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spk01: Good morning and welcome to the Solaris Oilfield Infrastructure third quarter 2022 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 your touchtone sign. To withdraw your question, please press star then one. VIN 2. Please also note, this event is being recorded. I would now like to turn the conference over to Yvonne Fletcher. Please go ahead.
spk00: Yvonne Fletcher Good morning, and welcome to the Solaris Third Quarter 2022 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 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.
spk03: Thank you, Yvonne, and thank you, everyone, for joining us this morning. The Solaris team has delivered another strong quarter, and I'm proud to share the results with you today. During the third quarter, our fully utilized system count increased roughly 12% sequentially to 94 systems, and adjusted EBITDA grew over 14% to nearly $24 million. We paid our 16th consecutive dividend at the end of the quarter with $10 million of cash and no net debt. Last quarter we spoke about how our investments in technology have increased both our earnings power and addressable market opportunity this cycle. And our results today continue to support that. We believe the 12% growth in our fully utilized system count outpaced the overall growth in the frac market as we deployed incremental systems to both new and existing customers due to our broader offering. We spent the last couple of years investing in technology and broadening our well site offering to include top fill solutions the auto blend unit, water and chemical silos, and a more sophisticated last mile service offering. Our goal with these investments is to provide additional efficiencies that complement the benefits already provided by our core sand storage offering. Each of these new technologies expands our total addressable market. Through our last mile services, we provide services for operator or service companies that prefer a bundled package, including both sand storage and delivery. Through our top fill solutions, we have added new customers that have historically used boxes or other bottom drop solutions. And through our auto blend system, we provide efficiency savings for customers that are experiencing limitations with existing blender designs, as well as provide a reliable all-electric solution for many of the electric rack fleets coming to market. During the third quarter, approximately half of our net growth in total systems deployed was pull-through share driven by delivery of additional top fill units. Our top fill system provides a powerful combination of our reliable and industry-leading sand handling equipment with flexibility to use both high-capacity belly dump and pneumatic trucking. By using belly dump trucks, we can increase per truck payload, which drives a significant reduction in total truck miles per job. Trucking efficiency is also improved by faster unload times, which drives an increase in truck turns per day. The combination of increased payload and faster unloading times reduces the overall number of trucks and drivers required to supply sand to a well site. Fewer trips and fewer drivers lower overall trucking costs and operational risk for our customers. Safety is also improved by having fewer people on the road and on well sites. Some of the growth in the third quarter also came from customers who led us into the Rockies and Bakken, where Solaris has historically had a smaller presence. The value proposition of using bottom-drop trucks in these regions can be greater than in many other areas as a result of higher payload allowances. Whereas in most basins, we can reduce total trucked miles by up to 20%, in the Rockies and Bakken, the reduction is even more significant, up to 35% to 40%. The trucking efficiency improvement is helping drive the backlog of demand for our top-fill technology in both existing basins that we operate in as well as historically untapped areas like the Rockies. We mentioned on our last call that nearly every customer that has a topfill system today has indicated plans to continue to use the system, and that continues to be the case today. Several of our customers have deployed multiple topfill units following initial trials with plans to continue to grow unit count. Based on the stickiness of current customers and the growing backlog of demand for these units, we believe additional investment in this technology is attractiveness. During the quarter, we added approximately seven fully utilized topfill units for a total of nine fully utilized topfill systems over the quarter. We expect to deploy additional units at a similar pace over the coming quarters. While it is always evolving, our near-term backlog indicates that one out of every three topfill units will drive pull-through sand systems that are currently not in use. For the fourth quarter of 2022, we expect continued pull-through demand for sand systems, which could be offset by a frack market that is expected to be flat to down due to normal seasonality around the holidays, resulting in a flat, fully utilized sand systems quarter over quarter. Turning to some of our other new technology efforts, we continue to test the ability of our full offering to handle wet sand, including modified sand silos, fluid silos, top fills, and auto blends. We believe we are close to finalizing the design of modifications for full field use in the near future. We also continue to be excited about the incremental efficiencies we can provide on well sites with our auto blend unit. During the third quarter, our blender revenue days were roughly the same, and we 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 blenders. We also continue to believe the new electric FRAC fleets coming into the market in 2023 provide an opportunity for continued auto-blend deployment in addition to the adoption for conventional fleets. In summary, we're excited about the opportunity in front of us to grow our addressable market, profit, and return on capital through investments in new technologies that help our customers improve their operations. Solaris is uniquely positioned to grow organically at attractive returns while continuing to pay our dividend and maintain our strong liquidity. With that, I'll turn it over to Kyle for a detailed review of our financial results and guidance.
