Archrock Inc (AROC) 2013 Q2 法說會逐字稿

Good morning. Welcome to the Exterran Holdings Inc. and Exterran Partners, LP, second quarter 2013 earnings conference call. At this time, I would 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 second quarter of 2013. If you have not received a copy, you can find the information on the Company's website at Exterran.com.

During today's call, Exterran Holdings may be referred to as Exterran or EXH and the 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 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 Exterran Holdings' annual report on Form 10-K for the year ended December 31, 2012, Exterran Partners' annual report on Form 10-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 your conference.

Okay, great. Thank you, operator. Good morning, everyone. With me on today's call is Bill Austin, CFO of Exterran Holdings and David Miller, CFO of Exterran Partners. As in the past, in the call today we're going to provide comments and a review of both Exterran Holdings and Exterran Partners before opening it up for questions. I'll review financial results, operating highlights, and our priorities moving ahead. Bill will provide a detailed summary of Exterran Holdings' financial performance and David will go through a detailed summary of Exterran Partners' financial performance.

At Holdings we achieved significant milestones in our performance improvement work this quarter. Let me highlight a few of our accomplishments. In the quarter we generated our highest level of EBITDA in over four years at $177 million, which is 21% better than the prior quarter and 74% better than the year-ago period. We continue to drive the overall positive profitability trend in our North America contract operations business as our gross margin has increased from the high 40% range to the mid-50% range over the last seven quarters. And we generated our highest level of gross margin dollars from our fabrication business in over three years.

As we noted in our press release and as we will discuss in more detail later, our results for the quarter included some one off events. However, the overall results were driven by strong performance across all of our product lines and in all of our regions. This performance is the result of the hard work of our employees focusing on the right goals and working hard to achieve those goals. I'd like to thank our employees all over the world for their focus and work to deliver continuously improving results for our customers and for our investors.

While we're excited and extremely pleased by these results, there are some aspects of our business that are presenting us with mixed signals, particularly around the activity levels in the North America market. First despite solid performance in our North America contract operations segment our operating horsepower did not grow. The primary driver for this in the quarter was a higher level of stop activity than we anticipated. Significantly our contract compression bookings in North America were better than expected for the quarter, so I remain optimistic about growing our horsepower in the second half of the year.

Second, the combination of high levels of fabrication through-put in the first half of the year and lower fabricated sales and bookings in North America have led to a reduction in our fabrication backlog. We believe this reduction is due to the rolloff of a few large installation projects that, by the way, generated a relatively low gross margin contribution and that we did not expect to recur, as well as a reduction in our customers' activity levels as they worked through installing and putting to work the equipment that they have purchased over the last several quarters. We believe we will see a recovery of order activity and backlog in the future as the infrastructure buildout in North America continues, though the timing of such rebound is hard to predict. In any event, this positive order activity will likely result in lower fabrication results in the second half of 2013. Somewhat offsetting the slowdown in the North America market, our opportunity set for international fabrication projects looks more robust than it has for some time. Predicting the timing of those awards is difficult, however, and we have seen several of our large project awards slip into future quarters this year, especially in the eastern hemisphere, but we remain confident that the oil and gas infrastructure buildout in international markets will afford us opportunities for growth.

Turning to our operating segments, in each of our North America and international contract operations business we had good performance in the quarter. In addition, in our North America contract operations results we benefited from a customer's exercise of purchase options on two natural gas processing plants in the Appalachian Basin and in our international contract operations results we benefited from a customer's exercise of the purchase option on compression assets in Latin America. As highlighted in our earnings release, together these items contributed about $18 million to our EBITDA and Bill and David will describe these transactions in more detail in their commentary.

In our North America contract operations business in the quarter revenue increased 10% in gross margin dollars of $92 million represented an 18% increase, each over prior period year levels and we've benefited from good labor utilization and the modest price increase we instituted at the beginning of year. As mentioned earlier our operating horsepower levels were lower than expected. Net operating horsepower declined by 35,000 in the quarter. In the quarter we had an increase of about 39,000-horsepower in our growth areas, which included the Eagle Ford, Avalon, and Niobrara shale plays, and the Mississippi lime, but these gains were offset by a decline of about 74,000-horsepower that was operating at conventional dry gas areas.

