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spk04: Good day and welcome to the Solaris second quarter 2021 earnings conference call. All participants will be in a 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 a touchtone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Yvonne Fletcher, Senior Vice President of Finance and Investor Relations. Please go ahead.
spk00: Yvonne Fletcher Good morning and welcome to the Solaris Second Quarter 2021 Earnings Conference Call. I am joined today by our Chairman and CEO, Bill Dartler, 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 new section. I'll now turn the call over to our Chairman and CEO, Bill Hartler.
spk05: Thank you, Yvonne, and thank you, everyone, for joining us today. The second quarter of 2021 was another strong quarter for Solaris. We generated a 23% sequential increase in revenue to over $35 million. Adjusted EBITDA increased 6% sequentially to $6.5 million. And we paid our 11th consecutive quarterly dividend. We ended the quarter with $46 million of cash and no debt on the balance sheet. During the second quarter of 2021, oil prices climbed from over $60 to over $70 as operators remained disciplined with supply additions and global oil demand continued to improve. U.S. natural gas prices also improved from the $2 range to over $4. Historically, U.S. operators have been quick to ramp completions activity in reaction to similar commodity price increases. This cycle, however, we are seeing a measured industry reaction, which we believe bodes well for sustained recovery in the U.S. oil and gas market. During the second quarter, public operators maintained capital and production discipline by holding FRAC programs relatively steady. Private operators that added significant completions activity in the run-up to oil prices in the $60 range have not had a significant activity response to the $70 jump. The U.S. horizontal rig count, however, is currently up over 30% from the second quarter average, while the completions ramp remains slower. Taking an initial look at the rest of the year, we believe that operators are allocating an increased portion of remaining 2021 budgets to drilling activity. Combined with sustained higher commodity prices, this provides incentive for increased U.S. completions activity later in 2021 and through 2022, which Solaris is gearing up for with new and existing customers and technology, which I will give more detail on shortly. Turning to Solaris activity, our system count has grown more than 25% over the course of 2021, which has closely followed overall industry trends. Our permanent exposure drove a stronger start in the first quarter than peers with different basin exposures, and our business model was relatively less impacted by winter storm Erie in February, both of which impacted our relative growth rates in the second quarter. Looking into the third quarter, we expect relatively flat frack activity for the industry as operators maintain capital discipline and shift budgets towards drilling activity. However, we expect to see some market share gains that should lead to solar system count increasing throughout the third quarter to exit higher than where we are today. This week, we are finalizing a three-year agreement with an existing customer who will switch their non-Solaris-provided sand storage equipment to Solaris on jobs where they manage those supply chain decisions. While we do not control the pace of this activity ramp, we expect to end the third quarter a few systems higher than where we are today with this customer alone. Additionally, as this customer's activity levels grow, we expect to grow with them. Strategic customer alignments such as this are an example of how we are gaining recognition and trust from new and existing partners, and how our customers are confident in partnering with us to drive further efficiencies in their completion operations. We see another great example of these type of alignments with our customers through the growth in our Last Mile business, where we help our customers solve supply chain issues by leveraging the continued development of our Solaris Lens Last Mile software. These developments position us even stronger as a dedicated and trusted provider of value for what we think will be a strong finish for the year and even stronger next year. On the topic of efficiencies, last quarter we spoke about our technology open house where we demonstrated our new electric blending technology as part of our full equipment offering. During the second quarter, we successfully ran our all-new electric blender on full-scale multi-well trials. During these initial trials, our blender reached up to 8.5 pounds of sand per gallon at 108 barrels per minute, which translates to over 27,000 pounds per minute of sand throughput. We achieved these rates over the course of multiple stages, and we believe they represent leading-edge performance in the industry. All of this was operated remotely from the safety of the data van on location, removing three or more people from potentially hazardous work areas 24 hours a day. While we are working on incorporating learnings from our initial trials, as well as developing the right commercial model for this new technology, the initial results are driving active dialogue with our customers around potential long-term commitments for multiple units. As a result, we are building additional units and expect to bring two more blenders into service late in the fourth quarter that we believe will generate compelling incremental returns. We have increased confidence that the demand for the new blender will generate additional pull-through revenue opportunities with a full Solaris equipment and services offering. In addition to the momentum we are generating with our electric blender, we also expect to bring our second-generation equipment for filling our sand systems using belly dump trucks to the market in the third quarter. This bolt-on addition to our sand system is in the final testing stages, and we believe it will extend the benefits of our reliable vertical storage and delivery system to markets where operators are seeing the advantages of belly dump trucking over pneumatic trucking. Solaris will continue developing and introducing solutions that automate operations and reduce the resources need for oil and gas development. We believe designing equipment that is fit for purpose, all electric and fully automated for today's high throughput completions design, which in some instances even push the limits beyond current levels, all with the goal of helping our customers maximize well site value, performance, economics, and safety. With that, I'll turn it over to Kyle for a more detailed financial review.
