Archrock Inc (AROC) 2013 Q1 法說會逐字稿

Good morning, welcome to the Exterran Holdings, Inc. and Exterran Partners, L.P. first quarter 2013 earnings conference call. At this time I'd like to inform you this conference is being recorded and that all participants are in a listen-only mode. We will open the teleconference for questions after the presentation. Earlier today Exterran Holdings and Exterran Partners released their financial results for the first quarter of 2013. 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 reconciliation of the measures to these GAAP measures in the summary pages of the earnings release 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. 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 Companies' prepared remarks on this conference call, and the related questions and answers 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 the results to differ materially from these projected in the forward-looking statements. Information concerning the risk factors, challenges and uncertainties that could cause actual results to differ materially than those in 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, 2012. Exterran Partners annual report on Form K for the year ended December 31, 2012. 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 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 CEO. I would now like to turn the call over to him. Mr. Childers, you may begin.

Thank you. Good morning, everyone. With me today is Bill Austin, CFO of Exterran Holdings; and David Miller, CFO of Exterran Partners. Let me highlight a few of our accomplishments in the quarter to get us started. Exterran Holdings and Exterran Partners each recorded improved profitability on a year over year basis. Exterran Partners completed an offering of $350 million of 6% senior notes in the quarter and Exterran Holdings and Exterran Partners completed $174 million drop-down transaction.

In today's call we'll provide a review of both Exterran Holdings and Exterran Partners before we open it up for questions. On the Exterran Holdings part of today's call I'm going to review our operating performance and our business development trends. Exterran Holdings had solid operating performance in the quarter. The first quarter highlights included our third consecutive quarter of positive earnings from continuing operations excluding charges and the highest level of quarterly EBITDA in over three years. At $146.5 million EBITDA as adjusted was 4% better than the prior quarter and 52% better than the year ago period. Net income from continuing operations excluding charges was $0.21 per share.

Looking at the operating results for each of our segments, in North America contract operations, our first quarter results benefited from prior period horse powered growth driven by healthy activity levels in liquids rich and shale plays. Our January 2013 price increase and ongoing efficiency initiatives including good labor utilization. With these positive developments, North America contract operations revenue was up by 6% and gross margin percentage increased from 51% in the prior year period to 55% for the quarter. Working horsepower was flat pretty much as we expected as we saw increase of about 32,000-horsepower in our growth areas partially offset by a decline of about 30,000-horsepower in conventional dry gas plays. Our top growth areas included the Eagle Ford, Avalon, Niobrara shale plays and the Mississippi lime.

We expect to have opportunities to continue to grow our working horsepower in 2013 and beyond, although operating horsepower levels for the first half of 2013 are expected to be flat. We're investing in new compression units to further standardize our fleet, including larger units for gas gathering as well as smaller units used in gas lift for secondary oil recovery. Additionally, we are on track with several process-driven initiatives being rolled out this year to improve the efficiency of our field service operations. Our actions include increasing the standardization of our field service practices and the deployment of mobile communication tools to our field technicians.

In our international contract operations business we had solid operating performance in the quarter driven by our large installed base of operations and ongoing operating cost initiatives. As expected, however, international contract operations financial results were down as compared to the prior quarter which were positively impacted by retroactive rate increases and previously discussed settlements related to the termination of a few projects. Our current backlog of contracted horsepower equates to over $40 million of annualized revenue and includes a contract operations project in Iraq expected to start later this year. Now, this project is our first contract operations project in Iraq and we're optimistic about future prospects in that country.

Delays on new projects impacted our first quarter bookings level. Although based on our existing backlog in new business opportunities we expect to grow our international contract operations business over the remainder of 2013. In our after market services business, overall profitability remains good driven primarily by improved pricing and cost discipline, although as expected, revenues were somewhat down from fourth quarter levels. In our fabrication business we had good financial results in the quarter and significant year over year improvement. We achieved improved profitability driven by a reduction in operating expenses from the implementation of profit improvement initiatives, higher margins associated with a project in the eastern hemisphere that commenced in the second half of 2012 and the continuation of improved market conditions in the US.

