Archrock (AROC) Q4 2018 Earnings Conference Call Transcript

Archrock (AROC 0.31%)
Q4 2018 Earnings Conference Call
Feb. 20, 2019 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants
  
  See all our earnings call transcripts.

Prepared Remarks:

Operator

Good morning. Welcome to Archrock fourth quarter and full-year 2018 conference call. Your host for this morning's call is Paul Burkhart, treasurer and vice president of investor relations at Archrock. I'll now turn the call over to Mr.

Burkhart. You may begin.

Paul Burkhart -- Treasurer and Vice President of Investor Relations

Thank you, Adrian. Good morning, 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 2018 as well as annual guidance for 2019.

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, they 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 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'll now turn the call over to Brad to discuss Archrock's fourth quarter and full-year results and provide an update of our business.

Brad Childers -- President and Chief Executive Officer

Thank you, Paul. Good morning, everyone. 2018 was a productive and successful year for Archrock. Last night, we reported strong fourth-quarter results to cap off a tremendous year.

As I reflect back on 2018, I'm proud of what our team accomplished from a financial, operational, safety and strategic perspective. To start off, I'd like to highlight a few of our 2018 achievements. As compared to 2017, we grew our revenue by 14% and adjusted EBITDA by 26%. We grew our contract compression operating horsepower by 277,000, bringing our operating fleet to more than 3.5 million horsepower.

And our fleet utilization improved to 89% exiting 2018 compared to 85% in 2017. We delivered strong results in our aftermarket services business as well. Revenues in AMS were up by more than 26% year over year and gross margin up 17%. Lastly, we completed our acquisition of Archrock Partners in April, which simplified our structure, accelerated our leverage improvement and lowered our cost of capital.

As a result of our excellent performance and growth in 2018, Archrock is well positioned operationally and financially as we enter 2019. Our service quality is solid. We have the talent and the processes to deliver a high level of service that our customers expect. Our fleet is competitive.

The strategic editions of large horsepower, highly utilized and standardized newbuild units has continued to improve the quality and competitiveness of our fleet while ensuring that our capital is invested in the most efficient assets from a returns perspective. Our customers are first rate. We've built relationships with stable, financially strong companies who push the relationships with Archrock as a partnership, and who value our service levels, equipments and technical expertise. Our financial position is strong and improving.

We've been successful in lowering leverage and are on track to be below four times in 2020, while maintaining sufficient available liquidity to fund growth and maintain robust dividend coverage of greater than two times. Now I think it's important to put our performance and current position in the context of the unique market we're experiencing. 2018 witnessed the largest single-year increase in U.S. natural gas production in history, resulting in a robust market backdrop for our services.

As we'll discuss later, we believe the increase in natural gas production and demand for compression is not just a part of the oil and gas commodity price cycle, but rather part of a structural change necessitating significant investment in additional natural gas production infrastructure of which compression is a critical part. These dynamics have resulted in opportunities to invest in new compression units at attractive returns, realize improved pricing and deploy the sizable amount of horsepower that our customers have already contracted to go to work in 2019. Taken together these factors are resulting in an exceptional environment for Archrock and support our ability to generate stable and growing cash flows today and over time. Turning to our operations.

Our contract operations business realized excellent performance and growth. We saw a sequential revenue improvement in all quarters throughout the year and delivered full-year gross margin of 59%. We increased our operating fleet in 2018 by 277,000 horsepower, reflecting the strong demand we're experiencing across our operational footprint. Over half of our new horsepowers deployed support customer activity in the Permian Basin with a balance supporting production activity in the SCOOP/STACK, Niobrara and Bakken.

Looking ahead to 2019 and based on our customer commitments today, we expect a similar geographic makeup for this year's weak growth as we continue to benefit from a geographically diverse operating platform. The biggest driver of our demand growth continues to come from large horsepower units. Utilization for this category held steady at 91% for the second conductive quarter. While large horsepower continues to lead activity, we've also been pleased with the demand we're experiencing for smaller horsepower units where utilization improved to 84% at year-end, up from approximately 80% at the end of last year, driven primarily by an increase in Gas Lift activity.

