Q3 2024 Archrock Inc Earnings Call
Good morning, welcome to the Archrock third quarter 'twenty 'twenty four conference call.
Your host for today's call is Megan Repine, Vice President of Investor Relations at Archrock.
Speaker Change: I turn the call over to Mr. <unk>. Please go ahead.
Speaker Change: Thank you Julianne Hello, everyone and thanks for joining us on today's call with me today are Brad Childers, President and Chief Executive Officer of Archrock, and Doug Aron Chief Financial Officer of Archrock Yesterday, Archrock released its financial and operating results for the third quarter of 2020.
Speaker Change: Sure. If you have not received a copy you can find the information on the company's website at Www Dot Archrock dotcom.
Speaker Change: During this call we will make forward looking statements within the meaning of section 21 E of the Securities and Exchange Act of 1934 based on our current beliefs and expectations as well as assumptions made by and information currently available to our trucks management team, although management believes that the expectations reflected.
Speaker Change: Such forward looking statements are reasonable it can give no assurance that such expectations will prove to be correct. Please refer to our latest filings with the SEC for a list of factors that may cause actual results to differ materially from those in the forward looking statements made during this call. In addition, our discussion today will reference.
Certain non-GAAP financial measures, including adjusted net income adjusted EBITDA adjusted gross margin and adjusted gross margin percentage for reconciliations of these non-GAAP financial measures to our GAAP financial results. Please see yesterday's press release, and our form 8-K furnished the SEC I'll now turn the call.
Speaker Change: All over to Brad to discuss our trucks third quarter results and to provide an update of our business.
Brad Childers: Thank you Megan and good morning, everyone.
Brad Childers: Archrock through tremendous performance during the third quarter building on the strong results and momentum we've delivered all year.
Brad Childers: Archrock excellent assets customer service and execution continued to drive consistency in our overall performance and enhanced earnings power.
Brad Childers: We're excited to have successfully completed the acquisition of <unk> at the end of August which is net income and cash flow accretive.
Brad Childers: Expands our business with Blue chip customers in the Permian and establishes archrock as the leader in electric motor drive compression.
Brad Childers: The durability of our positive outlook is further supported by the strong market, including high levels of new bookings.
Brad Childers: We had forecasted increases in natural gas and oil production.
Brad Childers: Which will serve as the foundation for an opportunity rich market in 2025 and beyond.
Brad Childers: With that backdrop, let me start today's call with a summary of key highlights from the third quarter.
We delivered adjusted net income of $47 million, which is a 53% increase compared to a year ago.
Brad Childers: Adjusted EBITDA of $151 million was up more than 25% versus the prior year period.
Our contract.
Brad Childers: Freshen operations and aftermarket services segments delivered record setting adjusted gross margins due to continued pricing improvement.
Brad Childers: Enhanced efficiency and the resulting profitability gains.
And we continue to increase shareholder returns, we raised our quarterly dividend per share by 13% compared to a year ago, all while maintaining robust dividend coverage of three times.
Brad Childers: In addition, we continued repurchasing shares under our share buyback authorization.
Brad Childers: The good news is twofold.
Brad Childers: The third quarter performance I, just described reflects significant outperformance and arthritis operations before taking into account the positive impact of the types of acquisition.
Brad Childers: I continue to be excited by the magnitude of the operational and financial improvements, we've already achieved with our platform transformation.
Brad Childers: And with the third quarter, including only one months as tops results. The best is yet to come as we continue to integrate this high quality and high margin operations building, an even more prosperous archrock.
Brad Childers: As Doug will discuss in more detail, we raised our full year 'twenty 'twenty four guidance to reflect this outperformance in our operation and the addition of touch.
Speaker Change: Next I'd like to share our perspective on the market.
As we've discussed for several quarters. This is a highly constructive market for compression.
Speaker Change: Like gathering systems processing plants and pipelines compression is mission critical infrastructure for natural gas transportation and for oil production.
Speaker Change: Given the structural increase in natural gas demand ahead, the midstream sector compression industry and Archrock are all on the cusp of an expanding opportunity set.
Speaker Change: A wave of global LNG projects that have already been approved and sanctioned are expected to result in a sustained call on U S. Natural gas production beginning in 2025.
Speaker Change: And more recently additional electrical generation to support AI and data center build outs in the U S is a developing trend that augments the opportunity set for natural gas.
