Archrock, Inc.

During today's call, Exterran Holdings may be referred to as Exterran or EXH, and Exterran Partners as either Exterran Partners or EXLP. Because EXLP's financial results and position are consolidated into Exterran, the discussion of Exterran will include Exterran Partners unless otherwise noted.

I want to remind listeners that the news 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 these risk factors, challenges and uncertainties that could cause actual results to differ materially from those in the forward-looking statements can be found in the company's press release, as well as in the Exterran Holdings' annual report on Form 10-K for the year ended December 31, 2011, Exterran Partners' annual report on Form 10-K for the year ended December 31, 2011, and those set forth from time to time in Exterran Holdings' and Exterran Partners' filings with the Securities and Exchange Commission, which are currently available 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 of Exterran Holdings and Exterran Partners. I would now like to turn the call over, please go ahead.

Thank you. Good morning, everyone.

With me today is Bill Austin, CFO of Exterran Holdings; and David Miller, CFO of Exterran Partners. In addition, Mark Sotir, Executive Vice Chairman of Exterran Holdings, has also joined us.

On today's call, I will review our second quarter results and provide an update on our operations improvement work in the quarter. Let me begin by saying we had a good quarter.

And our focus on improving our operating performance led to solid financial results in all of our business lines.

At Exterran Holdings, EBITDA as adjusted was $101 million in the second quarter, which is a 23% improvement over the year ago period. And our fabrication backlog was nearly $1.3 billion, up 75% over the prior year level.

Focusing our profitability by improving cost and pricing, disciplined growth, managing our portfolio of businesses, and reducing leverage at the Exterran Holdings level.

First, we are working on improving our profitability through cost and pricing initiatives in each of our core business lines.

Starting with fabrication. We booked a lot of business in the quarter and achieved our highest fabrication backlog in over 4 years.

As important, we have a higher gross margin percentage embedded in this backlog, which will lead to higher margins for the remainder of the year, both in terms of dollars and percentage. These improvements are a direct result of the centralization of our pricing decision-making, which has allowed us to impose more discipline in our system and increase pricing of our products as we meet market demand.

Further, we've implemented sourcing initiatives in our fabrication businesses, so that we're purchasing equipment on a more cost-effective basis and we are working on several process initiatives that should help us fabricate equipment and use our resources more efficiently.

In our AMS business, gross margin improved to 24% this quarter due to improved pricing discipline and more efficient use of resources in Latin -- in North America and internationally. Market activity in AMS, particularly in North America, is improving as well, so increased profitability is on a higher book of business than we had in recent quarters.

In North America contract operations, while margins benefited from a tax adjustment this quarter, we maintained the margin improvement from the first quarter driven by our February price increase and our profit improvement work. Our goal is to become the cost leader in providing outsourced compression services and our improving initiatives are critical to achieving that objective.

Second, I'd like to discuss our focus on disciplined growth. In the second quarter, lower natural gas prices led to a difficult environment for us to grow our operating horsepower in North America.

While we had good growth at about 50,000 horsepower in rich gas and liquids prone areas and shale place, that growth was offset by a decline of about 60,000 horsepower in conventional dry gas areas.

Bookings of new compression operations projects in the quarter were strong however. And as a result, I expect that we will end 2012 with operating horsepower relatively flat for the year, which means that we expect to increase working horsepower in the second half of 2012.

In our international contract operations business, with new projects starting in the Middle East, Asia and Latin America, I expect increased revenue in the second half of the year and the fourth quarter 2012 revenue above year ago levels.

I've already mentioned our solid level of fabrication bookings during the quarter, which have been driven by strong demand across our processing and treating, production equipment and compression product lines in the United States. We expect this additional backlog to increase our fabrication revenues, as well as include the improved gross margins in the second half as I referred to earlier.

Now let me talk about the recent actions we've taken in managing our portfolio to streamline our operations and increase our focus on our core businesses.

First, in our contract operations business, we conducted an extensive review of our fleet in light of changing market conditions and the protracted low natural gas prices environment, an identified equipment, of which we have an excess supply, units that are not fit for today's market or units that simply do not warrant additional investment to put back into the field.

And as a result of this review, we've decided to retire approximately 800 idle compressor units or approximately 300,000 horsepower, primarily from our U.S. fleet.

