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Archrock, Inc. (NYSE:AROC)
Q2 2019 Earnings Call
Jul 30, 2019, 12:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. Welcome to Archrock Second Quarter 2019 Conference Call. Your host for this morning's call is Paul Burkhart, Treasurer and Vice President of Investor Relations at Archrock. I would now turn the call over to Mr. Burkhart, you may begin.

Paul A. Burkhart -- Treasurer and Vice President of Investor Relations

Thank you, Rob. 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 Aaron, Chief Financial Officer of Archrock.

Yesterday, Archrock released its financial and operating results for the second quarter of 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 belief and expectations, as well as assumptions made by and the information currently available to Archrock's management team.

Also, 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 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 second quarter results and to provide an update of our business.

D. Bradley Childers -- President, Chief Executive Officer and Director

Thank you, Paul, and good morning, everyone. Archrock achieved excellent second quarter results, including strong growth in adjusted EBITDA, further expansion of our contract compression fleet and attractive gross margin percentages for both segments. I'll start today's call with a brief summary of key highlights from the quarter.

Net income of $11 million increased substantially compared to $4 million in the second quarter of 2018. Archrock delivered $101 million of adjusted EBITDA, a record quarter for Archrock and an increase of 19% over the prior year second quarter. We expanded our base of operating horsepower, adding 50,000 in the quarter and bringing Archrock's total operating horsepower at quarter end to more than 3.6 million.

We achieved gross margins at the high end of our guidance range for both contract operations and aftermarket services. We declared a 10% sequential increase in our latest quarterly dividend while maintaining a peer leading dividend coverage of 2.5 times.

And we announced the acquisition of Elite Compression, which we expect to close later this week. We believe the Elite operations and team members will deliver significant benefits to our shareholders over the near and long term.

By every measure, this was a great quarter for Archrock, thanks to a fantastic team of dedicated employees who work extremely hard every day to deliver safe and excellent service to our customers and returns to our shareholders.

Turning to our operations, during the quarter, our contract operations gross margin improved to 62% at the high end of our full year guidance range, benefiting from strong pricing, focused cost management and excellent execution from our operations team. The total operating fleet growth of 50,000 horsepower is primarily attributable to our horsepower additions that service growing production in mostly oil plays with significant associated gas volumes.

The Permian remains the largest driver of our organic growth with solid activity and fleet deployments also coming from the DJ Basin and the Eagle Ford.

Our growth continues to focus on large horsepower equipment that services midstream activity. Large horsepower comprise 73% of our total operating fleet at the end of the second quarter and remains the focus of our new build activity today and in the future. In our aftermarket services business, we improved gross margin to 19%, also at the high end of our full year guidance range.

Our AMS revenue was below our expectations as we saw several customers defer maintenance activity in the quarter and we passed on some lower margin jobs. Still, due to our increasing gross margin percentage, the business contributed in line gross margin dollars.

Now turning to the market. The fundamental, long term market drivers for compression remains sound. Compression is directly benefiting from the low and stable U.S. natural gas prices experienced over the last decade.

This stability has driven a structural increase in demand for low cost U.S. natural gas in the form of LNG exports, Mexico exports, petrochem plant feedstocks, and fuel gas for gas fired power plants. This significant incremental demand for natural gas has driven the sharp increases in production we've experienced in recent years, and we believe we'll continue to experience in future years, together with the expansion of the production and transportation infrastructure required to support this increased supply.

Beneficially, compression is a required component of this natural gas production and transportation infrastructure. These market dynamics led to record increases in U.S. natural gas production in 2018 and most forecasts show 2019, not being far behind.

As a result, our core customers continue to plan in advance for their future compression needs with many currently preparing for needs in 2020. As a consequence, spot pricing and customer quote activity remains solid.

We're profitably capturing growth in this market, as evidenced by the 257,000 organic horsepower increase in our operating fleet over the last 12 months, coupled with a continued increase in our gross margin. We are strategically investing in assets that will deliver strong returns from long term contracts and drive long term shareholder value.

