Greg Rosenstein – Vice President, Investor Relations Andrew Way – President and Chief Executive Officer David Barta – Chief Financial Officer.

Joe Gibney – Capital One David Havens – Deutsche Bank Daniel Burke – Johnson Rice John Watson – Simmons & Company.

Greetings, and welcome to Exterran's Fourth Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only-mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host Greg Rosenstein.

Thank you. You may begin..

Good morning and welcome to Exterran Corporation's fourth quarter 2017 earnings call. With me today are Exterran's President and CEO, Andrew Way; and CFO David Barta. During this call, management 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 U.S. Securities law 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 described in 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 yesterday and available on the Company's website. With that, I'll now turn over to Andrew Way..

Thanks, Greg. The fourth quarter was an excellent finish to a terrific year for Exterran. EBITDA, as adjusted was $51 million on revenue of $338 million, with each segment recording higher sequential revenue and gross margin. In our Contract Operations segment, we signed more than $45 million of new contract award during the quarter.

For the year, this business added backlog that was 1.4 times 2017 segment revenue through renewal a new project awards. The higher backlog addition versus revenue was a reverse of the trend over the past couple of years.

Simultaneously, we also achieved a higher gross margin percentage in this segment over 2016, as a result of cost productivity and project re-scoping. I am also pleased to announce that two of the three previously announced Middle East project awards are now fully operational.

In our product sales segment, gross margins were at the highest level since the fourth quarter of 2015. Improved execution through initiatives outlined in early 2017 continued to drive better productivity improvements. For the year, we achieved a double-digit gross margin percentage in our product sales segment of 10%.

Our fourth quarter 2017 gross margin percent of 12% compares favorably with a 3% margin posted in the fourth quarter of 2016. Bookings of $113 million were approximately 50% of product sales revenue in the quarter, which is consistent with the lower bookings reported across the industry at year end.

Customers pulled back following a strong order flow during the first nine months of the year. However, we believe this is transitory as customers spend their budget during these first three quarters of 2017 and took a pause to absorb capacity additions. Inquiries and activity to start 2018 would suggest the higher bookings total in the first quarter.

Customer focus on building up the midstream infrastructure in the Permian and Marcellus continues to drive orders in North America. In fact, it was a record year for processing and treating plants order.

And when you combine this with a Contract Operation project award internationally, which were primarily processing and treating plants as well, the secular trend for gas plant demand is truly global in scale. In our Aftermarket Services segment, I continue to be pleased with the progress we're making.

Our fourth quarter AMS revenue was 5% higher than where it was in the prior year, and I'm encouraged about our strategic direction, enquires and global activity levels. In 2017, we made strides in evolving the Aftermarket business model to one that drives commercial focus on leveraging each service event to seek recurring revenue streams.

This model is showing some signs of paying off with some critical and important wins. We had several other noteworthy accomplishments in 2017. We started the year by completing our financial restatement.

We continue to improve our global safety performance, strengthened our capital structure with a high yield offering, increased cash and liquidity to our relentless focus on cash management and invested a significant amount of new resources in several operational, commercial and internal areas.

Additionally, we developed our strategic growth plan with a regional operating model which will allow us to deliver customer solutions on a local level.

We also took steps to focus on our core business and enhance returns by making changes to our product portfolio by substantially completing the exit from our remaining non-core Belleli EPC product sales business in the Middle East, and moving certain production-related products to assets held for sale classification as we seek to exit product families which do not fit our longer term strategic direction.

After David discusses our fourth quarter financial results, the impact of some of our strategic decisions on our first quarter 2018 outlook, I'll provide some additional commentary on what we see for 2018 from both an operational and strategic lens. I'll now turn the call over to Dave..

Thanks Andrew. To discuss our segment results, I will again make comparisons to sequential quarterly performance. Starting with the Contract Operation segment, revenue increased 3% to $95 million and gross margin increased to $61 million as we maintain a gross margin percent of 64%.