We implemented a pricing increase on over half our active fleet in January of this year and expect additional rate increases on majority of remaining fleet throughout 2019. Given our high utilization rates, we maintain pricing prerogative and our latest contract pricing is reflective of a tight market we and our customers continue to experience. Spot pricing within our contract operations business has also remained strong with pricing on these units being placed in the field that is new units going to work being up between 10% and 30% from a year ago for high-demand units across all horsepower ranges. Similar to our contract operations segment, our aftermarket services business continues to benefit from the same strong market dynamics with 2018 revenue representing its highest level in five years.

Our aftermarket service segment is highly scalable and can be flexed to accommodate demand at activity levels merit. We're equally optimistic about the outlook for this business as customers continue to grow their own compression base and require our services. In addition to the support of macro environment, we remain proactive in our focus on innovation, efficiency and improvement. We believe this is critical to our success and ongoing position as a market leader.

Over the next two years, we'll be investing in our technology platform to harness current technology and more effectively manage our systems, processes, people and assets. This project will, among other things, upgrade our existing Oracle platform, improve our supply chain and inventory management through the incorporation of bar coding. Improve the efficiency of our field technicians and expand remote monitoring capabilities on our compression fleet. These are great investments for Archrock today, and over the long term, will result in improved equipment uptime and exceptional customer experience and operating cost reductions.

We believe this investment in our technology platform will further enhance our value proposition to our customers and yield attractive returns for our investors. Doug will walk through our capital investment plans in connection with our full-year 2019 guidance later in the call, but I'd like first to review our approach to capital allocation and growth, which is founded on three main objectives. First, to invest in capital efficiency, high return assets and efficiently grow the business and meet our customers' increasing production needs. Second, to reduce leverage to below 4x in 2020.

And finally, to continue our track record of returning capital to shareholders in the form of quarterly dividends. Our latest quarterly dividend reflects 10% growth over the prior year quarter, and we remain committed to increasing our dividend by 10% to 15% annually through 2020. Moving on to the broader market and looking ahead. We remain excited about the market for compression.

While there have been macro volatility and disruptions elsewhere in the market, the market for compression continues to experience highly constructive supply and demand dynamics. The landscape for the compression business has changed due to the structural shift in demand for natural gas, especially as the U.S. moves toward becoming a significant player in the global LNG market. The large-scale buildout of LNG facilities is creating incremental growth and demand for natural gas in the U.S.

that is directly benefiting compression, a critical component of the energy infrastructure value chain required to gather and move this additional gas to market. In addition to LNG, higher natural gas demand is being driven by pipeline exports to Mexico, power generation and used as a petrochemical feedstock. And growth in crude oil production is expected to continue to drive demand for compression for Gas Lift applications. With this continuing strong market for compression to support the transportation of natural gas and the production of oil, customer bookings and commitments for contract compression of horsepower to be placed into service in 2019, and even into 2020, remain at elevated levels.

In early 2019, we have customer commitment levels that are similar to what we had at the start of 2018. Yesterday, we announced our 2019 capital plan, which includes between $250 million and $300 million of growth investment in our fleet. This spending will support between 285,000 and 385,000 new horsepower additions, much of which is already under contract. In fact, as of today, we have signed commitments for about 250,000 of this new horsepower that will be delivered in 2019 to go to work, and we're actively negotiating additional contracts.

Our newbuild capital program reflects the ongoing opportunities to invest in assets yielding solid returns, while remaining focused on improving our balance sheet position. These 2019 investments are focused on large horsepower units that support stable, midstream applications, tied to natural gas and oil production in key growth plays. Let me summarize by sharing that the momentum we built in 2018 is carrying over into 2019. We have an exciting year ahead of us.

In addition to capturing market opportunities, we'll be harnessing technology to improve our operations to drive efficiency and profitability over time. With that, let me turn the call over to Doug for a review of our fourth quarter and full-year performance and to provide additional color on our 2019 guidance.