Our 2019 new build program is substantially committed to strategic customers and growth plays and we are now booking well into 2020.

Looking into 2020, we expect natural gas production growth will continue, but the rate of growth will moderate. This moderation supports our ability to further strengthen our balance sheet and to position the business to deliver positive free cash flow. We had a clearly defined, multi-year capital allocation policy focused on maximizing shareholder value.

We remain committed to three primary objectives. First, continuing to meet the needs of our customer base by investing in high return assets. Second, reducing our leverage to below four times in 2020; and third, growing our dividend, 10% to 15% annually through 2020.

We are steadfast in our commitment to this policy. Since the introduction of our capital allocation policy, we've taken advantage of the attractive opportunity set to deploy capital in high return assets, while at the same time, successfully reducing our leverage ratio by one churn and also increasing our dividend by 10% annually, all the while in concurrently maintaining peer-leading dividend coverage.

As we look ahead to 2020, our business will continue to benefit from the investments we've made and our capital policy will focus on further strengthening our balance sheet. We would expect our capital investments to follow the pattern of moderating natural gas production growth.

As a result, it is our current expectation that our 2020 growth capital will be roughly half that of 2019. This is expected to support our ability to generate free cash flow in late 2020 or early 2021 while meeting the needs of our core customers.

To date, our multi-year capital allocation policy is on track, and I'm confident based on the strength of the market and on our team, that we will meet the objectives and create value for our shareholders. The highly supported backdrop currently in place for compression also supported our recent acquisition of Elite Compression, which included the purchase of 430,000 compression horsepower.

As previously discussed, this strategic and immediately accretive transaction carries four main benefits. First, the operations we are acquiring are remarkably similar to our core contract operations business, that is large horsepower equipment focused on servicing midstream applications, backed by long term fee based agreements with blue chip customers.

Second, we executed the transaction at attractive economics. We expect the acquired equipment to generate annual adjusted EBITDA of approximately $55 million including $5 million of high confidence annualized cost synergies from the highly complementary nature of our two platforms.

Third, the acquisition reflects low risk growth. As I stated on our transaction announcement call, adding 430,000 horsepower to our fleet at a reasonable price in perhaps the strongest compression market we've ever seen is something we're excited about. And it allows our shareholders to immediately benefit from the low -- robust level of activity we continue to experience.

And fourth, this transaction results in enhanced basin density across a highly complimentary geographic footprint. The addition of Elite's assets into our portfolio further extends our leadership position in the Eagle Ford, while also adding to our position in the Permian, the Marcellus and Utica.

The related and concurrent sell of approximately 80,000 horsepower of non-core compression assets to Harvest Midstream for $30 million further standardizes our compression fleet. And the addition of Jeff Hildebrand to Archrock's Board of Directors will add substantial industry experience to our team.

Work to integrate the Elite business into our track is progressing well, supported by our team's experience and the complementary nature of our businesses, and we anticipate closing the transaction later this week. We've long discussed the benefits of consolidation in our industry, and we're excited to execute such a high value acquisition that checks every box of what we look for in a deal.

Now, I'd like to turn the call over to Doug for a review of our second quarter performance.

Douglas S. Aron -- Senior Vice President and Chief Financial Officer

Thanks Brad, and good morning, everyone. Archrock delivered another quarter of strong financial results. Revenue for the second quarter totaled $238 million, an increase of 5% compared to the prior year period. Adjusted EBITDA for the second quarter was $101 million, an increase of 19% over the second quarter of 2018, driven primarily by higher operating horsepower and improved pricing.

Net income for the second quarter of 2019 was $11 million, a substantial increase compared to $4 million in the second quarter of 2018. The second quarter of 2019 included $9 million of long-lived asset impairment, $4 million of debt extinguishment, and approximately $3 million of transaction-related costs.