Revenue and gross margin were higher reflecting the ongoing dynamics of new contracts coming online with simultaneous scope changes on other contracts and contractual recoveries. In the Aftermarket segment, revenue was 2% higher at $30 million. Our gross margin was $8 million was also a 2% increase.

This resulted in a flat gross margin percentage of 26%. The increase in revenue and gross margin was due to increased services and parts activity in Latin America.

Revenue in the Product Sales segment was $212 million or 10% higher while gross margins improved 20% to $24 million resulting in gross margin percent of 12% or 100 basis points higher than Q3. Productivity and mix continue to drive rate improvements.

I'll add the revenue from processing and treating orders with at its highest of the year in Q4 in terms of dollars and percentage of the segment in total. Geographically, revenue split was 92% from North America and 8% from international markets. Product sales bookings were $113 million translated into book-to-bill ratio of 53%.

Andrew cited the front-end loaded budget spend from our customer base as a primary reason for the lower orders. As you noted, we also have a line of sight to a higher range for Q1. Our product sales backlog was $461 million at the end of Q4 compared to $560 million at the end of Q3.

SG&A expense was $44 million in the fourth quarter, up from $43 million in the third quarter. Now shifting gears a bit, throughout 2017, Andrew discussed our strategic planning initiative including optimizing our product portfolio to maximize returns on core product lines.

Going back as far as the first quarter of 2016, we announced our intent to exit the Belleli EPC business. In the fourth quarter of 2017, we reached mechanical completion on all remaining contracts, and as such represented current and reclassified prior period financial results as discontinued operations.

Furthermore, as part of our plan to optimize our business structure and the product and service solution we offer to our customers, we classified certain assets within its product sales business line as assets held for sale on our balance sheet in the fourth quarter of 2017.

In 2017, those assets they're not held for sale does not make a material contribution to our margin, nor are they expected to in 2018. We also took a non-cash pre-tax impairment of $5.7 million related to those assets.

Turning to capital expenditures in the fourth quarter, total CapEx was $53 million was most going towards previously announced water projects in the Middle East. For 2017, capital expenditures were $132 million, which was below our prior guidance primarily due to productivity gains and timing of project awards.

We currently plan to spend approximately $240 million to $300 million in capital expenditures during 2018 including approximately $200 million to $250 million on contract operations, growth capital expenditures, and approximately $20 million to $40 million on equipment maintenance capital.

However, we do anticipate up to $75 million of the growth CapEx will be reimbursed during the year resulting in a lower net CapEx number, as reimbursement will be treated as deferred revenue. As in the past, growth CapEx is variable, is contingent upon the timing of contract operation project awards.

Included in the 2018 plan for example is approximately $60 million of carryover spending. As we noted in our last call, we are working on project pipeline of about $2 billion. Looking at the balance sheet, total debt end of the year was $368 million with undrawn and available credit of $585 million.

Our year-end leverage ratio which is net debt to adjusted EBITDA as defined in our credit agreement was 1.7 times as compared to 2 times at the end of Q3. Our net debt stood at $319 million, up from $297 million at the end of the third quarter, but down from the $322 million at the end of Q2 and $313 million at the end of 2016.

Our provision from income taxes for the fourth quarter of $2017 included a net provisional benefit of $5.6 million resulting from the Tax Cuts and Jobs Act enacted into U.S. law on December 22. I'll refer you to our 10-K which will be filed soon for a more detailed discussion regarding the impact of U.S. tax reform. Now I'll turn to the 2018 outlook.

The first quarter of 2018, we expect contract operations, Q1 revenues would remain in the mid-90s with gross margin flat to Q4. Project starts in the Middle East are expected to partially offset by project stops in Latin America. We should continue to see the benefit of the new project starts in our revenue and margins as the year progresses.

For our Aftermarket Services business, revenue should be in the mid-20s and gross margin percentage flat to Q4. The anticipated decline in sequential revenue is primarily related to the seasonal factors in Latin America.

In our Product Sales segment, revenue should be in the range of $210 million to $220 million and our margin should be sequentially higher versus Q4. SG&A should be in the range of $46 million to $48 million. Depreciation in the first quarter will be in the low $30 million range and interest expense will be approximately $9 million.

