This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk04: Good afternoon, evening, and welcome to the Solaris Q4 2022 earnings teleconference and webcast conference 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 telephone keypad. 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, Finance and Investor Relations. Please go ahead.
spk00: Good morning and welcome to the Solaris Fourth Quarter and Full Year 2022 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 Commissions that outlined 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 solarisboilfield.com under the news section. I'll now turn the call over to our chairman and CEO, Bill Zartler.
spk02: Thank you, Yvonne, and thank you all for joining us this morning. 2022 was another strong year for Solaris. We deployed systems to meet rising demand, invested in our business to grow our addressable market, and expanded our presence with new and existing customers and patients. We continue to focus on innovation and improving our service quality and reliability. Our most visible growth in 2022 came from our all-new electric top-field-based systems, where we started the year with a couple of units and have more than 30 operating in the field today. This growth would not have been possible without the investments we made in new technology, people, and continuous improvement of our offerings. The design and deployment of both of our new technologies, AutoBlend, and our TopFill-based system, together with ongoing system enhancements, are supported by our own internal engineering and manufacturing capabilities, which we ramped up to match our customers' strong demand. We invested $81 million in capital expenditures to support this strong demand, which helped drive a near-tripling of adjusted EBITDA to $84 million in 2022 and a fourth-quarter exit rate approaching $100 million. We also continue to pay our dividend and end of the year with no net debt. In 2022, we continued innovating to help our customers improve their efficiency by lowering their overall costs. The Solaris top fill system enables our sand systems to be compatible with belly dump trucks without losing the backup option and reliability of multiple offload points for pneumatic trucks. Belly dump trucking allows for increased sand volume per truckload and increases the number of turns per truck. Our system is not only unique in its redundancy, but can also be supported by multiple electric power sources. The result is 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. We are also seeing some of our customers use our top fill solutions to successfully complete SAML frac jobs, and we believe operators will continue to push the envelope in seeking further efficiencies. For example, some operators are testing the use of wet sand to drive additional efficiencies. Earlier this year, we completed our first live trial with a modified sand system and top fill system together on the wet sand portion of a frac job. While the wet sand opportunity today is small relative to total sand consumed, it has grown over the past couple of years, and we are ready to play a role in this development. We have a proven history of investing in and being rewarded for our efforts to support our customers' efficiency improvements as it has demonstrated in the rapid adoption of our top fill solutions. We believe our top fill investment allowed us to grow faster than the underlying U.S. frac market and grow our footprint in historically underrepresented basins like the Rockies. While belly dump solutions have been in the market for many years, including our own early designs, in 2022, our new system established Solaris as the largest provider of belly dump-compatible sand storage in the lower 48th. The strong topfill adoption has already resulted in us broadening our customer list, including pull-through sand silo work, and we are encouraged by the longer-term visibility for that to continue. Every customer that has a topfill unit today has indicated plans to continue using those units, and we are working with several of them on agreements for multiple units. Based on this current activity and backlog, we plan to build new units in 2023 to meet incremental demand. Beyond our top fill solution, the other new offering we continue to advance this past year is AutoBlend, our electric hydrated delivery system, which eliminates many of the problems of today's traditional blenders. Like our top fill solution, AutoBlend is designed with redundancy, increased automation, a smaller footprint, increased safety, and is 100% electric. These features contribute to a significant reduction in downtime typically caused by traditional blenders, resulting in an increase in pumping hours and lower maintenance requirements for our customers. While traditional blenders require one or more dedicated personnel to operate, AutoBlend can be run remotely from the data van. When used in conjunction with the full Solaris offering, including sand systems, fluid systems, and our top-flow solution, on-site labor requirements can be reduced by about 80%. Given the continued tightness in pumping equipment and labor availability in the industry, we believe our full offering translates to more wells per frack crew and ultimate results in lower operating costs for our customers. Even further savings are possible when our all-electric equipment is tied into the same power source as electric frack fleets, which continue to grow in the market. Today, electric frack fleets make up a small percentage of overall activity, though some estimate they could become a quarter of all activity over the next few years. While many operators are currently using either our top-fill solution or auto-blend, Approximately one-third of the FRAC crews we supported in the fourth quarter operated a