The second quarter of 2018 included $7 million of long-lived asset impairment, $2 million of debt extinguishment, and $6 million of transaction-related costs. In contract operations, revenue improved for the ninth consecutive quarter to $186 million, up 13% from the second quarter of 2018.

This increase resulted from higher operating horsepower and rate increases implemented in January across our fleet. We achieved gross margin of 62%, benefiting from price increases, strong execution by our operations team and disciplined maintenance practices which helped drive lower costs. In our aftermarket services segment, we reported second quarter revenue of $52 million compared to $61 million in the prior year second quarter.

We experienced some slowdown in our AMS business during the quarter as customers delay capital spending in their ongoing focus on managing capital. Our focus on -- on high margin business drove improvement in quarterly gross margins to 19%, up from 17% in the prior year second quarter, and at the end of our full year -- and at the high end of our full year expectation of between 17% and 19%.

SG&A totaled $29 million for the second quarter, compared to $27 million for the prior year period and in line with last year -- well, with last quarter's total.

For the second quarter, growth capex totaled $82 million, bringing year to date growth capex to $193 million. As we previously indicated, our 2019 growth capital will be first-half weighted. Maintenance capex for the second quarter of 2019 was $17 million bringing the total for the first half of 2019 to $32 million. We generated $11 million from asset sales in the second quarter.

For the first half of 2019, we completed $22 million, and we continue to expect roughly $30 million of asset sales for the full year, independent of the asset sale to Harvest, driven by our continued focus on honing our fleet with removals of underperforming non-standardized assets or assets in non-growth areas.

We exited the second quarter with total debt of $1.6 billion, up approximately $47 million compared to the first quarter, as we funded with debt a portion of our growth capital that supports high return compression assets. For the second quarter, leverage remained unchanged at 4.4 times. We continue to closely manage our capital position and remain firmly committed to and on pace to achieve our leverage reduction goals.

We exited the quarter with available liquidity of $442 million, down from about $486 million at the end of the prior quarter. As Brad mentioned, we recently announced the acquisition of Elite Compression and a related sale of non-core compression equipment to Harvest Midstream for $205 million in cash and approximately 22 million newly issued Archrock common shares.

This leverage neutral funding structure keeps us on track to achieve our financial targets including leverage of below four times in 2020, as well as annual dividend growth of between 10% and 15%, and dividend coverage of more than two times through 2020. We recently declared a second quarter dividend of $0.145 per share, or $0.58 on an annualized basis, reflecting an increase of 10% over the prior quarter and prior year quarter.

Our latest dividend represents a yield of 5.5% based on yesterday's closing price and a total dividend payment of $22 million. Our second quarter dividend will be paid on August 14th to all shareholders of record on August 7th.

Cash available for dividend for the second quarter of 2019 totaled $55 million, leading to second quarter dividend coverage of 2.5 times. We are pleased to deliver on our goal of capital return while maintaining extremely attractive dividend coverage.

As you saw in our earnings release yesterday, Archrock updated its 2019 annual guidance to include the Elite acquisition of 430,000 horsepower and the divestiture of 80,000 horsepower to Harvest.

Our revised guidance reflects five months of results from these transactions. We are raising our 2019 adjusted EBITDA range to $400 million to $410 million. In contract operations, we expect full year revenue to be in the range of $770 million to $785 million.

We expect gross margins of between 61% and 62% for the year, a 50 basis point increase at the midpoint compared to our guidance in February as we benefit from the addition of Elite's high quality fleet.

In our AMS business, we lowered our full year revenue range to $210 million to $225 million with gross margins of 17% to 19%. The AMS market has slowed and customers are deferring maintenance or electing to complete maintenance internally. Right now, we anticipate similar activity levels in the back half of the year as compared to the first half.

We expect SG&A to total between $119 million and $123 million. The second half run rate is increasing due to the higher spending on our previously discussed technology initiatives. Depreciation and amortization expense is expected to be around $188 million, an increase to account for the increase in compression assets.