Doug Aron -- Chief Financial Officer

Thank you, Brad, and thanks to all of you for joining us this morning. Archrock delivered another quarter of strong financial results. Revenues for the fourth quarter totaled $233 million, reflecting an increase of 12% compared to the prior year period. Adjusted EBITDA for the fourth quarter was $98 million, an increase of 31% over the fourth quarter of 2017, driven by higher operating horsepower, improved pricing and ongoing cost controls.

Included in our fourth-quarter results was $9.5 million associated with tax audits and settlements. During the quarter, we received $18.7 million from Exterran in connection with the spin-off involving proceeds it received from PDVSA relating to the sale of Exterran's previously nationalized Venezuelan assets in 2012. This payment did not affect our income statement. Net income for the fourth quarter of 2018 was $13 million compared with $49 million in the fourth quarter of 2017.

The 2017 results included a $53 million benefit from the Tax Cuts & Jobs Act. Net income for 2018 was $29.2 million, up 58% compared to the 2017 net income of $18.4 million. In contract operations, revenue improved for the seventh consecutive quarter to $176 million for the fourth quarter, up 13% from the fourth quarter of last year. This increase resulted from higher operating horsepower through our deployment of new units as well as higher pricing.

Gross margins remained strong at 59.4%. These are attractive margins driven by our team's quality operational execution and they faced some cost pressures in certain areas of our operations, including labor and parts. In our aftermarket services segment, we reported fourth-quarter revenues of $57 million, an increase of 8% over the prior-year quarter. Gross margins for AMS were 15% compared to 16% in the prior year fourth quarter and slightly below our guidance of 16% to 18% as we experienced several higher cost jobs in the quarter.

For the year, we delivered gross margins of 17%, up from 15% in 2017, driven by better pricing and ongoing efficiency initiatives to optimize our cost structure. SG&A totaled $21 million for the fourth quarter compared to $30 million in the prior year period. The majority of the $9.5 million benefit from tax audits and settlements resides in our SG&A. Excluding this, our fourth-quarter SG&A was in line with our guidance of between $28 million and $29 million.

For the fourth quarter, growth capital expenditures totaled $61 million, bringing our full-year growth CAPEX to $252 million and in line with our guidance. Maintenance CAPEX for the fourth quarter of 2018 was $13 million, bringing that full-year total to $50 million and also in line with our guidance. We exited the year with total debt of $1.5 billion, effectively unchanged compared to the third quarter. We were successful in further reducing our leverage position, exiting 2018 with a leverage ratio of 4.4 times, down from 4.7 times in the prior quarter and compared to 5.2 times at the end of 2017 pro forma for the merger.

This reduction resulted from another quarter of strong cash flow generation in our business as well as the cash benefits of the Exterran payment mentioned earlier. We're firmly committed to our leverage reduction goals and continue to expect leverage below four times in 2020. We exited the year with available liquidity of $392 million, up from $324 million in the prior quarter. This sequential improvement in our liquidity position was driven by increased borrowing capacity on our revolver, resulting from lower leverage as a result of growth in our EBITDA.

We recently declared a fourth-quarter dividend of $0.132 per share or $0.528 on an annualized basis, unchanged from the previous quarter and up 10% as compared to 2017. Our latest dividend represents a yield of approximately 5% based on yesterday's closing price and a total dividend payment of $17 million. Our fourth-quarter dividend was paid on February 14 to all shareholders of record as of February 8. For the fourth quarter, our cash flows from operating activities totaled $55 million and our cash available for dividend totaled $59 million, leading to fourth-quarter dividend coverage of 3.4 times.

Excluding the tax settlement, our fourth-quarter coverage would have been roughly 2.8 times. As you saw on our earnings release issued yesterday, Archrock introduced 2019 annual guidance. This marks an important change in Archrock's forecasting approach as it reflects the stability in our business, it's consistent with our energy infrastructure peers and is better aligned with the way in which we monitor our performance and invest in our business. We announced a 2019 adjusted EBITDA range of $370 million to $400 million.

In contract operations, we expect full-year revenue to be in the range of $730 million to $760 million as we continue to grow our operating fleet and benefit from higher pricing on existing and newly deployed units. We expect gross margins of between 60% and 62% for the year as we extend the margin improvement we achieved in 2018 by realizing the benefits of higher pricing and continuing our focus on controlling costs. In our AMS business, we forecast full-year revenue of $225 million to $255 million with gross margins of between 17% and 19%. The first and fourth quarters generally experience some seasonal impacts compared to our second and third quarters.

