Solaris Energy Infrastructure, Inc. Class A

Good day and welcome to the Solaris first quarter 2023 earnings teleconference and webcast. All participants will be in a listen-only mode. Should you need assistance, please signal conference specialists by pressing the star keys followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. And to withdraw your question, please press star then two. I would now like to turn the conference over to Ms. Emily Boltrick. Please go ahead, ma'am.

Good morning and welcome to the Solaris First Quarter 2023 Earnings Conference Call. I am joined today by our Chairman and CEO, Bill Zartler, our President and CFO, Kyle Ramachandran, and our Senior Vice President of Finance and Investor Relations, Yvonne Fletcher. Before we begin, I'd like to remind you of our standard cautionary remarks regarding the forward-looking nature of some of the statements that we will make today. Such forward-looking statements may include comments regarding future financial results and reflect a number of known and unknown risks. Please refer to our press release issued yesterday along with other recent public filings with the Securities and Exchange Commission that outlined those risks. I would also like to point out that our earnings release and today's conference call will contain discussion of non-GAAP financial measures which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. Reconciliations to comparable GAAP measures are available in our earnings release, which is posted on our website at solarisoilfield.com under the News section. I'll now turn the call over to our Chairman and CEO, Bill Zartler.

Thank you, Emily, and thank you everyone for joining us this morning. The Solaris team delivered a strong start to the year. In the first quarter of 2023, we grew quarterly adjusted EBITDA by nearly 10% sequentially and over 60% from the first quarter of 2022 to over $25 million. We also returned nearly $20 million to shareholders through dividends and share repurchases under our newly enhanced shareholder return framework. Our profitability growth was driven by continued deployments of both our top fill and auto blend systems and slightly higher pricing that went into effect at the start of the year. The continued deployment of top fill and auto blend units helped us maintain flat sand system activity sequentially as gas basin weakness drove frac fleet reallocations and increased white space in frac calendars. Our continued field execution and new technology deployments are helping to lower our customers' costs and drive improved well site efficiency, which resulted in the adoption of incremental eight fully utilized hot fill systems in the first quarter. We expect further deployments in the second quarter will help drive incremental EBITDA contribution that should be enough to offset any activity weakness driven by recent natural gas price weakness. Our new top fill technology has made quite a meaningful impact in a very short period of time, both to our customers and to Solaris. We launched this new offering just one year ago, and since then, we've grown from a couple of systems to over 40 in the field today. In the first quarter of 2022, only about 1% of our same systems were working with a top fill kit. In the first quarter of 2023, that rose to 25%, and we have visibility for incremental deployments to continue. We believe we are the largest provider of belly dump compatible sand storage in the lower 48 today and we expect demand for flexible sand delivery solutions that save money will continue to grow even in a frack market with some softness. The growth we have seen in our activity over the last year has been driven by both an increase in drilling and completion levels and an increase in pull-through share as top fill systems go to work with new customers. Our top fill system has allowed us to deliver increased value to a larger breadth of high quality and active customers than in the past. We expect that number to grow as operators increasingly seek to align with service providers to provide high quality, low cost, and safe technologies. We believe Solaris is well positioned to meet these needs with a growing offering per well pad. Our AutoBlend electric blending system is another technology that complements our traditional offering and further develops our strategy to help operators increase efficiency. While we've consistently had two to three blenders in operation over the last year, we've increased deployments toward the end of the first quarter and are currently running closer to five to six. We expect this should benefit second quarter results and are encouraged by further benefits to our earnings with a growing backlog of demand. Our AutoBlend electric blender extends our traditional equipment from a storage solution to a hydrated delivery system and replaces traditional blenders. The automated all-electric design eliminates many of the traditional sand delivery and blender points of failure, reduces personnel requirements, and compresses overall well site footprint. Our customers have already seen these benefits translate to reduced maintenance and operating costs, freed up headcount on location, and higher uptime. While the average frat job uses one traditional blender at a time, typically one or more backup blenders are required to keep operations running. Solaris' auto blend solution is designed with redundancy through the integration of three mixing tubs directly below our sand silos, effectively representing three blenders in one. Our system also removes several moving parts including sand screws and delivery belts which drive higher reliability and uptime performance. As deployments of both our new technologies increase during the second quarter, we continue to expect higher earnings and return opportunity per well site for Solaris. On well sites that use our top fill system and or auto blend, we would have approximately two to three times the capital deployed per frac crew and would expect two to three times the contribution margin compared to a single six-pack system per crew. Additionally, because both auto blend and our top fill systems can only be used in conjunction with Solaris SAN systems. We are already seeing meaningful pull-through SAN system activity and revenue when deployed with customers who are not already using our SAN system. Our expectation for this technology-led earnings and cash flow contribution for expanded offering combined with our outlook for declining growth capital expenditures later this year drove us to reevaluate the best uses of our excess cash. Early in 23, weakness in the global markets driven by financial sector volatility and recession fears drove a meaningful dislocation in our stock price relative to what we believe the intrinsic value of the stock to be. We've consistently returned cash to shareholders every quarter since initiating our dividend in 2018, and this year we saw an opportunity to enhance that existing shareholder return program. In March, we announced a commitment to return at least 50% of free cash flow to shareholders in the form of dividends and share repurchases. We increased our base dividend by 5% to 11 cents per share which represents the second dividend raise in our company's history and 18 consecutive quarters of dividend payments.