Interest expense for the year is expected to be slightly above $100 million. Turning to capital on a full year basis, we are tightening our range to $375 million to $400 million. This updated range is within the guidance range provided earlier this year and also includes the addition of the Elite business.

We are near -- narrowing our growth capital ranged between $285 million and $300 million.

This will support roughly $320,000 to $340,000 of new horsepower additions. Our 2019 newbuild program is substantially committed to customers and this horsepower will be placed in the field throughout 2019 with a very small portion extending into the early part of 2020.

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. Maintenance capex is forecasted to be approximately $60 million to $65 million, up slightly from our prior guidance to account for our larger fleet. Other capex which consists of capital for vehicles, technology and real estate is expected to fall to between $30 million and $35 million for the year.

This is a decrease of about $13 million at the midpoint compared to our prior guidance as we expect to spend less on vehicles and technology this year than originally forecast. We'll also continue to prune and optimize our asset portfolio for non-core assets, not meeting our targeted returns as we anticipate the sale of equipment will raise approximately $30 million for the year, excluding the transaction with Harvest, which will be used to support 2019 capital expenditures.

With that, I would now like to open the question -- open the line for questions. Bob?

Questions and Answers:

Operator

Thank you. At this time we'll be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from John Watson with Simmons Energy. Please proceed with your question.

John Watson -- Simmons Energy. -- Analyst

Thank you. Good morning.

D. Bradley Childers -- President, Chief Executive Officer and Director

Good morning.

John Watson -- Simmons Energy. -- Analyst

Brad, I don't want to belabor the point, but because it's an important -- in your growth capex commentary, you said half of what you spent in 2019 is the expectation for 2020. Did I hear that correctly?

D. Bradley Childers -- President, Chief Executive Officer and Director

You did.

John Watson -- Simmons Energy. -- Analyst

Okay. That's great to hear. I think that's prudent and will be received very positively. Great. Secondly, on the Elite acquisition, I might be incorrect here, but I believe they provided first call services to their customers. If that's correct, can you talk about Archrock's view moving forward on those type of services for Elite's legacy customers?

And if not, maybe some of the lessons you can learn from Elite and incorporate into the -- into Archrock's practices for other units?

D. Bradley Childers -- President, Chief Executive Officer and Director

Sure. Look, the first thing I'd say is we integrate the Elite operations into Archrock and work with our customers on what that means. It's critical that our customers continue to experience the same high quality services to which they've become accustomed.

In the Elite's transaction and with the Elite customer base, they have a large customer concentration with two customers that we do a lot of business with already, and that is of course Hilcorp and also Marathon.

And so the continuity of the business quality and the execution quality they will experience from the field is going to remain consistent. Second, we already within our track performed first call services with a number of customers throughout our organization, well, throughout the operation. What we offer our customers is we wish to meet them where they want to be met, where they want first call, we offer that to them. It's fully reflected in our rate.

And then there are different level of services we offer with customers depending upon the overall needs of that customer and the operational capabilities that they may have with our operational team and other staff members.

So this is not new to us. We've been there, we've done it, most importantly, we're going to continue to provide really great services to the Elite customer base, as we did to Archrock's customers today.

John Watson -- Simmons Energy. -- Analyst

That's great to hear. Thanks, Brad. One last one from me. We've heard some murmurings of a slowdown in orders for new units among the packagers. Is that something that you all have seen? And if so, can you talk about the implications of that phenomenon, given the current strength in the market?

D. Bradley Childers -- President, Chief Executive Officer and Director

Yes. So we're not a packager. So we don't have direct information, but we do believe that as delivery timeframes have reduced substantially from where they were, where we were previously greater than 50 weeks. About six months ago, we're now in the 33 to 37-week timeframe for delivery of large horsepower units. This has reflected, that the order activity has moderated and slowed down at the OEMs as well as in the packagers.