Speaker Change: Our customers will need our equipment, our service and our people to move gas to market to satisfy this additional demand and about 70% of our operating the fleet operating fleet is deployed on midstream gathering applications to do just that.
Speaker Change: For the other 30% deployed in gas lift applications for oil production, we see an equally exciting outlook.
Speaker Change: As more oil was produced the demand for compressors directed at gas lift also increases.
Speaker Change: Through the acquisition of tops, we have strategically grown our leverage to the Permian, which sits on the low end of the cost curve and is expected to lead the U S in oil and gas production growth well into the future.
Speaker Change: As you would expect in the opportunity rich market I just described.
Speaker Change: Server demand for contract compression horsepower to be placed into service in 2025, and even into 'twenty 'twenty six is elevated.
And we expect to be an integral participant and developing the compression infrastructure required to meet that demand.
Speaker Change: Moving to our contract operations segment, we've repositioned our compression operations to focus on the two most profitable segments of the market.
Speaker Change: Large midstream compression units and electric motor drive compression units.
Speaker Change: The benefits of this strategy are paying off and our utilization pricing and profitability.
Speaker Change: Our fleet remains fully utilized during the quarter with utilization exiting the quarter at 95%.
Speaker Change: At quarter end, we had $4 2 million operating horsepower up from $3 6 billion last quarter.
Speaker Change: On the pre acquisition fleet, we delivered approximately 37000 active horsepower growth excluding noncore active asset sales of 3000 horsepower.
Speaker Change: In addition, the former tops electric Motor drive operating fleet grew to 544000 horsepower as of the end of September.
Speaker Change: Our bookings activity with robust market demand and excellent customer service or sales team again secured strong contract operations bookings at pricing levels that were higher than in the previous quarter.
We have a strong backlog of Newbuild equipment starts for 2025 and have already begun sign contracts for 2026.
Speaker Change: Our team continues to realize additional price increases on our operating fleet and cost efficiently deliver industry, leading safety performance and equipment run times to our customers.
Speaker Change: This resulted in record monthly revenue per horsepower and adjusted gross margin on both an archrock standalone basis and on a combined basis.
Speaker Change: Our adjusted gross margin percentage was an impressive 67% up 300 basis points year over year.
Speaker Change: I remain ambitious about margin performance in 2025, given the sustained benefits I expect from investments into Limitary in communication technologies and the expansion of our electric motor drives capabilities.
Speaker Change: We closed on the acquisition of tops at the end of August just one month after announcement.
Speaker Change: I am excited with how well integration is going I'm pleased to share that everything we have seen through integration has confirmed the value of this acquisition for our shareholders our customers and Archrock.
Speaker Change: Yesterday, we announced a revised guidance for 2024, including outperformance in our pre acquisition business and four months of tops and remain confident in our ability to deliver the transactions accretion targets for 2025. This includes a 10% increase to earnings per share and at least.
Speaker Change: A 20% increase the cash available for dividend per share in 2025.
Speaker Change: Doug will cover our updated guidance in more detail.
Speaker Change: Turning to our aftermarket services segment the team delivered another outstanding quarter.
This level of performance and consistency in results is the best we have seen in a long time.
Speaker Change: Revenues remained elevated as great service is driving repeat business with customers we.
Speaker Change: We delivered a record third quarter adjusted gross margin percentage of 26% as we continue to focus on high quality and high margin work.
Speaker Change: Next let me turn to our financial and capital allocation strategy.
Speaker Change: Our strategy continues to be rooted in a returns based approach that balances our leverage position investment in high quality opportunities presented by the market and returns to shareholders.
Speaker Change: First we have an industry, leading balance sheet and leverage position and continue to target a leverage ratio of between three to three five times.
Speaker Change: This underpins our ability to execute on our plans and opportunistically adapt to market conditions.
Speaker Change: The second objective is investing in profitable growth opportunities presented by the market.
Speaker Change: Given the pricing and profitability improvements that we continue to drive in our business our corporate R. O I see is forecasted to be well in excess of our cost of capital in 2024 and is expected to continue to move higher as we invest in large midstream and electric motor drive Newbuild horsepower to.
Speaker Change: Our exceptional and growing customer base.
Speaker Change: The irr's at which we expect to invest Newbuild capital are strong in the mid to high teens with paybacks between five and six years.