In our international contract operations in the quarter we commenced the contract operations project in Iraq that was highlighted in our backlog description in our last call. This is our initial contract operations project in Iraq and we are optimistic about additional prospects in that country. Our backlog of new contracted projects in international equates to approximately $40 million in annual revenue and includes significant projects in Brazil and Indonesia that are expected to start up during the third quarter. And on the business development front we are optimistic about near term growth opportunities in Latin America contract operations. In our aftermarkets services business revenue is up 19% on a sequential basis to just under $100 million primarily driven by increased activity in North America as well as continuing improved execution in the field.

And in our fabrication business revenue increased 71% over the prior year period and gross margin of $75 million was almost three times the prior year period level. As a result of improved pricing and reduced costs, our profitability as measured by gross margin percentage has improved on a relatively steady state over the past six quarters. Our fabrication results this quarter benefited from higher through-put volumes in our manufacturing facilities, as indicated on prior calls, improved embedded margins in those projects as we have been able to increase pricing our bookings, and solid execution in our facilities, which has resulted in a reduction in fabrication costs over the past several quarters. Also during the quarter we opened a production equipment fabrication facility in northeast Ohio to serve the growing Marcellus and Utica markets. We discussed this in the past, but this is a significant milestone for us as we are expanding our fabrication footprint for the first time since Exterran was formed as a Company in 2007.

Turning to our internal performance improvement initiatives, we are continuing our efforts to improve the profitability of our operations. We are on track with several process driven initiatives being rolled out this year to improve the efficiency of our contract operations businesses and to improve the project and materials management expertise in our fabrication operations. In addition, we're continuing to invest in new compression units to further standardize our fleet and enhance our competitive position. We're adding both large units that will work in gathering applications as well as smaller units that will go to work in gas lift applications.

In wrapping up the Exterran Holdings section of my comments, the points I really want to emphasize and I hope you take away from this call is that we had good overall performance in the quarter and we are executing well in our core operations. I believe we are solidly on track to improve the Company's performance in 2013 over prior year results. We're excited about the response we've gotten in our results and progress we've made across our business segments in terms of our strategy and our performance initiatives. We remain focused on continuing to improve our core operations through our process driven initiatives and we have opportunities and are making changes that will deliver further improvement.

Now I'd like to turn to Exterran Partners. Exterran Partners delivered solid performance in the quarter. Highlights included a record quarterly level of distributable cash flow. Our average operating horsepower was over 2.2 million, up 17% as compared to the prior year period. Our financial results benefited from the compression assets we acquired from Exterran Holdings in March 2013 and the implementation of profit improvement initiatives.

In addition, Exterran Partners' second quarter results benefited from a customer's exercise of purchase options on two natural gas processing plants we discussed earlier. As a result Exterran Partners achieved a 64% increase in distributable cash flow on a 29% increase in revenue over the results for the prior year period. With an improved operating performance our gross margin percentage increased from 53% in the second quarter of 2012 to 59% in the second quarter of 2013. Looking ahead, we will continue to target growth at the partnership through organic growth opportunities associated with industry development of shale and liquids rich plays, further execution of our drop down strategy with Exterran Holdings, and third-party acquisitions. In addition, we expect to benefit from performance improvement initiatives being implemented in our North America contract operations business through 2013 to improve the efficiency of our operations. We have significantly improved the underlying profitability of the partnership's operations and we have opportunities for further improvement. Moving to the financial section I'd like to turn the call over to Bill to review our financial results for Exterran Holdings, including a summary of our trends and guidance for the third quarter.

Thanks, Brad. Before I go into our segment results I would like to note that in addition to Brad's remarks about our EBITDA results, we also reported diluted net income from continuing operations attributable to the Exterran stockholders excluding charges of some $0.31 per share in the second quarter. That's up from $0.21 per share in the first quarter and a loss of $0.48 per share in the prior year period.

Now moving on to the segment results, our North American contract operations revenue was $164 million in the second quarter. Gross margin came in at 57%. That's up from 55% in the first quarter of '13 and up from the 52.6% in the year-ago period. Profitability in the second quarter was positively impacted by ongoing efficiency initiatives and lower than expected mobilization costs in the quarter associated with the closing of the natural gas processing plant, and I referred to that in the last quarter's conference call. The exercise of purchase options on two processing plants as discussed earlier increased our revenue by some $6.5 million and increased our gross margin percentage by approximately 2%. In addition, the second quarter results included revenue of some $2.3 million from the operations of these plants.

Now looking forward in the third quarter, we expect revenue to be in the mid-$150 million level and gross margin percentage to be in the low to mid-50% range as some of the previously discussed plant demobilization activity will slip into the third and fourth quarter. Maintenance capital is $18 million in North America during the quarter as compared to $19 million in the first quarter and some $24 million in the prior year period. Maintenance capital spending in the third quarter is expected to be flat to slightly higher than the second quarter levels.