And we use that somewhat as intelligence in information on the market ahead. What I believe this reflects is that with natural gas production growth being at record levels in 2018 and then second to that in 2019 looking ahead, the market is expecting that there's less LNG coming on in 2020 through 2021, maybe even 2022.

And so order activity has already started to very helpfully moderate to support only the amount of growth that we expect in the market in those years. It does appear to us based upon forecasts by others that are responsible that natural gas production growth is going to be approximately half what it has been in the prior two years. Growth is ahead, but less growth. And so I think the order activity with packagers may be reflecting that.

The second dynamic I would suggest that's out there is that in 2018 and 2019, people order a lot of equipment and they have to digest that. Put the infrastructure in place and get it operating and so not every year is going to be a record year in production. Not every year is going to be a record year in equipment. And what we're seeing, I believe, is the market moderating its activity to reflect the actual demand for production and infrastructure that we'll see ahead.

John Watson -- Simmons Energy. -- Analyst

That is very helpful. Thanks guys, and congrats on another strong quarter. I'll turn it back.

D. Bradley Childers -- President, Chief Executive Officer and Director

Thanks.

Douglas S. Aron -- Senior Vice President and Chief Financial Officer

Thanks, John.

Operator

Our next question comes from Daniel Burke with Johnson Rice & Company. Please proceed with your question.

Daniel Burke -- Johnson Rice & Company -- Analyst

Yeah. Good morning, guys. Thanks.

D. Bradley Childers -- President, Chief Executive Officer and Director

Good morning.

Daniel Burke -- Johnson Rice & Company -- Analyst

So if we look at, you know, spot natural gas prices and low prevailing, even lower prevailing prices at the field level, can you talk about any changes that you've observed either among your customer base? I'm just thinking about different factors like churn or increased interest in gas lift or -- but not gas lift, excuse me, but the increased interest in electric compression or even gas lift?

D. Bradley Childers -- President, Chief Executive Officer and Director

Sure. So the current drivers -- or the drivers on that short term spot pricing really tend to be a combination of immediate production levels, injection and withdrawal levels and storage capacity and storage built. That is indicating on a short term basis or in a current annual basis some oversupply in the marketplace, that's really directly impacting that natural gas pricing.

But fortunately for us, our business is significantly less impacted by short term gas price volatility and it's much more levered to production levels. 74% of our fleet on gathering for natural gas production and 26% levered for oil production, because we have about 26% of our units on gas lift right now.

So it's not that we're totally immune from that level of volatility in the natural gas price, but we are very much -- it's very distinct from what really drives our operation, which is more about production growth that is anticipated in investment levels required, especially in some of the oil there, such oilier [Phonetic] associated gas plays. And so it hasn't impacted our business as much. The only caveat I put into that is that in this market, if it is sustained, we would expect to see a higher level of stock activity in our dry gas plants, which is you know, now reduced to a minority of the horsepower we have out operating. So there could still be some impact, we haven't seen that show up yet.

Daniel Burke -- Johnson Rice & Company -- Analyst

Thanks. Any comments on electric compression, Brad?

D. Bradley Childers -- President, Chief Executive Officer and Director

Sure. We do see some -- nothing like what is going on right now in pressure pumping, by the way, that's a totally independent dynamic that hasn't really translated into compression. We do have electric units in our fleets and we see some customers with a preference for electric motor drive instead of natural gas driven compression.

We see it primarily in a few markets that have the tightest environmental regulations in the country, most notably in Colorado and Wyoming. And that's where the combination of the focus on emissions management, together with available electrification has supported the development of more electric motor drive units. We really haven't seen that as a broad base move in the fleet outside of those states.