Fabrication revenue was up 75% and gross margin percentage improved from 10% to 12% as compared to the prior-year period. And with significantly higher work flows and improved profitability, gross margin dollars more than doubled. Fabrication performance in the quarter was negatively impacted, however, by cost overruns on turnkey projects that reduced our gross margin percentage by about 2%. Without this, the improvements in our fabrication operations would have even been more evident. Our continuing initiatives for the year include actions to improve our project management expertise and streamline how we plan for, source, and deliver materials for our fabrication operations.

In conclusion on the Exterran Holdings section of my comments we had good overall operating performance in the quarter. We are executing well in our core operations. We continue to see and will capture upside through our process-driven initiatives which we expect to drive improvement as we maintain our focus on increasing the profitability of our businesses. In North America markets we had solid bookings in each of our compression, production equipment and processing and treating product lines to meet the demand in the liquid rich and shell plays. And next week, we're opening a production equipment fabrication facility in northeast Ohio to serve the growing Marcellus and Utica markets.

In international markets, project delays have impacted our bookings and our overall backlog of installation work has declined over the past two quarters as we execute existing projects and increase our selectivity around new business in that area. But I believe that our current opportunity set and market conditions will allow us to maintain our current overall activity levels. And as a result I believe we are on track to achieve our second consecutive year of improved performance in 2013.

Now, turning to Exterran Partners. Exterran Partners delivered solid performance in the quarter, driven by the implementation of our growth strategy and performance initiatives as distributable cash flow was a record for the partnership and 8% higher on a sequential basis. Drivers for our improved performance included the contribution of assets purchased in a drop down transaction with Exterran Holdings in March 2012. Our investment in new fleet units, our January 2013 price increase, and the implementation of profit improvement initiatives. As a result, Exterran Partners achieved a 38% increase in distributable cash flow on a 20% increase in revenue over the results for the prior-year period. With improved operating performance Exterran Partners' gross margin percentage increased from 50% in the first quarter of 2012 to 56% in the first quarter of 2013.

Looking ahead we expect to benefit from the contribution of the March 2013 drop down and performance initiatives being implemented in our North America contract operations business throughout 2013 to improve the efficiency of our field service operations. Our goal is to continue 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. And moving on to the financial section of today's call I'd like to turn the call over to Bill for a review of our financial results for Exterran Holdings, including a summary of our quarterly trends and our guidance for the second quarter.

Thanks, Brad. As Brad said, I'll provide a breakdown of our results by segment and provide second quarter guidance, but first let me repeat, we continue to make progress in all of our segments and continue to press forward in our process initiatives. Now I'll provide a brief summary of the results of Exterran Holdings before we discuss the segment results. Again, as Brad said, but it bears repeating, and I know this is a little bit of a repetition, but we generate EBITDA as adjusted just shy of $147 million for the quarter. That's up 4% for the fourth quarter of 2012 and some 52% over prior-year levels. We did report positive earnings per share from continuing operations excluding charges of $0.21 per share. That's up from $0.09 per share in the fourth quarter and a loss of $0.42 per share in the prior-year period, that's first quarter of last year.

Now moving on to the segment results. North America contract operations revenue came in at $159 million in the first quarter, somewhat above our guidance range, but it was driven -- the increase was driven by increased activity levels and the January price increase. Gross margin at 55% in the first quarter was similar to the fourth quarter levels and up from 51% in the first quarter of '12. Again, the profitability in the first quarter was positively impacted by ongoing efficiency initiatives and an increase in rates. In the second quarter we expect the revenue to be somewhat lower than the quarter one levels and gross margin percentage to be in the 52% to 53% range, and this is driven by the closing of the natural gas processing plant and expected associated demobilization costs of approximately $4 million to be incurred over the next couple of quarters. Maintenance capital came in at $19 million in North America during the first quarter as compared to $16 million in the fourth quarter of 2012, and $15 million in the prior-year period. Maintenance capital spending in the second quarter is expected to be slightly higher than these first quarter levels.

Moving on our international contract operations revenues came in at $110 million for the quarter, down as expected as compared to the fourth quarter of revenue of $128 million, which as Brad said included retroactive rate increases in Argentina and settlements related to projects in Mexico and Brazil. The first quarter results, however, included the benefit from some increased activity levels in Indonesia, Brazil and Colombia. Gross margin of 58% in the first quarter as compared to 63% in the fourth quarter of '12. Again this was positively, the fourth quarter was positively impacted by those retroactive payments, settlements in Latin America.

