Good afternoon, and welcome to the Archrock Fourth Quarter and Full-year 2019 Conference Call. Your host for today's call is Megan Repine, Vice President of Investor Relations at Archrock. I will now turn the call over to Ms. Repine. You may begin.

Thank you, Jen. 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 fourth quarter of 2019 as well as annual guidance for 2020. If you have not received a copy, you can find the information on the Company’s website at www.archrock.com. During this call, we will make Forward-Looking Statements within the meaning of Section 21E 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 Archrock's management team. Although management believes that the expectations reflected in 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 be will reference certain non-GAAP financial measures, including adjusted EBITDA, gross margin, gross margin percentage and cash available for dividend. 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 to the SEC. I will now turn the call over to Brad to discuss Archrock's fourth quarter and full-year results and to provide an update of our business.

Thank you, Megan, and good afternoon, everyone. Simply stated, 2019 was a great year for Archrock. The strong results we reported yesterday, once again, reflect our exceptional customer service, our high-quality compression assets and our commitment to enhance the performance and profitability of the business. At the same time, we continued to balance our opportunity set with our promise of capital discipline, leverage reduction and return of capital. Let me share some of the year's highlights. We provided annual guidance for the first time and performed well against those targets. Of note, we grew adjusted EBITDA by 18% as compared to 2018. We continued to transform and standardize our fleets. We delivered a very active newbuild program within budget, executed several highly strategic asset sales and acquired Elite Compression. Together, these efforts reduced the average age of our compression equipments, improved our competitive position and extended our runway for efficiency gains. We enhanced our financial flexibility. With the successful extension of our credit facility and senior notes offering during the fourth quarter, we believe we have eliminated Archrock's need for external financing for five years or more, based on our current long-term plans. And we pushed out $1 billion of bond maturities by seven years. Last, we stayed the course on our three-year capital allocation plan to increase our dividend 10% to 15% annually, maintain a dividend coverage ratio of at least two times and reduce leverage to below four times by the end of 2020. These 2019 achievements, among others, further solidify our position as the leader in U.S. natural gas compression. Although commodity markets are off to a volatile start this year, the compression business is inherently more stable compared to other energy subsectors with direct exposure to commodity prices or to early cycle, activity-based services like drilling…

Thanks, Brad. Archrock ended 2019 on a high note with strong fourth quarter performance. Fourth quarter revenues totaled $246 million, reflecting an increase of 6% compared to the prior year. The adjusted EBITDA of $113 million was 15% over the fourth quarter of 2018 and was driven primarily by higher operating horsepower and pricing increases. The fourth quarter results included $6 million in gains related to the sale of assets. Net income for the fourth quarter of 2019 was $46 million and included a $40 million release of a deferred tax valuation allowance and a $26 million long-lived asset impairment, both non-cash. Even adjusting for these items, we reported significant year-over-year growth in net income. Turning to our business segments. In contract operations, we had record revenue of $204 million, up 16% from the fourth quarter of 2018. This increase as compared to the prior year resulted from higher operating horsepower and rate increases implemented across our fleet at the start of the year. We delivered gross margin in contract operations of $128 million, up from $105 million in the prior year quarter as we benefited from price increases, a larger and high-graded operating fleet as well as focused cost management. Fourth quarter gross margin percentage of 63% was up 1% compared to last quarter and up nearly 400 basis points from the prior year quarter. In our aftermarket services segment, we reported fourth quarter 2019 revenue of $42 million compared to $57 million in the prior year fourth quarter. Typical fourth quarter seasonality was even more pronounced in 2019 as budget constraints drove continued deferrals in customer maintenance activities. Considering the challenging market in 2019, our ongoing efficiency initiatives drove impressive gross margin performance. Fourth quarter AMS gross margin of 15% was flat compared to the fourth quarter of…

Hey, good morning, everybody. In the release and in your comments, you highlighted a reduction in the age of the fleet that you have now. As we are thinking about the capital needs beyond 2020, and I realize this is much more long-dated question, but with the change in the age of your fleet, reduced the demand for capital over the next couple of years? Or how should we think about this aspect of the business?