We expect SG&A to total between $118 million and $124 million. Depreciation and amortization expense is expected to be around $180 million, and interest expense for the year is expected to be slightly above $100 million. Turning to capital. On a full-year basis, we expect total capital expenditures to be approximately $350 million to $410 million.

Of that, we expect newbuild CAPEX to total between $250 million and $300 million to support approximately 285,000 million to 345,000 in new horsepower with maintenance CAPEX forecasted to be between $57 million and $63 million. We also anticipate investing between $43 million and $47 million for new vehicles and further investments in technology that Brad discussed earlier. We'll also continue to prune and optimize our asset portfolio for those assets not meeting our targeted returns, and we anticipate the sale of equipment will raise approximately $30 million for the year, which will be used to fund a portion of our 2019 capital expenditures. With that, we'd now like to open up the line for questions.

Adrian, will you please begin that process? 

Questions and Answers:

Operator

Thank you. [Operator instructions] And our first question comes from Jeremy Tonet from JP Morgan.

Charlie Barber -- J.P. Morgan -- Analyst

Hey, good morning. This is Charlie in for Jeremy. I just wanted to start off on the contract ops gross margins guidance for '19. That's obviously, a bit above kind of the historical range.

So just curious is that mostly just the pricing increases that you've passing through. And I guess how confident are you that you can kind of keep cost in check to keep that margin at that kind of guidance level?

Brad Childers -- President and Chief Executive Officer

Hey, Jeremy, this is Brad. Thanks for the question. We're pretty confident that we can achieve these margins. We put the range at 60% to 62% because we're positively inclined in the market with utilization as tight as it is, notwithstanding the inflationary pressures in the marketplace.

We believe we can overcome that as well as continue to work on our cost. So we're pretty confident in the 60-plus percentage range in this period. And one thing I've said in the past and I'll repeat here is that we think that this business at around 60% gross margin space on our financial platform and on our operating platform, yield solid returns on the investments we're making today. We see that as a strong positive.

And I'll point out that when and if on our platform gross margin gets a lot higher than that it invites the customers to self execute more than they do in their own analysis. So we feel really good in this range of kind of plus or minus 60%, and in the market we see ahead, we expect to be on the plus-60% range, which is what you see on our guidance.

Charlie Barber -- J.P. Morgan -- Analyst

Great. One on capital spend. I mean, even looking beyond 2019, you've seen some of your peers have come down a bit on where their spend is. So I'm just curious where your thought is as you think maybe in regard to kind of field age and new orders versus maybe high grading kind of the existing operating fleet.

Just the general mindset there.

Brad Childers -- President and Chief Executive Officer

Sure. One, look, I can't speak to what our competitors or others are seeing in their business exactly. I can't speak to what we're seeing in the market. And, look, stepping back, what we see in the market today is an opportunity to step forward and not to lean back.

The drivers of that are both the macro level as well as the transactional level. At the macro level, the shift that we see in the need for more infrastructure for the higher levels of natural gas and oil production in the U.S. that are occurring right now, they require investment. And this is part of the structural shift in demand driven by, candidly, a low natural gas price, which is resulting into the monetization of a lot of gas in the form of LNG and petrochem and for energy use and expert.

So that's the macro fundamental demand driver that is there and the U.S. supply is readily affordable, available and abundant to meet it. And so this is a part of the infrastructure buildup, it's been in the works for the last 20 years with the as in a Shell and Shell resources that is in both oil and gas and the natural gas price that's come from it's -- just monetizing, it's on the gas and this infrastructure investments require it to bring it to market. At the transactional level, our customers are looking for us to support their growth.

And so what we announced for our CAPEX budget equates to between 285,000 and a little bit over 300,000 horsepower of additions. 250,000 of which have already been booked to start 2019. So both at the macro level as well as the transactional level we see a great investment opportunity in our business and enterprise today as well as in our fleet to generate solid returns and be there when our customers need us. And that's what our capital budget requires.