Looking at the second quarter we expect international contract operations revenues to be above quarter one '13 levels, gross margin percentage is expected to be in the mid-50% range, it is somewhat lower than the first quarter levels as some project demobilization activity in Latin America slipped into the second quarter. Now, based on the start-up schedule of projects in our backlog, and Brad talked about the backlog of some $40 million of revenue in our backlog, we expect our gross margin percentages in the second half of 2013 to increase, and our annual revenues to increase modestly over the 2012 levels. Our international working horsepower was 1.007 million horsepower at March 31. It is basically flat for the quarter.

Fabrication operations had another solid performance in the first quarter. Fabrication revenue came in at $459 million, above our guidance range driven by solid plant activity levels for our product lines in the United States as compared to the $458 million in the fourth quarter, and $262 million in the year ago period. Gross margins at -- came in at 12%, similar to the prior period but up from the prior year. They were somewhat lower than expected, again, as Brad referred to the certain turnkey project execution issues discussed. Gross margin dollars at $56 million were up from $54 million in the fourth quarter and some $27 million in the year ago period. Fabrication backlog came in at $994 million at the end of the first quarter as compared to $1.07 billion at the end of the fourth quarter, but up from the $955 million of the March 31 quarter of 2012. Fabrication revenues in the first quarter was comprised of about 30% compression, 60% production and processing, and 10% Belleli Energy and was roughly 70% from North America and 30% from international.

Bookings during the first quarter were roughly 75% North America and 25% from international markets. As you break the backlog down the backlog is roughly 60% North America and about 40% international. The second quarter, again, while we had some charges in the first quarter, we expect the revenues to be in the $425 million, $475 million range but the gross margin back to what I guided to in the first quarter, more in the 13% to 14% range. In our after market services businesses in the first quarter revenue came in at $84 million, down from the fourth quarter levels as expected. Gross margins at 22% compared to 20% in the previous and prior year quarters. Looking forward to the second quarter, we expect after-market service revenues in the $90 million to $95 million range and gross margins again back in the low 20% range.

Moving on to our SG&A, our SG&A expenses came in at $85 million in the first quarter, lower than guidance which was in the $90 million range, but this was lower compensation and benefit-related costs and some bad-debt recoveries. This was also down from the $102 million in the fourth quarter, in the fourth quarter there were a fair amount of one-time issues in that quarter. Moving on to the second quarter we expect SG&A expenses in the $90 million range. Let's see -- moving on to, our depreciation and amortization expense came in at $83 million in the first quarter. We expect depreciation and amortization charges or expenses in the mid-$80 million range in the second quarter.

Our tax rate was 37% for the quarter, this is compared to our guidance of 38%. As we look at the remainder of the year, however, we look at that 37% as the right rate to model for the remainder of the year. Net capital expenditures were $92 million in the first quarter. Growth capital spending was about $69 million. Including $64 million in North America, primarily for our previously-announced fleet build program.

Maintenance capital spending for the quarter came in at $24 million. Now, during the first quarter we received our fourth installment payment of $4.7 million from the sale of our joint venture assets in Venezuela. We also received the second and third installment of approximately $17 million each, for a total of approximately $34 million for the first quarter and second quarters of 2013 from the sale of our wholly owned assets in Venezuela. The cash payments from the sale of the Venezuela assets are not included in our EBITDA as adjusted calculations and are not included in any net income from continuing operations attributable to Exterran stockholders.

Moving on, available with undrawn debt capacity at March 31 was approximately $505 million-- almost $506 million at Exterran Holdings level and some $412 million at Partners. Total consolidated debt at $1.63 billion at March 31, 2013, compared to $1.56 billion at December 31, 2012 and some $1.71 million (sic see press release -$1.71 billion) at March 31, 2012. During the first quarter debt did increase by some $13 million at Exterran Holdings level. It's driven by the timing of our billings for certain fabrication projects and they did increase by some $52 million to $733 million at the partnership, and this was to help fund organic growth opportunities. Exterran total leverage ratio, which is the total debt to adjusted EBITDA as defined in our credit agreement, was 2.5 at March 31, 2013, this compares to 2.4 at the end of the 2012, and some 3.6 at a year ago March 31 levels. As I step back, and in summary, we really had another solid financial quarter. We believe we are well positioned for the year, and we expect a solid year over year growth in 2013. With that, I'll turn the call over to David to talk about Exterran Partners.