spk03: Thanks, Bill, and good morning, everyone. To recap some of the numbers, during the second quarter, we generated $35 million of revenue and adjusted EBITDA of about $6.5 million. We averaged 53 fully utilized systems deployed to customers, which represents a modest sequential increase from the first quarter and over 25% higher than average fourth quarter 2020 levels. Total revenue increased 23% sequentially, driven mainly by an increase in last mile services and modest growth in system activity. Over the course of the quarter, we deployed a total of 87 profit systems, which worked with varying degrees of utilization. Our calculation of 53 fully utilized systems reflects the number of equivalent systems that generated revenue every day in the quarter, which we believe is the best measure for modeling purposes. The gap between our fully utilized and deployed systems was the highest it has ever been in Solaris history, driven primarily by the white space created by private operators with less consistent completion programs. Nearly two-thirds of current U.S. drilling activity is now private operator-driven, which is the highest percentage mix we've seen in recent history. Operating cash flow for the quarter was approximately $1.3 million and was impacted by several working capital cash requirements, which I will highlight in more detail. To ensure trucking availability for higher activity levels in our last-mile services, we've been making a conscious decision to pay for these trucking services at an accelerated pace. In addition, we experienced a buildup in accounts receivable that was mainly driven by late collections from a single customer that had merger-related transition delays and has now caught up. These delayed collections had a roughly $3 million impact on our operating cash flow. After a total of capital expenditures of approximately $5.1 million, our free cash flow was negative $3.8 million. Absent the customer-specific collection delay and adjusting for the accelerated trucking payments in the second quarter, free cash flow would have been slightly positive. Turning to shareholder returns, we returned a total of approximately $5 million to shareholders in the second quarter in the form of dividends, which is flat with the prior quarter. Since initiating our dividend in 2018, we have returned approximately $83 million in cash to shareholders in the form of dividends and share repurchase We ended the second quarter with approximately $46 million in cash and $50 million available under our undrawn credit facility for a total of $96 million of liquidity. Turning to our outlook, Solaris systems deployed in the second quarter were up slightly from first quarter levels and over 25% higher from fourth quarter 2020 levels. As we began the year with strong momentum and experienced minimal impact on fully utilized systems from inclement weather in February. As public operators remain committed to capital discipline, even in a stronger commodity price environment, we anticipate our activity to be flattish in the third quarter sequentially, though exiting the quarter higher than second quarter levels, driven by the introduction of our new three-year customer agreement. Many of our customers and peers have recently discussed rising cost inflation, and in many cases, using that as a rationale for realizing higher pricing. While we are seeing some of these same inflation pressures, We historically have not driven our pricing based on our costs and have challenged ourselves internally to find ways to become even more lean and strategic. We have instead focused our pricing strategy on value delivery to our customers. Every year, our customers receive upgrades to our systems and software enhancements that are included in our core offerings. During the 2020 downturn, we strategically and proactively offered temporary discounts in partnership with our customers. We've begun approaching those customers to recapture some of the temporary discounts as our value offering has continued to increase throughout the downturn. While we don't know the ultimate path recent inflationary pressures will take through the rest of the year, they are not the sole impetus for us pushing pricing higher and could have an impact on our ability to realize net pricing. Turning to our expectations for SG&A costs, SG&A expenses for the second quarter were approximately $5 million, inclusive of non-cash stock-based compensation. For the third quarter of 2021, we expect total SG&A to be roughly in line with the second quarter levels, inclusive of the normal quarterly expensing of non-cash stock compensation. Turning to CapEx, our typical annual maintenance and upgrade CapEx runs between $5 to $10 million. Last year, we spent $5 million closer to the low end for maintenance and upgrades due to the uncertainty created by the global pandemic. This year, our maintenance capex is closer to the higher end. Our previous expectation was for growth capex to add another $5 million, but given our decision to develop two additional blenders and the belly dump solution, in addition to continued automation initiatives, we expect growth capex to range from $5 to $10 million for the full year 2021 for a total capex budget of $15 to $20 million. Of the remaining spend for 2021, we expect CapEx for next quarter to be in the $6 to $7 million range before decreasing slightly in the fourth quarter. Solaris continues to be a leader in innovation, and our team continues to be focused on and energized by helping our customers maximize completion, efficiencies, and optimize well-site performance and safety. Operator discipline and an ongoing economic rebound point to sustained recovery for the U.S. oil and gas industry. which gives us increased confidence that investing in our new product developments can drive incremental returns for our shareholders in the coming years. We remain committed to preserving our conservative balance sheet, our dividend, and finding ways to add incremental returns for shareholders, both organically and inorganically. With that, we'd now be happy to take your questions.
spk04: We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question will come from George O'Leary with TPH and Company. Please go ahead.
spk02: Morning, guys. Morning, George. Sounds like, I mean, you had a successful field trial with the blender. It was a cool event in March to go see it in person and spend some time with you guys. Thanks for hosting that. Just curious how discussions with customers are going with respect to the blender and then what drives the decision to build one or not? Are they Are they giving you some sort of contract for you to build them? What drives the decision to build those blenders for customers?