Speaker Change: This is an ideal time for investment as we are capturing significantly improved levels of profitability and beginning to reap the benefits of a multi year strategic transformation to standardize our fleet and digitize our platform.
Speaker Change: We're delivering a higher level of service to our customers, which commands a higher price and further supports long term returns and shareholder value creation.
Speaker Change: During this period of market expansion, we are working to balance an abundant and attractive opportunity set with customers demands for capital discipline and return of capital.
Speaker Change: We're focused on funding this growth capex with a combination of cash flow from operations and support from modest non strategic asset sell proceeds as we continue to high grade our fleet.
Speaker Change: And finally.
Speaker Change: We're committed to returning capital to investors.
Speaker Change: Archrock Board of directors approved the second increase in Archrock quarterly cash dividend for 2024 and fourth increase in the last two years.
Speaker Change: Reflecting our confidence and enduring demand growth for natural gas and our transform platform, which is delivering excellent and consistent results.
Speaker Change: And we have significant financial capacity continue increasing cash returns to shareholders, while maintaining a prudent dividend coverage ratio.
Speaker Change: It's been an exceptionally busy productive and rewarding time at Archrock.
Transform platform is delivering meaningful and consistent growth in quarterly revenue profitability and cash flows at.
Speaker Change: At the same time, the tops acquisition strengthens our financial profile and enhances our ability to execute on our strategic plans.
Speaker Change: It allows us to invest additional retained cash flow into the business to take advantage of the robust market. We're currently seeing while further increasing cash returns to shareholders.
Speaker Change: As we talked about in prior earnings calls Archrock is celebrating its 70 <unk> anniversary. This year, a testament to the company's legacy of adaptability.
Speaker Change: While many compression companies have come and gone Archrock operation has endured and become the Premier U S natural gas compression company.
Speaker Change: I want to extend gratitude to our employees for enabling us to deliver the best performance in the company's history and for continuing to shape, our great story.
Speaker Change: With that I'd like to turn the call over to Doug for a review of our third quarter performance and updated 2020 for guidance.
Doug Aron: Thanks, Brad and good morning.
Doug Aron: Archrock delivered another quarter of strong financial results.
Doug Aron: Net income for the third quarter of 2024 was $38 million.
Doug Aron: <unk>, the $9 million of transaction related costs, and a $3 million debt extinguishment loss and adjusting for the associated tax impact we delivered adjusted net income of over $47 million.
Doug Aron: We reported adjusted EBITDA of $151 million for the third quarter 2024.
Doug Aron: We delivered an increase in adjusted gross margin of $22 million on a sequential basis due to significant significant outperformance in our pre acquisition business as well as one month contribution from the <unk> acquisition, which closed at the end of August.
Doug Aron: Our third quarter results further benefited from net gain on the sale of non strategic assets of $2 $2 million.
Doug Aron: For the third quarter growth capital expenditures totaled $42 million.
Doug Aron: Through the end of the third quarter, we have deployed $182 million of growth Capex and high return projects to meet the strong customer demand, we're seeing primarily in associated gas basins, such as the Permian.
Doug Aron: Included in the third quarter number is $12 million in Archrock funded Newbuild pet.
Speaker Change: New build Capex that was previously ordered by tops.
Speaker Change: Maintenance and other Capex for the third quarter of 2024 was $28 million.
Speaker Change: Maintenance Capex was down sequentially due primarily to fewer overhauls during the third quarter.
Speaker Change: Turning to the balance sheet.
Speaker Change: During the quarter, we funded the cash portion of the total consideration for the tops transaction with a combination of equity and debt to keep us on track to achieve our financial targets, including our objective of maintaining a consistent leverage ratio of three to three five times.
Speaker Change: We raised net proceeds of $256 million through a common stock offering in July.
Speaker Change: In August we issued $700 million.
Speaker Change: Aggregate principal amount of six and five eight senior notes due 2032.
Speaker Change: We also tendered for $200 million aggregate principal amount of six and seven eight senior notes due 2027 with $300 million of principal amount the remaining on that bond.
Speaker Change: This brought our period end total long term debt to $2 2 billion.
Our leverage our leverage ratio at quarter end was $3 five seven times.
Speaker Change: As it relates to our leverage ratio note that our leverage ratio is calculated as total debt divided by our trailing 12 months adjusted EBITDA for Archrock and for the <unk> acquisition.