The average age of the retired units was about 24 years. We believe these actions, combined with our continuing investment in new equipment, are required to improve the competitiveness of our fleet, further standardize our equipment and improve our operating cost structure.

In international markets, we continued to target long term projects with a focus on those that would include the redeployment of existing assets. We believe this sweep strategy positions us well to take advantage of growth opportunities in our core contract operations business globally.

As part of our continued review of our portfolio of businesses, we've determined to exit 2 additional areas. Specifically, we've launched [indiscernible] process for our contract operations and AMS business in Canada and for our production equipment fabrication facility in the U.K.

These decisions are in line with similar actions we discussed last quarter regarding our decision to halt plans to build a fabrication facility in Brazil for FPSO-related topside equipment. We will continue to evaluate our portfolio for opportunities to streamline and focus our business on our core operations.

Finally, I remain committed to the goal of reducing leverage at Exterran Holdings. Our covenant total leverage ratio has dropped significantly over the course of 2012 from 4.3x adjusted EBITDA at December 31, 2011, to 3.7x as of June 30, 2012.

We remain committed to actively managing our capital and reducing debt at the Exterran Holdings level over the long run.

However, in the second quarter, we increased borrowings by $94 million due to a higher working capital position, driven largely by an increase in accounts receivables and inventory. While some growth in working capital could be expected during periods of expansion, I believe that our increase in the second quarter was higher than typical due to the timing of billings, and I don't anticipate this buildup to continue in the third or fourth quarters, even as we increase our revenues from fabrication.

And we believe that our leverage ratio will continue to reduce for the remainder of the year.

Despite the positive momentum I believe we have in our operations, there are clearly some near term challenges to our business.

In our U.S. contract operations business, relatively low natural gas prices present a challenge to our growth, as gains in liquids-rich areas continued to be offset by losses in primarily dry gas producing areas.

Although we expect these challenging conditions to continue over the near term, we are encouraged by the recent modest rebound in prices and remain optimistic about the intermediate and long term growth opportunities for us. And as I mentioned, despite these market challenges, we expect flat full year operating horsepower performance in North America and growth in the second half of 2012.

In our international fabrication business, we continued to target an attractive set of opportunities. And although our international bookings levels are not where we want them to be, we are optimistic about the overall level of activity in international markets in the near to intermediate term.

So in summary, I'm excited about the progress that we've made to improve performance at Exterran and we've identified meaningful opportunities to continuing to improve the service we deliver to our customers and the value we deliver to our shareholders. I look forward to discussing our continuing progress with you next quarter.

Now, I'd like to turn the call over to Bill for a review of the financial results for Exterran Holdings.

Thanks, Brad, and good morning to everyone. I do understand that there are a lot of moving parts in our performance for the quarter.

It is a bit noisy but I will try to address some issues in several parts here.

Number one, I will highlight a number of financial results. I'll give guidance for the third quarter and some targets for the remainder of the year.

And finally, some comments on the earning power of the company and the improvement in our financial health.

First, Exterran had another good quarter. We accomplished a great deal operationally and financially.

And this provides us with much greater visibility regarding the second half of the year. We expect continued improvement in both the third and fourth quarter.

Now, due to the planned sale of our operations in Canada, the Canadian contract operations and aftermarket services businesses have been reflected as discontinued operations in both our current and historical financial results. So our operating results for the second quarter of 2012 and prior periods do not include any contribution from these Canadian operations.

Also included in discontinued operations for the current period is an impairment of intangible assets and long-lived assets that totaled some $40.8 million related to the planned sale.

Now let's look at some of the results. As Brad indicated, we generated EBITDA as adjusted of $101.5 million for the second quarter as compared to $96.2 million in the first quarter of 2012.

During this second quarter, we received our first installment payment in the sale of our joint venture assets in Venezuela. This cash payment of $4.7 million was not included in the EBITDA as adjusted.

However, we did incur charges of some $7.6 million related to sales tax audit associated with prior years, which were included and reduced our EBITDA as adjusted.

Now, our North American contract operations revenue was $149 million in the second quarter. This is somewhat below our guidance range but this is after the adjustment of about $3.5 million in revenues from Canada.

Gross margins came in at 53% in the quarter, up from 51% in the first quarter and 48% in the full year of 2011. Second quarter results included a benefit of approximately $3.5 million related to algorithm tax adjustment, portions of which will be ongoing.