Interesting question and a twist to a fleet question. So Kyle, the short answer is, the capital demand that we see is really more driven by activity in the marketplace. We just went through 2.5 years of its complete build-out of new infrastructure in North America, in the U.S., in particular. And that is really the driver of our capital budget. I mean, this was an unprecedented levels of growth in natural gas production, and we are a piece of that key infrastructure that provides that transportation in the U.S. And so that is really the driver. But on the other hand, taking the long view, as you intimate, this business was a roll-up that began sometime in the 1990s and through the early 2000s period. And in light of that and the location of a whole bunch of the compression assets that we have had historically, we have had an internal campaign of improving the operational capability, the competitiveness and the profitability of our fleet. And we certainly have turned down and pulled equipment out of the fleet that we thought did not compete effectively on those metrics. And we have invested in equipment that we believe compete exceptionally well for the future. And so some of that CapEx does reflect that migration of our fleet over a long period of time. So as we get to a point where the age of the fleet, the competitiveness of the fleet and location of the fleet has improved at the level it has today, it will and it should have a longer-term ability to generate better returns. I think that is probably the way I would characterize it more than it would reduce CapEx, which I see is market-driven.

Got it. Got it. That is very helpful. And then you had a really healthy dividend coverage ratio in 2019, it was around 2.8 times and that should be comfortably above two times in 2020. Just wondering if you have any preliminary thoughts around increasing shareholder returns with the free cash flow this year?

So as we get to that year three, as Doug said in his prepared remarks of our capital allocation commitment that we made coming from the simplification transaction and the consolidation of Archrock Partners back in 2018, we will be entering into kind of a new capital allocation program. But right now, we have been focused on debt reduction, leverage reduction and funding, self-funding our growth CapEx and what was just a really robust growth market. As we move to a more normalized market, as we move past that commitment that ends this year as we get leverage down below four times, we will absolutely step back and reevaluate our capital allocation priorities to ensure that we are maximizing the opportunity to drive returns to our investors. What that exactly looks like, it is too early to tell. The management team is going to look and put that plan together, make a recommendation to the Board, but we expect that plan to include every lever we can pull to maximize returns to our investors, whether that is in the form of additional dividend increases over time at a rate that makes sense, whether it is in the form of share buybacks, we still want to fund our operations long-term out of existing cash flow or, of course, whether that is incremental debt reduction, we believe all those levers are going to be fully available to us and on the table.

Got it? Thanks for the color. Appreciate it.

You bet.

Thank you. Our next question comes from the line of John Watson with Simmons Energy. Please proceed with your question.

Thank you. Good morning. Brad, to what extent are you expecting to shift units between basins this year, given the potential for decreasing activity in certain regions? And how will that impact utilization?

We do expect to see some shifts. The areas that are going to attract more start activity for us this year will be the Permian, of course, probably followed by the Rockies. And the primary location that we expect horsepower to come out would include the Mid-Continent area, especially the SCOOP/STACK area and possibly also the Central Texas and Barnett location. Otherwise, we see tremendous stability throughout our operation with growth primarily in the Permian and the Rockies. So that is what it would look like geographically. We don't, however, expect to see that become a large amount of horsepower moves, it is going to be incremental. But those are the horsepower moves we expect to see. Again, thinking about the market and what I have said, though, we are really expecting this to be a very stable market overall with some of the geographies that are more dry gas oriented or the older shale plays that are not as competitive to be the areas where horsepower has the potential to decline.

And I would think shifting a greater percentage of your fleet to the Permian is accretive to your overall margin profile. Can you walk us through other puts and takes between the low-end and the high-end of your gross margin guidance within contract ops?

So on the gross margin within contract ops, I will take a quick shot at the biggest drivers, and then Doug will top me up in all likelihood. But when I think about the opportunity, it is going to be driven on driven primarily around how pricing develops through the year on the revenue side and our opportunity to continue to take cost out of the organization, impacting the upside potential on gross margin. Similarly, as the competitiveness of the market may sharpen given that it is flat, we could see more price competition on the margin that could also impact it as well as, obviously, if stop activity exceeds our expectations or starts to fall below our expectations, that could provide an increment of downside pressure to our guidance range. So those are the primary drivers that I see. Doug, anything you want to talk about?

