Archrock, Inc. Q3 FY2024 earnings call

• Completed acquisition of TOPS at the end of August, which is net income and cash flow accretive, expands business with blue-chip customers in Permian, and establishes Archrock as leader in electric motor drive compression.
• Strong market for compression driven by natural gas demand, LNG projects, and oil production; customer demand for contract compression horsepower high for 2025 and 2026.
• Contract operations fleet fully utilized (95% utilization), 4.2 million operating horsepower; strong bookings activity with higher pricing, record monthly revenue per horsepower and adjusted gross margin.
• Aftermarket services had outstanding quarter with record adjusted gross margin percentage, revenues elevated due to great service.
• Financial and capital allocation: Focus on returns-based approach, industry-leading balance sheet, targeting leverage ratio 3-3.5 times; investing in profitable growth, returning capital to shareholders with dividend increase and share repurchases.

Contract Compression Operations: Delivered adjusted net income of $47 million, a 53% increase year-over-year. Adjusted EBITDA was $151 million, up more than 25% versus the prior year period. Fleet utilization exited the quarter at 95% with 4.2 million operating horsepower. Adjusted gross margin percentage was 67%, up 300 basis points year over year. Aftermarket Services: Delivered a record third quarter adjusted gross margin percentage of 26% with revenues elevated due to repeat business.

• Raised 2024 adjusted EBITDA range to $575 million to $585 million.
• Contract operations full year revenue expected in range of $970 million to $980 million with adjusted gross margin percentages between 66% and 67%.
• Aftermarket services full year revenue expected to range from $180 million to $185 million with adjusted gross margin percentages of 22% to 23%.
• 2025 earnings per share expected to increase 10%, cash available for dividend per share at least 20% increase.

• Inflationary pressure on maintenance CapEx.
• Factors causing actual results to differ from forward-looking statements, as referenced in SEC filings.

Q: Jim Rollyson from Raymond James asked about margin performance, moving parts, and sustainability of 67-plus percent gross margin.

A: Bradley Childers responded that standalone business was the bulk of outperformance, driven by strong utilization, pricing, and technology investments; addition of TOPS will continue to expand margins.

Q: Selman Akyol from Stifel inquired about market expansion stage and margin continuation.

A: Bradley Childers stated market is early innings with robust demand for natural gas and oil production, and investments in platform, telemetry, etc., will support margin expansion.

Q: Doug Irwin from Citi asked about CapEx allocation for 2025 and capital returns mix.

A: Bradley Childers said too early for 2025 guidance but emphasized disciplined capital allocation; mix of dividend growth vs buybacks depends on internal value generation and stock price.

Q: Gabriel Moreen from Mizuho Securities asked about dry gas plays and power provision for Permian electric units.

A: Bradley Childers said dry gas plays have measurable growth, and while power is a gating item, order book for electric motor drive is substantial.

Q: Steve Ferazani from Sidoti asked about aftermarket margin sustainability and TOPS acquisition impact on maintenance CapEx.

A: Bradley Childers said aftermarket margin performance is sustainable due to mix of higher margin service, quality team, and customer value; TOPS fleet's youth and electric motor drive will help reduce maintenance CapEx over time but inflationary pressure exists.

Q: Blake McLean from Daniel Energy Partners asked about TOPS integration and market drivers in gas lift.

A: Bradley Childers said TOPS integration is going well with no negative surprises; gas lift market still sees strong demand, dominant in Permian market today.