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spk00: Good morning and welcome to the Solaris Value-Filled Infrastructure Inc. Q4 and Full Year 2021 Earnings Call. All participants will be in listen-only mode. Should you need assistance, please send to 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. To withdraw your question, please press star, then two. Please note, today's event is being recorded. And now I'd like to turn the conference over to Yvonne Fletcher, Senior Vice President, Finance and Investor Relations. Ms. Fletcher, please go ahead.
spk03: Good morning and welcome to the Solaris Fourth Quarter 2021 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 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.
spk07: Thank you, Yvonne, and thank you, everyone, for joining us this morning. 2021 was an exciting year for Solaris. The market continued its recovery as global oil and gas demand improved significantly and supply remained constrained, which supported strengthening commodity prices throughout the year. This led to increased drilling and completion activity, and we redeployed systems to meet demand. We also brought two new technologies to market that are now showing evidence of success, and we remain committed to paying a dividend to our shareholders. For the fourth quarter of 2021, our fully utilized system count was up 7% sequentially to 63 systems and adjusted EBITDA was up 28% to approximately $10 million. We paid our 13th consecutive dividend at the end of the year with $36 million of cash and no debt. During the quarter, we ran two of our new top fill based systems on jobs that were part of our managed last mile offering. Our top fill offerings allow us or our customer to utilize higher payload bottom or belly dump truck trailers. while preserving the option to fill our silos using traditional pneumatic trailers for increased flexibility and reliability. During the fourth quarter, we were able to use our top fill technology to optimize trucking, which contributed to improved profit per system. We see this continuing as we roll out additional top fill systems. We also continue putting our auto blender integrated electric blender through trials. As of today, we have four completed auto blend units in the field. We're very pleased with how the units are running and are encouraged by the positive feedback from our customers. We continue to see multi-year growth potential with several customers with this new technology. The fourth quarter also saw a full quarter impact of higher pricing that we implemented in August, as well as mixed shifts as more customers opted for nine and 12 pack configurations of our sand systems to provide a greater buffer of well site storage due to sand and driver availability challenges. Our system configuration flexibility, top-fill offerings, and autobland technology represent additional opportunity for Solaris to grow revenue and margin on a per-fractly basis. As we look into 2022, we see industry fundamentals continuing to strengthen. Supply and demand balance continues to remain tight, with oil demand expected to continue increasing. Layering in recent incremental geopolitical risk, near-term oil prices have increased into the $90 range, and gas prices remain over $4 in MMBTU. Based on commodity prices, announced operator budgets, and discussions with customers, we see increased filling and completion activity in 2022. E&P operator budgets now point to an over 30% increase in spending this year. Although part of that increase will be due to rising service costs, activity is also increasing across the industry. The horizontal rate count activity is currently up over 10% over the fourth quarter of 2021 average and up over 30% versus the 2021 annual average. These rig additions will also translate into increased completions activity for 2022 and beyond. As a result, we expect Solaris' fully utilized system activity in the first quarter of 2022 to be up approximately 10% over the fourth quarter of 2021. Beyond activity trends, we see a continuation of many of the same things from 2021. Operators will continue to look for ways to improve efficiency and sustainability, which plays well into our strengths. We see the current constraints in many critical areas such as labor, sand, and trucking also continuing for the near term. During the fourth quarter, Solaris helped customers address some of these constraints by deploying more 9- and 12-pack offerings as well as our new top fill solutions. Both of these new and existing Solaris offerings help reduce the impact of supply chain bottlenecks by providing highly efficient large storage buffers with multiple unloading options, trucking flexibility, and built-in automation. We spent much of the last couple of years building our last mile management capabilities and relationships. We built a strong team and software support that can provide the highest level of customer service as well as constant data visibility and analytical improvements. Our strong balance sheet has also helped us secure trucking access as our debt-free balance sheet and liquidity allows trucking carriers both certainty and speed of payment. The addition of our top-field technology enhances these capabilities. In the fourth quarter, we benefited from deploying our Topfill systems to existing Solaris customers. While our Topfill solution provides