Charlie Barber -- J.P. Morgan -- Analyst

Make sense. One last follow-up here. On -- thinking about some of the your customers, not necessarily your customers, but some of the E&P names that have been reporting and kind of pulling back a little bit and trying to live more within free cash flow. I was curious what your thoughts are on the effects of maybe a slower growth outlook or pace versus maybe some potential, greater reliance on outsourcing compression services for maybe some of these larger E&P or up ship companies that have kind of traditionally done it in-house.

So just wondering if there's kind of may be any upside do you see that's something like that.

Brad Childers -- President and Chief Executive Officer

Yes. Totally constructed dynamic coming from our customers today on that front. One of the other reasons that you hit on that says this is the time to lean into investing in this business is that because of the demands for capital allocation upstream in the E&P customers, they are looking to outsource more right now. And so that capital rationalization that's occurring in the marketplace is very much constructively supporting the growth in our business as we put out long-term, midstream, good-yielding assets that we expect to be deployed and in place for a long time.

So that dynamic is very much supporting the growth in our business right now.

Charlie Barber -- J.P. Morgan -- Analyst

Great. That's it for me. Thanks.

Operator

And the next question comes from Ryan Pfingst from B. Riley. Your line is open.

Ryan Pfingst -- B. Riley FBR, Inc. -- Analyst

Hey, good morning, guys. Just on pricing. How much spot rate's up since your call on November 1? And maybe if you haven't had any, how much are they up since they bottomed back in early '17?

Brad Childers -- President and Chief Executive Officer

Well, for a lot of reasons, talking about the amount that the prices are up in the very short term is not something we're willing to do. That's just too tight of information to share for kind of obvious reasons. But from a bottom-to-top perspective, across large demand units, we're up between 30% and 40% in pricing overall from the bottom. So I mean, pricing is up sharply.

Now I will point out that there are some cost pressures that we've encoded, obviously, you see it in our gross margin performance, but pricing is definitely up and it's up robustly.

Ryan Pfingst -- B. Riley FBR, Inc. -- Analyst

OK, that helpful. And then turning to aftermarket services. What sequential progression do you expect for quarterly gross margins? And what are going to be the key swing variables that will likely determine whether the annual gross margin percentage ends up closer to 17% or that 19%?

Brad Childers -- President and Chief Executive Officer

Yes. Look, the BMS business, it's a lumpy business. It's a good business and it very much constructively adds to the return on the capital we have invested in this business by giving us that incremental margin, that's lower CAPEX requires -- we like the business, especially it sits right on top of the contract operations business very effectively. But that lumpiness translates into quarter over -- translates into what we see quarter over quarter.

And what influences it is the type of business mix we have in the quarter. More service business pushes us to the higher edge of our margin range and more parts business, which has a lot lower cost associated with it, pushes us to the lower end of that margin range and that's the variable that you're seeing. And it makes the business very hard to forecast and predict beyond the range that we set out. But those are the primary drivers that we see in the business.

Ryan Pfingst -- B. Riley FBR, Inc. -- Analyst

All right. Thanks, guys. I'll turn it back.

Brad Childers -- President and Chief Executive Officer

Thanks.

Operator

And the next question comes from John Watson from Simmons Energy. Your line is open.

John Watson -- Simmons and Company International -- Analyst

Hey, good morning, guys. Brad, I wanted to start on other CAPEX. Yes, I think you called this out in your prepared remarks, but I just want to make sure, the increase year over year in other CAPEX, that's due to some of the technological focused upgrades that you mentioned, the Oracle system, et cetera, is that right? And can you also talk to the potential revenue benefit from those of upgrades?

Brad Childers -- President and Chief Executive Officer

So the project that I described, you're right, it was in my prepared remarks -- is a part of the other CAPEX increase. So first off, I'll point out that, that other CAPEX increase comes in two components really. One is the technology project that I'll discuss. The other component is increasing investment in our tucks, which falls into other CAPEX.