We anticipate cash taxes for the year 2018 to be in the range of $27 million to $30 million which is significant savings from 2017. And before I turn it back to Andrew, I'll just mention, the new revenue recognition standards going to effect in 2018.

Our Q1 2018 guidance reflects our preliminary estimate of the potential impact of the implementation of this new guidance. At this time we did not believe the standards will materially impact our results. And now, I'll turn it back to Andrew..

Thanks Dave. I want to follow Dave's remarks by sharing our thoughts on the market for 2018 and then giving you a broader view of Exterran beyond this year. From a market outlook standpoint, we expect to see strong markets for our products and services.

With regional drivers influencing different products and services, drivers of incremental growth in the North American natural gas markets will continue to be liquid natural gas exports, petrochem growth and exports to Mexico. Take away capacity is increasing in the North East and West Texas, making more products available to multiple regions.

Service will become an increasingly important part of the midstream infrastructure market but cost efficiency and emissions will demand technical innovation. And Latin America remains our largest international region.

Increase in natural gas production is expected from the Vaca Muerta shale play in Argentina which should allow us to grow our presence and expand our customer base. Reforms in growth in Brazil and Mexico could drive additional partnerships and renewed demand for gas processing and treating plants.

And in Bolivia, we see opportunities driven by the country's infrastructure growth and desire to provide power using local resources. In the Middle East and Africa region, we see a strong pipeline of opportunities to offer customers our full complement of midstream solutions, both on a service and equipment sales basis.

The enquiry to auto-cycle time can be lengthy and lumpy, but we have a line of sight into significant opportunities to help customers monetize their hydrocarbons quicker than they could with larger plans that takes years to build or install.

The Asia Pacific region is in need of midstream technical expertise which should drive penetration of our aftermarket service business. We see opportunities to develop and leverage strategic relationships in several areas in the region.

Local capability is often required and we believe our refocused manufacturing facility in the region provides us with a competitive advantage. For Exterran, 2018 is the year of positioning, win and evolving for a new era. In our Exterran Contract Operations segment or ECO as we now call it, we must continue to execute on several fronts.

First, delivering the critical projects we have previously announced on with budget that's on time with all our start-up. Second, continuing to position the business to win, drive CapEx efficiency, lower cost and speed to market. The investing class will position us to win several large awards this year.

And third, scaling our complete capabilities in the Middle East. We have made an excellent start in 2017 and are excited about the future. In January this year, we completed a milestone of recording over 100,000 manufacturing hours at our newly repurposed Exterran facility in Al Hamriyah.

As I said earlier, we anticipate larger award which should drive growth for new and existing customers around the world, we continue to be excited about the project pipeline as global markets remain supportive of our growth investment opportunity and strategic direction.

We also look forward to lay in the foundation to offer service solutions in the U.S., which is a major market opportunity for us to help customers maximize productivity and efficiency. With over 450 plants sold, of which more than 100 are cryos, the U.S. market has the largest install base of Exterran gas plants and other midstream infrastructure.

In product sales, operational execution will be key to maximizing productivity of existing backlog. We will continue to drive differentiation through lead times, design and delivery to win new orders.

Our AMS business continues to make strides in new markets with its service model and we anticipate win a new projects to reflect our approach and develop a foundational backlog of recurring revenue as we build-out scale. As we move into the new era for Exterran, our focused pivots to growth and better returns.

We are evolving into a systems and process company focused on oil, gas, water and power. We intend to win through differentiated products with services pull-through. We plan to increase technology and innovation into our existing and midstream product family, while developing new offerings in water and integrated power generation.

Our go-to-market strategy will be executed by our regional operating model and supported by our global standards of excellence. We recognize that Exterran's new growth focus will evolve.

Markets will continue to change, customer demands will change, competition will change, and so the only thing that's a constant in the market that we operate is change. We will be ready to adapt as we believe the future is all about differentiated product with services pull-through.