Well, I would just complement, John, on trying to get us to tighten between 61.5% and 63% looking for incremental color there is, is well done. I would say, from an annual guidance range, we are still comfortable with those as the sort of goalpost and Brad did a nice job of outlining what could contribute to those being whether we are at the midpoint or higher or lower end will depend on really those things he talked about.

Perfect. I appreciate you all taking a stab at it. Very well done on the CapEx side.

Thanks.

Thank you. Our next question comes from the line of Daniel Burke with Johnson Rice & Company. Please proceed with your question.

Hey. Good morning, guys. Let's see. So plainly, the message today and implicit in the guidance is that the contract markets really stabilize and for you guys at a run rate that appears to us to be pretty consistent with what you have kind of seen post Elite in latter 2020. But I guess, just one question. Given the scale of the 2019 growth program, is there any lingering newbuild sort of tailwind that you have got headed into Q1 2020?

Daniel, I would tell you that there is probably a little bit in terms of some units that we took delivery of in January that weren't yet started. I mean, we have as good a cash flow conversion, as I believe there is or exists in the energy business in terms of what we pay for versus when we convert that to cash flow generation. But it isn't gigantic. So in terms of the pace of our investments, I think, or more I would say it another way, is if you start to think about our annual guidance range, and we have moved away from quarterly guidance, that you would expect this stuff both the tail end of last year's CapEx and then what we will be spending in that $80 million to $100 million range this year that you would see that the majority of that come online in the second quarter of 2020. Okay.

Okay. All right. That is helpful, Doug. Let's see. Brad, you are always pretty circumspect on the pricing front. But I think in the past, you guys have alluded or referenced this. Can you talk about maybe what portion of the fleet was still sort of able or what portion of the fleet you were able to push through pricing increases as you rolled the calendar to 2020?

Well, I can talk about the structuring of where the fleet is and give you an idea. So we had about 60% of the fleet that was available for that was out of term and available for a price increase. And of that, a good portion of it was in the month-to-month nonstrategic relationship context, where we were able to push through price increases. But the price increase was to get units that have recently come out of term up to a current market pricing. And as we have had price increases now for successive years, the available differential between where those contracts rolled out of to the pricing we could roll them into is definitely more modest than we experienced in 2018 and 2019. And that is why we gave the guidance we did, which is that we still find the price environment at these high utilization levels, constructive and attractive, but it is plateauing. And so we are keeping everything at a market price in a tough year where the optics for our customers are a little more challenging. So we are happy we were able to bring that pricing up on those contracts that were available to us. It just shows the strength of the high utilization we have in the market today in what is still a natural gas production-levered business with the natural gas price production levels looking good for 2020 and certainly looking good long term.

Great. And then maybe just one last one. What are the discussions like around gas lift now versus, say, a year ago at this time?

I don't think they have changed. Our gas lift to the a portion of the fleet on gas lift remains at about 25%. And that is stable and flat. So we haven't seen a drastic change in that, notwithstanding a tapering off of drilling activity in the Permian and other plays that also use gas lift. So I haven't seen or had any discussions of a real change in that dynamic. So far in 2020.

Okay, appreciate that, although only because their gas Thanks.

Thanks.

Thank you. Our next question comes from the line of Tom Curran with B. Riley, please proceed with your question.

Thank you. Megan, welcome to your first call with Archrock and best of luck.

Thank you.

So a few guidance questions for me. Do you for the technology program, do you still expect to spend a total of roughly $25 million this year? And then whatever the final estimate is for this year, could you provide us with the breakout between SG&A and CapEx?

For you are talking about on just the technology project the breakdown between those or?

Correct. The total amount you expect to spend on, I guess, it is Phase two or this year of the technology project and then the split between SG&A and CapEx?

