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Exterran Partners, L.P. (NASDAQ:EXLP)

Q4 2013 Earnings Call

February 25, 2014 11:00 am ET

Executives

D. Bradley Childers - Chief Executive Officer, President, Chairman of Exterran Partners, Chief Executive Officer of Exterran Partners and President of Exterran Partners

William M. Austin - Chief Financial Officer and Executive Vice President

David S. Miller - Chief Financial Officer of Exterran GP LLC, Senior Vice President of Exterran GP LLC and Director of Exterran GP LLC

Analysts

Michael W. Urban - Deutsche Bank AG, Research Division

James M. Rollyson - Raymond James & Associates, Inc., Research Division

Blake Allen Hutchinson - Howard Weil Incorporated, Research Division

Igor Grinman - JP Morgan Chase & Co, Research Division

Daniel J. Burke - Johnson Rice & Company, L.L.C., Research Division

Sharon Lui - Wells Fargo Securities, LLC, Research Division

Operator

Good morning. Welcome to the Exterran Holdings, Inc. and Exterran Partners, L.P. Fourth Quarter 2013 Earnings Conference Call. At this time, I'd like to inform you this conference is being recorded. [Operator Instructions] Earlier today, Exterran Holdings and Exterran Partners released their financial results for the fourth quarter of 2013. If you have not received a copy you, 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 Exterran Partners as either Exterran Partners or EXLP. Because EXLP's financial results and positions are consolidated in Exterran, the discussion of Exterran includes Exterran Partners unless otherwise noted. Also, the term international will be used to refer Exterran's operations outside the U.S. and Canada, and the combination of U.S. 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 the Exterran Holdings' annual report on Form 10-K for the year ended December 31, 2013, Exterran Partners' annual report on Form 10-K from the year ended December 31, 2013, and those set forth from time to time in Exterran Holdings' and Exterran Partners' filings with the Securities and Exchange Commission, which are currently available at exterran.com.

Except as required by law, the company has expressly disclaimed any intention or obligation to revise or update any forward-looking statements.

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

D. Bradley Childers

Great. Thank you, operator. Good morning, everyone. With me today is Bill Austin, CFO of Exterran Holdings; and David Miller, CFO of Exterran Partners. As we usually do, we'll provide a review of both Exterran Holdings and Exterran Partners before we open it up for questions.

I'll review our operating highlights, some market direction and priorities moving ahead. Bill will provide a detailed summary of Exterran Holdings' financial performance. And David will provide a detailed summary of Exterran Partners' financial performance.

To start off, I'm proud to report that Exterran Holdings and Exterran Partners each had a solid fourth quarter and a very strong 2013, highlighted by significant growth in revenue, gross margins, EBITDA and earnings per share.

For Exterran Holdings, EBITDA, as adjusted, for 2013 was $634 million, up 38% compared to 2012 and up 63% compared to 2011. For Exterran Partners, EBITDA, as further adjusted, was $238 million, up 32% compared to 2012 and up 71% compared to 2011. This significant year-over-year growth in our EBITDA results from the work we've done since launching our performance-improvement initiatives in 2011, aimed at simplifying our company, reducing our costs, reducing our debt and improving the profitability and competitive position of our businesses.

With this success, we're pleased to have announced this morning the initiation of a regular quarterly dividend at Exterran Holdings, which we believe reflects our confidence in Exterran's business and financial position, and demonstrates our commitment to create long-term value for our stockholders.

Exterran Holdings also delivered strong operating performance across all of our business segments in the fourth quarter. We grew operating horsepower in both of our North America and international contract operations. We increased bookings in backlog in our fabrication business, particularly in our Belleli Energy operations and we had a record quarterly level of gross margin in our aftermarket service business.

Looking at the full year highlights, we captured our highest EBITDA in the past 4 years, recorded positive earnings per share for the first time since 2009. For the second consecutive year, each of our 4 business segments grew revenues on a year-over-year basis, and each generated consistent or improved profitability, as measured by gross margin percentages, as compared to 2012. And we reduced debt at Exterran Holdings by more than $140 million in 2013, and brought our leverage ratio down to 1.6x at year end, compared to 2.4x at year-end 2012 and 4.3x at year-end 2011. The work of the past few years has positioned Exterran well to capitalize on the favorable trends we see in our industry, both in the United States and in international markets. Now looking ahead, we can now focus on the aggressive pursuit of opportunities for growth from our more profitable businesses and to maximize the value of our businesses for our investors.

Now turning to our operating results for 2013. In our North America contract operations business, working horsepower increased by 44,000 in the fourth quarter of 2013, driven by a solid level of starts in growth plays and reduced stop activity in conventional dry gas areas. For the quarter, we had an increase of 62,000 horsepower in our growth areas, these include the Eagle Ford shale, the Marcellus, the Niobrara, the Mississippi Lime and the Permian, and this was partially offset by a decline of about 18,000 horsepower that's operating predominantly in conventional dry gas areas.