attractive standalone economics to Solaris and our customers, the potential of future Topfill deployments to our new customers represents incremental market share and return potential for Solaris. We have strong demand signals from both existing and new customers for Topfill systems, and as such, we will be growing our Topfill fleet significantly in 2022. Our market penetration and timing plans for a top fill solution will remain dynamic based on market demand and supply chain. Another thing we can see continuing in 2022 is the electrification of well-set equipment. Almost all of the new frack equipment on order is electric. Our equipment has been all electric from inception. We're able to integrate our equipment to run off the same power source running the frack pumps on location. Our electric auto blend integrated blending unit in particular offers not just an electric design, but eliminates several complex components from traditional blender setups and provides built-in redundancy and automation. We deployed our first auto blend unit with multiple customers in 2021 and currently have four blenders in the fleet today. All four are working or scheduled to be working for customers during the first quarter with a few jobs transitioning past trial phase into earning revenues. To date, we have received very positive feedback from our customers, many of whom see the Solaris AutoBlend as a step change improvement from legacy blenders that helps them avoid spending capital on older, not fit for purpose technology with ongoing reliability and maintenance challenges. This dynamic has many parallels to our ramp up of sand silo deployments in 2017 and 2018 during the frack fleet reactivation cycle, where Solaris replaced old legacy, not fit for purpose sand handling equipment. Given this initial success and additional demand indicators, we are committing to building several additional auto blend units in 2022. Supply chain lead times on some of the components of the auto blend have continued to tighten, and we have already ordered long lead items for additional blenders as we advance commercial discussions. In summary, 2021 was a year of meeting market demand, keeping our commitments to our shareholders, and demonstrating success of our new technologies. In 2022, we will focus on continued execution to meet another year of anticipated market growth as well as the build-out of new technology to capture incremental market opportunities. Our customers will continue pushing for solutions that ensure wells can be completed as fast and efficiently as possible, and at current commodity price levels, the timeline to reach production is crucial to driving value. We believe our people, relationships, and technologies are well-positioned to ensure our customers can meet these timelines, while also offering all-electric, automated, and safe solutions that enhance sustainability efforts for the entire oil and gas industry. Given the results we've shared today, we're even more excited about the prospects for 2022 as we continue to invest in new technology while continuing to pay our dividend and maintain our strong balance sheet. With that, I'll turn it over to Kyle for more detailed financial and guidance review.
spk08: Thanks, Bill, and good morning, everyone. I'll begin by recapping our fourth quarter results. We generated approximately $46 million of revenue and adjusted EBITDA of about $10 million. We averaged 63 fully utilized systems which represents a 7% sequential increase from the third quarter. Growth in systems exceeded our initial expectations due to minimal holiday softness and a ramp of completions activity in December. During the fourth quarter, we made a strategic decision to focus on higher profitability last mile work and to utilize our new top field technology for our most consistent customers. This change in last mile job mix drove an overall decrease in revenue, but an increase in overall profitability in the quarter. Over the course of the quarter, we deployed a total of 98 profit systems, which worked with varying degrees of utilization. This was an increase of 10 deployed systems from third quarter levels. Our calculation of 63 fully utilized systems reflects the number of equivalent systems that generated revenue every day in the quarter. Our gross profit margin per system was up 14% sequentially in the fourth quarter. The strong incremental margin increase was driven by a combination of fixed cost absorption, improved last mile profitability, increased mix of nine and 12-pack configurations, and a full quarter benefit of the price increases we implemented in August. Operating cash flow was approximately $5 million after a net working capital build of approximately $1 million to fund activity growth and accelerated trucking payments, and approximately $3 million for prepayments of long lead items associated with our 2022 growth CapEx plans. After total capital expenditures of approximately $6 million, free cash flow was approximately negative $1 million in the quarter. Excluding prepayments for 2022 growth plans, free cash flow related to fourth quarter 2021 operating activity was positive $2 million. We returned a total of approximately $5 million to shareholders in the third quarter in dividends, which was flat from the prior quarter. Since initiating our dividend in 2018, we have returned approximately $92 million in cash to shareholders in the form of dividends and share repurchases. We ended the year with approximately $36 million in cash and $50 million available under our undrawn credit facility for a total of $86 million of liquidity. We're in the final stages of signing an extension of our credit agreement with our lenders and expect to execute the amendment this week. The terms of the credit agreement remain essentially the same as our current agreement, and the facility will run for a term of three years. Before I turn to our fourth quarter outlook, I'd like to note that our earnings release and 8K out this morning, as well as our 10K that will be published later this week, now consolidate our revenues and expenses into one line item. We believe the combined basis is more consistent with how we run our business and how the investment community evaluates our financial performance. Turning to our first quarter outlook. We expect the number of fully utilized systems operating in the first quarter of 2022 to be up approximately 10%. On January 1st, we implemented an additional price increase for the 2022 year that should result in improved system margin for the first quarter. SG&A expenses for the fourth quarter were approximately $5 million, inclusive of non-cash stock-based compensation. For the first quarter of 2022, we expect total SG&A to be approximately $5.5 million inclusive of the normal quarterly expensing of non-cash stock compensation. We continue to expect maintenance CapEx for 2022 to be flat with 2021 in the $10 million range. As we stated last quarter, growth CapEx related to scaling our auto blend and our belly dump solutions will be the primary driver of capital expenditures in 2022. Given the strong interest from our customers and an anticipation of significant growth of our new technologies, we have committed growth capital of between $20 and $30 million for the first half of 2022. We plan to be flexible with growth capital commitments for the second half of the year, depending on market demand for our new technologies and supply chain dynamics. Our distributable cash flow, defined as adjusted EBITDA less maintenance capital, resulted in a dividend distribution coverage of a little over one time in 2021 and closer to 1.5 times for fourth quarter 2021. The combination of our outlook for growing profitability and stable maintenance capital expenditures should result in a continued improvement in our dividend coverage on a distributable cash flow basis in 2022. We anticipate cash flow from operations, excess cash in our balance sheet, and if temporarily needed, borrowings under our credit facility will be sufficient to fund our working capital and growth needs in 2022. In summary, we're excited about how industry fundamentals are taking shape for the coming year, and we are excited to see the progress in the new technology we've been working on for the past couple of years. We also believe our technology service differentiation and focus on core competencies can help drive value for our customers and help to alleviate many of the supply chain constraints currently facing the industry. The timing of our new technology introductions with an industry upcycle offers exciting prospects for Solaris. We remain committed to capital discipline by focusing on new technology that can drive incremental returns for shareholders maintaining our dividend, and maintaining our debt-free balance sheet and strong liquidity position. With that, we'd be happy to take your questions.
spk00: Yes, thank you. At this time, we will begin the question-and-answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble the roster. And today's first question comes from Ian McPherson with Piper Sandler.
spk04: Thanks. Good morning, Bill. And Kyle, how are you? Good. Good morning, Ian. Bill, you're in the enviable spot of selling customer efficiencies in a market that desperately cries out for them right now. Can you speak to any light at the end of the tunnel or lack thereof with respect to the bottlenecks surrounding Sandler? sand trucking and logistics, do you think that these are enduring bottlenecks that are going to play to Solaris' hands throughout all of this year, most likely?
spk07: Yeah, they've always been enduring bottlenecks. It's the incremental piece that drives the total, and we've seen it as you rapidly added completions crews and lateral lengths and sand demand. You caught up with You know, the shutdown plants from the early days of COVID, and they're slowly coming back online. And as those do, it catches up. Trucking bottlenecks, you know, it's a driver shortage. There's plenty of trucks out there, and it's managing drivers. One of the things that surprised us a bit at the end of the year was the fact that we didn't see the slowdown. When you had drivers, you kept going. We moved a lot more 9- and 12-pack situations out there, folks preparing for bottlenecks over the holiday season, which was good for us. And we sort of see that trend continuing of creating a larger buffer just to ensure that you can keep running and don't have to shut down in the middle of the stage or some odd moment in time where you run out of supply. So those all really do play into the hands of reliable systems and ensuring that we can create the buffer and have the reliability needed to make sure that it makes it into the blender.
