Greetings and welcome to the Exterran Corporation First Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow a formal presentation. [Operator Instructions] Please note that this conference is being recorded. I will now turn the conference over to your host, Blake Hancock, Vice President of Investor Relations. Thank you. You may begin.

Good morning and welcome to Exterran Corporation’s first quarter 2020 conference call. With me today are Exterran’s President and Chief Executive Officer, Andrew Way; David Barta, Exterran’s Chief Financial Officer; and Girish Saligram, Exterran’s Chief Operating Officer. During this conference call, we may make statements regarding future expectations about the company’s business, management’s plans for future operations or similar matters. These statements are considered forward-looking statements within the meaning of US Securities Laws, and speak only as of the date of this call. The company’s actual results could differ materially due to several important factors, including the risk factors and other trends and uncertainties describing the company’s filings with the Securities and Exchange Commission. Management may refer to non-GAAP financial measures during this call. In accordance with Regulation G, the company provides a reconciliation of these measures in its earnings press release issued earlier today, and a presentation located in the Investor Relations portion of the company’s website. With that, I will now turn the call over to Andrew.

Thanks, Blake and good morning, everyone and thanks for joining the call today. First, I will discuss our organizational response to the COVID-19 pandemic. Then, briefly talk about the first quarter and our business outlook for the remainder of the year. Starting with the COVID-19 and how the organization has responded, I want to say a big thank you to all of our employees around the world, as we’re safely navigating these unique and trying times. Most of our teams have been working remotely and our ability to continue to run our operations efficiently is a testament to the commitment and dedication of our organization and to our customers. I would also like to express our gratitude and admiration for the frontline workers, first responders, medical professionals and various healthcare agencies and bodies that are leading the efforts daily on a global basis. And finally during this time, we are gratified to see our relationships with our long standing partners, customers, suppliers and other stakeholders evolve positively as we have transitioned to virtual collaboration. As the COVID pandemic became more prevalent in February, we put in place our global crisis management team that meets on a daily basis. This has allowed us to act swiftly to ensure the safety of our employees, contractors and customers through this pandemic. We started planning early in the quarter on scenarios for remote working and we ran test trials long before countries began implementing work from home notices. This enabled us to keep a high level of efficiency working remotely. Our biggest challenge is proven to be supply chain and logistics. We’re moving people and parts in and out of countries, with travel restrictions has caused some delays on executing daily activities. I’m happy to report that our many years focusing on local talent…

Thanks, Andrew. I would like to start with the commercial successes that we had during the quarter, that not only provide us additional backlog visibility for the coming years, but also exemplify the mission criticality of our products and services. Despite the obvious challenges, we saw very significant wins across all of our reported segments, and in all of our regions, showcasing the power of the one Exterran philosophy, the continued commercial intensity of our regional teams and the value of the integrated business model we have. As we highlighted on our fourth quarter call, we won a project for a fully integrated gas processing facility in the Middle East at a value in excess of $300 million along with a five-year operations and maintenance services agreement. Well, this project is a strategic win in its own right. We’re also excited by the potential for future expansions that this customer envisions. We are off to a strong start on execution, despite the challenging environment. Our engineering teams are leveraging technology tools, and setting the standard for virtual workplace collaboration to ensure that the initial design phase is robust and on track. We have also continued to drive strong interaction with our customer, key vendors and partners through remote video and collaboration technologies. While supply chain’s logistical routes and ports begin to fully reopen, our teams are ensuring that we are progressing on this and other projects to the maximum extent possible. We expect this project to materially contribute to revenue and margins, starting in the second half of this year and through the beginning of 2022 with ongoing contributions complemented by the AMS services after commissioning, In ECO, we had an important success in Latin America, where we signed an eight-year extension with one of our key customers worth approximately…