Financial performance in North America contract operation was also strong, as we benefited from horsepower growth, continued implementation of our performance initiatives, our fleet investment program and a modest price increase. We're proud of the gains in profitability in these segments in 2013. Gross margin dollars were up by 11% on a 5% revenue increase. And gross margin percentage was 55% for the year in 2013, up from 52% in 2012, and up from 49% in 2011. In our international contract operations business, even though our financial performance was flat compared to prior year results, we accomplished several major objectives that have set up 2014 for improved performance. These include rate increases in Argentina, a project expansion and rate increase in Indonesia and new projects in Mexico and Iraq. These accomplishments restored our overall business level to offset the impact of the project terminations in Brazil that we experienced in 2012. In addition, our business development efforts in 2013 have set us up well to participate in new projects we expect to be contracted this year.

In our fabrication business, we generated a significant increase in revenue and gross margin dollars in 2013, due to the substantial bookings generated in 2012 and better profitability due to the improvements we've made in our fabrication processes. The high level of activity in 2012 was followed by a slowdown in order flow during the first part of 2013. As a result, our bookings were lower in 2013, compared to the record-2012 levels, particularly in our processing, treating and installation product lines.

In the second half of 2013, bookings picked up and we recorded increased bookings on a sequential basis in both the third and the fourth quarters. Despite this increase in bookings, our continued focus on increasing throughput in our fabrication facilities is resulting in shorter lead times, which generally lead to lower backlogs. Although we believe our oil and gas backlog will continue to rebuild during 2014, we do not believe our backlog will return to 2012 levels, due to this increased efficiency, as well as a shift in product mix, away from our longest lead time products of processing, treating and installation.

As we work through the backlog in 2013 and implemented improvement initiatives, we drove our fabrication revenue up by 23% and our gross margin dollars up by 61% in 2013 compared to 2012. Contributing to this gain is the significantly improved profitability of our fabrication business. Our gross margin percentage was 15% in 2013, up from 12% in 2012 and up from 10% in 2011. In our aftermarket service business, for the second year in a row, we recorded the highest levels of revenue and gross margin in company history. Aftermarket services revenue was up 3% and gross margin dollars were up by 5%. Gross margin percentage was 22%, up from 21% in 2012 and up from 16% in 2011. Our sustained focus on capturing attractive business, new product offerings and closely managing our cost structure and utilization should provide us with opportunities to continue to grow this business in 2014. Next let me turn to a discussion of our markets and our business development activity. In North America, we expect to continue to benefit from infrastructure development in liquid-rich and shale plays across all of our service and sold product businesses in 2014. To meet demand in our contract operations business, as well as to continue to modernize our fleet, we invested significant capital into our fleet in 2013, adding approximately 160,000 horsepower of new units, including 61,000 horsepower to our fleet of compressors dedicated to gas lift operations.

In 2014, we expect to add about 200,000 horsepower to our fleet. For contract operations activities, we expect to continue to see growth in our businesses in the Eagle Ford, in the Marcellus and the Niobrara shales, as well as in the Mississippi Lime and in the Permian, though we also expect modestly declining horsepower in dry gas plays and conventional plays.

In Latin America, which is largely a long-term contract operations market, we have the product and services portfolio, industry contacts, geographic scale and overall reputation that position us well to capture the large opportunities we see in that market. In 2013, we signed sizable contract renewals in Argentina, Brazil and Mexico, as well as about 35,000 horsepowers worth of new contracts in Brazil and Mexico.

We've seen the trends, that started in this market in 2013, continue into 2014, and we expect to be in a position to capture our share of the projects that are going to come to market in the year.

In the Eastern hemisphere, we saw an improving opportunity set in 2013 that looks to further strengthen in 2014. The business met success in a new market due in 2013, winning contracts in Iraq for gas production, as well as the country's first contract compression project. In addition, Exterran completed the renegotiation and expansion of an oil production facility contract in Indonesia, extended contracts for the operation of natural gas processing plants in Oman and landed a $120 million tank farm booking in Abu Dhabi with our Belleli Energy business.

Going forward, the outlook for new projects remains robust, and we believe we're well positioned to win attractive projects in the region in 2014, particularly in the Middle East, Russia and Asia Pacific.

Now let me close my Exterran Holdings part of the call by highlighting our strategy and our focus for 2014 and beyond.

Our improved results have come from the actions we've taken based on a clear focus: Concentrate on our core operations, simplify our businesses, improve our processes and efficiency and reduce cost. As a result of these actions, we've enhanced our financial results, strengthened our capital position and positioned Exterran to benefit from industry growth and to compete more effectively. Going forward, we'll certainly continue these efforts, but we'll also expand our strategy to include more attention to the growth of our now-more-profitable businesses as well as maximizing the returns we generate for our stockholders.

With our work to simplify our business and focus on our reducing costs, we continue to have opportunities that will improve both our profitability and our competitive position. And among these opportunities are improvements to our North America field operations through simplified processes and more automation. These opportunities include improvements to our materials management and inventory processes that support our entire business, and they include improvements to our product development, engineering and fabrication processes. I'm confident that our work to improve our businesses will continue and that it will also continue to improve our margins, make us more competitive and improve our cash generation.

For growth, we'll focus on expanding in our core businesses, including growth of Exterran Partners through organic growth, executing our drop-down strategy and through third-party acquisitions.