Excluding this tax benefit, margins were essentially flat, and we're able to maintain the margin improvement we achieved in that first quarter, driven by our February price increase and some of our profit improvement initiatives.

North America operating horsepower did decline by 14,000 during the second quarter as growth in the liquids rich and shale plays were offset by declines in the conventional dry gas areas. North America operating horsepower was approximately 2.8 million at June 30, excluding approximately 48,000 horsepower in Canada.

Looking ahead at the third quarter, we expect North American contract operations revenues to be relatively flat and margins at those first quarter levels, and we do expect -- but we do expect improvement in our margins in the fourth quarter and next year, again, as a result of a number of performance initiatives.

As Brad discussed earlier, as part of our portfolio-related activities, we did review our fleet and decide to retire approximately 880 compression units totaling approximately 299,000 horsepower. As a result, we've performed an impairment review, and based on that review have recorded $92.2 million asset impairment to reduce the book value of each unit to its estimated fair value.

Based on our review, we also recorded $34.8 million asset impairment related to further impairment of units, which were originally impaired in the fourth quarter of 2010.

Moving on, as expected, maintenance capital increased to $24 million in North America during the second quarter as compared to $15 million in the first quarter of 2012 and similar to the trends we saw last year. Maintenance capital spending in the third quarter is expected to be similar to the second quarter levels.

Now moving on to the international. In the second quarter, our international contract operations revenues were $113 million, with a gross margin of 58%, both were somewhat above our guidance.

Our performance benefited from the start of a large compression project in the Middle East and reduced operating costs in the Eastern Hemisphere. Our current backlog for international contract operations were -- is in excess of $30 million of realized revenues and includes new business in Brazil, Colombia, Mexico and Indonesia.

Looking at the third quarter, we expect international contract operations revenues in the $116 million to $118 million range, and margin percentages to be similar to second quarter levels, again, benefiting from the full quarter of contribution from the large compression projects, which we've talked about.

I do reiterate and I want to mention that -- Brad's comments, that we expect increased operating horsepower in 2012 and a fourth quarter run rate higher than prior year levels.

Now moving on to fabrication results in the second quarter. Revenue came in at $268 million, somewhat above our guidance from -- our gross margins, at 10%, were in line with expectations.

In the second quarter of 2012, the definition of fabrication backlog was revised to include installations. This change was also made to prior periods for comparative purposes.

We made this change to reflect site preparation and facility construction business associated particularly, in our processing and treating product line.

The fabrication backlog did increase significantly from $955 million at the end of the first quarter to almost $1.3 billion at the end of the second quarter. The strong demand in the liquids-rich plays in North America again was the driver for our increased backlog.

With the additional new orders, the delivery schedule for our processing plants is being pushed out to late 2013.

Fabrication revenue during the second quarter was comprised of about 40% compression, 49% production and processing, and 11% Belleli energy. For revenues, bookings and backlog, roughly 3/4 were from North America and about 1/4 from international.

With our higher backlog levels, we expect to see sequential improvement in fabrication revenues in the third and fourth quarter and increased gross margin percentage due to improved pricing embedded in that backlog. For the third quarter, we expect fabrication revenues of $320 million to $350 million, with margins of approximately 12%.

Moving on to our aftermarket services business. In the second quarter, revenue came in at $102 million and gross margin was 24%, both better than expected and a significant improvement over the first quarter of 2012 and the second quarter of 2011 levels.

Revenues were achieved despite the elimination of approximately $11 million for our Canadian operations. Our profitability continued to benefit both from the profit improvement initiatives and including, as Brad indicated, the improved pricing discipline and better utilization of resources, and of course, there was an improved overall market activity level.

Looking at the third quarter, we expect aftermarket services revenues of $90 million to $100 million and margins to be in that low 20% range.

Our SG&A expenses were $94 million in the second quarter, somewhat higher than expected driven by that charge I referred to before of $7.6 million related to sales tax audits associated with prior years. In the third quarter, with no similar charge anticipated, we expect SG&A expenses to decline somewhat below that $90 million mark.

Net capital expenditures were $96 million in the second quarter. Growth capital spending was about $66 million, including a $32 million in North America, primarily from our previously announced fleet build programs.

Proceeds from the second quarter PP&E sales were $16 million and maintenance capital for the quarter was $30 million, including $24 million for North America.