Speaker Change: Given our expectation for continued strong performance in our underlying business as well as strong future earnings power from the tops assets, we would expect to be back inside of our stated leverage range of three to three five times by the end of this year, which is impressive given the earnings power on the horizon for the acquired <unk>.
Speaker Change: Electric Motor drive business.
Speaker Change: Turning to shareholder returns, we recently declared a third quarter dividend of $17.05 per share or <unk> 70 on an annualized basis.
Speaker Change: This reflected an increase of 6% over the Archrock second quarter 2024 dividend level and an increase of 13% over the Archrock third quarter 2023 dividend level.
Cash available for dividend for the third quarter of 2024 totaled $93 million, leading to impressive quarterly coverage on the increased dividend amount of three times.
Speaker Change: Importantly, we believe the increase in discretionary cash flow from the addition of tops will further enhance our financial flexibility and capacity to increase dividends to our shareholders over time.
Speaker Change: In addition to increasing the dividend this quarter, we repurchased approximately 650000 shares for $12 1 million at an average price of $18 63.
Speaker Change: Per share.
Speaker Change: This leaves $38 million in remaining capacity for additional share repurchases.
Speaker Change: As you saw in our earnings release issued yesterday Archrock increased its 2024 annual guidance to reflect year to date outperformance and the Companys pre acquisition business and to include the <unk> acquisition.
Our revised guidance reflects four months of results from the transaction.
Speaker Change: We are raising our 2024 adjusted EBITDA range to 575 million to $585 million.
Speaker Change: In contract operations, we expect full year revenue to be in the range of $970 million to $980 million with adjusted gross margin percentages of between 66 and 67% for the year as we continued to realize high levels of utilization.
Speaker Change: Benefit from price increases and AD tops as high quality fleet.
Speaker Change: In our Ams business, we now expect our full year revenue range.
Speaker Change: Full year revenue to range from $180 million to $185 million with adjusted gross margin percentages of 22% to 23%.
Speaker Change: We are focused on defending the profitability gains we've worked hard to achieve.
Speaker Change: Turning to growth capital on a full year basis, our updated expectation is approximately $260 million.
Speaker Change: As we continue to anticipate a $190 million and growth Capex for our pre acquisition business. The $70 million increase is exclusively related to the addition of the tops backlog and the remaining payments to packagers at delivery.
Speaker Change: This backlog of <unk> is substantially.
Speaker Change: <unk> committed to customers and the horsepower is expected to be placed in the field during the fourth quarter with a small portion extending into 2025.
Speaker Change: Of note, we've raised approximately $24 million so far this year through non strategic equipment sales to support our Newbuild investment program.
Maintenance Capex is forecasted to be approximately $85 million.
Speaker Change: Although our electric motor drive business will require less maintenance on a per horsepower basis. The gross amount will be towards the high end of our prior guidance to account for our larger fleet.
Speaker Change: Other capex, which consists of capital for vehicles technology and real estate is expected to be around $25 million.
Speaker Change: In summary, the significant outperformance in our pre acquisition business the.
Speaker Change: Continued deployment of innovative technology and expanded electric Motor Drive fleet result in an increase to our 2024 adjusted EBITDA guidance expectation and set a strong foundation for even higher levels of customer service operational execution and profitability in 2025.
Speaker Change: We have an opportunity rich market and expect to invest in higher return opportunities to profitably grow our business, while prioritizing and growing shareholder returns and maintaining an industry leading balance sheet.
Speaker Change: Julianne, we're now ready to open the line for questions.
Speaker Change: Thank you if you would like to ask a question. Please press star followed by the number one on your telephone keypad and the interests of time, we ask that you. Please limit yourselves to one question and one follow up question.
Speaker Change: Our first question comes from Jim Rollyson from Raymond James. Please go ahead. Your line is open.
Hey, good morning, everyone and nice job on the quarter again.
Speaker Change: Brad you talked about the margin performance, which was obviously really strong and I'm curious just to maybe understand the moving parts a little bit we can calculate obviously, what kind of revenue per horsepower per month bid cost obviously came down here and I'm just trying to understand.
Speaker Change: What the moving parts are between the legacy performance and then maybe what one month of tops actually introduced and how repeatable that kind of 67% gross margin.
Yeah. So when we look at the Standalone business jet.