And finally as to maximizing our return to our stockholders through our efforts over the last 2 years, Exterran Holdings has a better portfolio, higher-margin businesses, a strong financial position and a relentless focus on improved profitability. This has allowed us to return money to our stockholders by declaring our first dividend at Exterran Holdings in this first quarter of 2014. And paying a dividend is a major step for us as it shows the amount of progress we've made to stabilize our businesses and the confidence we have in our business and our financial position. And we will continue to evaluate alternatives to maximize stockholder value going forward.

Now turning to Exterran Partners. Exterran Partners generated solid results, delivering a 30% increase in distributable cash flow in 2013. Exterran Partners generated a 20% increase in revenue year-over-year, and a 32% increase in EBITDA, as further adjusted. We invested $118 million in new units to standardize our fleet, enhance our competitive position and increase overall cash-generation capacity.

We completed the drop down of compression assets, valued at $174 million, increasing the contract operations fleet to approximately 2.4 million horsepower. And Exterran Partners' quarterly distribution has increased 52% since its IPO in 2006. In 2014, we will continue to bolster Exterran Partners' leading market position as a provider of natural gas contract operations through a continued implementation of performance improvement initiatives. We also expect to increase distributable cash flow through continued fleet investments and growth through drop down transactions, organic growth and third-party acquisitions.

As a reminder, Exterran Holdings has dropped down the bulk of its North America contract operations business to Exterran Partners. Exterran Holdings is making cost cap payments to Exterran Partners as part of the omnibus agreement between the 2 companies. Driven by improved performance, our goal is to eliminate the need for these payments by the end of 2014. Now moving to the financial section of today's call, I'd like to turn the call over to Bill for a review of our financial results at Exterran Holdings and quarterly trends and guidance for 2014.

William M. Austin

Okay. Thanks, Brad. I'll now provide a brief summary of the results for Holdings, we'll discuss some of the segment results, and then I'll give you some guidance to the first quarter and then certain elements for the full year.

As noted previously, we've generated EBITDA, as adjusted, of $154 million for the fourth quarter, as compared to $157 million in the third quarter and $140 million in the prior-year period. We also reported diluted net income from continuing operations attributable to Exterran stockholders, excluding items, of some $0.18 per share in the fourth quarter that compares to $0.36 in the third quarter and $0.13 in the prior-year period.

Now moving on to the segment results. Our North America contract ops revenue came in at $155 million in the fourth quarter. We increased working horsepower, as Brad said, by some 44,000 in the quarter. Gross margin came in at 55%, as compared to 54% in the third quarter and 55% in the prior-year period. So pretty steady progress during the quarter and year-over-year.

In the first quarter, we expect revenues again to be in the mid-$150 million level and gross margins again to be in the 54% to 55% range. We have made good progress in improving the operating efficiencies of our North America contract ops business, although deployment of some of the system changes have slipped into the early second quarter of 2014. We do expect to see benefits from these changes begin in the second half of the year.

Maintenance capital came in at $16 million in the North America during the quarter, as compared to $21 million in the third quarter of '13 and $16 million in the prior-year period. Maintenance capital spending in the first quarter is expected to be a little higher than the fourth quarter levels.

Now moving on to the international contract ops business in the fourth quarter. Revenue came in at $131 million, as compared to revenue of $118 million in the third quarter and $128 million in the fourth quarter of last year. The sequential increase in revenue was primarily due to contract rate adjustments in Latin America, which -- by the way, it helps offset the expenses we already incurred during the year in those previous quarters.

We did also increase activity levels in Latin America, although we did experience a further delay in the startup of a significant project in Brazil, which is now expected to start up in the second quarter. I'll talk a little bit about that in a minute here.

Gross margin was 62% in the fourth quarter, as compared to 57% in the third quarter and some 63% in the fourth quarter of last year. Profitability in the fourth quarter was positively impacted by the contract rate adjustments in Latin America. Our gross margin percentage would have been approximately at the third quarter levels without benefit of certain adjustments. And by the way, I will note that in the past, the timing of some of these settlements, retroactive rate adjustments and periodic demobilization costs do drive some of the lumpiness that you see in the results of the international contract ops business.

In the first quarter, we expect international contract ops revenues to be in the $115 million to $120 million range, and gross margin percentage is expected to be in the high 50%, low 60% range. Now with the startup of our project in Brazil, which I talked about before, our revenues will be back in the mid-$120 million range within the second quarter.

Our international operating horsepower was $986,000 at December 31, somewhat up for the quarter, driven primarily by the higher activity in Mexico, Argentina, Brazil and Peru.

Now discussing fabrication. Our fabrication operations had another solid performance for the quarter with both revenues and gross margin percentage again in line with guidance. Revenue came in at $342 million, as compared to $403 million in the third quarter and $458 million in the year-ago period. Gross margins came in at 14%, which is a decline from 19% in the third quarter but it's up from 12% in the year-ago period. This 14% was driven partially by a difference in product mix, activity levels and a $4 million inventory charge. Again, this is in line with guidance.

Now I would note, just as I look back at the 19%, the third quarter margins were somewhat outside due to some catch-up savings that we had during the year which were realized in that third quarter.