Daniel Burke -- Johnson Rice & Company -- Analyst

Got it. And then a follow up would be on the margin percentage guidance for the core contract ops. Encouraging to see that, no -- no job and I think, Doug, as you identified Elite should contribute to that step up in margin. But it was nice to see as well in Q2 the margin over were just a touch over 62%. I guess my question was just on the base Archrock business, so what are the implied cost performance that you all achieved in Q2 sustainable?

Can you sort of hold those levels as we look forward? Not over any individual quarter, but just in general, as we look forward over the second half of this year, next year. Thanks.

Douglas S. Aron -- Senior Vice President and Chief Financial Officer

Sure. Look. In a word [Phonetic], we give guidance at the beginning of the year between 60% and 62% for 2019, and then as we tightened our range to 61% to 62%, that's our indication of confidence that we can perform within that band. We're pretty excited about how well the organization is managing execution in the field and the combination of the price increases we've obtained over the last two years, the continued price stability we see in the marketplace, as well as the execution in the field is going to continue to support our performance in that range.

So we're not just optimistic that we can stay within that range, we're excited about that -- what that means to the returns in our business for our investors.

Daniel Burke -- Johnson Rice & Company -- Analyst

Got it. Thank you guys.

D. Bradley Childers -- President, Chief Executive Officer and Director

Yeah.

Operator

Our next question comes from Jeremy Tonet with J.P. Morgan. Please proceed with your question.

Charles Barber -- J.P. Morgan -- Analyst

Hey. Good afternoon, this is Charlie. If I could just go back to the margins there on contract operations, can you maybe give a little more color on that cost reduction quarter-over-quarter and how that kind of plays into your expectations to kind of keep margins around that, you know, 61%, 62% kind of moving forward?

D. Bradley Childers -- President, Chief Executive Officer and Director

Sure. Look, there's no real mystery to it. We've discussed in the past that we really see this as a business that we should be performing and it delivers really good returns on our investments to manage in the 60% gross margin range given the platform on which this business operates.

But we guided to move it up into that 60% to 62% range based on what we saw in our forecast for units going to work, pricing that we would obtain in the year, and the ability to execute in the field.

We saw a material move in parts, management of the cost of parts, quarter-over-quarter or sequentially, and that had as much to do with a little bit of spending that we were not as thrilled about in Q1 together with great performance in Q2 to move it from the sequential 59% to 62% in the quarter.

It also -- we also benefited from some lube oil cost management and the absence of worker's comp spend that we had in the first quarter. And so those added up into what I think is a pretty good story on our ability to sustain our gross margin performance in this range.

Charles Barber -- J.P. Morgan -- Analyst

That's helpful. So then I guess if I'm thinking about the full year updated guidance, including five months contribution from Elite, it feels like you're set up in a pretty good position economy may be [Phonetic] even be toward the top end of the range you've given. Is there anything else that may kind of temper that expectation to kind of maybe push toward the top end?

Douglas S. Aron -- Senior Vice President and Chief Financial Officer

Yeah, Charlie, it's Doug. Look, I'd say, we're comfortable giving guidance in the range that we gave it, which is, that -- that 61% to 62% level not -- not trying to be cagey, but you know also appreciating that from quarter-to-quarter you can have maintenance on a given unit that can move things if you have an issue.

But look, I think the bigger picture here is in terms of what we can control in our business, within reason, we've pushed the top end in what's been a very strong market. We've grown substantially by adding horsepower, but we've tried to do that responsibly and done the same with pricing. That's typically something we look at once a year.

So on the top end, our gross margins, we feel very good about the forecast that we've put in there. And then on the opex side, the sort of flip side of that coin, we're very focused on that. I mean, I don't want to -- I don't want to take away from the strong work that the team put in to manage cost and drive those costs lower by doing maintenance in a responsible way.

You know, Brad talked about parts, but, you know, can it come in at the top end of the range? We believe that it can come in within that range and that's the best guess that we have at this point. We appreciate that each of you guys might model it a little bit differently.

But from our perspective, what we're going to do is, continue to focus on that cost management and hope to deliver strong results for the coming quarters.