Moving on to the international contract operations, revenue was $118 million in the second quarter, up as compared to the first quarter revenue of $110 million. Gross margin came in at 58% similar to the first quarter levels and similar to the year-ago levels. The exercise of a purchase option on compression equipment in Latin America as discussed earlier increased our revenue by $4 million and increased our gross margin percentage by about 2%.

Looking at the third quarter, we expect international contract operations revenues somewhat above the second quarter levels as we start up significant new projects as Brad said in Brazil and Indonesia. Gross margin percentage is expected to be in that 56% to 58% range again. Our international operating horsepower came in at 998,000 as of June 30. That's somewhat down from the quarter, but it was driven by the customer purchase option in Latin America.

Fabrication, our fabrication operations has another solid performance as Brad indicated. The revenue came in at $456 million in the quarter as compared to $459 million in the first quarter and up from $268 million in the year-ago period. Gross margin at 16% is up from the 12% in the first quarter and 10% from the year-ago period. A shift in the mix contributed to these higher gross margin percentages. The fabrication absolute dollar, the gross margin came in at $75 million, up from $56 million in the first quarter and some $26 million in the year-ago period.

Moving on to backlog, the fabrication backlog came in at $747 million at the end of the quarter as compared to $994 million at the end of the first quarter and some $1.3 billion at June 30, 2012. Fabrication revenue during the second quarter was comprised of about 25% compression, 65% production and processing and 10% was roughly 60% from North America and 40% from international. The bookings during the second quarter were roughly 50% from North America and 50% from the international markets. So that resulted in our existing backlog as roughly 55% North America and about 45% international.

For the third quarter we expect fabrication revenue again in that $425 million to $475 million range with gross margins in the 14% to 15% range. This is based on the expected mix of projects. For the fourth quarter we expect fabrication revenue in the $300 million to $350 million range and we're providing this fourth quarter guideline to highlight the expected impact of the order activity as Brad discussed in North America. In our aftermarket services businesses in the second quarter revenue came in at $99 million, up from $84 million in the first quarter. Gross margin 22%, unchanged from the first quarter levels and a slightly below the year-ago levels. I would have to say we're pleased with the progress we have made in the aftermarket service business as we continue to focus on job profitability and that continues to show results.

Looking at the third quarter, we expect the aftermarket services revenue to be somewhat higher, in the $95 million to $105 million range and gross margins again in that low 20% range. Our SG&A expenses were $91 million in the second quarter, up from $85 million in the first quarter. That first quarter benefited from some lower compensation and related costs and lower professional and consulting expense, but the $91 million was down somewhat from the $94 million in the second quarter of 2012. Included in this SG&A for the quarter were some accruals for short term incentives as we continue to beat our financial plan for the year. In the third quarter we expect SG&A expenses in that $90 million to $92 million range.

Other income for the quarter was $7 million, driven primarily by gains of $8 million as a result of customer exercise of purchase options and gains s on other equipment sales of about $4 million and that was offset by a currency translation loss of $3 million. Long lived asset impairments in the quarter were $17 million and included a charge of some $12 million related to our fabrication business in the United Kingdom. $4 million related to idle fleet equipment and $1 million related to the processing plant closed in the quarter. Depreciation and amortization expense came in at $81 million in the second quarter. We expect that same approximate amount in the third quarter.

Looking at taxes, our consolidated tax rate was 48% for the quarter. That is higher than expected primarily as a result of the no tax benefit associated with the impairment charge related to our fabrication business in the United Kingdom. Our tax rate for the net income from continuing operations attributable to the Exterran shareholders was 41% for the quarter and is expected to be approximately 37% for the remainder of the year.

Moving on to capital, the growth capital spending was about $66 million including $57 million in North America primarily for our previously announced fleet build program. We had proceeds from the sale of property, plant and equipment of approximately $56 million in the quarter and that included the exercise of these purchase options. So that net capital expenditures for the quarter came in at $52 million. Maintenance capital spending for the quarter is at $22 million.