Fabrication backlog came in at $680 million at the end of the quarter, as compared to $619 million at the end of the third quarter and $1.1 billion at December 31, 2012. Now over 30% of the reduction from 2012 to 2013 was related to an installation project of one customer, which was completed in 2013. As Brad said, fabrication bookings increased on a sequential basis in the third quarter and again in the fourth quarter.

Bookings were $403 million in the fourth quarter, as compared to $276 million in the third quarter and $233 million in the second quarter of 2013. The fabrication revenue during the fourth quarter was comprised of about 30% compression; 60% production, processing and installation; and about 10% in Belleli Energy. And it was roughly 50% from North America and 50% from international.

In the fourth quarter, both bookings and the quarter-end backlog were roughly 50% from North America and 50% from the international markets.

Now for the first quarter, we expect fabrication revenues in the $285 million to $335 million range, reflective of the relatively low bookings levels in the middle of 2013. Gross margins, we expect to be in the 15% to 16% range.

I would note that we've increased add margins over the last 2 years by almost 50% to that 15% that we achieved in 2013, and we believe gross margin percentages for the full year 2014 will again will be in line with this improved level.

Turning to our aftermarket service business. In the fourth quarter, revenue came in at $110 million, with gross margin percentage of 23%. Looking at the first quarter, we expect the aftermarket services revenue to be in the $85 million to $95 million range, with gross margins again in the 20% range. So like last year, we expect AMS revenues to be down somewhat sequentially in the first quarter. But overall, our AMS business is performing well and we expect another solid performance in 2014.

Moving on to SG&A expenses, that came in at $89 million for the fourth quarter, that's down from the $94 million in the third quarter and $102 million in the fourth quarter of 2012. As a reminder, third quarter results included a sequential increase in legal expenses.

In the first quarter of 2014, we expect SG&A expenses to be in the -- at the $90 million level.

There was a long lived asset impairment in the quarter that came in at around $4 million related to idle fleet. Depreciation and amortization expense came in at $83 million for the fourth quarter and we expect that to be in the mid-$80 million range in the first quarter. I would note that the consolidated tax rate came in inherently high for the quarter. Obviously, while it's higher than expected due to approximately $7 million of some one-time and other nondeductible expenses in Latin America and a $9 million valuation allowance recorded against net operating loss carry forwards in Italy.

The tax rate would have been approximately 36% without these expenses. For 2014, our tax rate from net income from continuing operations attributable for Exterran stockholders is expected to be in that high 30% range again.

Shifting to capital. Gross capital spending came in at $45 million which includes $30 million in North America primarily from our previously announced fleet build program. We did have proceeds from the sale of a property plant and equipment of approximately $17 million in the quarter, and net capital expenditures came in at $67 million for the fourth quarter.

Maintenance capital for the quarter was $23 million, slightly below third quarter levels. For 2013, net capital expenditures were $290 million, a bit lower than our guidance of $300 million to $325 million. Maintenance capital came in at $95 million.

Looking at 2014 again, we have significant opportunities to invest capital profitably. For 2014, we expect net capital expenditures to be in the $400 million to $450 million range, including maintenance capital in the $100 million to $110 million range. We expect to spend about $230 million to $270 million in fleet growth capital, and about $70 million for other expenditures. Currently, we expect the fleet growth capital will be split approximately 60/40 between North America and international. In North America, we expect about 75% of the issuance will be for customers of Exterran Partners and will be funded at the Exterran Partners.

Turning to cash flow, it's a big issue and a big success in the quarter. During the fourth quarter, we received our seventh installment payment of $4.8 million from the sale of our joint venture assets in Venezuela, and our fifth installment of approximately $18 million from the sale of our wholly-owned Venezuelan assets.

Subsequently, as in this quarter, we have received the sixth payment from the sale of our wholly-owned assets in the month of February. These cash payments from the sale of Venezuelan assets are noninclusive in EBITDA, as adjusted, and are not included in the net income from continuing operations.

Looking forward, we are still due some $205 million of principal payments from the sale of these assets in Venezuela. Again, we have received that second -- or the sixth payment in this quarter.

During the fourth quarter, debt decreased by some hundred million dollars at Exterran Holding levels. That's driven by the strong cash flow from operations. It did increase by $38 million at the partnership level as they invested in equipment.

Exterran Holdings' total leverage ratio, which is the total debt to adjusted EBITDA, as defined in our credit agreement, came in at 1.6x at December 31. As Brad said, this compares to 1.8x at September 30, 2013. And frankly, if you go back to the 2011 where we are 4.3x, this is a significant reduction in the debt levels at Exterran Holdings.

I would point out that S&P did recognize our improved capital position in the quarter, and we did get an upgrade from S&P.

Now for 2014, we believe we'll continue to generate cash at the holdings level and we expect our leverage to come down again in 2014. Cash distributions, received by Exterran Holdings based upon its limited partner and general partner interest in Exterran Partners, was $13 million in the fourth quarter compared to $12.6 million in the third quarter of '13 and $8.1 million in the fourth quarter of 2012. On a full year basis, cash distributions, again from the partnerships, came in at $50.1 million for 2013, that compares to $31.5 million for 2012.