And that's just required to support the level of breadth we're seeing in our operations and our workforce. But on the technology project, I'll share with you, this is pretty exciting stuff, we've seen the future and stepping back, we are looking at the ability to deploy more current technology tools to our overall platform to drive just a much higher level of efficiency in our field operations as well as in the company's operating platform overall, including our ERP. So what this will look like will be an improvement in the operating platform in the ERP system first, followed by deployment of better technology in the field to achieve a different level of efficiency in our field operations, and candidly, a great level of customer service experience improvement. So there's what we're working off of this project.

It's going to require about two years of investment and that's what's driving the other CAPEX. And we'll start to see the benefits of this project probably in 2021, potentially as early as late 2020, but that's the timing of when we're going to see it. Look, this is going to require about $25 million of investment, split between CAPEX and SG&A in 2019 and about $20 million in 2020. And then we'll see the benefits accrued after that.

As far as quantifying the benefits, what I'd share with you is that it's too far out. We believe this is going to generate solid returns. In fact the returns on this investment are equal to or exceed what we can achieve in investing in our equipment today. And so we're excited about those investment returns.

It's definitely going to have a positive impact in lowering our cost. How well that translates into incremental growth, more cost-effective growth and/or improvements in margin, we're going to -- we'll talk about that in the future as we see the benefits of the program.

John Watson -- Simmons and Company International -- Analyst

Great. That is very helpful. Thank you for the breakdown. And maybe as a follow-up to an earlier question on pricing, can you speak to what the gap is between leading edge and maybe your average unit deployed? And I know that's not easy because of the different horsepower classes, but I'm just trying to think through if there is a wide gap or a narrow gap between a unit deployed today that's been out in the field for a few years versus one that just went into the field today.

Brad Childers -- President and Chief Executive Officer

Yes. No, we can't quantify that. But what I'd share with you is that our effort right now is to keep our operating horsepower at market pricing levels. As you know, we have contracts that are of different durations from one to four years typically.

And so we can implement a price increase on units that are out of term. For 2019, we expect to be able to bring the vast majority of our fleets up to market pricing throughout the year. The price increase we implemented so far in January will bring about half the feet up to current market pricing, and that market pricing varies by market as well as by unit. But we feel good about that and then the rest of it will get -- the vast majority of the remaining fleet up to market pricing by the end of 2019.

This has been a multiyear effort to bring all of our pricing up to market because of the term that we have on the contracts. But we feel good about our ability to do that in 2019.

John Watson -- Simmons and Company International -- Analyst

Perfect. That's very helpful, more than you know. One last one. You did a really nice job of speaking to why growth CAPEX is needed at this point of the cycle for a variety of different reasons.

Is there a -- I'm assuming that you could've spent even more growth CAPEX, you could have grown the fleet by a larger number than what you're planning to. Can you speak to that either qualitatively or quantitatively how the demand for horsepower compares to what you're planning to spend?

Brad Childers -- President and Chief Executive Officer

Yes. Correct, you're completely right. There is more demand in the market then we are meeting. We are definitely trying to work with our key core customers to meet their needs, but we are not satisfying all the demand for capital and equipment that we could entertain with new customers in the marketplace today.

So in order to satisfy and meet the multiple capital allocation objectives we've laid out, this is the amount of capital that we've been willing to spend in this market, but there's definitely an appetite for the market to absorb more. The other side of that is also interesting because if we don't see the market developing along the lines that we've seen then we'll definitely be on the lower or even have the ability to pull back some of our CAPEX. So the CAPEX plan that we've laid out is dependent on the market performing as we expect it to. We have flexibility to both ramp up within the range and meet our financial objectives in 2020 as well as candidly pullback if the market doesn't show up as strongly as we see it showing up right now in our expectations with our customers.

John Watson -- Simmons and Company International -- Analyst

Great. Understood. Thank you, all, for taking my questions, and congrats on a good quarter.

Brad Childers -- President and Chief Executive Officer

Thanks.

Doug Aron -- Chief Financial Officer

Thanks, John.

Operator

[Operator instructions] And our next question comes from Daniel Burke from Johnson Rice. Your line is open.