Thanks, Girish. The first quarter reflected another solid performance with EBITDA, as adjusted of $33.8 million on revenue of $210 million. Operating cash flow from continuing operations was $9.4 million. The US compression manufacturing business contributed $49.5 million of revenue and while we don’t measure EBITDA at that level, we estimate the business was slightly above breakeven on an EBITDA basis. So excluding the results for US compression, the EBITDA margin for the remaining business is approximately 20%. From a segment perspective, revenue for Contract Operations was $95 million. Our gross margin was $63 million, resulting in the gross margin rate of 67%. As we discussed on the past two calls, there were two ECO projects where the customers were considering purchasing the assets. In the first quarter, there were completed and there was a one-time benefit of roughly $10 million of revenue and $8 million of gross margin, which was included in our quarterly guidance given on our last call. We will continue to have an AMS contract for both facilities going forward. For AMS, revenue was $28 million and gross margin was $7 million. This resulted in the gross margin rate of 24%. Revenue was down sequentially as the first quarter is typically the low for the year driven by seasonality, and as we previously discussed, we experienced logistical challenges late in the quarter, because COVID-related travel and supply chain interruptions. Revenue in the Product segment was $88 million and the gross margin was $3 million, resulted in the gross margin rate of 4%. This also included roughly a $5 million impact of fixed overhead under absorption. Bookings for the quarter were $458 million, and our Product Sales backlog was $648 million at the end of the first quarter, compared to $278 million at the end of the…

Thanks, Dave. As I reflect back, last year was a challenging year for the industry as it adjusted to new returns focus, an emphasis on capital discipline. Entering this year, we felt better about the market we were serving, underlined with the commercial successes we had in Q1. It has now become evident very quickly, that at least 2020 will prove to be possibly the most challenging year any of us have had in our careers. Our focus nevertheless remains twofold. First, protect the balance sheet, and second, we execute on key projects. We will control what we can control to ensure we protect the core of the organization and to set the company up to succeed in the coming years. Our strong liquidity position and balance sheet affords us the ability to weather these storms over the coming quarters. I believe our Middle East exposure will serve us well over the coming year and provide us with some additional opportunities in these challenging markets. I will reiterate what I said last quarter, we would expect 2021 to be a growth year for the company as we execute on our backlog and as the world returns to a new normalcy. Despite these times, I would like to leave you all again with a company where transitioned to. One, with a multibillion dollar contracted backlog, EBITDA margins greater than 20% that although requires investment, realizes significant returns on those investments well above its cost of capital, all while providing the consistency more aligned with an industrial business. With compression been a smaller part of our portfolio, our Product Sales segment will have a higher margins, predictable supply chain cycles and aligned to more mission critical infrastructure. This new model is much more stable, and given the criticality of our product offerings is much more resilient even if the market slows. This is the transformation that we are well into. And while the current environment may limit the number of large opportunities we had planned short-term, our strong backlog and diverse base of natural gas production focused facilities positions Exterran uniquely relative to many in this environment. And with that, I’ll now turn the call back to the operator.

Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Kyle May with Capital One Securities. Please state your question.

Good morning. I wanted to well, first appreciate the updated outlook and assumptions as you’ve provided for the year. But I was wondering if you could walk through the different puts and takes of each segment in your new outlook to get us a better idea to kind of have a frame of the year?

Hey, Kyle, this is Dave. I guess just overall you know as I mentioned in the comments, if you take you know this quarter, second quarter or first half and annualize, you obviously have a step up as you mentioned and you know the vast majority of that is driven by things that are either contracted or in our product backlog. So you have probably the most significant step up would be on the Product side with the large order we talked about that we won in the first quarter will begin – we are beginning to executing that. So that’ll pick up in terms of its impact on revenue and margin in the third quarter and then further in the fourth quarter. We also have a couple of ECO contracts that are – will be kicking off late this quarter. So you have that as well. They’re smaller in terms of the overall impact between those two drivers. That is the far and away that in the vast majority. And we do, as we’ve mentioned in the comments have assumption that we do see a very gradual return to more normal activity around, particularly around travel. So, for example, on the AMS side, we need to be able to get people in and out of countries and have them mobile within a country. So there’s a bit of an improvement as a smaller assumption in the third quarter, but then in the fourth quarter relative to the second quarter a bigger impact. So that would be the – that’s kind of the general drivers of the changes.