Now as you look at the full year capital expenditure guidance we now expect that net capital expenditures will be in the $325 million to $350 million range as compared to our previous guidance of some $425 million to $450 million and this is driven by higher than expected proceeds. I've talked about those asset sales and the expected slippage of some projects into later in the year. In addition, we now expect maintenance capital of about $100 million to $110 million as that compared to our previous guidance of $105 million to $115 million. We do expect to expend approximately $230 million in total fleet growth capital and about $80 million for other expenditures. Now we do expect that the fleet capital will be split approximately 85/15 between North America and international, but in North America we expect the majority of that capital to be for units in the EXLP customers, for the EXLP customers and will be funded at the partnership level.

Now moving on. During the second quarter would received our fifth installment payment of some $4.7 million of our sale of joint venture assets in Venezuela. I would remind you that during the first quarter we received the second and third installments of approximately $17 million each for a total of $34 million for the first and second quarters of 2013. That was from the sale of our wholly owned assets in Venezuela. The cash payment from the sale of the Venezuela assets are not included in EBITDA as adjusted and are not included in the net income from continuing operations attributable to Exterran stockholders excluding charges. Available but undrawn debt capacity at June 30 was approximately $497 million at the Holdings level and some $430 million at Partners' level.

Total consolidated debt came in at $1.64 billion at June 30 as compared to $1.63 billion at March 31 and $1.8 billion at June 30th of last year. During the second quarter debt increased by $31 million to $928 million at Exterran Holdings level and this is driven by inventory increases related to and the timing of our billings for certain fabrication projects. The debt decreased by $18 million to $715 million at the partnership levels as proceeds from asset sales more than offset expenditures to help fund organic growth opportunities. Exterran Holdings total leverage, which is the total debt to adjusted EBITDA as defined in our credit agreement, came in at 2.1 times at June 30. This compares to 2.5 times at March 31 and is down significantly from the 3.7 times at June 30, 2012. I would point out that we continue to enhance both the liquidity and the financial flexibility of both Companies. In summary, we had another solid overall financial performance in the second quarter and we believe that we're positioned for a solid year-over-year growth in 2013. And I will turn the call over to David for a discussion of the financials of Exterran Partners.

Thanks, Bill. Exterran Partners had another solid quarter. In the second quarter Exterran Partners average operating horsepower increased by 254,000 to approximately 2.24 million operating horsepower driven by the assets acquired in the drop down transaction with Exterran Holdings which was completed on March 31, 2013. For the quarter Exterran Partners generated EBITDA as further adjusted of $71.1 million as compared to $52.4 million in the first quarter of 2013. Distributable cash flow was $44.7 million in the second quarter of 2013 up from $37.1 million in the first quarter.

The exercise of purchase options on two processing plants as discussed earlier increased our EBITDA as further adjusted by $13.3 million and our distributable cash flow by $6.5 million. Distributable cash flow coverage in the quarter was 1.6 times. Excluding the benefit of the cost cap payments our distributable cash flow coverage increased to 1.46 times in the second quarter from 0.92 times in the year-ago period. Net income per limited partner unit was $0.52 in the second quarter compared to $0.31 in the first quarter 2013 and a loss of $0.47 in the year-ago period.

Revenue grew to $125.5 million in the second quarter as compared to $106.1 million in the first quarter due in large part to increased average operating horsepower. Gross margin was 59% in the second quarter as compared to 56% in the first quarter and 53% in the prior year period. Cost of sales per average operating horsepower was $22.72 in the second quarter, down 4% from the first quarter 2013 and prior year levels. The exercise of purchase options on the two processing plants increased our revenues by $6.5 million and increased our gross margin percentage by 2%. In addition, second quarter results included revenue of $2.3 million from the operation of these plants.

Earlier this week Exterran Partners announced its distribution equal to $2.09 on an annualized basis. This is a $0.005 higher than the first quarter of 2013 distribution and $0.02 higher than the second quarter 2012 distribution. On the balance sheet total debt decreased by $18 million during the quarter to $715 million at June 30, 2013. As proceeds from the sales of property, plant and equipment offset capital deployed to fund international growth opportunities. In May, Exterran Partners extended the termination date on $250 million of interest rates swaps reducing the fixed base rate on this portion of its floating rate debt to 1.66% through May, 2018. These five year swaps in conjunction with Exterran Partners' recent $350 million issuance of 6% senior notes locks in the costs of borrowing at relatively low rates on $595 million of Exterran Partners' $715 million in outstanding debt at June 30, 2013. Available but undrawn debt capacity under our revolving credit facility at June 30 was approximately $430 million. We believe that our debt capacity gives us the financial flexibility to finance organic growth and positions the partnership for future acquisitions. As of June 30, 2013, Exterran Partners had a total leverage ratio covenant debt to adjusted EBITDA of 3.0 times compared to 3.4 times at the end of the first quarter.