Technology infusion and new offerings may involve both organic and inorganic path to the capabilities of our core mission to become a systems and process company. We will enter new markets with a new focus, focused by four regions, with global teams empowered to enable closer interaction with our customers.

Those are the pillars of our strategy and as the year progresses, we'll give you updates and progress report on three key focus points; our products upgrade, our new product development and our service model penetration.

In summary, we expect revenue and profit growth as measured by EBITDA as adjusted to grow this year at a pace similar to the street's existing expectations. Beyond the numbers however, is where the real story of Exterran will be told in 2018.

The year of positioning, wining and evolving will be reflected in the pace of our capital investments and new project wins, execution of existing orders and implementation of the strategy I outlined earlier. Thank you again to all of our employees for a great 2017, and to our shareholders and lenders for their support.

Together, we'll continue our value creating focus in 2018 and beyond. I would now like to open up the line for Q&A. Thank you, operator..

At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is Joe Gibney from Capital One. Please go ahead..

Thanks. Good morning. Just a question on order pace on products sales as we look into first quarter. You guys have been pretty clear about some abetment of the bolstering pace that we saw in 2017. We saw some budget exhaustion clearly and the pull-through there into the first quarter.

I am just curious you're indicating higher quarter-over-quarter was a bit more than air pocket there in fourth quarter as things came to a stop. Any sense of the magnitude of the recovery there inbound in the first quarter to help set the baseline in 2018 would be helpful if you think about it..

Yeah. It's Joe. We're still seeing a lot of activity throughout North America, strong demand still from a Permian and Delaware, also in Appalachian, the Marcellus shale continues to create opportunities for us, specifically Eastern Pennsylvania, Northwest Virginia. So we are still seeing a tremendous opportunity on inbounds.

I'd say the fourth quarter pulls was pretty consistent with what we expect to come into the fourth quarter, so we were not surprised. We have already seen the quarter-to-date orders that have commitments that's greater than what we saw in the fourth quarter with another month or so to go.

So, I don't think at this stage, we would say, things are back to the full run rate of our highest quarter in 2017, but the leading indicator which is demand and inquiries both here in North America and overseas are still strong. And so, we are hopeful that the year will shape up to be another great year for us on product booking..

Okay. That's helpful. On ICO, just the expectations as we look into 2018, as the CapEx guidance is encouraging there for your view of growth. It sounds like of the $45 million you referenced in the quarter, some of its new contracts, some of its extensions.

I was wondering if you could parse there between extensions and contracts in that $45 million figure. It sounds like your targeted view there sort of $2 billion project pipeline still intact.

So, I am assuming some of the larger Middle East and LatAm scoped project you talked about before are still in queue and potentially just to the timing shift from 2017 and 2018, is that accurate?.

Yeah. It's accurate. One small update, the $45 million was actually all new contract awards split between the Middle East, actually the first one in Asia for a while and also LatAm. So they will come on sometime in the fourth quarter and beyond this year, so relatively small in value, but nevertheless encouraged by the activity.

We are still seeing large opportunities through both the Middle East and LatAm. We've adjusted our CapEx number for the year and as you rightly pointed out, it's encouraging, because we only put CapEx to work when we see opportunities to book new contract. And so, we still see a very balanced opportunity.

We are hopeful here in the next few months that we'll have some awards. We've already released engineer and preceding feed studies on a lot of these awards. And so we are already actively working internally and very excited about the facilities that we've developed both in the Middle East and also elsewhere to help with that workload.

So it is a timing topic. We still have the same visibility. We are encouraged by the activity. And since our last earnings call, we've seen even additional inquiries coming through the funnel which is in very, very early stage.

So we're obviously handicapped the balance of the total portfolio, we see a very solid $2 billion of revenue in our line of sight over the next 12 to 18 months. But our internal inquiries have picked up significantly, and so we are very encouraged by that..

Okay, helpful. I appreciate it. Thank you..

Great. Thanks Joe..

Our next question is from David Havens from Deutsche Bank. Please go ahead..

Good morning. Andrew, you talked about the pipeline of activity that you see coming and we've also talked about the evolving technology. Can you just discuss with us what is it in your portfolio that excites the most, you know probably better said.