As a reminder, the distribution level for the third quarter and again in the fourth quarter is in the high splits, that is the 50/50 split, which provide the general partner, which is indirectly owned by Exterran Holdings, with an increased share of incremental distributable cash flows generated by the partnership. We expect, with this help, that this will grow and build the value of our general partnership ownership.

Beginning with dividend payment, I think it's important for me that to -- and for the company to talk about this initiation of our dividend program. It does demonstrate our commitment to creating value for the shareholders. We will maintain financial flexibility to execute our strategic plan. We'll continue to strengthen our balance sheet and still invest in future growth.

In summary, we believe this action reflects our confidence and the strength and the stability of our long-term financial position.

Now I'll turn this over to David to talk about Exterran Partners.

David S. Miller

Thanks, Bill. Exterran Partners had a good overall quarter, including a solid level of organic horsepower growth. In the fourth quarter, operating horsepower increased 43,000 to approximately 2.26 million, as growth in shale and liquids-rich plays more than offset net stops in conventional dry gas plays.

For the quarter, Exterran Partners generated EBITDA, as further adjusted, of $58.8 million as compared to $55.7 million in the third quarter of 2013 and $48.9 million in the prior-year period. Distributable cash flow was $37.8 million in the fourth quarter, as compared to $33.3 million in the third quarter and $34.2 million in the fourth quarter of 2012. Maintenance capital expenditures were $10.8 million in the fourth quarter, as compared to $12.7 million in the third quarter and $8.5 million in the prior-year period.

Distributable cash flow coverage in the fourth quarter was 1.31x. Excluding the benefit of the cost cap payment, our distributable cash flow coverage was 1.02x in the fourth quarter, as compared to 0.91x in the third quarter and 1.31x in the prior-year period. As Brad mentioned, our goal is to eliminate the need for cost cap payments by the end of 2014 through our performance-improvement initiatives.

Looking at full year performance. Our distributable cash flow coverage increased from 1.22x in 2011, to 1.29x in 2012, to 1.36x in 2013. Excluding the benefits of cost cap payments, our distributable cash flow coverage increased from 0.78x in 2011, to 1.02x in 2012, to 1.13x in 2013, which demonstrates meaningful progress towards this objective. As a reminder, during the 2013 drop down, we announced that the SG&A and operating cost cap thresholds would be raised in 2014, which will reduce the level of cost cap reimbursements to the partnership in 2014. The SG&A cost cap threshold will be raised to $15 million per quarter from its prior level of $12.5 million per quarter and the operating cost cap will be increased to $7.50 per horsepower per month from $7.25 per horsepower per month in 2013.

Revenue for the fourth quarter was $118.9 million, as compared to $115.8 million in the third quarter and $102.3 million in the prior-year period. Gross margin was 56% in the fourth quarter, in line with third quarter and prior-year period.

On an annual basis, gross margin was 57% in 2013, as compared to 53% in 2012 and 47% in 2011. Exterran Partners expects to continue to benefit from further cost reduction initiatives in North America's operations as discussed earlier by Brad. Cost of sales per average operating horsepower was $23.51 in the fourth quarter, up 1% from the third quarter 2013 and up 3% from prior-year levels. For the full year 2013, cost of sales per average operating horsepower was down 4% from 2012 levels.

Net income for limited partner unit was $0.19 in the fourth quarter, compared to $0.16 in the third quarter and $0.31 in the prior-year period. Late last month, Exterran Partners announced its distribution of $0.5325 per limited partner unit or $2.13 on an annualized basis. Our quarterly distribution is $0.05 higher than the third quarter 2013 distribution and $0.02 higher than the fourth quarter 2012 distribution.

On the balance sheet, total debt increased by $38 million during the quarter to $758 million at December 31, 2013, as capital was deployed to fund internal growth opportunities. Available but undrawn debt capacity under our debt facility at December 31, was approximately $387 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 December 31, 2013, Exterran Partners had a total leverage ratio covenant debt-to-adjusted EBITDA of 3.1x, as compared to 3.0x at the end of the third quarter and 3.7x at December 31, 2012.

Gross capital expenditures for the fourth quarter were $53.2 million, consisting of $42.4 million for fleet growth capital and $10.8 million from maintenance activities. For the full-year 2014, we expect total fleet growth capital expenditures to be in the $150 million to $175 million range and maintenance capital expenditures in the $45 million to $50 million range.

In summary, fourth quarter financial highlights included growth in operating horsepower of 43,000 horsepower, 1.31x distributable cash flow coverage and a 3.1x debt-to-EBITDA ratio. We believe this was a strong quarter.

At this point, I'd like to turn the call back over to Brad for some closing comments.

D. Bradley Childers

Great. Thanks, David. Last week, we announced that Bill Austin has decided to retire as CFO of Exterran Holdings, effective April 4 of this year. Until his retirement, Bill will continue to oversee his current responsibilities and assist in transition planning. On behalf of the board and Exterran employees, I want to thank Bill for his significant contribution since he joined Exterran in 2011.

In addition to his financial leadership, Bill has played a key role in driving the performance-improvement initiatives that have improved Exterran's operating efficiency and financial performance, and we sincerely wish him the best in his retirement.