Gross capital expenditures for the second quarter 2013 were $41.8 million consisting of $32.2 million for fleet growth capital and $9.6 million for maintenance activities. For 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 $0.52 per unit, 21% sequential growth in quarterly distributable cash flow, and 1.6 times distributable cash flow coverage. Operator, at this point we'd like to open the call up for questions.

Thank you. We will now begin the question-and-answer session.

(Operator Instructions)

Mike Urban from Deutsche Bank.

Thanks, good morning, guys So been a number of moving parts really across the Company, but specific to the US contract business, good performance here, but kind of adjusting for the customer purchase option. I mean it looks roughly like the reported margin would have been fairly flat over the last three quarters. I'm just trying to get a sense for what's going on on an underlying basis from all the initiatives that you've been putting in place and either what do you think that margin improvement has been or the dollar amount that you saved or however you want to quantify it? Just want to try and get a sense for the progress you've made over the last handful of quarters here.

Yes, Mike. This is Brad, let me speak to that. I think the progress has been good and steady, but as you point out actually has the purchase options and the one D mode expense that has been pending that we pushed into Q3, Q4 as Bill discussed, it does create some moving parts. And when we pull that out I'm very confident with and pleased that our progress has gone from that high 40s percentage target up to the solidly, solidly mid-50s range is where I think we settled right now after noise and that progress has been take out the noise fairly steady. We believe in it and we think we have more ahead of us.

Okay. That's helpful. Thank you. And in the fabrication business you were pretty clear on the expectations here in the near term just given the decline in backlog and some of the timing of orders. How much of the improvement in the margin you saw here in the quarter was either the mix or just better underlying operating performance versus the volume? I guess trying to get the same kind of thing. I mean what has kind of the underlying performance improvement been in fabrication so that we can kind of think about what is baseline and ongoing versus the impact of the lower volumes that you're going to have here for the next quarter or two?

This one is not as straightforward to answer on that margin target because the mix issues do make such a big difference. What we did see in Q2 was number one, really good execution as I highlighted on cost and a shift in the mix. We did have the pull-through of more highly profitable product lines in Q2 than we've had in some prior quarters and that did impact that performance and that margin. And on the cost side you're right, we also are benefiting from an overall level of higher volumes, but the execution side is delivering its contribution no doubt.

Looking forward, we tried to give you a picture of our mix and while we see it balance between North America and international what we've seen in the marketplace, and we think others have too, is a dip in the order activity in the processing and treating segments, which is one of our more profitable product lines. And so while we believe we have improved the underlying profitability I'm afraid that that fabrication margin, just like revenue, is going to remain lumpier than people are going to really want from a baseline perspective. So the improvement is definitely there on the cost side. We are definitely executing well, but we can't eliminate some of the lumpiness that we're going to get based on market activity and the mix of the products that come through the fab shops on any quarterly basis.

Okay. Understood. The last one for me is that -- and correct me if I'm wrong -- I think there has been more of an emphasis placed on recurring revenue type business, so again, maybe take out some of the lumpiness that you have on the fabrication side maybe more of an emphasis on aftermarket which I think is lower for you as a percentage of revenues or earnings relative to maybe similar type companies. Is there a focus to improve that and to grow that business? So what kind of progress are you making there?

Well, on the -- the answer is correct that we do focus and are focusing on the recurring revenue businesses to maximize our performance in profit in those segments. We think of it as focusing on our core operations and trying to go through and find those areas where we are not generating either because of the scale in that particular market or that product line, the level of profitability that we've targeted. So you're right about that focus. On the AMS question in particular, while we are focusing and have seen some good growth and restoration of that business over the last several quarters it's not grown as substantially or as significantly as we would like to have seen, especially in some of our stronger markets. So I don't -- I wouldn't expect to see anything but incremental growth in the revenue in margins from that line going forward.

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

Jim Rollyson from Raymond James.

Good morning, gentlemen. Brad, you mentioned on the contract operations side, you kind of during the quarter you picked up 39,000-horsepower from some of the newer shale plays and lost I think the number was 74,000 from conventional plays. Can you maybe speak to how you see that proceeding going forward, maybe the opportunity for equipment, new equipment into the newer plays and maybe contrast that with just how much you can lose out of the conventional from what you see today.