Again, we continued to see good opportunities to deploy growth capital in the United States and in the international markets. For 2012, we now expect net capital expenditures after sales proceeds of $350 million to $375 million.

Now moving on to the balance sheet. Total consolidated debt increased by $94 million during the quarter from $1.7 billion at March 31 to $1.8 billion at June 30, with most of this increase at the parent level.

In the second quarter, Exterran Holdings' debt increased by $86 million to $1.16 billion due to the higher working capital position, driven largely by an increase in accounts receivable and strategic inventory. Although linked to improving overall activity levels, particularly in our fabrication business, this increase in working capital was also driven by the timing of billings to our customers.

We expect working capital levels to moderate in the second half of the year, and we remain committed to generating cash flow and reducing borrowings at the current level.

Available but undrawn debt capacity at June 30 was approximately $604 million, including $257 million at Partners.

At June 30, Exterran Holdings had a total leverage ratio, that is covenant total debt to adjusted EBITDA, of 3.7x as compared to 3.6x at March 31. We have no significant debt maturities until January 2014.

Now, I might also point out, as we look forward, our interest charges will decline $4 million to $5 million per quarter over the next 2 quarters.

Now finally, a couple of comments about our financial health. We are executing on our cost and pricing initiatives, and I believe our earnings power as a company has improved quarter-to-quarter and will continue throughout the remainder of the year.

Our liquidity is also improving. And overall, we simply have more financial flexibility, certainly versus last year.

We continue to target free cash flow, and we expect the leverage ratio moving more towards 3x by the end of the year.

Now moving on to Exterran Partners. Earlier today, Exterran Partners issued a separate earnings release for the first time and plans to continue this practice going forward.

In addition, we plan to have a separate discussion of the partnership's financial performance. These actions are being taken to enhance investor awareness and the knowledge of the partnership.

So now, I will introduce and turn the call over to David Miller, our Chief Financial Officer of Exterran Partners, to review the financial results for the Partners.

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

Revenue was $97.2 million in the second quarter as compared to $88.7 million in the first quarter, benefiting from a full quarter contribution from the March 2012 drop-down.

Operating horsepower declined around 9,500 horsepower in the quarter to approximately 1.91 million operating horsepower as the growth in liquids rich and shale plays was offset by declines in dry gas areas.

EXLP generated EBITDA as further adjusted of $45 million in the second quarter as compared to $40 million in the first quarter. Distributable cash flow was $27.3 million in the second quarter, up from $26.9 million in the first quarter.

Distributable cash flow covered the second quarter distribution by 1.2x.

As a result of our performance initiatives, lower lease expenses and the ad valorem tax benefit discussed earlier by Brad and Bill, cost of sales, excluding depreciation and amortization per average operating horsepower, was $23.72 in the second quarter, down 14% from prior year levels.

Earlier this week, EXLP announced a quarterly distribution increase for the second quarter of 2012 and its distribution is now $2.01 on an annualized basis. This distribution is a $0.005 higher than the first quarter of 2012 distribution and $0.02 higher than the second quarter of 2011 distribution.

In conjunction with the previously discussed fleet review at Exterran Partners, we plan to retire approximately 250 idle compressor units or approximately 67,000 horsepower. Exterran Partners recorded a long-lived asset impairment of $28.1 million, including $20.7 million related to these units and $7.4 million related to the further impairment of units originally impaired in the fourth quarter of 2010.

These impairments are a subset of the impairments Bill discussed in the Exterran Holdings financial review.

On the balance sheet, total debt increased by $8 million during the quarter to $644 million at June 30. Available but undrawn debt capacity as of June 30 was approximately $257 million.

We expect this debt capacity will enable us to finance the organic growth of EXLP's compression services business and position the partnership for future acquisitions.

As of June 30, 2012, Exterran Partners had a total leverage ratio, which is covenant total debt to adjusted EBITDA, of 3.6x, unchanged as compared to the end of the first quarter. We have no significant debt maturities until November 15 -- November 2015 at EXLP.

In addition to growth through the implementation of our drop-down acquisition strategy with Exterran Holdings, we also have attractive organic growth opportunities, including several projects coming online in the second half of 2012.