Thanks, Bill. For the quarter, Exterran Partners generated EBITDA as further adjusted of $52.4 million as compared to $48.9 million in the fourth quarter of 2012. Distributable cash flow was $37.1 million in the first quarter, up from $34.2 million in the fourth quarter of 2012. Distributable cash flow coverage in the first quarter was 1.34 times. As a reminder we're paying the distributions on the units that we issued in connection with the drop downs but did not have the benefit of those assets in the quarter as the transaction closed on March 31. Net income for limited partner unit was $0.31 in the first quarter compared to $0.31 in the fourth quarter 2012, and $0.09 in the year ago period.

In the first quarter Exterran Partners' average operating horsepower increased by 22,000 to approximately 1.98 million operating horsepower, driven by strong organic growth in organic horsepower in Q4 2012. Revenue grew to $106.1 million in the first quarter as compared to $102.3 million in the fourth quarter, primarily due to the increased average operating horsepower. Gross margin was 56% in the first quarter as compared to 56% in the fourth quarter of 2012, and 50% in the prior-year period. Cost of sales per average operating horsepower was $23.74 in the first quarter, up 4% from the fourth quarter of 2012 and down 5% from prior-year levels.

As mentioned, we completed $174 million drop down transaction with Exterran Holdings on March 31. In connection with the drop down transaction, the omnibus agreement between Exterran Partners and Exterran Holdings was amended to among other things increase the cap on SG&A costs from $10.5 million per quarter to $12.5 million per quarter for the remainder of 2013, and to $15 million per quarter in 2014. And to increase the cap on operating costs from $21.75 per operating horsepower per quarter, to $22.50 per operating horsepower per quarter beginning on January 1, 2014. Both of these caps will now terminate on December 31, 2014. Our goal is to reduce and eventually eliminate the need for these payments as Exterran Partners expects to benefit from the field service initiatives and Exterran's North American contracts operations business as discussed earlier by Brad. Excluding the benefits of the cost cap payments our distributable cash flow coverage increased to 1.15 times in the first quarter of 2013 from 0.85 times in the year ago period.

Earlier this week Exterran Partners announced its distribution equal to $2.07 on an annualized basis. This distribution is $0.005 higher than the fourth quarter distribution of 2012 and $0.02 higher than the first quarter distribution in 2012. On the balance sheet, total debt increased by $52 million during the quarter to $733 million at March 31, 2013, as capital was deployed to fund internal growth opportunities. In March 2013 we completed a private offering of $350 million of 6% senior notes due 2021, and used the proceeds to repay borrowings under our revolving credit facility. Upon completion of the notes offering we amended our senior secured credit agreement which, among other things, reduced the borrowing capacity under the revolving credit facility by $100 million to $650 million and extended the maturity date of our term loan and revolving credit facilities to May 2018. Available but undrawn debt capacity under our revolving credit facility at March 31 was approximately $412 million. We believe that our enhanced debt capacity gives us the financial flexibility to finance organic growth and positions the partnership for future acquisitions.

As of March 31, 2013, Exterran Partners had a total leverage ratio, covenant total debt to adjusted EBITDA of 3.4 times compared to 3.7 times at the end of 2012. Gross capital expenditures for the first quarter of 2013 were $32.7 million, consisting of $24.4 million for fleet growth capital, and $8.3 million for maintenance activities. For the full year 2013 we continue to expect total fleet growth capital expenditures to be in the $125 million to $150 million range and maintenance capital expenditures in the $45 million to $50 million range. In summary, Exterran Partners had a solid quarter highlighted by earnings of $0.31 per unit, 8% sequential growth in quarterly distributable cash flow, and 1.34 times distributable cash flow coverage. This concludes our prepared remarks and I think at this point we'd like to turn it over for questions.

(Operator Instructions)

Jim Rollyson, Raymond James.

Good morning, guys. Good quarter. Couple of questions around Partners, if I may. Obviously you didn't get the benefit of the drop down in the quarter, although I see it that you kind of did the ending horsepower that seemed to show that. As we transition into the second quarter, how should we think about utilization, I assume it will come down a little bit initially and maybe price per -- revenue per horsepower and margins kind of with the influx of that capacity.