That was the vast bulk of the contribution to the outperformance in the quarter.
Speaker Change: Coming in at 66, 8% before including.
Speaker Change: The performance from tops, so, it's a really strong quarter for the underlying business and the drivers of that have been really important work we have been.
Speaker Change: Executing on now for several quarters in fact years. It really reflects the strong utilization and pricing environment, we have plus the investments we've made in technology. That's both in the form of telemetry communications to help us drive a much more responsive business model for the benefit of our customers and can do.
Speaker Change: For the benefit of cost we've also reap some rewards for reduced pricing and lube oil.
Speaker Change: And the business and so that's a part of it too, but youre seeing outperformance driven by both revenue and cost and on the underlying business as being the biggest driver for that outperformance in the quarter.
Speaker Change: And I imagine with tops kind of adding on to that that probably should be a pretty sustainable.
Speaker Change: Type of number.
Speaker Change: Maybe switching gears for the follow up.
Speaker Change: Go ahead sorry.
Speaker Change: It's not just sustainable the additional addition of tops is going to continue to expand our margins. We're very ambitious about what we get to do with margins going forward, both with the acquisition and implement integration fully of the tops operation plus the future benefits of the transformation we've been investing in.
For the last few years.
Speaker Change: Yes, that's exciting.
Speaker Change: And maybe one for Brad or Doug, but you referenced the $70 million of Capex. That's in the updated growth Capex budget and I think you said $12 million came out of the third quarter. So it's like 58 in the fourth quarter as you roll into 'twenty, five and just thinking about this generally going forward.
Speaker Change: How do you think about allocating growth capex between the traditional legacy business and the electric motor drive tops business.
Speaker Change: Overall, we expect our investment in electric motor drive as a percent of our capital allocation for new build equipment to continue to expand.
Speaker Change: The legacy business was running at about between 20, and 30% of our Newbuild capex being allocated to electric motor drive both new unit acquisition as well as conversions of gastritis into electric motor drives going forward, we expect that percentage to increase to more like 40%.
Speaker Change: So 40% 50%.
Speaker Change: It's too early we haven't finished our allocation of what we think we're going to be doing in 2025.
Speaker Change: I know that percentage is going up as the market is looking to increasingly electrify and the oilfield.
Yes.
Speaker Change: That's helpful. Thanks, guys.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Selman <unk> from Stifel. Please go ahead. Your line is open.
Thank you good morning, congratulations on a nice quarter.
Okay, maybe even in your opening comments you talked about.
Speaker Change: The period of market expansion and I'm just curious.
Speaker Change: You sit today and you see the electric coming.
Speaker Change: Sort of where are we in this period in Italy as we go.
Speaker Change: So to the baseball analogy.
Speaker Change: What inning, but just how much longer does this have to run.
Speaker Change: A couple of thoughts Selman number one unlike a nine inning game or even with overtime. This doesn't and so I don't know if theres never a ninth inning.
Speaker Change: It means that the analogy can be difficult to implement but when we look at the market ahead the market is robust.
Speaker Change: Both for demand for natural gas as well as for oil production.
Speaker Change: What we are seeing in the marketplace from our customers what we're seeing in forecasts across the board is that we are at a very early stage of expanding the infrastructure to support the amount of natural gas production required to help.
Speaker Change: Power of the World and so both through the export of LNG now with increasing demand for AI and data centers, we see that the energy consumption that will be fueled by natural gas is going to continue to expand for a while on oil production.
Speaker Change: We're highly leveraged to the Permian basin.
Speaker Change: 30% of our fleet now on gas lift to support oil production.
Speaker Change: As the lowest cost basin out there, we think that the demand on the Permian oil production is poised to grow so the position we have leveraging against natural gas production, which is going to grow in oil production out of the Permian, which we believe is going to grow and as forecasted growth puts us in a strong position and I would say it's early innings.
Speaker Change: Overall in the market, but also in a game that doesn't actually have a ninth inning.
Speaker Change: All of that is fair, but then you also talked about sort of reconfiguration.
Speaker Change: Some compression with <unk>.
Speaker Change: Electric Motors.
Speaker Change: And.
Speaker Change: Is that continues should we just continue to expect.
Speaker Change: I guess margins and duration.
Speaker Change: To continue to head higher.