Gross capital expenditures for the second quarter of 2012 were $17.4 million, consisting of $6 million for fleet growth capital and $11.4 million for compressor maintenance activities. We expect an increased level of growth capital spending at the partnership towards the end of the year, with total fleet growth capital expenditures expected to be in the $85 million to $100 million range for the full year 2012.

Excluding any effect of future acquisitions of new equipment, maintenance CapEx is expected to be in the $40 million range for 2012. With a total of about 2 million operating horsepower or 62% of the combined U.S.

contract operations business of Exterran Holdings and Exterran Partners, Exterran Partners is the largest natural gas compression service provider in the United States.

This concludes our prepared remarks. Operator, at this point, we'd like to open the call up for questions.

Just wanted to get a sense for -- I know it's difficult to break out, but a sense for the progress in the North American business there. So you had some moving parts with Canada coming out, obviously, activity levels down for the quarter, a price increase ongoing, rationalization of the business.

So apples-to-apples, if all those things were the same quarter-over-quarter, activity levels and what have you in the mix, would your margin have been higher based on some of the initiatives that you've been putting in place?

Mike, it's Brad. In short, incrementally, so what we had for some top line movements in the contract operations business, even taking Canada out of comparable periods is we had -- one of the plants that we operate in our contract operations business in the Permian was shut down for about half a month with significant impact for that operation, and we had some of our other non-contract business, our water business, loosen revenue or have some revenue declined again incrementally, but adding these up, they impacted that top line performance.

And then in contract operations itself, we didn't get quite the level of horsepower gains we've wanted so that was the kind of the third incremental hit to that top line revenue performance. But normalizing those period over period, it was flat.

Had we had those, I think we would had incremental positives but our pricing increase is in stock and our cost initiatives continue to work. And so we would have delivered I think slightly and incrementally better without that noise on the top line and that doesn't include just the Canada coming out period over period.

Okay, that's helpful. And great increase on the bookings and backlog in the fabrication business and as you alluded, the margins are coming higher now.

You can see that coming through a little bit in the guidance. Just wanted to get a sense for the timing of when that runs through?

Is that pretty proportionately or are there any kind of long time -- sorry, long term projects in there that come a little later or is it pretty proportionately as we go over the next several quarters here?

Some of that backlog is a little longer -- I'm sorry. Mike, this is Bill.

Some of that backlog is a little bit longer than what we've had in the past because the installations run out a little bit longer. But the backlog is there, and what you're seeing in my guidance for the third quarter and then hopefully a little stronger in the fourth quarter, is you are starting to see that build in the fabrication.

Okay. And as far as the pricing and margin and backlog, again, we can see some of that beginning to flow through in the third quarter per your guidance but presumably, there's a timing and a mix impact there, I'm still running off some older business.

On a leading-edge basis, how much higher on average, would you say, your pricing, your embedded margin is versus kind of that say 10% or so level you been at in recent quarters?

On a longer term basis, we're pretty comfortable guiding through the third quarter on that, but not looking too much further out right now. We still have some significant heavy lifting and cost work to do in our fabrication segments.

And that's in all the product lines and I've got a lot of confidence that the focus that we're bringing on, managing cost and improving efficiency, are going to pay off and continue to push those margins up. But getting them up right now, we're in that too, with a little more room upside that we see in this year to see those margins move up and we're pretty pleased to see that progress and we will follow that up with more progress.

You mentioned earlier in the comments about exiting or expecting to exit the year with about the same amount of active horsepower as you started with, which I think you said, implies improvement in second half. Curious where that comes from because from the standpoint of liquid basins versus dry gas, since you had noted, probably getting some tractions in the liquids basins and obviously, things have been a little bit soft in dry gas, but the gas recovering little bit, just kind of curious where -- how that's playing out.

Sure. I mean, a little bit soft in dry gas is a very generous statement at current price levels or especially price levels that we saw on the first half of this year for natural gas.

We're really seeing the activity in the bump in growth coming in the liquids-prone basins. So anything in particular, the Eagle Ford is still the leader for us right now in putting out our horsepower.

And it's coupled with, at the current moderate -- more moderated gas prices, we're not expecting the same level of stopped activity in the back half of the year. But based upon our book of business right now, what we do see are some pretty good bookings in the liquids-rich areas to make up that difference, Jim.

That's where it's coming from.

All right, makes sense. On the retirement side, a couple of questions around that.