And while this is an understandable time for Bill to retire from his personal perspective, we continue to have significant opportunities ahead which, Bill, we're just going to have to continue to capture even without you. But, Bill, we wish you well.

William M. Austin

Thanks, Brad. Listen, for those of you -- I've been privileged to work with some extraordinary people at Exterran. I've enjoyed my time here, professionally, personally. Thankful that I've had an opportunity to contribute to Exterran's success. The company is in great financial and operating position, and there's a strong financial team that supported me, the company and has remained here.

I do want to thank Brad, the team. I mean, there's lots of people to thank, board members, analysts and even some investors, many of whom I consider friends. You may miss some of my more colorful phrases, but I do feel this is the appropriate time for me to pursue some of my personal interests. Again, thanks to everyone.

D. Bradley Childers

Thanks, Bill. Operator, at this point, we'd like to open the call up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Mike Urban.

Michael W. Urban - Deutsche Bank AG, Research Division

Best of luck to you, Bill. So you talked about having a lot of growth opportunities out there, some of which you've talked about in the past, especially on the organic side. You did talk about acquisitions at the MLP, which you haven't really talked about in the past and which you haven't really ever done. What do you feel has changed out there? Is it a function of just the improved profitability performance of the underlying business? Has the kind of the seller environment changed, is there -- a little bit of all of those or something else?

D. Bradley Childers

Well, what we've tried to communicate in the past, Mike, is that we do believe that there should be 3 legs of growth, especially at Exterran Partners: organic and drop down, as well as third-party acquisitions. And what we see now is, with our improved performance, candidly, we just feel more bullish in our ability to consummate a transaction, digest it and make a successful acquisition through what may be available and what might come into the marketplace. That's really the only change. Beyond that, it's not something that we'll comment on specifically.

Michael W. Urban - Deutsche Bank AG, Research Division

And do you feel like, maybe you won't comment on it specifically, but I certainly don't expect specific targets, but I mean do -- I guess that would imply that you do feel like there are things out there to buy that would be complementary to the fleet. I mean, you have done a lot of work to standardize the fleet and weed out some of the stuff that may not fit as there's stuff out there to buy that would fit with that operational strategy.

D. Bradley Childers

Well, I'll make just a couple of comments. If you look at what has happened in the marketplace just in the last year, clearly, others have found some acquisitions that they thought were worthy to pursue. And so you can see some movement in the marketplace. But when we look at whether we're going to grow, we thought that what was really the focus, really important, first, to focus on what we could do internally to improve our operations and to improve our profitability. And that's what we've really been focused on for the last 2 years, and that has yielded pretty good results and we're happy with those results. But as an entity that has grown through acquisitions, it was the digesting of some prior acquisitions that really was the focus of the work and remains the focus of the work of our profit-improvement initiative that we've been managing internally now for 2 years. Having made good progress there, I just believe we will be in a position to, should we find transactions and assets that we think are a good fit, we'll be able to bite them off better, integrate them more successfully, deliver value for our customers that way, as well as for investors.

William M. Austin

And, Mike, I'm just going to add to Brad's point, we now have something to roll these into, as opposed to a rollout, and that's a big difference from where we were.

Michael W. Urban - Deutsche Bank AG, Research Division

Got you. And on the dividend, great to see that. Certainly indicative of the work that you've done to date. Going forward, I think, implicitly, the level of dividend is obviously going to be tied to the cash flow of the business and the profitability and cash flow at the LP and the GP, is there any thought towards tying that more explicitly to those, the cash flow and the distributions generated at the LP and the GP, as that becomes a bigger part of the cash flow story?

William M. Austin

Mike, if you look at our cash flow, we generate a fair amount of cash from the stable side of our business, and these are the contract operations of which the LP and the GP are certainly a big part of. So we also have a pretty stable cash-generation capability in international contract ops. Fabrication may be a little bit more volatile. But when we looked at the dividend, we took that all into account. I do think that, as the company goes forward, you'll see that stability of cash, whether it comes out of the limited partnership interest or general partnership interest or over all our contract ops, as that becomes -- as that grows, I think the company will have to evaluate how to maximize that value for the shareholders.

Operator

And our next question comes from Jim Rollyson.

James M. Rollyson - Raymond James & Associates, Inc., Research Division

Brad, when it comes to the cost-cutting increments that you think you still have out there, at least let's say from a partners perspective, all else being equal, what kind of impact do you think that has on margins? I mean, if you think about the kind of close to 56% margins in the last couple of quarters and then obviously, over the last few years, that's trended up. I mean, how much more upside is there if you assume flat pricing and flat everything else just with your benefits on the cost side?

D. Bradley Childers

Sure. Jim, I don't think you're ever going to hear me confirm that we're done and there's just no more room. And just so, for the record, know that. But as we look forward, I do believe we still have ahead of us the same level and pace of improvement coming in our gross margin performance that we've accomplished in the past, if that gives you any indication. Although we don't really guide directly to longer-term gross margin target, I'm very confident that we still have work that will have impact, and the magnitude should be comparable to what we've achieved.

James M. Rollyson - Raymond James & Associates, Inc., Research Division

And do you think there actually is ability to get some additional pricing as you go forward, given what sounds like a pretty robust demand outlook?