Speaker Change: I mentioned in the prior set of comments that we are very ambitious about where margin gets to continue to go based on our investment in our platform. The use of telemetry communications technologies to help drive efficiencies in the field certainly the size and the increasing size of our own.
We're all horsepower in our fleet on gathering and the addition of electric Motor Drive. We believe these factors are very constructive to support margin expansion going forward.
Speaker Change: Okay. Thank you.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Gabe Moreen from Mizuho. Please go ahead. Your line is open.
Gabe Moreen from Mizuho Your line is open.
Speaker Change: Gabe you might be on mute.
Speaker Change: Julian maybe let's put him back in the queue and go to our next question.
Speaker Change: Certainly our next question will come from Doug <unk> from Citi. Please go ahead. Your line is open.
Doug Aron: Alright. Thanks for the question, let me just start with a follow up on Capex.
Doug Aron: You called out the increase this year being tied to tops.
Doug Aron: Guys are still working through the 25 budget.
Speaker Change: Just curious how we should think about the right run rate for the combined business here moving forward. If you could maybe talk about the directional gate posts around 25%.
Speaker Change: Yes, it's too early for us to really give guidance for 2025, we will give guidance early next year, what I would share is that when you look at our overall capex for the last couple of years.
Speaker Change: Those levels as well as our overall capital allocation approach, we've been very disciplined and investing in high quality and high return assets.
Speaker Change: And driving profitability with the <unk> acquisition, we know we're going to continue to benefit from that momentum.
Speaker Change: And look to invest in this durable profitable business going forward. So we will be in a position to share more with you at the beginning of the year.
Speaker Change: Understood.
Speaker Change: While tight for next year, then maybe just to follow up on capital returns.
Speaker Change: <unk> cast the buyback program. This quarter again, I'm, just wondering how youre thinking about the right mix of dividend growth versus buybacks moving forward.
Speaker Change: Could you maybe see an acceleration in buyback activity here now that <unk> closed.
Speaker Change: When I outlined our capital allocation framework and the prepared part of the call I was trying to emphasize that in the balance between all of these priorities that what we see right. Now is an expansionary market ahead. So we do see an increasing call for capex to be devoted to investing in growth.
Speaker Change: And secondly, when it comes to measuring that against share buybacks, we are definitely not price insensitive and so it's a function also of what we think is the internal value generation versus the price of the stock. So in measuring that we look at our own internal investment opportunity to balance.
Speaker Change: Buybacks on the one side versus.
Speaker Change: Investing in the business on the other and then finally I've got to point out that we have an incredible set of blue chip customers.
Speaker Change: They want our services they want our equipment and they want our people to support their growth and we need to be there for them. When they are calling on us to expand with them in their production.
Speaker Change: Understood I appreciate that detail.
Speaker Change: Our next question comes from Gabriel Moreen from Mizuho Securities. Please go ahead. Your line is open.
Gabriel Moreen: Okay, sorry about that earlier guys.
Speaker Change: Okay.
Speaker Change: Quick questions.
Speaker Change: I think last call you mentioned about dry gas areas seeing some horsepower shift just wondering what the latest that you're seeing there and I think some of your competitors and probably <unk> as well as mentioned in the past about how.
Speaker Change: Our provision in the Permian not use too much of a iteration being a challenge.
Speaker Change: For deploying incremental electric units I'm just wondering what are your current read is that situation.
Gabriel Moreen: So gave I think I got two questions in there one what's going on in dry gas plays and number two.
With the installation of electrical being limited potentially gated by the expansion of power availability, what's what.
Speaker Change: Why do we think about that what our commentary on that debt against the two questions correct.
Yes, Thanks, Brian.
Speaker Change: Yes. Thanks, So number one in dry gas plays and the market is actually pretty good we actually saw.
Speaker Change: An increment of growth in the Haynesville in the quarter.
Speaker Change: Do not nothing like what we see in the Permian, but definitely measurable and we're happy to see that as.
Speaker Change: As gas production coming out of the Haynesville stepped up a bit and other dry gas plays candidly I would describe the market as flat and otherwise showing evidence of long term slow our harvesting.
Speaker Change: On which we're participating in still driving a nice operation and good profitability throughout throughout our operations.
Speaker Change: 80% of the growth that we see in horsepower right now is in the Permian. So just wanted to put the dry gas context.
Speaker Change: Context in response to your question, but there is still money to be made for a very long time and several of these splits.