spk07: Thanks, Bill, and good morning, everyone. Our strong third quarter results are a testament to our team's innovation and strong execution. We generated over $92 million of revenue and adjusted EBITDA of nearly $24 million. We averaged 94 fully utilized systems, which represents a 12% sequential increase from the second quarter. We believe our growth exceeded that of the industry frat crew count driven by incremental demand for our traditional and new technologies. This growth was partially offset by lower volume and mix in our last mile logistics offering. Our gross profit margin for a fully utilized system was flat sequentially in the third quarter. The strong incremental margin contribution from our top fill and sand system deployments was offset by a combination of lower last mile profitability, higher system support costs, and startup costs associated with ramping new product deployments and activity in underrepresented bases. As we rolled out the top fill equipment, We have used them in many of our integrated last mile jobs and have been able to enhance our margins. However, job mix and other issues outside of our control that can be difficult to predict, such as sand and frack availability, drove a decrease in our third quarter last mile profitability coming off of a record second quarter. Although job mix will remain challenging to predict on a near-term basis, we see continued momentum going forward with our integrated last mile service offering as our team continues to execute utilizing our top fill equipment. Operating cash flow during the quarter was approximately $21.5 million, net of an increase in working capital of approximately $2 million to support activity growth. After total capital expenditures of approximately $27 million, free cash flow was negative $6 million in the quarter. We returned a total of $5 million to shareholders in the third quarter in dividends, which was flat from the prior quarter. Since initiating our dividend in late 2018, we have returned $107 million in cash to shareholders in the form of dividends and share repurchases. We ended the quarter with approximately $10 million in cash and $44 million available under our $50 million credit facility for total liquidity of $54 million. Net of $6 million of net borrowings on our credit facility, we remain in a positive cash position with zero net debt. Together with cash flow from operations and excess cash on our balance sheet, the intent of this borrowing on our credit facility is to fund our working capital and growth needs. As we continue to invest in the growth of our expanding business, we anticipate borrowings on our credit facility to be temporary. Turning to our fourth quarter outlook, we expect some normal seasonality which will impact our last mile services as trucking and logistics activity could take a pause around Thanksgiving and the year-end holidays. As Bill stated, we continue to expect pull-through activity from new technology deployments that could potentially offset this seasonality for a flat, thin system count in the fourth quarter. On a profitability basis, we expect potential seasonality, continued system and startup costs, and a reduction in last-mile activity to result in flat, sequential system margin in the fourth quarter. As we continue to grow our offering next year, we expect continued improvement in our earning potential per frat crew throughout 2023. SG&A expense for the third quarter was approximately $6 million. For the fourth quarter of 2022, we expect total SG&A to be similar to the third quarter at approximately $6 million. Turning to our capital outlook, for the fourth quarter of 2022, we expect total CapEx to be between $15 and $20 million. Based on the success of our new technology deployments and strong indicators for incremental demand, we are initiating 2023 CapEx guidance of $75 million, of which $10 to $15 million will be directed towards maintenance capital as our fleet continues to grow in size and capabilities. Our 2023 capital program will be weighted towards the first half of the year with flexibility to increase or decrease in the back half of 2023 based on demand indicators. Our dividend remains important to our shareholders and to us, as all of our employees are owners of Solaris stock. We use distributable cash flow defined as adjusted EBITDA plus maintenance capital as a measure of our cash return potential. In the third quarter, our dividend distribution coverage was over four times. 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 through the end of 2022 and into 2023. In summary, we are encouraged by the growing revenue and earnings contribution we are seeing from our new technology investments year to date. As our business expands, our team remains committed to driving the highest quality of service for our customers, innovating technology-based solutions to the evolving challenges in the oil and gas industry, and being leaders in raising safety standards through streamlining and automating low-pressure completion operations. We will remain focused on delivering new technology solutions that can both drive efficiencies for our customers and grow our earnings per frac crew, generate incremental returns for our shareholders, support our dividend, and maintain our strong balance sheet and liquidity position. With that, we'd be happy to take your questions.
spk01: Thank you. We will now begin our question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. And at this time, we will pause momentarily to assemble our roster. And the first question will come from Luke Limone from Piper Sandler. Please go ahead.
spk06: Luke Limone Hey, good morning, Bill, Kyle, Yvonne. On the incremental 23 CapEx, you've noted how you're seeing increased incremental demand for top-fill deployments and maybe auto blend as well. In the past, you've given us some parameters on how accretive these could be to gross profit per system. but maybe on a more simplistic basis, can you talk about how the ROC from these investments in 23, or maybe even comment on how additive this could be to 23 Street, but I estimate appear pretty low at this point at about, I think 110 million or so.
