Greetings and welcome to Exterran's First Quarter 2021 Earnings Conference Call. I would now like to turn this conference over to your host, Mr. Blake Hancock, Vice President of Investor Relations. Thank you, sir. You may begin.

Good morning and welcome to Exterran Corporation's first quarter 2021 conference call. With me today are Exterran's President and Chief Executive Officer, Andrew Way; and David Barta, Exterran's Chief Financial 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 the U.S. 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 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 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. Exterran had a strong performance in the first quarter as we focused on employee safety, operational efficiency, and effectively managing our global backlog while positioning the company to take advantage of a robust pipeline of bidding activity. The first quarter marked a solid commercial beginning for us in 2021, highlighted by the award and commencement of our first multi-year contract for Exterran water solutions, valued at approximately $200 million. Although the effects of the COVID-19 pandemic are still being felt worldwide, the vaccination rollout is beginning to yield positive effects. Nonetheless, some areas in the eastern hemisphere continue to face virus outbreaks, which might pose timing challenges as we collaborate with our vendors and suppliers to push our projects forward. Examining our expanding pipeline of opportunities, we remain optimistic about the commercial prospects in the international market. The recovery in oil prices and our customers' needs are contributing to an increase in natural gas production, which is driving a strong global demand for our traditional products and services. Looking ahead at the market opportunities over the next few years, we estimate over $2 billion available for gas projects and over $1.5 billion in project award potential for water. We continue to believe that the demand for natural gas will grow and play a crucial role in the energy ecosystem moving forward. Our pipeline of opportunities reflects this outlook, and we are excited to contribute to the ongoing global energy transition. Particularly important to our own transition is our Exterran Water Solutions business. Our success in the first quarter reinforces our confidence in this product line and its bright prospects for continued growth and value creation. I would like to take some time today to discuss our water business, detailing our services and outlining the total market potential across various industries. Additionally, I want to update you on our business progression. Our technology was originally developed for the municipal water sector to remove iron and bacterial growth through mass transfer using a microbubble reactor. This concept was later adapted for environmental applications in ARIAT and pond management. It was further tweaked to cater to the challenging water conditions in the oil sands, where extensive treatment of large volumes of water was necessary. The expansion of the oil and gas industry and the significant volumes of produced water create a substantial market opportunity. By innovating with a focused application, we have developed a range of product lines that offer our customers a comprehensive solution for primary, secondary, and tertiary treatment, scalable across various volume ranges. We are pleased to be a leader in this field with a commercially validated and fully integrated solution. With more than 70 patents, our core technology is well-suited for high flow and difficult fluids, and we are broadening our applications to include mining, utility wastewater treatment, and produced water desalination. In the oil and gas sector, while oil production is expected to remain flat until 2030, natural gas production is projected to increase. In contrast to the stagnation in oil production, the volumes of produced water are surging due to elevated water-to-oil ratios and the maturity of fields. In some areas where we operate, water cuts exceeding 90% have become standard. Industry forecasts predict a 30% increase in produced water by 2025 and possibly an additional 20% growth by 2030. This represents a significant and valuable opportunity for our company. Translating this into the markets we operate in, we see produced water in the oil and gas industry representing a $30 billion opportunity, with our microbubble flotation technology applicable to approximately $5 billion of this market. As I mentioned earlier, we envision our technology serving many industries, including petroleum and mining, with origins in municipal water management. We firmly believe that our water business is positioned for rapid growth which will enhance our financial performance and generate substantial value. In summary, as we look to the future, it is evident that Exterran Water Solutions was a modest contributor to our revenue and margin at the start of 2020. However, with the promising pipeline of opportunities ahead of us, we are confident that our annual revenue from water could surpass $150 million in the coming years. Ultimately, considering the significant market potential we are targeting, water could account for more than 30% of the company's total adjusted EBITDA by 2023. Now, I'll hand it over to Dave.