D. Bradley Childers

Yes. For important reasons, we don't talk about our pricing outlook ahead, but we are happy to talk to you about what we have done. And that is that we did have a price increase in the first part of this year that was across the board and had some legs to it. And we'll reevaluate pricing every year to see what is going on in the market. And some of it is definitely in response also to cost increases that are felt by the industry and impact us as well. So we've had some success now for a couple of years running increasing pricing, and we'll reevaluate that annually.

James M. Rollyson - Raymond James & Associates, Inc., Research Division

Okay. That's helpful. And as it relates to the roughly 75% of North American spending on the contract operations business, which you said would be at Partners, how do you think about or evaluate the organic growth side of that business versus completing additional drop downs?

D. Bradley Childers

Well, the 2 are definitely not mutually exclusive. So we are operating the North America business as one operation. We candidly, from an operational perspective, are somewhat agnostic as to whether the horsepower has operated at the holdings level today or at EXLP. So when we look at fleet additions, that's solely based on where the market is going, where we see good opportunities for equipment by customer and by basin, and that is candidly very independent of the way we're thinking about the drop-down strategy, which has a different pace and different focus.

Operator

And our next question comes from Blake Hutchinson.

Blake Allen Hutchinson - Howard Weil Incorporated, Research Division

I guess just to add on to that within NACO, the last couple of years have been marked by a little bit of first half decline in active horsepower with a kind of second half catch up or surpassing that decline. I guess I'd take it from the broader commentary that -- and the bullishness in some of the buildout that, that may not be the case for the coming year.

D. Bradley Childers

So, #1, Blake, I've noticed the same trend, by the way. We've discussed that internally quite a bit. And we are looking for the year in which we will buck the trends. But look, overall, we think the market is pretty good and we're finding our fair share of opportunities and our outlook includes growth. The timing of the growth is lumpy. And I'm not going to try to give a firm outlook as to how much growth we're going to get in the first half of this year compared to the back half of the year. But I will say that, like others in the business right now, we're seeing good opportunities to grow, our customers need some help. They need the horsepower and they need our services, and our opportunity set looks pretty good. That said, in this first quarter, right now, I think that we're going to be, on the first quarter, flat to slightly up on horsepower, just based on the timings of when we're starting some of this horsepower operating.

Blake Allen Hutchinson - Howard Weil Incorporated, Research Division

Okay. That's great. And then just shifting over to international, first of all for Bill, just to be clear, you kind of left high 50s, the low 60s out there for international gross margin possibility in the first quarter. Does the pricing adjustment, although it's kind of a one-time and the catch up for last year kind of translate into a better gross margin to start the year? Is that what we should read from leaving the door open for a little bit higher gross margin performance?

William M. Austin

The catch up, when you catch up, you also lock in those certain portion of those prices on a go-forward basis. So that certainly helps. The only thing that's, if you will, hurting us a little bit in the first quarter is we need to start this project in Brazil, and that will really, really kicking it into the right year. And that's what I tried to guide a little bit into the second quarter. Normally we don't talk about second quarter, but -- or 2 quarters out. But I tried to guide that when that project comes on, which we fully believe will happen at the end of this quarter, beginning next quarter, that really kicks it up. And I want to get out and you should look in the second quarter and beyond at a -- more of a run rate in the mid-120s. So that was the intent.

Blake Allen Hutchinson - Howard Weil Incorporated, Research Division

Okay. Great. And then just taking several points from the commentary, including the buildout that you cited, the 60/40 domestic/international buildout, putting -- kind of doing the math, if that's a proxy for growth expectations and Brad's comments that the pipeline is looking pretty good. I mean is there -- should we take that maybe the international growth profile is going from kind of low- to mid-single digits to maybe high to approaching double digits in kind of broad strokes, not really just thinking about kind of year-to-year?

D. Bradley Childers

I don't if I'd move it in double digits, but what we're really talking about completely is that the bid activity, in particular in Latin America, has been really high and these are sizable projects. The issue with these sizable projects is they do experience more uncertainty and delays on the calendar as they move forward, and we're seeing some of that. And even though, I think they're a bit squirrelly and they're moving around in time, we are pretty ambitious about our ability to capture some nice projects in Latin America in '14, and that's really what that bullishness is about. There are also opportunities in Eastern Hemisphere that will be more modest for growth in '14. But I wouldn't extrapolate that to a percentage overall on the business, because the business has gotten bigger than that, based on the projects that we see out there.

Blake Allen Hutchinson - Howard Weil Incorporated, Research Division

Great. And then I guess my parting shot for Bill is we all love you and everything, but I think the share price says it all in this instance, so congratulations on a job well done.

William M. Austin

Thanks, Blake.

Operator

And our next question comes from Igor Grinman.

Igor Grinman - JP Morgan Chase & Co, Research Division

My question has been answered.

Operator

And our next question comes from Daniel Burke.

Daniel J. Burke - Johnson Rice & Company, L.L.C., Research Division

Just a quick question on fabs, since it hasn't yet been touched on in Q&A. Just is the North America cycle, is it showing signs of life for you all right now? You alluded to the larger Belleli award that I assume was encapsulated in the Q4 backlog build. But just wanted to understand the status of the North America portion of the business right now.