Number 1, is this it for now or do you think there is possibly more to come in the next few quarters? And number 2, you mentioned it having a positive impact on your cost structure.

Could you maybe elaborate a little bit on that?

Sure. I can give you some framework on that.

So first, we expect that there will be some discussion on this for the quarter, and let me just lay out a couple of thoughts on this. So this equipment on average is 24 years old and we have an average a life of our equipment of 25 years, and so this includes some pretty veteran units in their retirement.

So that context is, I think, important when you think of the average life of the unit of 25 years, that this stuff is right at that point, so it's kind of point 1. Point 2, I can confidently say this is it for now, but I can also tell you that we have a fleet to manage and over the long haul, we've got to both add horsepower to the fleet and remove horsepower from the fleet.

And so this is it for now. And I feel pretty good about the past coal activity that has put us in a good position, and when I think about that, we've taken now about 1.3 million horsepower of old equipment out of the fleet up through this most recent hit.

And that's equipment we don't think we should be spending money on and taking it out of the fleet makes good operational sense and makes good financial sense. And that puts us in a position where what we believe is that with the idle equipment we have now, coupled with our new build program, we have good flexibility, good number of units that we can invest in, put back to work and grow profits and grow that application profitably.

So yes, this is it for now, feel real good about operating this fleet going forward, but it is a fleet.

Okay. And last one, you guys referenced the SG&A comments for holdings, curious on Partners'.

You've been running a little bit higher for the last couple of quarters compared with what your run rate had been. What are your thoughts on that going forward?

I think I understood the question correctly. The costs are up a little bit this quarter because of the full impact of the drop-down.

Is that -- are we at a run rate that we should expect kind of going forward into this $12 million, $13 million type range?

Yes, that's what I believe it is.

That's a refreshing problem to have, but just curious on the capacity and the process of treating side within fab. And I know you guys were roughly sold out on your Broken Arrow facility, kind of through midyear '13, I'm just kind of curious where that stands today, given the nice uptick and order flow we've had in the 1Q and that piggybacked obviously in the 2Q as well, just things obviously are kind of tight there, just kind of curious about perspective.

Yes. It's still tight.

We've booked that up now, we think, through most of '13, from a capacity perspective. So we're really happy about that.

It is a high class problem to have but the booking goes up nicely as the markets tightened up.

Okay, helpful. And Brad, just high level, could you just talk a little bit about your efforts on process improvement within your international fabs?

I think you got a quarter of roughly mix there on international, a little bit disproportionately lower than I'm sure you want it to be. Talk a little bit about the project management team, retooling and some of the bid, no-bid discipline you guys are trying to put in place, just kind of curious of your perspective there, how things are coming along and maybe how much you think international petrol weight within fab in the next year.

Sure. I mean, that's a -- it's a big question.

Let me try to give you some kind of some bullets that we're focused on. So the number one, I've got to point out that this move that we're making this quarter to Aldridge is a part about -- a part of our efforts to really rationalize our capacity and our footprint globally, to improve -- realign our cost structure and our delivery structure to the markets that we serve.

And so that's not a small step in trying to address profitability. And we're going to continue to work on those footprint issues within our fabrication business overall.

Another way we've done that is to expand or to take advantage of idle capacity in our existing facilities. And so that's improving margin by putting in some of our -- the robust market-driven product lines like pressing and treating and PEQ.

In particular, we're adding in the ability to fabricate in our other facilities that were not previously used for those product lines to take advantage of that spare capacity and also expand the capacity overall where the market wants more capacity, that's giving some uplift on improving profitability. And then finally, I'll hit the one you said on the bid, no-bid.

We have a good process in place now driven by our product line teams to ensure that as projects come in, there's more discipline brought on the front end of those projects to be much more efficient in putting together proposals where we have the opportunity to make good returns and to win. And downgrading, and not spending a lot of time, resources and energy on projects that don't meet those 2 criteria, so that process is in place and we'll forget about how it's operating right now.

So that gives you 3 bullets on that previous question. We have to go further, if there's something else that I didn't hit that you wanted to really hear about.

A couple of questions. On the fabrication backlog, good to see that backlog continued to grow and better embedded margins.

The mix shift over the last year, year-over-year and sequentially, looks to be installation. How do we think about margins in installation versus in, I'll just call it, your traditional backlog?

Sure. I'll hit that one.