What differentiates Exterran and what makes you think that you can keep and then grow market share in the next couple of years? What is it about your portfolio that you think is, can get to that market share capture?.

Yeah. I think there are a couple of things that we've already seen with some of the wins that we announced last year. First, it's our ability to put the integrated project together.

And so, we have the ability to operate both on the processing side, the treating side, the compression side, and the work that we've done over the past 12 months to really focus on a modular system to be able to take product to the market and build it faster than what the traditional means would be – has been impressive.

And so, that's certainly one area. The other thing I would say on the water side is that we have been – we've been in the water space for some time, albeit very small and we've been pretty excited about the opportunities that we've been developing.

We were in the process of finishing a large water project in the Middle East that has really the capabilities to expand and be able to put that into the same segment as we offer from a service to have our first Exterran contract operations in a Water segment.

In North America, we picked up the pace in the last six months also and have some technology that we've been focused on and we now have our first six or seven units rented in North America which is a new segment for us to fill.

We've been focused on productivity and efficiency, making sure that we can help our customers to drive more out of the nameplate.

I mentioned already today that we have a significant install base in the U.S., and when you think about the capacity on a lot of those nameplates, we have been working hard the bottlenecking and spend a lot of time trying to repurpose those assets, so our customers can get more out of the units without really having to spend a lot of CapEx.

And so, those are things that we've been spending our time on. We have some additional technology areas that we are working on right now from both an adjacency that we'll share with you when we get down that road..

Okay, thanks. Then, also just fingers and update on you talked about it mass heat transfer Cat engines that became longer and longer.

Can you give us an update on what you see?.

Yeah. So, I think there's a couple of things I'd like to mention on this topic that I think is relevant for those listening today. First of all, in the last 12 months, we have dramatically changed the way that we think about launching product into our manufacturing facilities. We've introduced slot planning to really maximize our efficiency internally.

Very hard to run a business in the timeframe that we've had over the last few years when you have dramatic order drops and dramatic order increases in an environment that you have a variable workforce. So, we have kind of moved from the order meet the slot as opposed to slot meets the OS. So, we launched slot in advance.

We allocate the slots to customers in commercialized ITO phase. We follow it by engines and right now we've got forward engines bought up to a year out. So, orders that will be delivered in the first quarter 2019. I'd say the major supply chain bottlenecks that's we've had certainly has stabilized.

For sure it's the Cat engines and some of the lead times continue to be as long as 52-weeks, but we've had a stabilized delivery time frame and so we anticipate that that will improve throughout the year, but I think it's a mixture of us and Caterpillar working together to understand those lead times and making sure that we bought in advance so that we don't bring that pain to our customers.

And so, I think that's been the critical relationship that we've been able to develop together over the last nine to 12 months..

Our next question is from Daniel Burke from Johnson Rice. Please go ahead..

Andrew, on the U.S.

gas plant install based service opportunity, do you have any revenue stream there presently and then if you think about that opportunity, who are you taking share from? Are you taking back responsibilities with customer down managing, or who is otherwise performing those tasks?.

So, we celebrated a few weeks ago our first AMS win in North America for processing and treating, and so, albeit very small.

I think today, it's a space that we have been talking to more of our customers over the last 12 months, and you know it's part of the challenge is the infrastructure build out has been so rapid, that as well as the quantity of plants that we sold, there are lot of plants operating in different regions that when we sold that plant, let say to a 200 million extent of cubic feet gas output, that plant probably has a more of a demand of sort of 250 plus.

And so, our nameplate today are operating in a certain configuration and with some adjustments to hardware and some software, we're working through some opportunities to help our customers upgrade. So, for the equipment that we have in store, as I mentioned, we have a lot of plants.

I think that's a terrific opportunity and we already have started that effort today.

For sure, our customers will have a wide variety of capabilities from some of the large integrators that have – there are maintenance teams to others that you know require help from you know small regional players and others, and of course the, some of the OEMs that are providing equipment as part of the processing and feeding facilities can have some spare parts if you want.