Sure. The best guidance I can give you, Jim, is you look back over the same breakout and my comments for the last three quarters we've tried to give you this on a quarterly basis and I think adding up the last three quarters would give you a fair indication of what's happening in the marketplace. This quarter was surprising. It was larger than expected by a fairly significant percentage basis and I can share with you just to give you that idea, compared to Q2 of '13 our stops were up 18% in this quarter in Q2 versus Q2 -- versus Q -- the prior quarter and it was up 42% over Q1 of '13. So we've seen -- this is an aberrationally high stop quarter for us. We did not expect this level of stop activity. The sales and the start activity on the other hand has actually been fairly consistent with our expectations and our plan. So I think this quarter is a little bit aberrational. Go back to the prior quarters. It will give you a better picture.

Okay. That's helpful and then one maybe on Partners specifically, the revenue per active horsepower was up like 5% sequentially, just trying to understand. Was that influenced at all by the processing sale? And, if not, is this sequential increase basically a benefit from the pricing increase you put forth and something we can expect maybe to repeat going forward?

There's probably a little bit from the pricing increase, but there was $6.5 million in the revenue line from the sale of the processing plant that would have driven that up a little bit.

Okay. That's helpful. Last one also on Partners, is the bump in SG&A sequentially mainly related to drop down?

Yes.

Probably a good number for going forward?

Yes, yes, good number going forward.

Thanks, guys.

All right, Jim.

Blake Hutchinson from Howard Weil.

Good morning, guys. First off for Brad I mean I think you guys again were very clear with regard to the trajectory of fabrication top line for the back half. Is it your sense when you call out the kind of processing and treating install, I guess inventory held by customers I guess for lack of a better term, is this an issue that kind of takes care of itself in a couple quarters or do we need to be thinking more towards maybe mid-'14 or late '14 before that kind of bottleneck works itself? Just, I won't tie you down, but kind of general sense on that might be helpful.

Sure. Timing is elusive. So we don't have the crystal ball and I wish we did, but we don't, but I can characterize that what we expect and I think the industry is looking at this similarly, is this is a slowdown and a deferral of work that will resume once the infrastructure buildout picks back up. And we have heard from a number of customers and do believe that the buying activity, everybody needed to get in line and get their equipment, the buying activity over the prior three and four quarters was very significant and our customers are now just working through that and getting those projects installed. The other thing I point out is there is somewhat of a bottleneck in some of the NGLs that needs to abate over time to really support continuation on a lot of some of the midstream project, but we think that this is a temporary slowdown and it will resume. We can't really foresee the timing any better than anybody else in the marketplace. So I don't really have that crystal ball. One other thing that I would point out in the quarter, we had a significant amount and we have had a significant amount of installation activity that's pulled through our backlog, but a lot of that came in, as I highlighted in my call, at very low margin. We used that primarily to pull through our processing, treating and production equipment, and compression equipment, so some of the revenue that you're seeing in the revenue decline is not going to translate as directly into gross margin decline with that installation component of the business.

Okay. That's helpful. And then in your remarks you also mentioned that you saw some growth in the international opportunity, maybe offsetting that at the same time and I guess, I just wanted to clarify that that's -- you're speaking to the international fabrication opportunity set, or is that the international contract compression opportunity set, or all the above, maybe compartmentalize that international outlook for us.

Sure. Let me make that clear, sorry if it wasn't as clear coming out in the call. The comment really in the call was directed at fabrication, so in international and particular in eastern hemisphere we see a significant opportunity set ahead of us. There are large projects. They're difficult to land, but there is a very significant backlog of opportunities that we're working through and that we expect to positively impact our fabrication segment in the future. But on the other hand I'd tell you that in the contract ops part of the discussion I did also make the comment that we see a significant number of large contract compression opportunities. For those, it's more focused in Latin America and so the backlog in our international businesses are of opportunities. The opportunity set is robust, both in fabrication, primarily eastern hemisphere, and in contract ops, primarily Latin America.

Okay. That's great and then just again point of clarification from Bill, when you talk about the wind down and demobilization of the West Texas plant, should we just kind of take the numbers you gave us last quarter, and just assume that you are -- it's been pushed back and everything is going to unfold over 3Q and 4Q rather than 2Q and 3Q. Is that kind of the thinking?

I think last time I indicated it was around $4 million. We spent maybe 20% of that and the other amount, it's become harder to predict that, but I'd split half and half third quarter fourth quarter on the --

Great. I'll turn it back. Thanks, guys.

Thanks.

Joe Gibney from Capital One.

Thanks, guys. My question's already asked and answered. I appreciate it.

