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spk06: Good day and welcome to the Solaris first quarter 2023 earnings teleconference and webcast. All participants will be in a listen-only mode. Should you need assistance, please signal conference specialists by pressing the star keys 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. And to withdraw your question, please press star then two. I would now like to turn the conference over to Ms. Emily Boltrick. Please go ahead, ma'am.
spk00: Good morning and welcome to the Solaris first quarter 2023 earnings conference call. I am joined today by our chairman and CEO, Bill Zartler, our president and CFO, Kyle Ramachandran, and our senior vice president of finance and investor relations, Yvonne Fletcher. Before we begin, I'd like to remind you of our standard cautionary remarks regarding the forward-looking nature of some of the statements that we will make today. Such forward-looking statements may include comments regarding future financial results and reflect a number of known and unknown risks. Please refer to our press release issued yesterday, along with other recent public filings with the Securities and Exchange Commission that 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 solarisoilfield.com under the News section. I'll now turn the call over to our Chairman and CEO, Bill Dartler.
spk04: Thank you, Emily, and thank you, everyone, for joining us this morning. The Solaris team delivered a strong start to the year. In the first quarter of 2023, we grew quarterly adjusted EBITDA by nearly 10% sequentially and over 60% from the first quarter of 2022 to over $25 million. We also returned nearly $20 million to shareholders through dividends and share repurchases under our newly enhanced shareholder return framework. Our profitability growth was driven by continued deployments of both our top fill and auto blend systems and slightly higher pricing that went into effect at the start of the year. The continued deployment of topfill and auto blend units helped us maintain flat sand system activity sequentially as gas basin weakness drove frac fleet reallocations and increased white space in frac calendars. Our continued field execution and new technology deployments are helping to lower our customers' costs and drive improved well site efficiency, which resulted in the adoption of incremental eight fully utilized topfill systems in the first quarter. We expect further deployments in the second quarter will help drive incremental EBITDA contribution that should be enough to offset any activity weakness driven by recent natural gas price weakness. Our new top-fill technology has made quite a meaningful impact in a very short period of time, both to our customers and to Solaris. We launched this new offering just one year ago, and since then, we've grown from a couple of systems to over 40 in the field today. In the first quarter of 2022, only about 1% of our sand systems were working with a topfill kit. In the first quarter of 2023, that rose to 25%, and we have visibility for incremental deployments to continue. We believe we are the largest provider of belly dump-compatible sand storage in the lower 48 today, and we expect demand for flexible sand delivery solutions that save money will continue to grow, even in a frack market with some softness. The growth we have seen in our activity over the last year has been driven by both an increase in drilling and completion levels and an increase in pull-through share as top fill systems go to work with new customers. Our top fill system has allowed us to deliver increased value to a larger breadth of high quality and active customers than in the past. We expect that number to grow as operators increasingly seek to align with service providers to provide high quality, low cost, and safe technologies. We believe Solaris is well positioned to meet these needs with a growing offering per well pad. Our auto blend electric blending system is another technology that complements our traditional offering and further develops our strategy to help operators increase efficiency. While we've consistently had two to three blenders in operation over the last year, we've increased deployments toward the end of the first quarter and are currently running closer to five to six. We expect this should benefit second quarter results and are encouraged by further benefits to our earnings with a growing backlog of demand. Our AutoBlend electric blender extends our traditional equipment from a storage solution to a hydrated delivery system and replaces traditional blenders. The automated all-electric design eliminates many of the traditional sand delivery and blender points of failure, reduces personnel requirements, and compresses overall well site footprint. Our customers have already seen these benefits translate to reduce maintenance and operating freed up head count on location, and higher uptime. While the average frack job uses one traditional blender at a time, typically one or more backup blenders are required to keep operations running. Solaris' auto blend solution is designed with redundancy through the integration of three mixing tubs directly below our sand silos, effectively representing three blenders in one. Our system also removes several moving parts, including sand screws and delivery belts, which drive higher reliability and uptime performance. As deployments of both our new technologies increase during the second quarter, we continue to expect higher earnings and return opportunity per well site for Solaris. On well sites that use our top fill system and or auto blend, we would have approximately two to three times the capital deployed per frac crew and would expect two to three times the contribution margin compared to a single six-pack system per crew. Additionally, because both auto blend and our top fill systems can only be used in conjunction with Solaris SAN systems, we are already seeing meaningful pull-through SAN system activity and revenue when deployed with customers who are not already using our SAN system. Our expectation for this technology-led earnings and cash flow contribution for expanded offering, combined with our outlook for declining growth capital expenditures later this year, drove us to reevaluate the best uses of our excess cash. Early in 23, weakness in the global markets driven by financial sector volatility and recession fears drove a meaningful dislocation in our stock price relative to what we believe the intrinsic value of the stock to be. We've consistently returned cash to shareholders every quarter since initiating our dividend In 2018 and this year, we saw an opportunity to enhance that existing shareholder return program. In March, we announced a commitment to return at least 50% of free cash flow to shareholders in the form of dividends and share repurchases. We increased our base dividend by 5% to 11 cents per share, which represents the second dividend raise in our company's history and 18 consecutive quarters of dividend payments. We also initiated a $50 million share repurchase program. Since initiating that program, we have repurchased approximately 1.6 million shares for just over $14 million in the first quarter, which represents approximately 3.5% of the company's fully diluted ownership. We believe committing to a framework for returning cash to shareholders over the long term drives even stronger alignment between our company's owners, which includes Solaris employees. We have $36 million remaining under our current share repurchase program and will continue to be active and opportunistic buyers of Solaris shares. I'd like to summarize by saying that I'm extremely proud of our strong start to 2023. While market supply and demand dynamics may continue to be in flux through at least the near term, we will remain focused on strong operational execution, growing our revenue and margin opportunities per frat crew, paying a consistent dividend, and executing on our share repurchase program. We look forward to updating you on our progress over the coming quarters. With that, I'll turn it over to Kyle for a more detailed financial and guidance review.