combination of sand silos, fluid silos, last-mile services, top fill, and or auto blend on one well site. While these individual services already offer many efficiency benefits as standalone offerings today, we believe more integration could result in new customers or incremental work with existing customers. We expect to see a growing number of well sites with multiple Solaris offerings. Additionally, we view the return potential of a fully integrated Solaris City opportunity on a per-frac crew basis to be a multiple of a single six-pack system today. Throughout 2022, we spoke about how we frame this return opportunity on our new technologies relative to the investments made in those offerings. We believe that for every well site where we deploy a sand system, fluid system, top fill, auto blend, and last mile services, We deploy approximately two to three times the investment and expect two to three times the return or contribution margin per frac crew compared to a single six-pack. We're already seeing these incremental returns on well sites that incorporate our new technologies. As we continue to ramp up additional deployments over the coming quarters, we would expect to see our overall profit per system grow over time as well as continued pull-through benefits to SAM system deployments and new customer additions. As we think about our plans for 2023, we will continue investing in growth capital that creates positive returns for our business. We also see opportunities to return incremental capital to our shareholders. The backlog of demand for our top-fill equipment continues to outstrip supply, so our top-fill system will make up the majority of our growth investments in 2023. As we build our fleet, we expect to be nimble with those plans based on the balance of customer demand and bottom-drop trailer supply. Our capital plans for 2023 are weighted towards the first half of the year so we can meet demand and maximize the benefit of the returns and cash flow we expect to generate. We also focus on how we will share our excess cash flow with investors over the course of the year. Every employee at Solaris is also a shareholder, and in total, we own 16% of the company, so we're highly incentivized to find the right balance of investment into our business and returns to investors that will maximize shareholder return. During 2022 and into 2023, we also increased how much we give back to our employees, which Kyle will share more detail on later. Our results would not be possible without our employees, and we believe having the strong shareholder alignment in our employee base combined with a strong team-focused and entrepreneurial culture has led to Solaris being a great place to work. I'm proud to share with you that for the second year in a row, we've been recognized as a top workplace by the Houston Chronicle. This incredible achievement is a testament to our team's dedication to build an organizational culture where people feel supported, engaged, and excited to help Solaris achieve our goals. Wrapping up, I would like to say that at Solaris, we're extremely proud of the strong performance we achieved in 2022 and look forward to executing on our prospects for growth in 2023. Our customers' increasing demands for high-quality service, continued innovation, and cost-effective solutions have pushed us to be proactive in solving the always-evolving industry pinch points. We expect our expanded offering to provide a superior economic and efficiency benefit to our customers while also enhancing our returns. We are confident in the conversion of our strategic investments into a meaningful free cash flow inflection over the coming quarters and will remain thoughtful on how we deploy this excess cash. With that, I'll turn it over to Kyle for a more detailed financial and guidance review.
spk03: Thanks, Bill, and good morning, everyone. I'll begin by recapping our fourth quarter results. We averaged 92 fully utilized sand systems, generated over $84 million of revenue, and adjusted EBITDA of over $23 million. Extreme winter weather events disrupted much of U.S.-based land activity late in December and January, which caused job start delays and negatively impacted our fully utilized system count in the fourth quarter by two systems. Seasonality impacts largely played out as expected in our last mile volumes, though the decrease in our rental and last mile activity was partially offset by an increase in systems deployed with new top fill solutions. During the quarter, we continued to manufacture new top fill units, adding approximately six top fill units on a fully utilized basis, bringing the fourth quarter to a total of 15 units. During the quarter, we realized strong incremental margin contribution from additional top fill. However, this was offset by higher system costs caused by the extreme winter weather and, to a lesser extent, continued ramp-up costs associated with new product deployments and activity in the Rockies. Absent job startup delays and higher weather-related costs, adjusted EBITDA in the fourth quarter would have been approximately in line with the third quarter and in line with prior activity and system profitability expectations. Operating cash flow during the quarter was approximately $24 million. After total capital expenditures of approximately $22 million, free cash flow was positive $2 million in the quarter. Due to continued supply chain tightness we saw throughout the fourth quarter, we pulled forward some long lead item deliveries for our 2023 growth plans. We returned a total of $5 million to shareholders in the fourth quarter in dividends, marking our 17th consistent quarter of dividend payments. Since we initiated our dividend in late 2018, we have returned about $112 million in cash to shareholders in the form of dividends