spk07: Yeah, Luke, I'll take that one. You know, when we think about return on capital, you know, we really target call it a two to three year payback on all the capital we put into the business. That's sort of on just a standalone basis. And the really compelling piece with the top fill units is we're able to redeploy idle capital. So some of the sand silo systems that we have today that aren't working, we're able to gain market share through deployment of the top fills. So that becomes really compelling from an incremental ROCE. We're deploying, you know, roughly $3 million of capital, but the incremental is only called a million and a half.
spk06: Okay, got it. And then I believe you said you're at nine top fill systems right now. With the CapEx for 23, where do you see 23 ending up on the top fill systems?
spk07: Yeah, the nine is a fully deployed system count. And so, again, that's a pretty conservative way to think about it. That was the blended average for the entire quarter. So we're adding top fills every day. And, you know, the way we think about capital costs per top fill is roughly a million and a half dollars. So you can kind of do some math to imply what the ending count number is. We won't probably be too descriptive here today as to what that will be. But based on the guidance, you can back into that.
spk00: Yeah, Luke, a different way of thinking about it is that we probably continue to add top fills at a similar pace. And so you should continue to see both the pull through that Kyle referenced
spk03: additional sand systems plus the contribution on that two to three your payback on the growth capex and 23 so I think we would agree with you that the street seems a little low right now okay and yeah about a third yeah about one out of every three that's going to work so that the one each one gets an incremental capital return one out of three to one out of the half is is actually pulling through an incremental sand silo set that would not be used that's actually idle capital so that you will get actually increased returns on that portion.
spk06: Okay, got it. Super helpful. Thanks a bunch.
spk01: And the next question will be from Steven Gingaro with Stiefel. Please go ahead.
spk02: Thanks. Good morning, everybody. So just to follow up on Lou's question a little bit, when we've sort of traditionally been Don, our Solaris model, we've sort of looked at our expectations for frack fleets and assumed you guys had about a third of the market. Should we be changing that approach?
spk03: It appears as if we are gaining market share when you look at that metric. So, yes, I think incrementally with the top fill unit, we're able to hit a market that has traditionally not been using silos. Some of our current customers are using it, so we're not changing market share. We're actually just adding capital there. going to work on those particular pads. But in many cases, somewhere between a third and a half are actually pulling through new silos for new market.
spk02: Okay, great. That's helpful. And then when we think about your free cash flow generation next year, it sounds like, based on your comments in response to the prior question, you – You think the consensus might be a little low for next year, might be a lot low, but the free cash generation should be positive next year, even with that growth cap X you're talking about.
spk03: Yeah, absolutely. And, you know, we will. Manage the CapEx going into the year. Right now, our expectations is that we have plenty of demand going into next year, and we'll plan on building it. If things change, we can rapidly slow that down if needed. But right now, it feels like those top fill units will go to work, be coupled with existing silos, as well as bring new to work. But even on top of that, there is additional significant free cash flow generated beyond the CapEx required.
spk02: Thank you. If I could slip in one more, just from your perspective of the market, I mean, you guys have a, I think you generally get an early insight into activity, and you kind of commented on the fourth quarter. It feels like, you know, there's a continued growth in U.S. land activity next year, albeit maybe at a slower rate because of equipment availability in general. What is your view of how 23 completion activity plays out at this point?
spk03: You know, you can't predict that. I think we view it as continuing to be, you know, steady to up a little bit. You know, if oil prices rebound significantly, it's going to grow. If things happen in the election to change the sentiment around the politics in the country, things would go up faster or it could slow down. I don't see many scenarios where it falls significantly next year when we look at our probability lens, but, you know, it always can.
spk02: Okay, great. Thank you for the details.
spk01: The next question comes from David Smith from Heikkinen Energy Advisors. Please go ahead.
spk05: Hey, good morning, and thank you for taking my question. Of course, I'm wrong, but you haven't increased pricing that much this year versus last, right? I mean, certainly nothing comparable to the increases seen across most of the other OFS assets like rigs and crack spreads. So I'm curious if you can talk about how you view potential to improve your pricing going into 23?
spk07: Yeah, typically we're setting pricing once a year for the rental business, sort of on a calendar basis. So you're right, we did reset pricing the first quarter, and for the most part, pricing hasn't moved throughout the year. As we bring on new customers, they tend to be at a higher incremental rate, or I should say the marginal rate at that point in time. But in general, we have really not reset pricing for the base load of our business. So we do expect going into next year there will be a price increase. We're entering into those discussions with our customers. I think our customers recognize we're investing a heck of a lot of money into our business, and they're getting incremental benefit for that investment. So it's not a pure price increase. There are true investments we're making into the existing fleet, and you see that in some of the maintenance capital numbers as well as on a growth capital base. or modifying our capacity by using bucket elevators. So I think that is our expectation going into next year, and, you know, stay tuned for more details as to what that looks like.
