with your cost initiatives that you'll be in a position to eliminate the cost caps when they terminate by the end of this year?

Hard to answer that specifically. The way we want to make sure we're thinking about it is that, our goal is to drive sufficient improvement so that we render the cost caps not needed and no longer necessary. It doesn't mean that we'll necessarily be there. Looking forward, as we engage in further drop down activity, we want to be mindful of the relationship and respect the omnibus agreement between EXH and EXLP. So it's hard to guide further than that we really want to render them out of play is our approach to guiding that part of the discussion.

I think directionally we're showing that we are making those kinds of improvements.

Okay, I guess in terms of just looking at the coverage without the cost caps, is there a specific target that you guys are aiming at?

Well, I don't know that we have a specific target, but we should be somewhere between [$110 million and $120 million] in any case. We have not spelled that out, but that's a good guide post at least at this juncture.

Okay, great. In terms of the gross margin percentage. You did indicate that you anticipate to moderate a bit in the first quarter from I guess the 55% to low the 50% range. Just trying to understand how much of the improvement in Q4 was related to your cost reduction initiatives and how much was it related to the timing of some of the maintenance expenditures?

Well, we don't break that out. Obviously, some proportion of both. But what we focus on -- normally in the first quarter, we do have a little bit of a drop off in that percentage as we catch up to some maintenance. We don't have as much in terms of vacation. So we'll have some more call-out activity.

What we would direct people to look at is, quarter-over-quarter, year-over-year, we think we're going to make progress. If you look at our first quarter of last year, we'll make significant progress over the first quarter of last year. Then hopefully, build on that throughout the year. So if you look at the results that we achieved this year, in terms of the increase in margin percentage. We had about a 4% margin percentage increase year-over-year. Looking within the quarters, we made progress in most of those quarters. We expect to make more progress in most of those quarters next year too.

Daniel Burke, Johnson Rice.

In terms of organic growth in NACO being a little slower through the first half of 2012, I assume that's really with a reference point as the substantial additions you made in Q4. So just curious, if you could maybe elaborate on why you'd see that slowdown? Maybe one factor as well, I think you said you added or will add 170,000-horsepower in 2013. What were the adds in 2012?

Sure. Dan, so on the growth side of the equation, what we're seeing in the market right now is, we had 145,000-horsepower for 2012 compared to 170,000-horsepower for 2013. That suggests that what we see still a relatively robust market going forward; however, in contrast and you're right, the step back for 2013 is that, we saw fourth quarter activity was particularly robust on the start cycle. We also saw a slowdown in the stop activity in a few of the plays that we don't expect to remain at those lower levels of stops.

As we see the migration away from the dry conventional into some more of the shale plays and liquids prone plays. So it's that combination that makes us pause. The particularly robust nature of Q4 driven by both the start activity as well as the slowdown in some of that stop activity. We think that some of the producers will slowdown on some of the growth in some of the stops at the front half of this year.

Right. When you say slowdown on some of the stops, you mean that stop activity will pick back up a little bit here in the first half of 2013? Am I understanding that right?

That's exactly right.

Okay. That's helpful. One question, almost a formality here. But the Venezuela payment, did it flow through discontinued ops this quarter?

It's a split. $16.8 million did go through there and the $4.6 million, I think we've did that as a line item. I'm sorry, equity and earnings -- it came in the equity account.

Okay, so --

Because one came in owned and one is part of a joint venture they come in two different pockets.

Okay. So there was a roughly offsetting discontinued operations charge encountered in Q4 then?

Oh, we took a little bit more in Canada. That's what you're seeing in the --

Okay, that's helpful. I appreciate that. Then maybe, just the last one. Maybe I missed it, Bill, but did you give an effective tax rate number for 2013?

I did. Effective tax rate looks like it's about 38% for the year.

38% for the year. Okay, thank you, guys.

Gary Farber, CL King.

Just on your EBITDA margins. You've had a nice trend up since fiscal 2011, but still below the peak. I'm just wondering, how you think about the progression once you get out of this year, towards where you were a few years ago as trying to reach that level.

Well, all I'll say is, we project to make continued progress on our -- but we haven't given you targets in terms of we'll get back to the peak. I think if you look at the run rates we're exiting this year versus last year, we'll make more progress this year on that EBITDA percentage.

Will it be a function of waiting, towards your revenue growth or just other things on the process side that you alluded to.

Well, as we said, we're going to have better -- or increased revenues in our fabrication this year versus last year. So you'll see some revenue, but hopefully, what you see is more EBITDA. That will give you the percentage increase. So we expect a percentage increase or we expect to make some progress on our EBITDA percentage in 2013.

Marc Silverberg, Barclays.

Just a few final EXLP questions, if I may. You've added more than 80,000-horsepower at the MLP level in the back half of 2012 organically. So I guess given that stepped up level of organic spending opportunity, does this change at all the potential size or timing of near term drop downs into the Partnership?

Well, number one, we don't really talk about the timing of drop downs as you know. The best indication for the way we're approaching the drop downs is just to look at our past track record. But I also don't think that this changes -- this level of organic growth changes the way we are thinking about or approaching our drop downs.

Okay, great. Then next, just trying to get a better understanding of the underlying movement within the net 50,000-horsepower adds that you had at Partners. Could you give a break out of the starts and stops similar to the one you've given at Holdings? Also if you can, specific Basins where you're seeing that. If they've changed any from previous comments.

Yes, do you have a break out of the -- We haven't broken it out similarly, but the magnitude is -- really they sit on top of each other. So proportionately it's going to look very similar. So I think you could just use the same ratios for the break out between what we see on the growth side versus what we saw on the soft activity for Partners as we had for Holdings.

As far as where we're seeing in the growth, it's not going to be surprising. It's across a few of the growth plays right now that you're hearing a lot about. A lot of growth out of the Eagle Ford. We've got growth out of the Permian, Mississippi Lime, Avalon, Niobrara are the top growth plays. It's not a limited list, but that's a good list of where we're seeing some of our growth.

Okay, got it. Then for EXLP growth spending. I think you've previously mentioned about $100 million you're expecting for 2012. It looks like that came in a bit higher about 20%. Just curious, has any portion of the 50,000-horsepower adds accelerated timing shift from 2013 into 2012? Or was that just an outright increase in spending opportunity?

No, a little bit was pull forward, but mostly it was just an increase in spending opportunity.

Okay, great. Then, just last quick one. Regarding the pricing increase, could you comment a bit on customer acceptance you're seeing in the market so far? That's it for me. Thanks.

Yes, sure. Customer acceptance has been good. I think that there's been an understanding of where we've been on pricing with our customers. The program has been effective, without any significant pushback from our customers.

We have no further questions at this time. I will now turn the call back to Brad Childers for closing remarks.

Everyone, we thank you for following both Exterran Holdings and Exterran Partners. Thanks for participating in the call this quarter. We'll talk to you again following our first quarter results. Thank you.

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