Got it, that’s helpful. And the next question I was curious about was in the Product Sales segment of the business. I know you’ve been working on the strategic review of the US compression business or US compression fabrication, and it sounds like you’re getting a little bit closer, but just wanted to get your latest thoughts around when you expect to see the inflection point in those margins?

So Kyle, I mentioned in the – in my prepared remarks that we are working a dual path right now and we have been for some time. So we’re clearly working through the backlog. And that should be taken us through some time into the third quarter with backlog that we have in the facilities. We have been able to remain open at the facilities during the past several months with regards to focusing on the quality of the work and making sure that we safely exit the work content that we have in the facility as we go through the coming quarters. So, as we think about the next couple of months ahead of us, we have a dual process that we talked about. It’s been a very difficult environment to get anything done, but nevertheless, should we not get to a place where we have one of the alternatives then, we’ll in the Q2 earnings call, we’ll announce and update you on that current status at that point. And so both plans are working in parallel. We have been adjusting the structure of the facility, the cost of the organization that we’ve been working through and keeping our customers informed of that process. And so right now, depending on which outcome that we work through in the course of the next, I’d say five weeks to six weeks, we’ll get to a conclusion of the decision that we’ll announce and update you all at that point. We also indicated in the first quarter as we had higher revenue, and I think Q1 will be the higher revenue that we’ll see for our compression business. If you look at the outcome of that business, as we explained – as Dave explained, it was slightly above breakeven slightly at an EBITDA level. So if you actually back out the compression business from the first quarter, you’ll get to close to 20% EBITDA margin as a company, just from what happened in the first quarter. And so what we expect here over the course of the next three quarters or four quarters, and really as we look into 2021 and beyond, as we talked about high grade in the portfolio, and as we talk, in my final part of the prepared remarks in terms of a multibillion backlog contract and margins above 20%, hopefully you can start to see that becoming realized as a result of what we just delivered in Q1 and the indication of that. So once we get to that conclusion, we’ll communicate that to you, I think it’ll likely be at our Q2 earnings call. And then we’ll have some visibility into what that looks like for the balance of the year.

Okay, that’s very helpful. And one more for me, you touched on the ECO contract extensions, and I was just curious how the re-contracting compares to the prior contract and also versus your expectations?

Sure. Kyle, this is Girish. You know in terms of expectations, I’d say very positively. I think one of the important things to note is, we’ve been operating in Argentina for several decades. And this isn’t a contract that it’s, you know, coming up for the first time as a renewal. We’ve actually had it in operation for several years, gone through multiple rounds of renewals. So the characteristics are a little different than a contract that we have run for the initial term and then coming off for a renewal, which allows us to therefore keep our margins pretty much intact. You know the contract typically is made up of a variety of different factors, obviously price is one of them. Scope is another various other contractual terms. So we’ve been working very closely with our customer for several months and getting to this point, because it is a fairly long extension, and therefore a complex contract. And we’re very pleased as is the customer with the overall outcome, which gets them what they want and allows us to keep our margins pretty much intact.

Yeah that sounds great. All right, I’ll turn it back. Thank you.

Thanks, Kyle.

Thank you. [Operator Instructions] Our next question comes from Tim Monachello with AltaCorp Capital. Please state your question.

Hey, good morning, everyone. Thanks for all the detail in the prepared remarks. That’s great. First question I’ll start with here just on the water business. Just curious in the $120 million to $140 million 2020 guidance range, did I hear correctly there’s $15 million to $20 million that was previously included for water projects on the margin basis there?

Tim, it was actually – this is Dave. Tim that was actually a new product orders we sort of included both process and the treating and water you know again –

Okay got it.

Mark-to-market US market assumption.

Okay, got it. And then I was just curious if you could provide some detail around how that business has progressed in the current market environment. Have you seen the same slowdown in water as you have in your other business lines?