Well, Jim, let me -- let me try a little bit. I don't know -- I mean, we obviously are dropping down horsepower that's highly utilized, so I don't see -- I mean, there may be some blips here and there but I don't see utilization coming down. As you can see, we dropped it down on March 31st, so you're going to see the full value of the EBITDA in the second quarter, which you didn't see in the first quarter. So while there is -- there's probably a little bit more make-ready, a little bit of this and that, I don't know that you'll see tremendous differences in the second quarter versus the first quarter.

Jim, this is David. All the horsepower being dropped down is utilized, and that horsepower in terms of its rights and that sort of thing shouldn't be much different than the horsepower that was already in the partnership.

Pretty much steady as she goes.

Yes.

Yes, that's how I see it.

Okay. That's helpful. Obviously this gives you continued room for growth and distribution. Should we expect just a similar kind of steady increments as opposed to any big upticks that is kind of still the philosophy?

Well, I think that our history has been that way, Jim, and while we don't make those kind of projections that has been our history and we certainly want to prove out this increased profitability and show that we can do the things that we say we are going to do without the benefit of the cost caps. I think that's starting to get a little traction here. But just look at our history. I think it's probably a good indicator.

Okay, and the last one just maybe a little bit of what you're seeing in the domestic market here given the pickup in gas prices here that we've experienced, especially relative to where we were a year ago. Is that starting to lead to more activity, are you seeing, or just maybe a little color on the market.

On the market overall it remains stable and good especially, Jim, it's Brad, in the growth plays. And we're encouraged by that uptick in gas price, but we haven't seen it drive a lot of change in behavior yet in the dry gas plays. So just factually we just haven't seen that, yet. But we are encouraged by it and we do believe that if we continue to see increase in the gas price, and if the producers believe it's stable, we believe the first impact is going to be a slowdown of some of our net stop activity in dry plays and so we are looking to see if we can find that yet. But we just haven't seen a change at this point.

Okay. Appreciate the color, guys. Thanks.

You bet.

Thank you.

Mike Urban, Deutsche Bank.

Thanks. Good morning, guys. In the North America business I understand why the margin guidance is lower sequentially, but what's going on behind the closure of the processing plant, is that the end of a contract, or the profitability on that not what you would like, and therefore once those demob costs are incurred, you should, that's part of the upward trajectory, just trying to get a little more color on that.

Sure, so, yes, we are just -- we're going to stop operation of a plant that has been operating for a long time. It is just that it has hit the end of its useful operating life in that location so we're demobing that plant. It's an unusual activity for us. We don't have a bunch of this stuff, and so we're trying to make sure that we're clear on what the costs, what we think the costs are going to look like for the next two quarters on this demob and that's what is really behind those numbers.

Okay, so presumably it wasn't, I guess you said the end of useful life but presumably that would also mean that it at some point kind of weighs on the margin, so again as those run off, the kind of margin improvement that we've seen in the last couple of quarters, is that what you think the underlying run rate is right now?

No, from a gross margin percentage basis I don't think that this is going to show up as a negative at all in our run rate on gross margin percentage. And we see that for the year once we make it through this, we're still expecting net growth, especially in the back half of the year, in our overall contract operations business in North America, so I think that this will show up as a one-time for these quarters on the expense side primarily, and then it's not going to be noticeable after that.

Mike, let me add, that plant is not in EXLP, by the way.

Okay. That's helpful. And on the fabrication side, again you gave us some guidance there, was there anything, it doesn't look like it based on the guidance, but was there anything kind of pulled forward into that first quarter number or just good execution there?

Yes, just good execution on the top line. We had a lot more pull-through across our fabrication, all of our fabrication product lines in the quarter. So it was really just good execution is what we saw.

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

Yes.

Blake Hutchinson, Howard Weil.

Good morning, guys. Brad, from a big picture perspective, I guess the one thing that sticks out in the release is your mention of some delays and awards that are impacting international bookings. And you kind of hit on that in your commentary. But, I know you're reluctant or were reluctant earlier in your tenure to kind of size for us the international opportunity set and really talk more about the type of projects you are looking for, or the Company is now looking for. I was hoping if you could maybe kind of just expand upon the opportunity set you're seeing, maybe you compare it to where you were six months ago, year ago, and just give us some comfort in what is out there or in store for the international markets.