Yes, Tom, we are just digging up now to make sure we can give you a responsible answer to the breakout for your question.

Okay. Yes, sorry. So yes, in terms of the overall dollar spend and for 2020, we are looking like about $9 million of CapEx this year and similar, call it, $7 million, $8 million for SG&A. So total, a little bit below your $25 million number, probably closer to the $16 million to $20 million range.

Great. Thanks, Doug. And then or Brad. Sorry, Doug. And then for AMS, similar question. When it comes to the revenue split, what was it between parts and services for 4Q? And then what do you assume it will be in setting 2020 guidance? That is the revenue question for AMS. And then I will ask a similar one to John's for contract ops. What would be the key swing variables for AMS's gross margin at from the low end to the high end?

You want to take that part first, Brad, or -.

Sure. Yes, let me just what we are pulling up. Let me I can talk to the swing on AMS. Look at AMS, we have been fairly disciplined in trying to bring the gross margin up, that may have actually cost us an incremental revenue in prior periods, and we are candidly kind of OK with that. But the changes will be a combination of, yes, product mix to take the lead off the first part of your question. The more part cells that we have, that tends to be more of a drag. On the other hand, that is SG&A-light and infrastructure-light margin dollars that come in on part cells. And the higher end is the more service revenue, including work in the field for our customers on their units as well as work in the shops for the customers on their units, typically, the higher the margin is. But look, the real driver behind AMS right now is that we have been in a very constrained environment for capital. Customers have been focused on deploying a lot of new horsepower. And so I think that, that has left a lot of pent-up and deferred demand. And growing deferred demand as more of the units that were set over the last few years are in need of more service. So while we are optimistic for an uptick, we do need to see those deferred maintenance practices abate and the customers get more active on the level of investment they put into their existing equipment. So that is the long answer. Equipment mix, customer activity levels, which will drive pricing to be incrementally higher as they try to activate and find resources for including using Archrock. Doug, I will turn it to you.

Yes. Well, just on 2019, AMS revenue was 37% parts and 63% service.

And Doug, is that was that for 4Q? Or the full-year?

That was full-year. Q4 is very similar, 36% and 64%.

Great. helpful. I appreciate your fielding my questions.

Thank you.

Thank you. Our next question comes from the line of TJ Schultz with RBC Capital Markets. Please proceed with your question.

Sorry, just one clarification on guidance and pricing some midpoint guidance. I think you said it seems a full-year from Elite and then slightly higher pricing year-over-year. But is that just really saying you get the benefit of the improvements in pricing you saw in 2019 and then the assumption for this year is that you really are not factoring additional pricing increases so we flex kind of the low end and high end if you put through any pricing concessions or pricing increases from here?

No. I think it was really a comment made at a bit of a higher level, TJ. I'm if you just we look at we acquired Elite, or closed on that August one of last year, which meant we had the benefit of it for 5/12th of the year. Obviously, for 2020, we will have it for all 12 months. Also included in that transaction was the sale of the Harvest assets. And then on the price increases that were pushed through, we will see those don't happen all if necessarily at the same time. And then lastly, yes, as Brad mentioned, there will be some price increases on some of the fleet that pushes through the sort of some of those gets you to, I think, we said 4% year-over-year EBITDA growth at the midpoint. And that is if you think about where we are spending $80 million to $100 million on growth CapEx for this year to still see EBITDA growth, you would attribute that to each of those factors that we just described.

Okay. Appreciate it. Thank you.

Thank you.

Thank you. Ladies and gentlemen, at this time, there are no further questions. I would like to turn it back to Mr. Childers for closing comments.

Great. Thank you, operator. And thank you, everyone. We appreciate your interest in Archrock. Thanks to the hard work of our employees. 2020 is off to a great start, and I'm confident we have the right plan to deliver value for our shareholders today and well into the future. I look forward to seeing you all out on the conference circuit and updating you on our first quarter results in May. Thanks, everyone.

Thank you. Ladies and gentlemen, this concludes today’s teleconference. You may disconnect your lines at this time.