Speaker Change: That's one and then on power being a gating item for the Permian electrification, we're absolutely seeing signs of that with several of our customers and yet our order book for electric Motor drive is substantial.
Speaker Change: And I'm going to point out that typically our customers only commit to contracting with us for units when they have their infrastructure.
Speaker Change: <unk> in place so for the most part.
Speaker Change: What we're seeing is still a strong order book for electric Motor drive towers, a gating item our customers responsible for that and for the most part most of our customers are able to get their power in place ahead of our compression arriving on site.
Speaker Change: Thanks, Brian maybe if I could just squeeze one follow up on that last answer.
Speaker Change: Bit of a roundabout way trying to ask about 25 legacy tops capex, but when you made the acquisition.
Speaker Change: Was it really important to you to kind of preserve the.
Speaker Change: Slots to the tops may have had with different fabricators to manufacture new units and if you don't for example use that those orders or keep that level of order book.
Speaker Change: Do you end up losing that going forward and getting it.
Speaker Change: Getting placed on behalf in the back of the queue, sorry long winded question there.
Speaker Change: Got it short answer no we were not.
Speaker Change: No part of the transaction was really driven by any supply chain concerns or.
Speaker Change: We need to expand our ability to acquire electric motor drive units.
Speaker Change: We don't have any doubt or any.
Speaker Change: Any perceived limits on our ability to acquire the equipment that we need.
Speaker Change: On the other hand, the only caveat to that I would point out is that what we did acquire with tops is an excellent set of assets.
Speaker Change: Right management team superior field staff that understand how to drive electric motor drive as well as a supply chain that has worked effectively and efficiently for that operation and so while we are not limited. We don't believe we're limited on the availability of electric motor drive for us to acquire we were happy to step in to the.
Speaker Change: Quality supply chain. They also have.
Speaker Change: Got it thanks very much thank.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Steve <unk> from Sidoti. Please go ahead. Your line is open.
Speaker Change: Good morning, Brad Doug I appreciate all the detail on the call.
Speaker Change: Want to flip to the smaller side of the business, but really impressive margin as well in the third quarter.
Speaker Change: The aftermarket business, 26% plus gross margin anything one timer in nature or anything to do with mix or is there anything sustainable in terms of that type of margin, which I don't think we've ever seen in aftermarket before.
Speaker Change: I appreciate the question and I appreciate that comment.
Speaker Change: There is nothing one time about that.
Performance that we're seeing right now so it's not noisy at all it's very clean set of results driven by the operations on the mix the improving margins do reflect an increasing mix of more service, which is higher margin compared to parts, which is comparatively lower margin.
Speaker Change: And third what's really being reflected in this margin I believe is the quality of the team that we feel for our for our customers.
Speaker Change: Just like in contract operations right now the value of <unk>.
Speaker Change: Have a great set of field technicians, well managed to execute on projects is reaping some reward from the marketplace because labor is very valuable and so we're able to both do higher margin and higher quality work for our customers and pull through those results.
Speaker Change: That's helpful. Thank you.
Speaker Change: My follow up I, just wanted to ask about.
When you made the <unk> acquisition, you talked about it being more cash flow accretive even EBITDA accretive and we're certainly seeing that your maintenance Capex guidance you really just went to the higher end of the range, even though you have significantly expanded the portfolio. When we think about the high grading of the fleet in the last three years now you've added this younger.
Speaker Change: Electric Motor drive fleet.
Speaker Change: Does that put a cap on your maintenance Capex and provide you the opportunity to generate a lot more cash flow on that revenue.
Speaker Change: Let me speak to the Capex side of the question in.
That is that because the tops fleets, both electric motor drive and younger that will be basically accretive to our same ability to save on a per horsepower basis on maintenance maintenance capex going forward.
Speaker Change: So the benefit of that cash flow that you are citing will accrue to us over time for sure.
The only caution I'd throw it in balance that off is that we just went through a significant inflationary period over the last year.
Speaker Change: <unk> years, three years and the impact of that inflation is something that we're absolutely see incomes come through in our overall parts at Spence and so now we have maintenance activity ahead, thats going to have to account for that inflationary pressure that is going to come through in maintenance Capex Needless to say we are aggressively.
Speaker Change: Looking to mitigate that with price increases as well as great execution on those projects.