Charles Barber -- J.P. Morgan -- Analyst

That's fair enough. Just last one from me on aftermarket services, maybe a little bit more color on customers kind of delaying [Phonetic] maintenance activities there. How much can customers really push that out? You know, I understand you've changed your guidance for this year, but it's still possible for maybe some of these pushed out activities to still come in maybe during this year. Any color there?

D. Bradley Childers -- President, Chief Executive Officer and Director

Yeah. First let me just, own up to the fact that this business is notoriously challenging to forecast on a quarterly basis. It's a very short term turnaround on a bunch of the activity in different markets. And so forecasting this within a tight range is a challenge.

As some of our customers have chosen to defer some of their maintenance, we agree with your thesis that it can't go on forever. But in this lower natural gas price environment that you're experiencing today in some of the dry gas plays, which have a lot of activity for our AMS business, we do see some management and cost rationalization occurring in the field.

We believe some of it will come back, but how much of it? I go back to point one, which is very difficult to forecast. The only other thing I'd point out is that the other objective of growing revenue is in some -- somewhat in conflict to our objective to improve the profitability of the segment. And as we've chosen to turn away from some jobs that were lower margin in the quest for profit, we're OK with where we're coming out from a gross margin dollars perspective.

The ability to make the same amount of money with less work and less risk is not a bad thing for that business. So we're going to continue to manage it, but it's going to depend upon somewhat customer activity to see a full rebound as well as our willingness to push profit is going to or desire to push profit is going to keep that revenue number a little bit more in check in the year than we thought when we issued 2019 guidance.

Charles Barber -- J.P. Morgan -- Analyst

Great. That's it from me. Thanks.

Operator

Our next question comes from Thomas Curran with B. Riley. Please proceed with your question.

Thomas Curran -- B. Riley FBR, Inc. -- Analyst

Good morning, guys.

D. Bradley Childers -- President, Chief Executive Officer and Director

Good morning.

Thomas Curran -- B. Riley FBR, Inc. -- Analyst

For Elite, your initial cost synergy is estimated at $5 million, it struck me is quite conservative. Now that you've spent another month evaluating Elite and modeling NewCo, what's your best case scenario for annualized cost synergies and as you consider cases where you would exceed that $5 million, in which area you seem to offer the most potential for harvesting incremental savings?

D. Bradley Childers -- President, Chief Executive Officer and Director

Well, even in today's call, we reaffirmed our guidance range on the synergies at $5 million, which is the same as we had at transaction announcement. So we feel very comfortable with that. Most of that is at the SG&A platform level, as we do not need to repeat some of the more senior SG&A activities as well as back office activities that we have already established at Archrock.

And by the way, it's a cool strength that we can add a tremendous amount of incremental horsepower, whether organically as well as through acquisition, without expanding by -- other than by an increment, the SG&A base that we have already at Archrock. We love the leverage and the efficiency that gives and how well we can grow the business.

But we haven't closed the transaction yet. There's not been a lot more work done since. And finally, the Elite organization runs a very tight shop. It's a smaller organization that I would say is fairly well leaned out. And that's one of the reasons why our more modest synergy number of $5 million is the one that we continue to think is going to be achievable.

And then with that synergy, we're very excited about the value that this brings to our platform.

Thomas Curran -- B. Riley FBR, Inc. -- Analyst

Okay. Shifting gears to 2020. You know, I'll second John Watson's positive response to the sneak preview you've provided for growth capex and the discipline you've committed exercising there. I'll reach for something else on 2020. Could you provide us with any target or goal you have for where you'd like to keep working capital as you move to 2020, especially as you, you downshift from the aggressive new build investment mode you've been in?

Douglas S. Aron -- Senior Vice President and Chief Financial Officer

Yes. So Tom, this is Doug. I guess, specifically, was there a segment of the working capital balance that I mean, as I think about it, you know, receivables, inventory, payables, cash, I mean, were you, what segment of working capital were you sort of envisioning in that question?

