Solaris Energy Infrastructure, Inc. Class A

Good morning and welcome to the Solaris Oil Field Infrastructure Third Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal conference specialists 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 touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I will now turn the conference over to Emily Voltrick, Director of Finance and Investor Relations. Please go ahead.

Good morning and welcome to the Solaris Third Quarter 2023 Earnings Conference Call. Joining us today are 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 outline 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 in the news section on our website. 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 executed strongly and safely during the third quarter with total Solaris system count flat sequentially, despite a bottoming of market activity. We generated over $23 million in adjusted EBITDA in the third quarter, and our capital spending rate declined 20% sequentially to $17 million, resulting in another quarter of positive free cash flow. We returned $5 million to shareholders through dividends under our enhanced shareholder return framework, marking our 20th consecutive quarter of dividend payments and over $150 million returned to shareholders since 2018. I'm also pleased to share that yesterday our board approved a dividend of $0.12 per share, representing a 9% increase in our 21st consecutive dividends. Turning to the third quarter highlights, we maintained flat activity at 108 fully utilized systems during the quarter as the drop in frac crews we followed was offset by the deployment of our top fill systems. Our fully utilized top fill systems increased by six systems to 33, a year-over-year increase of more than 250%. We followed an average of 67 frac crews during the third quarter, which was down 8% compared to the second quarter, and was lower than we anticipated when delivering third quarter guidance. We believe industry activity bottomed in the third quarter and while current activity has modestly improved, we expect average fourth quarter activity levels to be roughly flat sequentially and could be down slightly depending on the impact from seasonality. As we look into 2024, we expect activity to improve from current levels and we plan to be ready for it. Independent of overall activity levels, operators will continue to push for increased efficiencies and reduce per-well drilling and completions costs. Solaris has an innovative culture that has allowed us to meet and play a role in driving several of these efficiencies for our customers. Our current maintenance and upgrade program is a large part of that. During the third quarter, we took advantage of the market softness to do proactive maintenance on our fleet, which did result in some extra costs during the quarter. This maintenance involved upgrades and standardization of equipment to ensure Solaris is prepared to respond quickly to anticipated activity improvement with the highest level of system reliability and functionality. This proactive maintenance program is currently tapering and we expect to enter 2024 with the ability to service roughly 100 frac fleets with our upgraded SAN systems, of which 60% could have multiple Solaris systems. and should the market demand it, we have additional 40 systems that could receive similar upgrades and to be deployed with customers. The continued performance of our new technology was a highlight of the third quarter. We employed six additional fully utilized top fill systems with the auto blend utilization flat, which means nearly 55% of the front crews we followed have at least two different Solaris systems on them. This was up from over 40% during the second quarter. Our top fill design has established Solaris as the largest provider of belly dump compatible well site sand storage in the lower 48. Using our top fill system, our customers benefit from higher truck payloads and faster unloading times, resulting in fewer trucks and drivers needed to supply well sites and ultimately lower costs. Our system is not only unique in its redundancy, but can also be supported by multiple electric power sources. While our top fill new build program is wrapping up in the fourth quarter, we continue to see opportunities to deploy more systems. We expect to end the year with roughly 58 top fill systems in the fleet. We had 33 fully utilized in the third quarter, which was below our deployable capacity as a number of units went through our upgrade and maintenance program. This leaves us with room to increase utilization as we continue to see interest for these units from both new and existing customers across multiple basins. We expect our fully utilized top fill system activity to improve over the next few quarters as more units become available. As our growth capital spending for top fill units slows down in the fourth quarter, our total capital expenditures will decrease. As a result of this, we expect to generate significantly more free cash flow during the fourth quarter and throughout 2024. As we've said before, generating and providing shareholder returns have always been paramount to Solaris' strategy. We initiated a regular quarterly dividend in 2018, and including our dividend announced yesterday, we have paid 21 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. As part of this enhanced returns framework, we raised our dividend twice to 12 cents from 10.5 cents, reflecting a 14% year-over-year increase. The second component of this program was the initiation of a $50 million share repurchase authorization of which we have repurchased $26 million worth or approximately 3 million shares to date. I'd like to summarize by highlighting that our results so far in 23 are showing success in our differentiated strategy of growing our earnings and return for frat crew we service. While we pulled forward our upgrade and maintenance program in the third quarter, we expect these temporarily higher costs to somewhat mitigate and are excited about the healthy outlook to continue to Thanks, Bill, and good morning, everyone. I'll recap our third quarter financial results. We generated nearly $70 million of revenue, adjusted EBITDA of over $23 million, and free cash flow after asset sales of $6 million.