Sure, thanks Joe.

Daniel Burke from Johnson Rice.

Good morning, guys. Bill, maybe one question on clarification, the $18 million of EBITDA, was that figure entirely included in the gross margin of the domestic and international businesses and was there then a separate gain component on the other income line? I didn't quite understand the apportionment.

Yes, good question, Dan. I tried to break out what was included in the revenue line both in North America and international. I think it was $6.5 million in North America and about $4 million in international. In the other amount, the gain came in other income. So that -- it was like a little over 7 -- almost $7.7 million in the other income. So while it did come in as EBITDA only -- what did I say? $6.5 million, $4 million came in the revenue stream in the contract ops.

That's helpful, thank you.

Okay. I know that's confusing and you do have to unload it, but that's the way you unload it.

Okay. That's helpful clarification. Maybe a question then on the fabrication business again focused on North America and production and processing. I guess I understand that as the install backlog declines, it produces a favorable mix impact, but I guess one other corollary I thought of was the higher install backlogs or higher install inbounds suggested that your large project volume was on the rise last year. In terms of looking forward at production processing and the thought that there are delays, can you differentiate the outlook for the large projects that might involve an install component versus the more bread and butter side of production processing and production?

Just thinking about how to address that. In some ways, yes. There is a correlation what happened in the prior -- for the prior four quarters in that we saw, with such a spike in production equipment and processing and treating we did have a number of customers who then also wanted more assistance on the installation side. In other words, the market is trying to absorb so much equipment that it's not just the equipment that gets tough to find, it's also the project management, engineering and construction side that also needs more resources and so they tap into us, among others, to help them put a lot of that equipment to work. And so as we see a decline in some of the processing and treating, it should also mean there's enough resource that we won't be doing as much of that work. The other part of it is our internal drive to improve the selective of when we're willing to deploy our resources to support that. We've very focused on deploying those resources only when we have good pull-through and can execute well and generate better returns. And so you're seeing the combination of those three factors really market down a bit. Correlation is there's not as much assistance needed in the marketplace for the installation. And finally, our focus on driving the pull-through and the profitability of that segment, all of those are impacting that mix a bit going forward and I think that does hit the point you're trying to ask.

Okay. And then maybe to bring it into focus with regard to Q4 and the thought that the top line would come down, mix is trending favorably for revenue in fab in Q4 but presumably absorption does suffer somewhat. Is the gross margin expectation outlined for Q3 still a reasonable expectation for Q4?

Dan, this is Bill. We really haven't given guidance on that, but as I say, the mix and what Brad said about the installation, look, we're improving the profitability across the board. I'm not here to give you guidance on that, but quarter 3 I think is -- well, we just gave you guidance on quarter 3. Let's leave it at that.

Fair enough, guys. I appreciate the help.

Thanks.

Sunil Sibal from Citigroup.

Hi, good morning guys. Thanks. Congrats on a good quarter. Couple of questions related to the partnership. First of all of the $32 million CapEx spend on the organic growth side how much capacity did you guys add at the partnership level, and if you can break it between gathering versus the lifting services.

Sunil, I'm just going to ask for some help. When you think about capacity, can you --

I mean the horsepower.

How much horsepower was added and then how was the mix between what went into gas lift versus what went into gathering?

Yes.

We don't typically provide that level of detail in our capital spend guidance or -- We have a fair amount -- I think this may go back to the question of the gas lift application as such and we do see really good demand for the gas lift application, but we don't break that out between partnership and North America.

The one thing that we would share with you is that rather than thinking about that increment, because the increment is not something we typically talk about, if we look at the fleet overall including just all of NACO and EXLP now being very representative of what's going on with NACO, but with higher utilization overall, the amount of gas lift applications that we have with our units right now running at somewhere between 15% to 18% of our fleet. And the remainder is in more traditional gathering applications. And I think that's fairly indicative of how the fleet is moving overall and that's for both NACO as well as at Exterran Partners.

Okay. That's helpful. And any impact of the sale on your cost number for the second quarter?

Can you repeat that? I didn't understand the question.

Was there any impact of the sale on your cost, on your cost number and what you have for the cost number is a good run rate going forward?

No. The cost number is a good number going forward.

Okay. That's all I had.

The sale impacted revenue by $6.5 million, but there's no impact to cost.

Okay. Thanks.

Okay, great. Thanks, Sunil.

Bhavesh Lodaya from Credit Suisse.