Daniel Burke -- Johnson Rice -- Analyst

Good morning, guys. As the market has heated up over the last couple of years. I was just curious, what level of pricing escalations have you seen on your newbuild investment costs? Can you kind of quantify may be the step up, if any, you've seen in the unit pricing over the last, say, two years?

Brad Childers -- President and Chief Executive Officer

Yes. The key vendors have -- we've seen price increases in the 5% range in '18 is what we saw. And that's both coming from the major OEMs and through the packagers. But it's been in about that range.

Daniel Burke -- Johnson Rice -- Analyst

OK. Thanks, Brad. And then sort of shifting gears. The focus here is appropriately on growth and a 90%-ish utilized fleet certainly speaks to a tight market.

We've recognized there's churn in the fleet as well. But what's the opportunity given the intensity of demand out there in the market to push utilization of the entire fleet above that sort of 90% level as we look forward over the next year or two?

Brad Childers -- President and Chief Executive Officer

We're going to try to exactly that, I can assure you. That's the easy thing to say. The hard thing is to gauge how successful we can be given the fact that there is churn, so we'll have new units coming into the fleet that start working when we turn them on. We have units coming off, we have units in the shop getting ready for the next job.

And then we have to have somewhat in every major market, the ability to have units, especially on the smaller range available for us. But, look, for the highly utilized, large horsepower, three-stage units, we're well above 91% already. So we're pushing that utilization rate as high as we can, we're going to continue to work to optimize our business and have deliveries and work done on it just the time -- in-time basis as we can to achieve the highest utilization returns for investors as we can. So we're already seeing that in certain categories and it's working.

The ability to pull that up across the broad range of horsepower and geography that we operate in, that makes it more challenging.

Daniel Burke -- Johnson Rice -- Analyst

Got it. And then maybe if I could squeeze just one last one in. I don't want to turn annual guidance into quarterly guidance, but when we think about the margin progression this year, you've got the price capture weighted -- price capture here in Q1. Should we think about the margin advance in the contract ops business is pretty ratable as the year advances at least through Q3? Or would you provide any incremental nuance to how to think about that margin trend as the year goes on?

Doug Aron -- Chief Financial Officer

Yes. Sure, Daniel, it's Doug. I think -- look, let's talk, first, I guess, about our CAPEX levels and spending. We see that being weighted sort of 60-40 or even 65-35 to the first half of the year.

Obviously, you get a slight lag, not much. I mean, I think this business is much as any, does a very good job of sort of converting CAPEX into cash flow pretty quickly. So for modeling purposes, I think we tell you maybe start assuming that in Q2 and Q3 given that the bigger slug of the CAPEX gets spent in the first half with them, the smaller percentage showing up in the second half of the year. And yes, you're right on the pricing impact, most of that flows through effective January 1.

And so I think, as you said, we've got guidance that we've given that's meant for the year. There is some start-up expenses that you'll also see that are related to those new starts that will offset or mute some of that, which is why I say, look for those to start in Q2 and Q3. But overall, that's kind of where we'd expect to be.

Daniel Burke -- Johnson Rice -- Analyst

Got it. OK, Doug. I appreciate that. Thank you, guys, for the time.

Doug Aron -- Chief Financial Officer

Thanks.

Brad Childers -- President and Chief Executive Officer

Thanks, Daniel.

Operator

There are no more questions. I'd now like to turn the call back over to Mr. Childers for final remarks.

Brad Childers -- President and Chief Executive Officer

Great. So thank you, everyone, for joining our call this morning. 2018 was a strong year for Archrock. I'm optimistic that 2019 is shaping up to be an equally constructive year as we benefit from the strong market dynamics that are driving oil and gas production growth in the U.S.

I look forward to updating you on our first-quarter results in May. Thanks, everyone.

Operator

[Operator signoff]

Duration: 43 minutes

Call Participants:

Paul Burkhart -- Treasurer and Vice President of Investor Relations

Brad Childers -- President and Chief Executive Officer

Doug Aron -- Chief Financial Officer

Charlie Barber -- J.P. Morgan -- Analyst

Ryan Pfingst -- B. Riley FBR, Inc. -- Analyst

John Watson -- Simmons and Company International -- Analyst

Daniel Burke -- Johnson Rice -- Analyst

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