Yeah. So I think it’s really a business of two markets, as we’ve described, pretty much largely with the rest of the product business, we feel very good in the Middle East. We’ve got projects that are continuing to progress from a commercial bid activity. In the last five weeks or six weeks, we’ve been active, and still been working with our customers to spec and to scope projects that we see visibility for the second half of 2020. It’s very clear that in the last five weeks or six weeks when you’re trying to work through commercial propositions and various proposals and technical evaluations, doing them in people’s living room on zoom is not the most effective, but nevertheless, customers are still being working with us on that. So I’d say there has definitely been a little bit of a pause in terms of some of the timing that we saw on the projects. But the good news is that we haven’t seen a dramatic change in some of the long-term plans and the visibility that our customers have. I’d say here in the US a little bit of a different story for sure. Both on the assets that we have operate in, and the outlook, I think there’s a little bit more of an unclear picture right now as operators and people really work towards their ultimate production goals. And as the oil production slows for sure, we’re seeing that impact in the water needs. And so I’d say we’ll probably need another five weeks or six weeks to really understand the implications of what that means for us for 2021 with our water business here in domestic US. For the guidance that we gave, that was very little in the water business for the second half of this year. So there’s no real big material changes to what we’ve already guided. But here in the US paying close attention customer by customer, site by site, well by well to understand their needs and then internationally still seeing interested outlook and working towards some of the second half closure on maybe some of those projects.

Okay, very helpful. Thank you. Second question on the Product Sales margins. Understand there’s some under absorption in the second, sorry in the first quarter, and based on the guidance that you don’t see a ramp up in those large or I guess the manufacturing those larger product bookings till the second half, would you expect to see margins in that same range or lower in the second quarter for Product Sales?

Yeah, I think we’re going to still see a similar absorption impact in Q2 as we saw in Q1. So, from a mix standpoint, again, similar type margins, I think it’s probably safe to say and then as we go into the second half, we’ve got a couple of product orders in hand, the big one that we’ve talked about the Middle East, that’s kind of an engineering phase. So it’ll have a gradual pickup in terms of helping us with some of the fixed costs, first with the engineering team, and then as it transitions into the parts of that, that will be manufacturing. And then, as Andrew talked about, you’ve got the other piece, which is the compression piece, which again, we will hope to have an update by the end of the second quarter in terms of where we’re going with that, but you know, that business will resolve that and that will alleviate some of the pressure we have around fixed costs there, regardless which path we take.

Okay, great. Then the next one here, just in terms of the guidance as well. You mentioned that it includes an assumption that you’ll have better access internationally I guess borders opening up or the travel restrictions taken away. What – do you have a sense of what that guidance could look like if that doesn’t happen?

Yeah, I think it’s not a, I think when we gave that range we’ve kind of – we looked at this probably 15 different ways as you can imagine. And when we gave that range, we have scenarios in there, where it doesn’t – we don’t fall outside there. So that the low end of the range had some puts and takes, but that assumes somewhat of a continuation of these at least in the nearer term for the next couple of quarters.

Okay, got it. And then my last one –

Bottom end of the guidance.

Got you. And then just my last one on the renewals. Just curious if there’s any significant CapEx associated with that renewal? And if you have any other, you know, material and that are coming up that might be at risk in this environment?

Kyle this – Tim, sorry, this is Girish. No – no significant CapEx. As I mentioned earlier, you know, given that this is not the first cycle of renewal, we have done this a couple of times. There really isn’t a lot of incremental CapEx, as you know, it is a large fleet that we have in Latin America and Argentina, particularly. So there is maintenance CapEx that’s covered in the guidance that we mentioned, but other than that, not a significant amount. The other projects that we’ve talked about are already, you know, covered. They’re covered within the guidance that we have given and don’t see a significant change there.

Okay, understood. Thank you very much.

Ladies and gentlemen, there are no further questions at this time. I’ll turn it back to management to conclude. Thank you.

Thanks, everyone for dialing today and having an update on our first quarter earnings. We look forward to getting through the second quarter and coming back to you at the end with another update. So appreciate it, and have a great day.

Thank you. This concludes today’s conference. All parties may disconnect. Have a good day.