Solaris Energy Infrastructure, Inc. Class A

Good morning and welcome to the Solaris Oilfield Infrastructure Second Quarter 2023 Earnings Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key 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. Please note this event is being recorded. I would like now to turn the conference over to Yvonne Fletcher, Senior Vice President of Finance and Investor Relations. Please go ahead.

Good morning and welcome to the Solaris Second Quarter 2023 Earnings Conference Call. I am joined today by our Chairman and CEO, Bill Zartler, and our President and CFO, Kyle Ramachandran. 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 outline those risks. I would also like to point out that our earnings release in 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, Yvonne, and thank you everyone for joining us this morning. I'm pleased to share another strong quarter of profitability growth as we continue to see success from our top fill and auto blend technologies. We grew quarterly adjusted EBITDA by 7% sequentially and 27% from the second quarter of 2022 to nearly $27 million. We generated free cash flow of $7 million and we returned $16 million to shareholders through dividends and share repurchases under our enhanced shareholder return framework. Industry fractures were down sequentially in the second quarter as the impact of soft natural gas prices became evident in completions activity. We saw the impact of lower completion activity in our sand system count We're able to offset that with earnings contribution from our top filled and auto blend systems, which were both up over the last quarter, as well as from increased contribution from ancillary trucking services. Over the last 18 months, we've made strategic investments in new technologies with the goal of enhancing both our earnings power and addressable market potential. Our goal with these investments is to provide incremental value to our customers that complement our core sand storage offerings. As a result, this allows us to expand our footprint and customer list in the lower 48 and drive higher earnings and cash flow per frack crew we service. Our results this quarter continue to highlight the returns on this strategy. Prior to developing these new technologies, on average, we deployed one six-pack sand system to every frack crew we covered. Today, with our expanded offering, we're deploying 50% more systems, including top fill and auto blend units, on our covered frack fleets. We expect that further new equipment deployments in the third quarter will help drive incremental EBITDA contribution, resulting in growing earnings per frac fleet regardless of what happens with industry frac activity. Our top-fill technology has been a major driver of the success. Today we have nearly 50 units in the field compared to only a couple units a year ago. Our top-fill system provides a powerful combination of our reliable and industry-leading sand handling equipment with the flexibility to use both high capacity belly dumps while preserving pneumatic trucking as a backup. This flexibility reduces the total delivered cost of sand for our customers by reducing the number of truckloads required through higher payloads, turning trucks more quickly, and industry leading flexibility with multiple unloading options. Our top filling units have become industry leading in a short period as we are the largest provider of belly dump compatible sand storage on the market today. Our AutoBlend electric blending system is another technology that complements our expanded offering and further develops our strategy to help operators increase efficiency. Our customers continue to see the benefit from increased automation, smaller footprint, built-in redundancy, enhanced safety, and all-electric design when compared to the downtime and costs associated with traditional and even some newer electric blenders. In the second quarter, we more than doubled our average auto blend deployments, which helped drive improved cost management and profitability during the quarter. We're encouraged by a strong backlog of demand and expect another quarter of improved profitability in this offering in the third quarter. Longer term, we also continue to believe the strong backlog of demand for electric frack fleets coming into the market this year and next provide an opportunity for continued auto blend adoption. More recently, we have successfully integrated our auto blend, top fill, and sand systems on several well sites with the same power sources our customers are using to supply their frac operations, including grid power, turbines, and natural gas powered engines. Our systems have been 100% electric since inception, which has become even more relevant today as operators are pushing toward electrification of oil and gas development to lower cost and improve their emissions footprint. All of our systems are designed to be able to plug into virtually any of our customers' on-site power sources with no modifications required. In some cases, this has already given us a competitive advantage where an operator required equipment on-site to be plug-in capable. We believe the trend of operators asking for or requiring all electrical equipment will continue to grow, especially as the demand for E-Fleets grows. This presents a unique opportunity for continued adoption of both our current and new technologies. As we head toward the back half of the year, we expect our capital spending rates to slow down as we complete our budgeted capital program for new technology units. We will continue to reassess the market for signs of additional demand for more units, but at this time, our capital guidance remains unchanged. With the enhanced earning power of Solaris, we believe we will begin generating meaningful cash flow again as this growth capital slows. We began to see this during the second quarter as free cash flow inflected to a positive $7 million. We expect free cash flow to accelerate in the back half of this year. Generating and providing shareholder returns has always been a paramount to Solera's strategy. We initiated a regular quarterly dividend in 2018 and have paid 19 consecutive dividends since then. Earlier this year, we committed to a long-term framework for enhancing our existing shareholder returns program by returning at least 50% of free cash flow through dividends and share repurchases. We increased our base dividend by 5% to $0.11 per share, which represents the second dividend raise in our company's history, and initiated a $50 million share repurchase authorization. Since then, we've repurchased approximately 3 million shares, or 6.5% of the company's fully diluted ownership, for $26 million. On a cumulative basis since 2018, we've returned nearly $150 million to shareholders, which includes the repurchase of approximately 12% of the total outstanding shares. I'd like to summarize by highlighting that our results so far in 2023 are showing success in our strategy of growing our earnings and return per frac crew we service. We expect our profitability to trend higher as we expand our offering per well pad. Free cash flow is expected to be strong moving forward, driven by an expanding margin per frac crew and the completion of this year's growth capital program. Although operator activities expect to flatten out in the second half of this year, the longer-term commodity outlook remains healthy. We will continue to be focused on delivering strong operational execution, growing our earnings power, and executing our shareholder return framework through a consistent dividend and opportunistic share repurchases. With that, I will turn it over to Kyle for a more detailed financial and guidance review.