Thanks, Andrew. We have issued a press release, the investor deck and later today we'll file the 10-Q. So, I'm not going to go through the usual recap of the financials. Rather, I'll talk about our outlook for 2021 in the next couple of years. While there are still uncertainties around global and industry business activities, our backlog, the relative stability of the ECO business and a strong commercial pipeline gives us confidence in providing an outlook for the next several years. As we stated in the earnings press release, we see at least a 15% compounded growth rate for EBITDA as adjusted over the next two years with our updated guidance for this year of $150 million to $160 million. This view incorporates the water business outlook Andrew provided. Along with this, we also expect gas product bookings to begin to improve later this year and into 2022 with revenue recognition beginning in 2022 and 2023 to help drive increased EBITDA as adjusted and cash flow. This outlook also incorporates the impact of the productivity improvements and cost savings we have realized over the past several years. We will have meaningful operating leverage as we can handle increasing volume with only small changes in the cost structure. With regard to our cash flow outlook, our guidance for 2021 free cash flow is negative $60 million to $70 million. As a reminder, this is driven by the working capital uses, deferred revenue and capital expenditures. Turning to 2022, we expect deferred revenue to be similar to 2021 with higher capital expenditures, given the current backlog and an expectation for at least one more sizable ECO win. Working capital usage for the Middle East project will be meaningfully higher next year as we'll get further into the construction phase of this project. We have chosen to invest in these high-return and high-margin projects to further transition to a more sustainable energy-focused company and although it requires capital over the next several years, it will generate significant cash flow in 2023 and beyond. As we move to 2023, we expect strong positive free cash flow as deferred revenue is expected to decline to a more normalized level. EBITDA, as adjusted, is expected to be above $200 million and working capital will start to contribute with the conclusion of the Middle East project. However, the full offset to the working capital build will be realized over several years. We also will not assume any company-funded additional growth capital expenditures. This all could result in free cash flow in 2023 of over $100 million. Thinking about this forecast in terms of leverage for 2022, we expect to maintain a similar leverage ratio level to 2021 with leverage significantly decreasing in 2023. Even with this improving outlook, we have commenced a review of our capital structure strategy to ensure both near-term and long-term success. As we have talked about before, our longer-term strategy included in this process is external project financing. We have developed a structure that we believe works for the relevant stakeholders and are discussing this with several potential capital providers. All options are on the table consistent with our commitment to driving improved financial performance and shareholder value creation. And with that, I'll turn the call back to Andrew for his closing remarks.

Thanks, Dave. So, as we progress in our transformation, it is important for us to make sure our leadership is aligned with many of the important metrics that we believe will create long-term value, including managing our balance sheet and cash flow by improving EBITDA, improving the margins in our backlog which should result in improved longer-term returns and also tying part of our total compensation to total shareholder return which directly aligns with our shareholders. We've also added ESG into our leadership goals and objectives, again tying compensation to further our strategy in a sustainable energy world. We're incentivizing our teams to make the right choices for all stakeholders and help drive both near-term and long-term value. As you hear today, we're accelerating our company's transformation underpinned by our growing commercial pipeline. I'm really excited about the potential opportunities we see in our water business. I believe that upon conclusion of the strategic review of our capital structure, we can come away with a solution or solutions that support both our near-term and longer-term needs. I want to take a moment to thank our employees, our customers and vendors for their commitment to Exterran over this time. And to all our stakeholders, we are committed to driving longer-term value. And with that, I'll now turn the call back to the operator.

Our first question comes from Kyle May with Capital One Securities. Please go ahead with your question.

I'm pretty impressed to see the 2023 EBITDA number and the outlook. Just wondering if you can provide any additional color around the business and its segments to help us frame up how you see things improving and changing over the next couple of years?

Yes, I think again those outlooks were really based on, as we said, the water project we won, assumption for another significant ECO project and then a gradually improving product sales environment. So again, not going to go through all the details today by segment, but that one ECO project will contribute. Obviously, the water deal we signed in the first quarter, we began executing, will start contributing in the back half of 2023. So the product sale and then the outlook Andrew provided for water will certainly be a big contributor in terms of product sales in addition to this ECO project.

I was also wondering if you could talk more about the capital structure strategy review, maybe what options are on the table and what time frame you have in mind?

Yes, I think Andrew obviously talked about a pretty significant pipeline of opportunities and I think on the gas product side, very consistent, we continue to see a multi-billion dollar pipeline. And those are projects that we have, the customers, the project, all of that's lined out. These aren't speculative type things. These are real things that our teams are engaged with customers on and then for the first time, we provided a water pipeline, the same story. We've got those lined out by project, by customer and those are things our guys are engaged in some capacity. So, we have a significant pipeline in front of us that we're currently working on and I think shorter term I want to make sure we're doing the right things in terms of leverage as we kind of grow into the leverage - better leverage position. And then certainly from a long-term perspective to make sure that we're balancing both that short-term opportunity to engage on these products and a longer-term view of maintaining that type of success going forward. In terms of options, I'm not going to go into lots of details, but I would say, we don't have biases nor does our Board. We're going to consider any options that make sense to create value and to serve all of our stakeholders. So, I would just say, we're looking at a range of opportunities. And at this point, I'm not going to probably predict a timeline other than to say this is a priority for our company and our Board to resolve how we get to this pipeline and engage with our customers actively.