D. Bradley Childers

Yes. The market is definitely active. We see pretty good opportunities that we're working on to capture. We have seen a lull in our actual bookings for the last couple of months, compared to the opportunity set that we're working on. But in compression, it's certainly good. Production equipment is picking back up. But we have seen the most pronounced slowdown from our bookings and opportunity set is in our processing and treating business in North America. And so, overall, I'd say, yes, we're still seeing good activity, nice opportunity set, but the product mix is shifting in our opportunity set and our expected bookings to include less processing and treating. And I think that's being shared across the market. But yes, we still see that there's an active market that we hope to capture some good opportunities in the year.

Daniel J. Burke - Johnson Rice & Company, L.L.C., Research Division

Okay. Fair enough. And then since Bill ventured forth into the second quarter with a comment on international top line, is there any reason to believe that the margin profile you all see in Q1 changes in Q2 with that Brazil startup?

William M. Austin

No. And I just will not talk too much about that. But that will come on at a nice healthy margin but not enough to just move things wildly, if you will.

Daniel J. Burke - Johnson Rice & Company, L.L.C., Research Division

Okay, Bill. So -- but in other words, no reason to think about margin, differentially, from Q1 to Q2 in international as we sit here today. Is that fair?

William M. Austin

No. I'd still say the guidance I gave you in the high 50s, low 60s is a good one.

Daniel J. Burke - Johnson Rice & Company, L.L.C., Research Division

Fair enough. And then, I guess, the last couple for me, just on the topic of growth at the partnership level. When you look at growth opportunities, do you guys have a more -- how much more expansive is your view of the asset base than domestic contract compression? And then I guess the simpler side would be any reason to think we're on a different-than-normal calendar for you all that typically sees the traditional drop down in the spring?

D. Bradley Childers

As you know, we don't specifically comment on drop down timing. But as we said before, history is a good predictor of the future. So we're looking at -- yes we're -- that's basically the guidance we'll give, history is a good predictor of the future. And then I kind of missed your first question, are we looking at -- can you repeat the first part of your question?

Daniel J. Burke - Johnson Rice & Company, L.L.C., Research Division

Yes, happy to do so. Just as you look at -- an M&A came up earlier, as you look at opportunities out there to continue to grow the partnership level, how much broader is the opportunity set that may be simply fee-based domestic contract compression as you contemplate the business over the next couple of years?

D. Bradley Childers

The company strategy right now that I really have us focused on, and we're going to remain focused on because we think there's still much more value to capture, is going to keep us very focused on our core business of contract operations and compression. That's not to say that we wouldn't look at an adjacent operation, an adjacency in the business, and see that as an opportunity. But right now, the focus of the company is going to be on that core competency we have, especially through EXLP and contract operations. So that strategy is what we're going to stick to because we think it's the one that's going to pay us -- pay the best returns for us in the near term and for our investors also.

Operator

And our last question comes from Sharon Lui.

Sharon Lui - Wells Fargo Securities, LLC, Research Division

Wondering given the recent strength in gas prices, have there been, I guess, any change in demand in some of the conventional regions?

D. Bradley Childers

Sharon, what we've seen is -- we can't tell you that the cause and effect is as strongly correlated as we would like to see. We have seen a slowdown in some of the stop activity in the conventional plays and some opportunity is coming out of them also. So it does appear that whether it's production-driven, demand-driven and, potentially, short-term gas-price-driven that there is a correlation right now in what we're seeing in some of the opportunities. But when we talk to our customers, we'll tell you the gas price move has not been big enough or sustained well enough, long-term, for us to conclude that it's really changing behavior, to be a little direct.

Sharon Lui - Wells Fargo Securities, LLC, Research Division

Okay. That's helpful. And then I guess for 2014 maintenance CapEx, how much is actually related to the North America contract operations?

David S. Miller

Well, specifically for Exterran Partners, we gave guidance of $45 million to $50 million for Exterran Partners.

Sharon Lui - Wells Fargo Securities, LLC, Research Division

So would it be reasonable to assume, I guess, the same proportion for the remaining drop down opportunity, based on horsepower? Is that the right way to look at it?

David S. Miller

Yes. Yes. So, proportionately, what's remaining at NACO that hasn't been dropped in yet would probably get an additional share of that above the $45 million to $50 million.

Sharon Lui - Wells Fargo Securities, LLC, Research Division

Okay. And have you quantified, I guess, the remaining EBITDA that can be dropped down to the partnership, over time?

David S. Miller

We haven't quantified that publicly, but I think the math is -- I think you can get to the math fairly easily.

Sharon Lui - Wells Fargo Securities, LLC, Research Division

Okay. So same type of thought in terms of the G&A allocation?

D. Bradley Childers

Yes.

David S. Miller

Yes.

D. Bradley Childers

Yes.

Operator

We have no further questions. At this time, I'd like to turn the call back over to Brad Childers for closing remarks.

D. Bradley Childers

Great. Thanks, everybody, for your interest in Exterran Holdings and Exterran Partners. We look forward to talking to you again after the close of our first quarter. Thanks very much.

Operator

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

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