Hi, guys, good morning. Quick question on EXLP. How do you guys see the third-party acquisition landscape and like what is the size or scale of acquisitions that you're looking at?

Well, a couple things, one, we don't really comment on acquisition activity going forward. We're public. Other entities that are in our space are public, also. So commenting specifically on anything that we're working on is not fair game. So we can't really do that, but what I can share with you is that the market is relatively dispersed and there are a number of good fleets and well run operators out there managing fleets of all sizes from the 50,000, there's a category of players that's at the 50,000-horsepower in their fleet range. There are several at the 100,000-horsepower range, and then there are a handful that have fleets that are in the 500,000-horsepower range and up. And we consider any accretive -- any opportunity that could be accretive that would bring in good quality equipment and that makes for our operation to be something that we can work on and will. So that's the way I'd characterize the market today.

Let me just add that we have a fairly low leverage in the NLP now and we have lots of capacity, so we would welcome opportunities in the NLP.

Okay, then maybe just a question on distribution. Last three quarters the distribution coverage has been fairly strong even after the impact of cost caps. Is there any visibility or thoughts around increasing the growth of distributions going forward?

I'll go first. Look, we don't look ahead to guide what's going to happen to the distribution growth, but if you look at our history, we've been pleased that in the past we've been able to have a very steady very reliable, up till today, very reliable steady increase in our distribution over time. And that has been a way that we thought would be a great way for our investors to see the continuing value and growth up to this point. We don't really comment on the distribution growth going forward.

I would just add to that that we look at both the distribution coverage including the cost caps and then distribution coverage excluding the cost caps as we're trying to wean ourself off of the cost caps.

Right, fair enough. Thank you so much, guys, and congrats on a great quarter.

Thank you.

James Bardowski from Sidoti & Company.

Hey, good morning, guys. The bulk of my questions were answered but there is a lone straggler remaining. I think it was Bill that mentioned regarding the debt slight increase at the holding level was a result of a mismatch of billing cycles. Is that correct?

Yes, that's part of it. We did build up some inventory as we executed on a robust fabrication revenue number.

Okay. So this $31 million increase is a slight bump in the road, then. Can we expect the number to head back south?

We do think we're going to generate at Holdings a good amount of cash in the second half of the year.

Okay, excellent. That's all I have. Thank you, guys.

Okay. Thank you.

Matt Niblack from HITE.

Good morning. Just want to make sure I was correctly following at the Partners level how the $13 million EBITDA impact of the processing plant sales flowed through the income statement. So that hits the other income and expense line? Is that correct?

So $6.5 million hit revenue and $6.8 million hit the other expense line.

Right. In the release what is the $13.3 million in EBITDA?

The EBITDA as adjusted adds back other income which is the -- so then you have the $6.5 million in revenue that hits EBITDA and then the $6.8 million in other income that gets added back in to get your EBITDA as adjusted.

And the other plant on the impact are the Holdings level. Is that right?

I'm sorry. Say that again.

There are two plants that --

Both plans it's the same plant. We consolidate so the same impact to Holdings as to Partners.

Okay. I'm just reading the release and it says the customer exercised the purchase option on two natural gas processing plants, increased our EBITDA as further adjusted by $13.3 million. I guess the $13.3 million number I'm trying to understand.

Yes. I think there is a difference between the two releases. It's $18 million at Holdings because we also had the Latin America purchase option exercises and it's $13 million at the Partners level because it's just the North America, two processing plants split as David said between -- they both impact EBITDA but split between the impact to revenue and other.

At Holdings, that sum comes up to $18.2 million. That's why it looks a little strange.

Okay. Thank you.

If you need to follow up, follow up with David or myself after.

Great. I may do that. Thank you.

Great. Thanks.

Marc Silverberg from Barclays.

Hi. Good morning, everyone. Just one quick one left for me. Regarding the elevated stop activity that you've highlighted, were there any surprises with regards to specific conventional basins driving that slowdown, or was it usual suspects and just a larger number than we had built into your forecast?

Yes. There was not. There was not any standouts that were of a magnitude we could identify individually. It really was across the board just a higher level. So no, there's no help that we can see from the information that helps us understand it differently than that.

Okay. That was all I had. Thank you.

Great. Thanks.

Sharon Lui from Wells Fargo.

Actually my questions have been asked and answered. Thank you.

Thanks, Sharon.

And I will now turn the call back over to Brad Childers for closing remarks.

Okay. We thank everyone for your interest in Exterran Holdings and Exterran Partners and 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.