Our next question comes from the line of Doug Becker with Northland Capital Markets. You may proceed with your question.

I was wondering if you could give a little more context around the timeframe and win percentage you expect out of that pipeline of $2 billion of gas, $1.5 billion of water projects just over the longer term.

Yes. So, I think the guidance that we gave today handicapped certainly over the next couple of years the timing of the projects. Various projects in different countries, in different locations are at different stages. Some are in early feed and we're designing equipment based on the specifications of the actual application. Some of these projects would be a second train where we already have the first train. Some of these projects are replication of what we've already designed, built, and we currently operate, and we currently own. And so it's a question of local timing. And others are expected - in as much we've built into our plan, the designs that we were currently working through with our customers in the various applications, but it still has to pass certain local tests. So, it's a really difficult task. As I've said, every quarter, really trying to predict the absolute order bookings in certain countries and certain locations has been tough, but we're very confident with the size of the pipeline that we have and our win rate within the applications in the product lines. But we're confident with the guidance that we've provided. Our teams globally have been working hard over the past six to nine months interacting with a lot of customers in many places. And as we look at the pipeline, we tend to build that into our overall resource allocation from starting of the application, all the way through to engineering and then ultimately how we're going to manufacture the product or how we're going to interact from an overall global supply chain. So, we constantly run what we call our S&OP planning process that takes into consideration near-term, medium-term, and longer-term planning that will build in the applications into that pipeline. So - but over the course of the next couple of months, we'll continue to keep you posted on both the size and scope of the pipeline and hopefully see in the next few months some of the wins that come through but allows us to start putting that into backlog to realize the forecast that we just provided.

And maybe, I would add that this pipeline includes both ECO-type opportunities and product sale type opportunities. And so, Andrew provided some view on the water business and in that horizon, it would be like a 10% to 15% type win rate, but again, there are projects in there that could be 10-year ECO, there are some projects that could be 20-year and then probably a 20% to 30% kind of win rate on the rest of it with the horizon we provided. But again, some of these projects go out for quite a number of years.

That makes sense. It seems like the U.S. infrastructure build might include a sizable portion for upgrading aging water infrastructure in the U.S. Is this something that Exterran is going to be targeting?

Yes. We've started working with state level and certain customers on various regulations and potential implications of what the technology that we have can provide in terms of some solutions. And so I'd say those discussions are progressing. I wouldn't say they've accelerated. They're certainly progressing. We feel pretty good at the pace and the level of intensity that we see here in North America. Clearly, the larger projects we see for our water business are overseas. And so we're certainly seeing a correlation here with new finds, new production, additional gas output, equal - some of the water cuts that we talked about in my prepared remarks, which drives a real need for additional volume and quantity of water we use that we see in parts of the Middle East. But in North America, we're certainly seeing early signs of various legislations, not just on the water side, but I see it also on the gas side, and I think that can only help and play into the strengths of what Exterran does. We're very comfortably working in that environment and certainly, the technologies and solutions we have both on the gas side and on the water side play into the overall narrative that we're seeing come forward.

And there was a press release that the force majeure had been lifted in Iraq. Just any context about the implication for Exterran?

Yes. So, it's an important project, one that we've been working on for some time. I'd say, internally, we've made incredible progress on everything that we can control with regards to all of the designs, the engineered reviews, the supply chain, the logistics aspect of planning. This is a project that will be managed and is being managed out of our Middle East team with support from our headquarters team here in Houston. The force majeure that we also read about in relation to our customer with the end user, and we've been working hand-in-hand with the three parties over the last couple of months and really we've built that into our guidance today and built that into the overall outlook that we see. It's an important project. I will say cautiously, as I made a remark in my opening comments that we're still not seeing a perfect world as it relates to COVID and as a global company with a global need for both people, parts, logistics supply chain that comes from various parts of the world. We're continuing to monitor the challenges that we see in countries and the COVID implications of what could happen in various parts and we're reading about that and we're seeing on the news daily. So whilst the force majeure has been lifted, we feel confident that the project is in a good place. And we've made a ton of progress really in line with what we anticipated at this stage with everything that we can control internally and I think it comes back to some of the things I talked about in previous calls where we invested in technology and infrastructure and allow us to have seamless engineering and our visibility on the projects globally. So really our engineering teams have been able to remotely manage this project in an incredible way. So we're excited about the project and we hope that there are many more to come.