I think the advantage for Exterran is that we already own and operate plants all around the world and we know what it takes to drive efficiency and reliability to the level that's world class.

And so, we have maintenance schedules, we have our own internal analytics that really helps us to think about preventative maintenance and the kinds of changes in environment. So, I'd say, we're trying to take an approach more from selling parts to selling an assurance of a certain outcome.

And that's what we're seeing some real interest right now in the different place. So, at this time, it's an upgrade focus, and then as we move forward, we'll start to work through how do we help our customers to drive more efficiency in their plants based on leveraging what we view internationally..

Okay, great. That's helpful. And maybe one on the CapEx, so up to $75 million that could be reimbursed, is that specific to the third Middle East project or is it pointing to another opportunity.

Just wondering the specificity there, what it was referring to?.

It's additional opportunity. So we've seen the third opportunity that we described last year that we announced in Middle East is significantly well on with the building of it and the facilities, the equipments at the facility, so we are through a lot of the initial milestones on that project, but no, we have new opportunities that we are building in.

And as Dave mentioned in his script, there's a net impact, as some of this will be reimbursable. So, we see new opportunity and that's why we've raised the CapEx for this year..

Got it. And then, maybe just one last one. I think the supply agreement for compression equipment that you all have with Archrock concluded in the fourth quarter of last year.

Was that a contributor to lower inbound and is it a contributor to the slightly higher margin forecast for Q1 2018?.

Well, first of all, we did have the supply agreement as you know from Archrock kind of rollover in November. Archrock continues to be an important customer for Exterran and we're continuing to enjoy orders from Archrock.

When I look at the overall inbounds for the fourth quarter, it was mostly the P&T slowdown that really impacted us, I mean dramatically from what we saw on a run rate. So, compression was still a pretty solid in the fourth quarter, P&T really took a dip and that's where we've seen the rebound in Q1.

So we'll compete in now with others for Archrock's business and we are enjoying orders from Archrock and we hope to continue to be an important supplier to Archrock..

Okay, great. Thank you. Thank you for the time..

Thanks..

[Operator Instructions] And our next question comes from John Watson from Simmons & Company. Please go ahead..

Good morning. Thanks for taking my question..

Good morning..

Good morning..

On rental compression across the industry, this is bit of a crystal ball question, but do you have a guess as to how much horsepower you expect to build this year?.

I do not have that in front of me. I think we have been listing as, no doubt you, that a lot of the compression companies are talking about, demand that still continue and we've seen that demand and inquiries. And so, I would say right now it's in higher horsepower, which is consistent with what we saw all of last year.

And so, if that demand continues, I think we are very well positioned to enjoy that volume. But I couldn't tell you from an absolute horsepower what our capacity that we've got planned for North America this year. Not in front of me..

Okay. No problem.

Has there been any uptick in demand for smaller horsepower unit? I now it's predominately larger horsepower, but anything on the smaller horsepower thought to report?.

Yeah. There has been a little bit of an uptick. We've seen kind of more balanced, while the higher horsepower has continued the same kind of pace of inquiries that we saw last year. It has been a smaller horsepower uptick.

And we've seen that in a number of basements, over 1,000 to 2,000 horsepower range and we are also seeing another regions around the world some more of the kind of well head opportunity of compression. So, I think the good news on the smaller horsepower is the lead times are lot better and are more consistent.

And so I think that's easier for people to plan. The challenge that we really given the industry, which I think is unique is that we are asking customers to make decisions on their requirement over a year out. And that's not something that we had to do before.

So, everyone is having to learn how to plan more efficiently from where they were in the past when they may have been more readily available inventory and lead times were half of they are today. But we are working hard with everyone to make sure that we understand that, and so we'll continue to see that inbound inquiries today..

Okay, great. Thank you..

Thank you. This concludes the question-and-answer session. I'd like to turn the floor back over to management for any closing comments..

Thanks everyone for dialing in today. We look forward to updating you throughout the year as we continue to execute on our strategy. And thanks again, so appreciate it..

This concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time..