Sure. There are really two main points to it. Number one, we see the opportunity set as very consistent supporting our current level of activity. So by comparison we grew our backlog fairly consistently throughout 2012 and we see that in 2013 our bookings level will be what we saw also in '12, but we're not seeing the same level of growth in backlog that we previously experienced. And that is what I really wanted to really hit is that with that comment, is that we are a good level of operating activity today in fabrication. We see that continuing certainly in the market and our opportunity set is good to support that level. But that's really the point that I was trying to make sure I drove.

So that was more of a fabrication comment rather than an international contract compression comment?

Yes, it was. It was much more around our fabrication business.

Okay. I got you.

We wanted to take your growth trajectory, it is good activity, but calm down the growth trajectory.

Understood. And I'm not sure what we kind of just decided on the previous kind of margin line of questioning with regard to North America. I know, Bill, you have been kind of reluctant to call the, any kind of natural level, but are we -- I take it there wasn't anything unusually positive in 1Q, so as we work through some of these 2Q and 3Q expense issues, is 55% a good -- do you feel a good do you feel that is more of a natural margin for the business right now?

I'll take that. We have been reluctant to guide to an absolute margin level and, Blake, honestly we're still not going to guide to a natural margin level. What we've tried to suggest is we believe we're going to get improved profitability in the margin consistently. We got it pretty consistently last year, we're going to get it very consistently this year. There is, of course, some fluctuations in cost quarter-to-quarter, and while we had a very good operating quarter, I think it reflects really good execution, there are no significant one-time items in the 55%, that we achieved this quarter. There are minor contributors but we believe all of it is pushing us in the right direction. So we're still not going to fixate on a particular percentage point but we're focused on continuing to improve profitability in that operation, even from here.

Great, one quarter closer to pinning you guys down. I'll turn it back, thanks.

Nice try.

Good try.

Sunil Sibal, Citigroup.

Hi, good morning, guys. Congrats on a great quarter. Couple of things. On the third party acquisition market for North American contract business, just curious what are you seeing in terms of your opportunities are there?

Yes, Sunil, it is Brad. We won't talk and we can't really talk about specific opportunities that we see in the marketplace, so we can't go down that road at all. What we're convinced of, however, is that while we've had good growth at EXLP, number one, organically, and number two, we're going to continue with drop downs, and that's provided a real engine of growth for us to date, we're anxious to add the third leg of growth and look at what the market does offer us for acquisition opportunities from our customers directly or in the market. That's really about all we can say at this point.

Okay. That's fair. And in terms of your process-driven initiatives, I was kind of curious how much more headroom do you guys have in terms of bringing down your cost structure?

Yes, going back to the prior question, we're not going to quantify exactly how much room we have but we believe that we will be executing solid -- I mean, these are actions we are taking now and implementing all year long, not just ideas, but actions that will continue to improve the profitability and the competitiveness of our business. So we believe we have headroom.

Okay. That's it for me, guys, thank you.

Yes.

James Bardowski, Sidoti & Company.

Good morning, guys. Congratulations on a pretty good quarter. Excellent.

Thank you.

Just had a couple of generalized questions, if you don't mind. Regarding the fleet reevaluation of the compression fleet, that's still going on, correct?

In terms of -- every quarter, James, we look at our fleet, and there are -- there is some of what I would describe as nips and tucks. There is some equipment that is no longer competitive and we look at it every quarter, and you'll see that from quarter-to-quarter as we standardize on our fleet, as we introduce new equipment to our fleet. There are always some units that drop out or become non-competitive. So you'll see that. I think that's what your question is, isn't it? I answer your question?

Okay, you did, yes. So it is an ongoing quarterly aspect.

Absolutely.

Regarding -- I guess regarding any kind of potential horsepower that might come out, do you see the Company implementing more horsepower, i.e. for North American contracts, versus horsepower that could potentially be removed? I'm just trying to get an idea of how I could view the utilization rate going forward.

Yes, I think that, just in a look -- building the expectation of what you should expect looking forward, I would look at our kind of most recent 12 to 24-month period as being indicative of what the interaction looks like between horsepower coming in and horsepower going out absent a significant change in the gas price outlook. So I think that it's hard to predict the future exactly, but what we've performed in the more recent periods is fairly indicative of what that in and out looks like on horsepower. And I'll add to that from a utilization standpoint we're in that mid-80%, 85%, 86%, and that's a nice utilization range.