spk04: Okay. When we look at your capital program for this year, it's good to see the increased uptake of the top fill systems and the auto blender in particular. I was wondering if you could put a little more detail around the strategic CapEx, growth CapEx in terms of what type, maybe quantity of units that we might expect you to be running on both of these, and also what type of accretion we might contemplate relative to the current EPIDOPR system that we've seen in Q4.
spk08: Yeah, the range, Ian, is really around hedging a little bit on the supply chain and ensuring that we get some of these materials and components in in the time frame that we expect them to come in. So that's why we see kind of a range. As far as units We're building multiple of both the blenders and the top fills. As far as paybacks or returns, we've always targeted returns in line with where we've been in the silo systems as we think about incremental pieces of capital. The really exciting piece of these two new pieces of technology are the ability to pull through new customers and new market share. And so when we look at the returns there, that becomes very compelling for us. So more details to come for sure. But we're making these investments because we believe, both from the trials over the last 12 months, as well as the conversations with customers, that there is significant demand for both of these products, and they address exactly your first question, which is around the tightness throughout the supply chain on sand, trucking, et cetera. Both of these pieces of technology help alleviate some of those bottlenecks, and so we feel that there's a really exciting opportunity here to deploy those pieces of kit. And, you know, we hope that in the future we're building beyond what we've guided to today, but we're going to be very conscious of the uptake in terms of deploying additional capital. We're very excited about the opportunity there.
spk04: Thank you, Kyle. Thanks, Phil.
spk00: That's it. Thank you. And the next question comes from Stephen Gingara with Stifel.
spk05: Thanks. Good morning. Two things to me. One, I guess it's kind of a follow-up. When we think about industry rack fleet demand, and we sort of translate that to demand for your services, how should we think about the changing dynamic with more silos at the well side? I mean, is there any sort of step change that you think we should be modeling in as far as demand for your systems change? over the next year or two? Do you think it's somewhat temporary related to sand shortages, that there's more units per site? How would you guide us to think about that dynamic?
spk07: Well, I do think that the use of more storage per site is driven by fear of the supply chain. But also, if you look at the rate, the speed at which the fracking is being done with today's increased simulfracks, longer laterals, If you look at the amount of storage on the well site on a day's use basis, like you would conditionally look at storage, that's a trend that continues, and it continues to drive the need for more storage on site. That said, the industry is always trying to save a dime and making sure that they can do it. We provide the insurance, and that buffer really is insurance to continue fracking at those kind of rates. So I think there is a bit of a step change with it happening right now. that will continue. I think on an incremental basis, the addition of the top fill solution will bring us additional profitability per system driven by ones where we use it ourselves in our last mile offering. We also see incremental demand for that system combined with the silos to customers that are not currently using our equipment. So we do see a significant incremental growth with that, and that trend we don't see reversing.
spk05: Great. Now, that's very helpful. And when we think about, you know, you mentioned pricing, I think, a couple times, price hike last year, and I think you said one January 1st. Where do you stand? Can you give us any kind of benchmark for where pricing stands versus, you know, from trough levels and or from peak levels? Yeah.
spk08: I don't know that we'll get into the specifics relative to, say, 2017 or 2018. A lot has changed. Our mix has changed. You know, the last mile piece is an area where that's going to have some significant impact in how that evolves. But I think, you know, we showed good partnership with our customers in the downturn, and they're showing good partnership with us as activity levels increase here. I think what we've been able to demonstrate for our customers is a continued investment in our systems. One of the thoughts I was going to make to Bill's prior comment there was we are making investments to help our customers use our silos more efficiently. And that's around turning trucks more quickly and using the full capacity of the silos on a continual basis. And those are ways where we can make a modest investment but drive a significant improvement to our customers' efficiency in terms of the trucking and use of the silos. And so on a net basis, they may actually be paying less. And that's always been our theme in terms of pricing is we're trying to find ways for our customers to pay less for the fully delivered cost of sand by making strategic investments. And things like the top fill also accrete to that story as well.