Speaker Change: I'm, just giving the heads up that it's hard not to see those in that inflationary pressure come through in the cost of maintenance Capex, which doesn't have a direct revenue offset on the income statement.
Speaker Change: So that absolutely we expect the <unk> acquisition to be beneficial to cash flow.
Speaker Change: For Capex as you pointed out and we also see however, inflationary pressure coming through on Capex differently that we've seen in prior periods.
Speaker Change: Very helpful. Thanks, Brad Thanks, Doug.
Speaker Change: Thank you.
Speaker Change: Our last question today will come from Blake Mclean from Danielle Energy Partners. Please go ahead. Your line is open.
Speaker Change: Thank you very much good morning.
Speaker Change: Good morning.
Speaker Change: A lot of good information already shared but I thought maybe I'd ask one kind of bigger picture question.
Speaker Change: And it's around the opportunities youre seeing in power demand growth.
Speaker Change: We agree with you guys that it's very early innings here midstream operators continue to talk.
Speaker Change: A bunch about the growing opportunity set and I was wondering could you just talk a little bit about how you work with those teams to explore those opportunities and kind of how much visibility that gives you guys. As you look out over the business over the next.
Speaker Change: X number of years.
Speaker Change: But as you know we don't directly provide the power.
Speaker Change: And in fact, the customers typically procure the power. So we're one step removed first just on the procurement side and then second.
Speaker Change: So to address your direct question and looking at the increased power demand coming out of data centers in AI.
Speaker Change: What we do on that market is much like what we do for the LNG market and that is try to follow the market demand by project try to understand which customers gas as our gas is likely to be sourced.
Speaker Change: That project and then ensure that we're partnering as well as we can with the customers that are good.
Speaker Change: Going to participate in that production. The same thing is true on the power side, we're watching the projects as they develop as best we can trying to understand which customers are positioning to supply the gas and ensuring that we have.
Speaker Change: Great relationships partnerships and effective customer service with those customers. So we're one step removed from directly being able to do so.
Speaker Change: To give you more commentary on that just given our position in the marketplace.
Speaker Change: Got it thanks and then.
Speaker Change: And then the other one I had.
Speaker Change: Had for you guys was really more specific on.
Speaker Change: The <unk> acquisition and ongoing integration there.
Speaker Change: Anything you would share with respect to more details on lessons learning lessons being learned along the way synergy capture relative to expectations anything like that I know, it's early but.
Speaker Change: Sure I shared in my commentary the prepared commentary that the integration is going well.
Speaker Change: There are no negative surprises and in fact the <unk>.
Sure we partner with the top team and integrate with their operation to the Archrock platform. The more optimistic I am about the long term benefits of this acquisition to our shareholders.
Speaker Change: Our customers in Archrock.
Speaker Change: I'm going to add that when we approach the acquisition from day, one we add a compatible culture operating philosophy.
Speaker Change: Very similar approach on investing in technology that is <unk> communications and automation to drive our businesses and we're finding a lot of opportunities and how we get to exploit that.
Speaker Change: But that's kind of attribute that we both share to drive better service and I'll also point out that we've done a few acquisitions over the years.
Speaker Change: Late in 2019 in mid.
Speaker Change: Mid con back in 2014 and now tops.
Speaker Change: In 2024, and we have had.
Speaker Change: <unk> had a track record of very successful integration of these operations into the Archrock platform. I believe this one will be no different and maybe better than any of the prior acquisitions.
Speaker Change: Thanks for that and one one just more specific one there can you talk just a little bit about the unique market drivers and the gas lift market.
Speaker Change: Have you guys seen changes in operator behavior as it relates to gas lift versus other.
Speaker Change: Artificial lift options anything you would share there.
No we've not seen any change in that dynamic we still see strong demand for compression for uses gas lifts and we think that it is it is the dominant approach, especially in the Permian market today.
Speaker Change: Good. Thank you all very much for the time.
Speaker Change: Okay. Thank you.
Speaker Change: There are no more questions now I'd like to turn the call back over to Mr. Childers for final remarks.
Brad Childers: Thank you everyone for participating in our call today.
<unk> underlying business performance remains outstanding.
And we're excited about the tops transaction its integration, which we believe will create substantial value for our shareholders I look forward to updating you next quarter on our progress. Thank you everyone.
This concludes today's conference call. Thank you for your participation you may now disconnect.
Brad Childers: [music].