and share repurchases. Since 2018, our cumulative returns represent a peer-leading payout ratio of 32%. We look forward to engaging with our shareholders, board, and management team about potential uses of future free cash flows. We ended the quarter with approximately $9 million in cash and $42 million available under our $50 million credit facility for total liquidity of $51 million. Net of $8 million of borrowings on our credit facility, we ended the year in a positive net cash position. Together, with cash flow from operations and excess cash on our balance sheet, the intent of the borrowing on our credit facility is to fund our working capital and growth needs. We anticipate borrowings on our credit facility to be temporary as we inflect on our capital investment rate relative to the growing operating cash flow of the business. Turning to our first quarter outlook, we are very excited about the immediate opportunity in front of us to continue to grow our top fill units, which will drive incremental share and cash flow. Today, we have more than 30 units working in the field and continue to deliver additional units from our manufacturing team. Our backlog is strong with visibility for additional deployments to both existing and new customers. From a macro perspective, we are keeping our eyes on commodity prices, particularly recent natural gas price weakness. This weakness has driven a decline in gas-directed drilling activity, and we expect this will have an impact on gas-directed U.S. completion activity in the near term. We have already seen a few gas-directed projects flip to the right. And since Solaris operates in all U.S. basins, we will not be immune to any reduction in completion activity. However, the continued demand for our new top-fill systems should provide partial protection from any decline in natural gas-based activity. In addition, our assets are highly mobile and easily moved across basins if the frack crews move to oil-focused areas. We expect system and total company profitability to increase sequentially due to a catch-up in pricing increases and incremental contribution from new technologies. Based on our manufacturing timelines, we expect approximately seven incremental top fill units will be fully utilized in the quarter. However, as a result of the softness and gas prices, we expect our sand system count to be down a few systems in the quarter. Turning to SG&A, as Bill alluded to, in 2022, we continue to make conscious and real-time decisions in the way we support our employees. Inflation was and continues to be a reality for all our employees, and this past year, we proactively provided two cost of living adjustments and elected to cover a higher percentage of employee healthcare costs for 2023. This year, we also increased our 401 match. Since Solaris' inception, we are proud to provide attractive compensation to all our employees, including company equity, dividends, and continuous training, among other benefits. We have experienced relatively low turnover and we believe this is at least partially driven by how our employees are rewarded. Turning back to the numbers, in the fourth quarter, SG&A expenses were approximately $6 million. As a result of our additional efforts to support retention and attract new employees, we expect total SG&A in the first quarter to be between $6 and $7 million. In the first quarter, we will pay annual cash bonuses, which will likely result in working capital being a use of cash during the quarter. Shifting to our capital outlook, We are revising our 2023 capital expenditure guidance to a range of $65 to $75 million, which accounts for improving operational efficiencies and flexibility to respond to changing market dynamics while maintaining our plans for continued top-filled system deployments. Our 2023 capital program will be weighted towards the first half of the year, with the first quarter being the highest and subsequent quarters showing reductions. As we finalize the building out of our top fill fleet, we expect our capital spending rate to decrease significantly as we shift towards a much lower maintenance capital mode. In a flat or even slightly down overall frac market, we expect lower growth capital spending to result in significant free cash flow for Solaris. In the fourth quarter, our dividend distribution coverage was nearly four times. We used distributable cash flow defined as adjusted EBITDA, less maintenance capital. as a measure of our cash return potential. Together with improved pricing, our outlook for improving profitability and stable maintenance capital expenditures should result in a continued improvement in our dividend coverage on a distributable cash flow basis throughout 2023. We're encouraged by the growing momentum in our free cash flow conversion from our growth investments thus far and will continue to evaluate further opportunities for using excess cash. Before we open the call for questions, I'd like to reiterate that our goal at Solaris is to create sustainable value for our stakeholders by providing innovative solutions that exemplify automation, innovation, quality, safety, and ultimately lower the total cost and carbon footprint of oil and gas development. We are proud of our relentless focus in deploying technologies to the industries that help drive incremental efficiencies for customers and position us for long-term growth. We have conviction that 2023 will continue to be a tight environment for supply and demand. And we're excited to keep pushing the envelope in both meeting our customer's demand for efficient, low cost and safe solutions and generate incremental returns for our shareholders, support our dividend strategy and maintain our strong balance sheet and liquidity position. With that, we'd be happy to take your questions.