As this has become an increasingly important part of our business, we had to move into the backlog and that was a concern for us too as we see the expansion of that scope of work, primarily around our processing and treating plants. But for purposes of margin comparability, it's north of the 10% range you're seeing right now in the backlog that we have embedded in our business and in that installation business going forward.

I will highlight that the rest of the market, however, is not necessarily there, that, that is -- that EPC business has traditionally been a pretty low margin business, more in the 10% range. And so there's a reference, and a 10% or higher, but it hasn't been a high margin business.

Historically, it's very competitive, but the margin embedded in our backlog is better than that and it compares more favorably to our processing and treating and project [ph] for the product lines.

Okay, that's helpful. And I'll stick with margin then, I know it was a relatively small, but the removal of Canada from aftermarket, did that -- what impact did that have on margin in Q2 and outlook for margin in aftermarket?

Yes. I'm going to get -- I'm going to ask somebody to correct me if I get this wrong.

But with the growth that we made in revenue in aftermarket, that was on the top line revenue that was even absorbing a reduction of I think about $11 million out of Canada, and it -- but it operates at a lower margin than we're seeing right now that we're achieving our overall North American business, but that gives you the top line.

But we would have had better EBITDA coming from there, but not better margin.

Okay. You would have more EBITDA but not as strong a margin in margin percentage in Q2 if Canada have stayed in the fold is what you said, Bill.

Is that right?

That is correct.

All right. And I'll squeeze one more in.

On international contract, I think what I heard was revenue guidance is up year-over-year in Q4. But I mean Q3's revenue guidance would indicate you'd be up versus the Q4 '11 run rate.

Is the right way to think about it that Q3 to Q4 is pretty flat in international then?

I don't have the Q-over-Q numbers in front of me but we are seeing -- we have a lot of horsepower going to work in Q3, it's -- that we look to the impact in Q4 more fully. So I can't tell you off the top that's going to be the case, but what we do look at is that we're going to see revenue increase in Q3 and Q4.

But just the timing of those starts is not exactly recorded in that revenue impact. And I don't have that quarterly number in front of me, sorry.

Just a question about the impairment you took against your fleet. That charge strikes me as particularly large for assets that were almost completely through their useful lives.

Could you just speak to that for a second?

Yes, I can. The way to think about this fleet is this was a fleet that, in a large part, and maybe in the largest part, was accumulated through acquisitions from the mid-90s through the early 2002 period.

And those acquisitions were, of course, cash flow driven transactions. And what was on our books, with some of these older equipment that was acquired through those acquisitions, was the impact of purchase accounting.

And so that's why you're right. If we just run these on a straight line basis, we would've have had a very limited financial impact to taking these and removing these from the fleet, and so this -- but significant to the sizable impairment you're seeing is really driven by that acquisition history.

And do you continue to have acquisition units in your fleet that could be subject to further impairment? I mean, I understand that it's noncash, but it's still a significant part of your equity and I guess if that remains, equity keeps going down and debt keeps going up, which typically isn't a happy equation.

Yes, I understand that, a valid point. Yes, there are still units in our fleet that were certainly acquired through that acquisition process.

We are, however, pretty comfortable looking at the fleet and our ability to make good returns and utilize this equipment going forward at this point.

Okay. And just -- do you have a tangible equity covenant in any of your debt?

We do not.

Okay. Could you just review what those -- quickly what those covenants are?

They are just generally EBITDA covenants, and I'll have to look to David. Okay, I guess on the current total debt to EBITDA must be less than 5x.

The secured debt to EBITDA must be less than 4x, and the EBITDA, the interest greater than 2.25x.

Bill, if you have the numbers available, great. If not, I can just follow-up with David offline.

But do you have 4 installation bookings in the quarter? What was the split between the U.S.

and international? And then how many discrete or individual awards it involved?

Well, I can talk to the total fabrication. In North America, the bookings were 75% in North America, and 24% -- 25% international.

We don't break out the installation bookings but they were predominantly in North America.

They were. Okay.

And then turning to international contract ops. If the numbers I have are correct, the backlog was basically cut in half from the end of Q1 to Q2 from $60 million to $30 million.

Based on your shorter cycle or nearer term opportunities that's in your expected probability weighted win rate, where would you exit the year, backlog wise, according to your current guidance?

Well, Tom, good question. We don't project that as such.