spk05: I appreciate it. And a quick follow-up, if I may. If I just look at the implied growth capex for Q4 and 23, you know, it's just 60% of that were top fill systems, and I'm guessing that it might be more than 60%. that that kind of points to 30 or more top fill systems um you know if it's one out of three new top fill systems supports you know an incremental uh you know profit uh system being deployed and is is just kind of the the the right way to think of it that just that that growth capex alone is probably pointing to you know 10 or or more systems you know being added uh you know beyond, you know, whatever, you know, completion growth activity next year, my support.
spk03: I think you're spot on, David. All right.
spk05: I appreciate it. Thank you all. Thanks, Dave.
spk01: The next question will be from Samantha Ho from Evercore ISI. Please go ahead.
spk08: Hey, guys. Congrats on the really impressive growth in the system, fully licensed account. Maybe just saying on that same line of discussion, I was wondering if you could talk about, you know, the pull through from the top still. Are you displacing sort of this legacy technology? Can you kind of talk about just what type of customer mix or technology mix you're gaining traction with where you're able to displace the, you know, where you're able to pull through the fully utilized systems?
spk03: I think we hit on a bit in the discussion around the markets. So the Rockies and the Bakken, especially where you have enhanced payload capacities over the road, the offering is a very compelling improvement to put the top fill system in those markets. Those markets themselves have grown a little bit, but we have displaced other technologies and legacy type equipment up there. But that is rapid growth. That is more incremental system pull through in those markets than others, but we're seeing increased use in the Midland and Delaware Basin as well using relatively short hauls but being able to put a higher payload per truck than you would in either a box or a pneumatic truck.
spk08: Okay, great. Oh, sorry.
spk03: No, go ahead.
spk08: Well, how does it work when you have a customer that, you know, only taking your top fill technology? Do you have this? I mean, I can see how, like, if you have, if you're already providing the silos, you can just sort of add headcounts to take on this incremental service. But when you don't have that, you know, that dual blended bundling, how does that work in terms of, like, the number of people you need to support the top fill systems?
spk03: Well, the top fill system is only used in conjunction with our silo system. So incremental person out there potentially to run the silo system, but it's never an independent set. It's either a silo, it's a top fill unit with a silo system with a customer that may have had an existing silo system that is switching from pneumatic trucks to belly dump trucks, or we're putting a whole new package of both sand silos and top fill unit with a new customer.
spk08: Okay. Got it. Um, Okay, no, that's great. Congratulations, guys. Thanks.
spk01: And once again, if you have a question, please press star 1. The next question is from Sean Mitchell with Daniel Energy Partners. Please go ahead.
spk04: Good morning, guys. Thanks for taking my question. Maybe just another one on the CapEx increase for 23. Just to clarify, is most of that or the majority of that for top fill systems, versus blenders outside of the maintenance number? And then number two, is there anything in the supply chain? I mean, there's still a lot of folks on calls talking about supply chain issues today. Is there anything in that supply chain that would maybe limit your ability to fill the top fill system or build the top fill systems on the current pace you're building today?
spk07: Yeah, Sean, I think the majority of the growth piece is going to top fill, so you got that right. And then as far as supply chain goes, we went from building, you know, call it two sand silo systems a month to eight sand silo systems a month back in 17 and 18. And we've done the same thing on the top fill in terms of building out manufacturing capacity internally, finding some third parties to help us augment our internal capacity. And then specifically on components and supply chain, we've got multiple vendors that we've been working with for the past two years, and we've continued to build up our demand with them, and they're stocking inventory to some extent, and we're negotiating more favorable payment terms than we've had in the past. So in general, I think the supply chain for us looks pretty good, but it is long-dated. So, yeah, we've obviously had to put in orders for next-year deliveries for certain components. But at this point, we feel like we're managing it as best we can. It's hard to predict some unforeseen hiccups that are certainly possible, but we've been very diligent and enhanced our team internally to address those specific areas.
spk04: That's great. Thanks for the color, and congrats on the incremental demand for the top fuel systems. Sounds great. Thanks, Sean. Thanks, Sean.
spk01: Ladies and gentlemen, we have reached the end of the question and answer session. Now I can turn the call back over to Mr. Bill Zartler for any final closing remarks.
spk03: Thanks, Chad. And thank you, everyone, for joining us this morning. And thank you to our employees, customers, and shareholders for your continued dedication to Solaris. This continues to be a very exciting time for our company as we continue to commercialize our new technologies, improve our historical offerings, and form new and deeper customer partnerships. We look forward to finishing the year off strong and sharing updates on our growth initiatives next year. Thank you all. Stay safe and have a great day.
spk01: Thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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