Thomas Curran -- B. Riley FBR, Inc. -- Analyst

You know, to the extent you have targets for each that -- that would be great, Doug. Or just maybe for working capital, networking capital, its entirety as a percentage of revenue, say, on a trailing 12 month basis, just as you look to manage working capital and minimize the drag it imposes on cash flow.

You know, what are the goals or target ranges you have for either networking capital in its entirety, DSOs, days payable. Where do you focus heading into 2020?

Douglas S. Aron -- Senior Vice President and Chief Financial Officer

Yeah, well, look, I think it's an interesting question. We certainly -- look, let's start with as you talked about the day sales outstanding, and for the most part, you look at the top ten customers within our revenues and we've got some outstanding customers with outstanding balance sheets and credit ratings.

And so for the most part, our DSO is good. It can be better, I'm sure everybody's can. And we're working through some of that. But in terms of, I guess I don't think on a day-to-day basis about the working capital being particularly a drag as we think about more what we've talked about in the past is our conversion from capex on new equipment to revenue coming in and starting up is pretty quick.

There's a certain amount of working capital that will always be necessary in this business. And I guess I would tell you that even as you reduce capex, just given the amount of horsepower we have outstanding, there will always be the necessity for carrying some of those receivable balances. We've worked hard even before I got here to try to reduce the amount of inventory we're carrying and not have quite as much there.

But overall, I wouldn't anticipate into 2020 a material change in those working capital balances.

Thomas Curran -- B. Riley FBR, Inc. -- Analyst

Okay. Helpful. Thanks for that, Doug. And then, Brad, you know, ever since Archrock moved toward uniform compressor configuration in the wake of the Universal and Hanover merger, I believe you standardized to Air-X-Changers for coolers. Did you foresee any risks or maybe opportunities related to Chart Industry's acquisition of Air-X-Changers from Harsco?

D. Bradley Childers -- President, Chief Executive Officer and Director

No, we don't. I mean, Air-X-Changers has been a very reliable vendor for a very long time and we don't see that the Chart management of that business is going to change that in any way. Chart has done a very good job of reaching out to us and engaging in the communication and giving us great indications of continuity of service and quality going forward. And so we don't expect that to be a negative for us.

Thomas Curran -- B. Riley FBR, Inc. -- Analyst

Good to hear. Thanks for fielding my questions.

D. Bradley Childers -- President, Chief Executive Officer and Director

Thank you.

Operator

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

D. Bradley Childers -- President, Chief Executive Officer and Director

Thanks, operator, and thank you, everyone, for joining our call this morning. Before wrapping up, I'd like to close with this.

When I think about where Archrock stands today and what lies ahead for our business, I remain excited about where we're going for a few key reasons. The market remains strong, providing attractive opportunities to profitably grow our business, for investing in and taking delivery on new equipment that supports the structural demand growth we're experiencing. Our team of world class employees continue to execute on behalf of our customers, delivering reliable, safe and efficient compression services day-in and day-out.

And finally, we remain focused on generating attractive returns and value for our shareholders. We're in one of the strongest positions in the Company's history and I'm proud of all that we're achieving and the prospects for growth and improved returns that lie ahead.

Thanks, everyone. I look forward to talking to you again on our third quarter earnings call.

Operator

[Operator Closing Remarks].

Duration: 44 minutes

Call participants:

Paul A. Burkhart -- Treasurer and Vice President of Investor Relations

D. Bradley Childers -- President, Chief Executive Officer and Director

Douglas S. Aron -- Senior Vice President and Chief Financial Officer

John Watson -- Simmons Energy. -- Analyst

Daniel Burke -- Johnson Rice & Company -- Analyst

Charles Barber -- J.P. Morgan -- Analyst

Thomas Curran -- B. Riley FBR, Inc. -- Analyst

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