spk03: Yeah, George, the trials have gone very well. As Bill alluded to, the operational performance is exceeding expectations. So we're really excited about it. Our customers are really excited about it. We obviously have one working in the field today. We expect to deliver two more by the end of the year. At this point, all three of those are not under contract, but the way we're approaching it and what we've communicated very specifically with customers is in order to grow beyond that point, we will need commitments from customers. And those discussions have been very productive to date. You know, not to get ahead of it, but in 17, 18, you know, we were built, we had a long queue of people that were waiting for six packs and we were building on order. We're definitely not there at this point, but the early momentum is starting to feel a little bit like those days because this really represents differentiated technology that just isn't out there today. And so the conversation has changed from what am I picking for a sand storage system to who's going to deliver the most efficient hydrated stream to my high pressure soil well site. Really constructive conversations, still early days, but we're really excited, which again drove the decision to start ordering some long leads on the two additional blunders. Kyle's got it. That's right.
spk02: Great. That was very helpful. And then the market share game commentary was encouraging, and just one customer adding a few systems by the end of the quarter was encouraging as well. Let's try the strategy and the pitch there to customers to go and take market share and gain work from folks who are using computer systems.
spk03: Well, it's a mix. You still have folks out there that do have assets on balance sheet that they've been using, and I think over time people have recognized that what we've been able to do is really provide a higher value offering in a more comprehensive manner, whether it's automation or in the way the system works, whether it's software in terms of remote monitoring or now this most recent evolution with the blender. So I think what it demonstrates is our laser focus on the low pressure side of the well site and our team's ability to innovate there. And we're really excited about what the implications are of this new sort of evolution in the company's growth.
spk05: And I think, George, I'd add one more. It's the actual system and service that we provide. The reliability has been really good as we've come out of the slowdown. We've been able to put systems back to work and ramp the people side up correspondingly. And the reliability of the system is ultra low. We track it on a regular basis, and we actually track time to repair if there's a problem. So, you know, we're laser focused on ensuring that our customers keep completing as fast as they want to complete.
spk02: Great. I'll sneak in one more if I could. Simulfraction being a big topic as we talk with investors, investor clients. Any color on what percentage of your systems are doing work on simulfraction, given how large they are and how much sand they keep on site? I could imagine there's good interest in deploying all systems where simulfraction is ongoing.
spk03: It certainly changes every day, depending on the mix of not only our customers, but their sort of plans. Not every pad is conducive to a simulfrac. Typically, it's going to require a little bit larger footprint, and, you know, just the number of wells on location are going to be a driver of that as well. So I don't know if it's, you know, 10% to 20% on any given day is probably within the range, and then some days it may be higher than that.
spk05: But anecdotally, it is slowly increasing.
spk02: Thank you both. Thanks.
spk04: Again, if you have a question, please press star then one. Our next question will come from John Hunter with Cowan. Please go ahead.
spk01: Thank you. So I just wanted to ask on the activity outlook into the fourth quarter. I mean, clearly you have some encouraging signs as you exit the third, but I'm curious how you're thinking about a potential activity uplift in the fourth quarter. And then as it relates to 2022, you know, we've heard some indications of a modest increase in frac activity next year. So curious how you're thinking about the improvement in the fourth quarter and then perhaps in 2022. Thanks.
spk05: We see a ramp coming. Rig count is the leading indicator. We have not seen recently a corresponding increase in the frack fleet count. So that's building back a duck inventory that may have been worked down over the first half of this year. So all signs are, and certainly with the economics of the oil price today, it's a pretty good incentive to go in and complete those wells as soon as they're drilled. So It really is a timing issue, and I can't predict when beginning that ramp starts, whether it's next week or November. I think it's driven by individual capital budgets, where they are in their cycle. But certainly looking on into next year, we see an increase coming, and we've had increased talk from our customers that they're going to need more equipment coming into fourth quarter next year. It's really just a timing issue.
spk01: Thanks, Bill. That's helpful. And then my follow-up question is on, you know, dollars of margin per system. You had a bit of an increase from 1Q to 2Q. I'm curious on flat activity, would you expect your margin per system to be flat as well? Or are there any other, you know, puts and takes I need to be considering as I look forward into the third quarter?
spk00: Yeah, I think for now, Jonathan, I think we're expecting it to be relatively flat. If you look at the pickup from Q1 to Q2, we probably did $60,500 of gross profit per system. That was closer to $64,000. And so that increment, part of that was getting some storm recovery help, and then the latter part of it, even though systems were flat, was really doing a lot better in our last mile business. And so Assuming that we can continue that performance into Q3, then that should translate into a flat contribution margin per system.
spk01: Great. Thanks, Yvonne. I'll turn it back.
spk00: Thanks, Sean.
spk04: We have reached the end of the question and answer session. I would now like to turn the call back over to Mr. Bill Zartler for any final closing remarks.
spk05: Thank you, Matt, and thank you all for listening to the call, and thank all of our employees, customers, and stakeholders for another good quarter. All the efforts that have gone into the new product development, we really look forward to continuing executing on our core business plan and continuing to make those products and services better, as well as successfully adding to our offering to connect the dots to really manage the low-pressure side of the frack side. So thank you all, and have a great day.
spk04: The conference has now concluded. Thank you for attending today's presentation. You may now
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