But you're right. The backlog, a fair amount of that has been installed into a question that went before.

The run rate in the fourth quarter will be higher and we are going to show progress, both run rate in the third quarter to the fourth quarter. But I don't have a nice projection of what the new bookings based on probability or whatever will come in the third and fourth quarter for the international comps and comps [ph].

We do have opportunity, we just don't have anything comps those waited on there.

Okay. And then strategically, I guess this might be more of a question for Brad.

But you guys have a had pretty impressive success partnering with Petrofac in Iraq when it comes to the early production skid sales. Looking downstream for Belleli, is there any kind of similar opportunity to work with them more broadly in the region or even globally?

Sure. So we have utilized Belleli in -- as our EPC arm for the some of the markets in the Middle East where they certainly have great experience, and we see opportunities to take our products to bear.

So the short answer to that is yes. We have worked Belleli in that way and there is a good chance we could find a marriage there to deploy them as our arm for EPC work in that part of the world.

Great, just one last one for me. Again, based on your current guidance, looking at Q2 or -- I'm sorry, Q3 and then ideally, Q4 as well, what is the expected revenue mix between compression and PNP for fabrication?

Let me look at that, Tom. We don't have it.

I have it in the backlog and I don't have it at my disposal right now, but I'll get back right to you to give you that kind of break out.

Can we talk about the asset impairment and previous impairments from kind of a practical level? I mean, is this equipment efficiently going to be cut up and cease to exist?

And I know from previous impairments, there has been some equipment that's been held from sale, have we kind of given up on that and we're really practically here removing horsepower from the market at large?

It's going to be mixed. Some of the equipment, we'll certainly scrap.

Some of it we'll set aside and harvest for -- especially, hard to find parts, based on the age of some of that equipment and just part out, and some of it, we will try to put into the market if it makes sense to do so for pricing, and taking into account pricing and the value of cash flow and competitive considerations. So since we have a market where we think there's too much equipment available, certainly taking it out of the market entirely is something that is attractive for a bunch of that equipment.

But where we can sell it for value, we're going to sell it for value.

Okay, good. And then if we look at, I mean, just an estimation perhaps here, if we look at what is still listed as idle in the North American fleet, is there a big disparity in the kind of average age of that equipment?

And the purpose of this question is more thematically, we talked about trying to get some idle equipment into international markets and with that equipment, if listed, would it still be attractive, in your opinion, to those markets? Or do we end up having to make kind of more new capital equipments if we get horsepower base opportunities internationally?

Both. And a lot of that equipment are very suitable to get to work in North America, as well as internationally.

And larger horsepower applications, both in the U.S. and in international, however, will also require some new build.

So it's both. It's remaining -- it's very good.

Let me just point out too that taking the step, we reduced the average age of our fleet from approximately 20 years to something like 15 years and it's not just at the age is what's at issue, but the packaging standards and the standard equipment that is in the younger parts of our fleet are more suitable to all markets and especially the current growth markets. So taking these actions is really important for us to improve the competitiveness and the returns on our investments going forward.

Great, that's a good answer. And then Bill, just on the guidance, I think I caught that the ad valorem tax benefit would continue to benefit you in Q3 but the margin guidance seems to suggest -- margin guidance goes back to 1Q levels in North America.

Did I hear you wrong that the ad valorem tax benefit continues?

Yes, Blake, about half of that continues. And so we will get that benefit on a go-forward basis.

The guidance of -- back to the first quarter, we still want to stick with that. There are some other expenses but we're -- that's our guidance for the quarter anyway.

We expect a lot more of that to come through in the fourth quarter.

Just one last standing for me. On the Partners side, just looking at your revenue on a per operating horsepower basis, it looks like that jumped quite materially during the quarter, certainly more so than I'd expect to be attributable to the price increase you had.

Is that related to the skews which are more liquids related unit deployment or is it something else that maybe driving that?

I think the main driver in there is you're dividing total revenue by operating horsepower and we dropped down a processing plant in the last drop-down, and so that would skew the revenues up a little bit. Some improvement in our operating -- in our contract operations revenue, but I think it's also boosted by the operating plant, process plant.

So would you say current levels are pretty good to run with based on how much new contribution you have on the processing side?

Yes.

Great. Well, look, thanks, everybody, for participating in this quarter's call, and we look forward to talking to you following the next quarter.

Thanks very much.