spk05: Great. That's good colors. Thanks, Phil. And just one follow-up maybe related to that. If we think about incremental EBITDA per fleet for a year on a system, I mean, given the amount of fleets you have deployed, is that sort of $700,000 range, give or take, make sense?
spk08: Yeah, I think in the fourth quarter, it was probably a little bit higher than that. And, you know, what we talked about in the prepared remarks is additional scale, as well as a pricing increase. So I think, you know, we're We're focused on continuing to create that number up to where it has been historically.
spk05: Okay, great. Thank you for the call, gentlemen.
spk00: Thank you. Thank you. And once again, as a reminder, please press star, then 1 if you would like to ask a question. And the next question comes from John Hunter with Cowan.
spk01: Hey, good morning, everyone. Morning. So the first question is just on the activity front. You said December had kind of a strong exit. You guided up 10% in the first quarter here. I was wondering if you could help me think about how activity is trending so far, I guess, into the middle of February here. Is it up that 10% or are you expecting continued increase through the end of the first quarter?
spk08: Yeah, I mean, as far as the shaping of the quarter, I think it's evident in kind of what's going on today that there's just a continuing increase in activity throughout the quarter. You know, January sometimes has some slow starts just coming out of the holidays. And I think as we've seen February shape here, we're continuing to see activity go up. And, you know, obviously commodity price is helping that.
spk01: Yep, that makes sense. Thanks, Kyle. And then Kind of related to that on the margin front, you know, looking at it on a gross profit per system, you know, do you think you could be bumping up on the $1 million gross profit per system level, I guess, in the first quarter, you know, given some of the price increases you've put through and some of the help you've gotten from MIX? Any help you can offer there? Thanks.
spk08: Yeah, again, I don't think we're going to get too far into the details on how that shapes up, but we have kind of been clear that we're seeing it continue to improve.
spk01: Got it. Then looking at, you know, 2022 activity growth, Bill mentioned 30%, you know, E&P spending up this year and the RIG counts tracking up 30% plus. How would you expect that to translate into, you know, completion activity this year? And would you expect Solaris to be able to outperform whatever forecast that is, given some of the technology investments you're making.
spk07: Yeah, I think if you forecasted 30% activity and 30% increase in spending, that's probably 20 to 25% increase in activity around numbers based on the fact that you're going to get some efficiency gains as well as there's some cost creep to the operator in there. But we also do see us continuing to gain market share through the new offerings. As I said, incrementally, We see the top fill adding a set of customers that we don't have today, and we think that will continue to grow based on really the addition of our buffer as well as the trucking flexibility really is a unique addition to the industry's fleet.
spk01: Thank you. I'll turn it back.
spk00: Thank you. And the next question comes from Sean Mitchell with Daniel Energy Partners.
spk06: Hey, good morning guys. Thanks for taking the question. Um, good to see the, uh, the growth CapEx. Obviously there's some demand here for your auto fill, um, auto blend and top fill units. Um, one question for me is the top fill units is, is that demand in your, I mean, just kind of big picture, is that demand really being driven by the simulfrac kind of frenzy? It seems like a lot more folks are talking simulfrac today, both public and private. And then the second question would be kind of a follow-on. Has your mix in customers changed a little bit over the course of the last year? Are you seeing more private companies kind of go to this system than you traditionally have seen?