spk04: We will now begin the question and answer session. To ask a question, you may press 1 then start on your telephone keypad. If you're 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 our roster. Our first question comes from Stephanie Vangaro with Stifle. Please go ahead.
spk01: Thanks. Good morning, everybody. A couple of things for me. The first is just a clarification. I think you said you had 15 new top fill units in the fourth quarter and then 30 units in the field currently. Was that accurate, Kyle? No.
spk03: Yeah, so it's 15 fully utilized in the fourth quarter, and today we've got roughly 30 that are working out in the field today. So, you know, in the third and fourth quarter, I'd say the overall utilization rate of the TOFLA units was lower than it is today. As we continue to ramp the manufacturing, we're making some tweaks, and so we've retrofitted some of the original units, and so that caused a little bit of white space which is why you see such a dramatic increase from say uh fourth quarter average levels to where we are today now the guidance is that we will add seven on a fully utilized basis uh for the first quarter so from six to seven increases you know significant on a percentage basis, but we're seeing that white space contract significantly as we really hit our inflection point on manufacturing and keeping these units operating in the field. You're accurate in your description.
spk01: Great. Thanks. And then you mentioned, I think you mentioned some costs in the fourth quarter, but I have two questions around that. One is, The gross profit margins in the fourth quarter were very good, and I assume it was because you had lower pass-through revenue in the quarter. Can you just clarify that? And then when you start thinking about the incremental contribution margin or decrementals in the first quarter, things soften a little bit. How are you thinking about sort of the overall first quarter with the additions of probably better utilization of those top fill units, but maybe a few less sand units in the field. Are we thinking flattish, or do you think we're actually down sequentially?
spk03: Yeah, so there's a lot in there, and I'll try to pick through it. And if I miss anything, you know, let me know, and we can circle back on it.
spk01: I was only allowed one more question, so I had to get a lot into it.
spk03: Fair enough. You got seven in there, Stephen. So I... So I think, yes, in the fourth quarter, we did see less volumes on the pass-through side. So that will drive incremental margins on a percentage basis. What we've tried to consistently talk about is margins on a dollar basis. So we really think about what are the dollars created per system. And so that's how we're sort of oriented. And I think quarter over quarter, that was roughly flat. So while the margin percentage was up, the actual dollars were roughly flat. And again, that's driven by Just let's pass through and then in terms of costs yet, so we you know we the weather impact Did have an impact on overall costs. We've got you know fixed costs here and some activities are less Than we had forecasted that's just going to mean more cost absorption as we look at the first quarter we I think we did talk about in the call and the prepared remarks rather and Margin expansion, and it's multifold. One is we held pricing for the most part flat for all of 2022. We began this year with a pricing increase across virtually all of our customers. So we'll see that have an impact. And then, yes, we will deploy incremental top fill units, as we talked about in the first question, which will contribute to margin expansion. The last mile piece is always a relatively volatile part of our business. We don't have any incremental capital associated with the last mile part of our business. We do have incremental folks that we've added. We've got a really strong team that's managing that. but we haven't invested any capital. So that's sort of an up-and-down part of our business. We have, over time, high-graded the overall quality of our customers there. So what that means is actually lower margin on the pass-through, but we've got much more consistent work of higher quality base. So on balance, that's where we want to shift the work. And we do see, again, margins expanding on the base of the new capital as well as pricing.
spk01: Got it. Great. No, that's great color. Thank you.
spk04: Again, if you have a question, please press star, then one. At this time, there are no further questions. This concludes the question and answer session. I would like to turn the conference back over to Bill Zartop. Zartler for closing remarks.
spk02: Thank you, Jordan. I'd like to conclude today by thanking all of our Solaris employees for their enormous contributions in 2022. I'd also like to thank our customers and suppliers for their continued support and efforts throughout the year. We believe that we will 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.
spk04: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Disclaimer