Our next question comes from the line of Tim Monachello with ATB. You may proceed with your question.

Thanks for taking my question here. Just to do with the outlook for 15% EBITDA growth over the next couple of years, you get to over $200 million by 2023, which is definitely encouraging and thanks for providing that. Curious within that outlook, how much growth capital would you need to allocate in 2022 to get there?

Yes, we've got the one project that we announced in the first quarter, has - assumption for capital spending this year and next. And then we made the assumption, I think as we said, one more ECO project in that. So there is not a - we don't give specifics on - by project what the capital is going to be, but that's it. So, there's no other assumptions beyond that in terms of other ECO that will self-fund, so.

Okay. And it sounded like you're alluding to in your commentary, Dave, the 2022 free cash flow could also be negative. I would assume some sort of improvement from the 2021 levels, but do you have any commentary on where 2022 free cash could fall out based on your guidance for EBITDA?

Yes, so the. I think some of the variables and we didn't go through all the details, but again this ECO projects that we won in the first quarter on the water side will have more of its capital spending next year and then the big change versus this year will actually be an increased use of working capital for the project we just discussed with Doug. So that project, just based on the schedule and it's still a little bit fluid, as Andrew mentioned will actually be a - the larger use of working capital. Deferred revenue will be at a similar level to this year. Cash taxes, similar level to this year. Interest again will depend on debt balance that we calculate that. So, it actually will be an increased use of working capital next year versus this year and probably a similar type CapEx number. So, it actually will be a larger use of cash next year than this year on higher earnings.

Okay, that's helpful for sure. And then just in terms of the capital structure review, since you're not ruling out anything, do you think the Board would be supportive of issuing equity at these pressures?

Yes, again I'm not going to answer for our Board and I would just say that our Board is absolutely 100% committed to serving all of our stakeholders. And when you think about a comment like a capital structure review, it's not just investors, but they're obviously an important stakeholder group, its customers as well. When you got a pipeline like this, our customers look to us and want to know that the project will be executed flawlessly even behind the scenes. So I would say, our Board is very open and would consider any type of option that makes sense for that stakeholder group. But just as we said, we're not ruling out anything and that would be true.

All right, I will turn it back. Thanks for the commentary and impressive growth outlook.

Our next question should be from the line of Samantha Hoh with Evercore ISI. You may proceed with your question.

Dave, maybe just to stay on that line of questioning. I had thought when you guys talked with us last time that a lot of the work was going to be sort of project driven in terms of different - maybe creative ways to finance it. It sounds like you're trying out a more holistic approach now. Curious if this is going to be a hindrance in terms of booking this pre-emptive second ECO water project or do you need to have some sort of structure in place for that to put these on the books.

No, we said in the remarks that it assumes one more ECO project that we would fund ourselves. So whether that's a water project or a gas-related project, that's already contemplated in the guidance we gave. So not going to be a hindrance to that current ongoing tender process of the water deal. And in terms of project financing, it is certainly a - potentially an important longer-term solution to resolve or to provide us extra capital. So that's certainly a priority if we look at it.

Okay. And then maybe just to go back to the outlook. Just in terms of the water piece, I mean, it definitely sounds like you guys are expanding the market opportunity with different customers. Curious if you could sort of rank in terms of where that opportunity is coming from? I think I heard $150 billion or what was it like $330 billion in opportunities from oil and gas, but I'm just kind of curious what other end markets you guys are targeting or how the end markets rank within their various prior opportunities?