I guess on a separate question now, is there -- regarding future drop downs to the LP, is there a preference towards what type of payment you would prefer? Would you rather see an assumption of debt from the parent company, or would you prefer additional equity interests in the growing North American contracts?

If you look historically we've had I think it is seven drop downs, and about two-thirds of those drop downs have been equity and about a third debt. Is that right? And some of which we've taken back in this last drop down, we've obviously taken back at the parent. Equity, we thought it was the, not only the right thing to do to keep the capitalization at EXLP at an appropriate level. We thought it was a very good investment on our part. Now, we do have approximately 41% interest in the limited partnership. Longer term we want a significant position in our limited partnership. I'm not saying it has to be at 41%, but a significant investment, so, but we haven't given an indication of exactly how we'll drop down in the future. Over time the partnership will need a combination of debt and equity to finance its organic growth and we'll look at that at the time -- or at the appropriate time. I hope that answers your question.

It does. I'll save a couple extra and more secular questions for a later time, and thank you for taking time to answer.

Sure.

(Operator Instructions)

Daniel Burke, Johnson Rice.

Good morning, guys. I just want to make sure I understand your commentary or perspective on international correctly. So then in the press release when you talk about maintaining overall activity levels, does that mean then, that the fabrication top line in the first half '13 is sustainable through second half '13? Is that the right interpretation of that comment.

Yes, it's pretty good. Look, it is a lumpy business, both from a bookings perspective and a performance perspective, but what we're really suggesting is targeted at new bookings. And on the good news side what we expect is that our bookings level in '13 will be comparable to our bookings level of '12, and that does support the run rate on fabrication revenues in the -- at the level that we're seeing currently for the rest of '13.

Okay. Great. That's helpful. And then, Bill, if I heard you correctly, did you say that NACO revenues will be down a bit in Q2 versus Q1, is that because of the closure of the nat gas plant, is that also affecting the revenue line, or did I mishear that?

No, you heard it correct. That is what is happening. That plant will take our revenue down a little bit as well.

Okay. Good, just wanted to clarify that. And then, just to continue, maybe one last one, skipping around the segments. On the international contract compression side, it doesn't sound like much changed there in the outlook, but it seems like the -- I think you guys have been throwing around a $50 million number, now $40 million, I just wanted to understand if anything had fallen out of that backlog. And then on the comment that in Q2, you will have demobs, is that still Brazil where you guys are dealing with that or is it elsewhere in Latin America?

If I remember, now I have got to go back and look. We have been saying about this $30 million to $40 million. I think we were at $50 million sometime early last year, but the backlog has stayed relatively consistent in terms of the backlog to be installed. And, yes, the demob that we're looking at is some in Brazil but I think there is a little bit in some of the other Latin America countries as well.

Okay. Great, that is all I really had left, guys. Thank you.

Thanks.

Mark Silverberg, Barclays.

Hi, good morning, everyone. For the partnership, you previously indicated a comfortable long-term coverage excluding the cost caps of between 1.1 and 1.2 times, realize that wasn't firm guidance, but this quarter looks like you landed right down the center of that. Do you want a few-quarter buildup at this level before you were to think about removing these caps? Any updated thoughts on how we should be thinking about the timing for the eventual termination of these caps?

Marc, let me just say we'd like to target, and I think in some of the go-arounds I said it would be a nice target that 1.1 to 1.2 is a long-term target we would be comfortable at. As far as the cost caps, we extended some of the cost caps through '14 at some, what I would call, reduced levels as we improve our operations there. So our cost cap support technically terminates in 2014, and to be very blunt about it, we would like to be able to say we don't need them anywhere past that 2014, and that is certainly our goal.

Got it. Okay. That was the only one for me. Thanks so much.

At this time we have no further questions. I'll now turn the call back over to Brad for any closing remarks.

I want to thank everybody for your participation in our call this quarter. I want to make sure we're clear on what's going well in the Company right now. We continue to execute well in driving improved profitability in our core operations and we're looking forward to '13 being our second year of improved performance. We continue to have opportunities to take actions to improve that profitability and we'll do that all year long. And the current market is really in our bookings while we're supporting our current activity levels. With that, we look forward to talking to you again next quarter. Thanks very much.

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