spk07: Your first question, Sean, the private – The demand for the system and its functionality really is growing and has additional customer uptake on it. And you can look at it in two places, right? Are we adding more well site storage or is it really driven by the volume of sand per truck? And so I think one of the features is, you know, we have plenty of unloading capacity through the traditional methods, but if you can increment up a truck by 10 to 15% and shortage of drivers, you're going to lower your driver need and driver time by moving to the belly dump. And I think that's one of the largest drivers for the what and the why of the top fill. In terms of the mix, yeah, you know, it always swings. But, yeah, there are more active privates. You know, we're seeing stuff in gas basins. We're seeing stuff in the oil basins. It's picked up, you know, generally across the board in most basins.
spk06: And then, Kyle, just to follow up, I thought I heard you say the growth capex would be spent in the first half of the year. Is that correct?
spk08: The guidance that we provided so far is around what we will spend in the first half. And the follow-up to that is to the extent we see additional demand, which we hope and expect to see, we will come out with more refined second half of the year guidance.
spk06: Got it. Thank you.
spk00: Thank you. And the next question comes from Samantha Ho with Evercore ISI.
spk02: Hey, guys. Thanks for taking my call. Bill, I guess just to maybe delve into the whole pickup in market share, I think you guys traditionally have been about one-third market share of the FAC fleet. Can you maybe peg for us what your target would be by year end? Sure.
spk07: We don't look at it really on market share. We look at it by customers. And so if we said customer X or customer Y really is trying to take advantage of the use of belly dump trucks, and that's a big driver for what they do, we think those customers will be using the Solera system as we continue to grow out our top fill fleet. And we really look at it on a customer-by-customer basis and think we have targets that will adopt this system as we roll out the additional equipment.
spk08: Yeah, I think it's the top fill, but it's also the auto blend system as well. And, you know, Sean, you alluded to simulfrax. And the reliability of traditional blenders is not great. It's a big challenge on well sites today. And what we're seeing in some of our adoption is around reliability of that system, but also just the peer capacity from a throughput standpoint as well.
spk02: Okay, and then just maybe I'm curious about the mix of the 9 and 12 packs. How many of those do you guys have as part of what's deployed right now?
spk08: It's still a sub-20% of our overall mix, I would say, but it did have an impact in the first quarter. And really what we're trying to get to there is, you know, as – supply chain gets tighter from a trucking and sand capacity standpoint, our system provides the sort of most efficient way to store high volumes on location. And so bolting on an extra three or an extra six pack really can easily provide a little bit of extra storage for customers.
spk02: Is the pricing dynamic similar in terms of, you know, when you have customers that are going to up to nine or 12 packs? And then my other thought was I'm just kind of curious how much visibility you have into what you like fleet right now is, you know, these rigs, I mean, not rigs, if these systems are really being locked in for, you know, very long term or is it still sort of like job to job? Like what's the visibility that you have these days versus like maybe a year ago?
spk08: As far as the traditional fan systems?
spk02: Yeah. Yeah, I'm kind of curious if customers are signing longer term contracts or, you know, have this contracting dynamic that's changed.
spk08: Yeah, we have one contract today that has a three-year term, which effectively is Solaris is a dedicated provider of storage for that particular customer. And that's gone well for us. We've expanded share with that customer since signing that contract. And as far as our traditional other customers, you know, it continues to be, I guess, if you will, on a spot basis. But as we look at some of the new technologies, we are working towards – trying to term up some of that capacity. And then as far as the pricing on the 9s and 12s, yeah, I mean, it tends to be kind of in line with where we are in traditional systems.
spk02: Okay, great. Thank you.
spk00: Thank you. And we have reached the end of the question and answer session. I now turn the call back over to Mr. Bill Zartler for any closing comments.
spk07: Thank you, Keith. I'd like to conclude today by thanking all of our employees at Solaris for their contribution in 2021. I'd also like to thank our customers and suppliers for their continued support and efforts throughout last year. We believe we'll continue to provide valuable equipment and services to help improve your productivity, and without all of you, we would not be sharing our positive results today. Thank you all. Stay safe and have a great day.
spk00: Thank you. The conference has now concluded. Thank you for attending today's presentation. May not disconnect your lines.
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