Yes, Samantha, it's very hard to hear. I think there's some background noise on your end. So maybe I will try to answer what I think of that. We're seeing a number of opportunities arise in various markets and as I mentioned in my prepared remarks, the technology was originally developed in segments that are going back to water municipalities. We're looking at areas that have different applications in mining. As we've been developing the technology for the oil and gas industry, we've also been talking to people and customers in that space and we're very excited about the productivity benefits that we can bring to that industry that started with the original technology, but really have just left it play out. The benefits that we've seen from our customers who are already using the technology, predominantly in the Middle East, but also here in North America, the productivity benefits that we see, we're able to reapply back to those spaces. I wanted to give a little bit of a color today because as I've talked for a number of quarters about the transformation that we're on. We started off back in 2016, sold multiple product lines, exited a lot of the low-margin commodity business and really started to focus on water as a product line and what we see going forward as I mentioned in my prepared remarks, water is going to be a significant part of the company going forward. With the initial success we've had, at least with the discussions underway with customers, it's too early today to say what that will look like from an absolute industry segment perspective, but we're very confident that over the course of the next few quarters, we'll get some success putting this technology and the application back into other segments. Making Exterran even less reliant in this space that we're predominantly in today, which is oil and gas. And so very excited by the work that's taking place by the team. It's multi-region. We have opportunities that we're working in Latin America. We have some applications that we're working on currently in Asia and obviously the Middle East has been a big market for us and will continue to be in the future as well. Over the course of the last 18 months, as we've built our capabilities in the regions, both commercially and technically, we're very confident that those applications will come to fruition and excited about the prospects that we see.

And just one last one, about the Middle East, it looks like revenue had a nice little step up sequentially this quarter. Is there anything operating on a more normal basis out there now?

Yes, I didn't catch the first part of your question.

Just the Middle East revenue had a nice sequential improvement there. I was just wondering if that - all the work and actually is sort of operating normally now, like everything has recovered from COVID?

Yes, no, I think as Andrew said maybe in response to Doug's question, the COVID challenges still aren't over. The good news is our manufacturing facility and engineering facility in the UAE has recovered well and we're performing well, but I would say we continue to face some challenges, frankly coming from places like India, where we have engineering resources and supply base that ultimately reaches in the areas like that. So, I would say it feels a little better, but I think the caution that Andrew provided is I think the world is far from past this and as we've all seen, India has become a real challenge that we're seeing regionally across the Middle East. There are some countries that are still kind of under the radar in terms of U.S. news, but are still dealing with some pretty challenging situations. But I would say that we're getting through those. Is that affecting our operations? It hasn't affected the large project there. At this point, it has been predominantly engineering and manufacturing and getting ready things in our control. But far from being something that's over and it's part of our past, we're going to probably continue to have to work through challenges for some time yet.

Our next question comes from the line of Brian DiRubbio with Baird. You may proceed with your question.

Just a couple of cleanup questions. What's the current availability on your revolver?

I don't know, but I have that in front of me it's over $100 million. Yes like, $110 million approximately.

Okay. And we're going to see increased availability as EBITDA recovers. Correct?

Right. So nice thing is with the outlook we gave for the second quarter year-over-year, that's a nice improvement. So that's going to continue. And that was part of our outlook is for growing EBITDA that's certainly going to help. I mentioned similar leverage levels next year to this year, which would imply a higher debt level on higher EBITDA, but, yes, that's - we're certainly now at a point where growing EBITDA is going to certainly help in terms of availability.

Okay. That helps. So as I'm looking at it right now, you have approximately give or take, about $152 million of total liquidity. You're going to burn about $60 million to $70 million this year.

Yes. And then we got the...

So the challenge really becomes in 2022 as you sort of hinted multiple times about your strategic review of the capital structure.

Yes. And as I said similar leverage levels next year to this year. So it's not - that we consider at all dire or extreme. But I think we have to be prudent as a company looking forward to make sure that we're trying to anticipate any challenges, but also the bigger motivation is the opportunities we see again having a pipeline of over $3.5 billion just on things we're currently working. It's really as much about being prepared for that if not more. But again, growing EBITDA obviously solves some of those challenges.

Understood. And I guess as you think about this review. Are you going to look to address the mismatch that you have in terms of where you're generating EBITDA and all your interest expense here in the U.S. and all your EBITDA outside of the U.S.? You're going to try to resolve some of that mismatch.

I mean, I would say again very encompassing review. So everything's on the table, being thoughtful working with our bank partners and thinking through all the options that just will solidify the foundation of the company. Again, there is quite a range as you can imagine of things that we will consider and look at and see if it fits into the part of the solution.

Okay. That does it for me. Thank you.

Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to turn this call back over to Mr. Andrew Way for closing remarks.

Thank you, operator, and thanks everyone for dialing in today. We look forward to updating you at the end of the quarter and be safe out there. Thank you.

Thank you for joining us today. This concludes today's conference. You may disconnect your lines at this time.