spk02: Thanks, Bill, and good morning, everyone. I'll begin by recapping our first quarter results. We generated nearly $83 million of revenue, adjusted EBITDA of over $25 million, about a 10% sequential increase, and returned approximately $20 million to shareholders. Revenue in the first quarter declined 2% sequentially. primarily as a result of lower ancillary services contribution, including our last-mile trucking and equipment transportation. In addition, we saw some softness in gas-directed activity driven by low gas prices. Despite the 2% decline in revenue, EBITDA grew almost 10% sequentially as we saw strong incremental margin and contribution from additional top-field deployments and improved pricing across our base rental offerings. During the quarter, we deployed eight additional topfill systems on a fully utilized basis, which also contributed to pull through sand silo work and incremental gross profit per sand system equivalent. We held our fully utilized sand system count flat sequentially at 92 compared to previous expectations of being down a couple of systems. Operating cash flow during the quarter was approximately $17 million and reflected a seasonally higher use of working capital, including annual employee bonus payments and a distribution under a tax receivable agreement. After total capital expenditures of approximately $19 million, free cash flow was negative $2 million in the quarter. First quarter cash capital expenditures were lighter than expected due to the timing of equipment deliveries late in the quarter, which we expect to have a delayed cash impact in the second quarter. We returned a total of $20 million to shareholders in the first quarter in dividends and share repurchases, marking $131 million in cash returns since initiating our dividend in 2018. Our cumulative returns represent a peer-leading payout ratio of 35%. We use payout ratio to measure how much of our operating cash flow is converted to dividends and share repurchases for shareholders. We ended the quarter with approximately $2 million in cash and $26 million borrowed under our credit facility. We recently amended and expanded our credit facility to $75 million giving us pro forma liquidity of approximately $51 million at the end of the quarter. The increase in liquidity supports the timing of our cash needs as our capital expenditure program is weighted towards the first half of 2023, and we expect to continue with opportunistic share repurchases. As a result, we anticipate borrowings on our credit facility to be temporary as our capital investment rate inflects relative to the growing operating cash flow of the business. I would now like to take a minute to address the evolving nature of our key metrics, including activity levels, revenue, and earnings. Historically, the majority of our revenue and service offering consisted of renting sand silo systems on a monthly basis, thus making our fully utilized system count a key metric. As we have expanded our offerings beyond equipment rental to include trucking services, the nature of our revenue and margin profiles has evolved, creating the need for explanation beyond just system count. Our trucking services, which include last-mile sand hauling, can be harder to predict, and due to their high-revenue, low-margin pass-through characteristics, basic changes in trucking activities, such as longer distances between mines and well sites, can drive disproportionate changes in revenue and margin. For example, ancillary services, which mostly consist of trucking services related to last-mile sand transportation, comprised 5% of total gross profit in the first quarter of 2023, compared to 10% of gross profit in the fourth quarter of 2022 and 19% of gross profit in the first quarter of 2022. The primary driver of this sequential change was fewer tons transported in our last mile service offering. Excluding ancillary trucking services, total contribution margin grew 14% sequentially and over 80% year over year. We expect contribution from ancillary services to be roughly flat in the second quarter. Turning to our second quarter outlook, we are optimistic about the continued growth of our new technology offerings, which should drive incremental share, earnings, and cash flow. We have close to 40 units in the fleet today and are continuing to deliver additional units from our internal manufacturing team. Our backlog remains strong with visibility for incremental deployments to both new and existing customers. We expect to deploy five additional top-fill units on a fully utilized basis in the second quarter. On the sand system side, as we continue to see high reliability and performance of our equipment, we have seen operators take cost-saving measures, as some customers have recently swapped out their 9- and 12-pack sand silo configurations for 6-pack configurations, or reduced their use of extra sand systems for forward staging on subsequent pads. While we have seen some customers successfully reallocate frac fleets from gas-directed basins, these movements have driven white space in the calendar. Considering this white space, together with the changing sand activity mix due to cost-saving efforts, we expect our sand system count to be down between 10% and 15% in the second quarter sequentially. We expect our auto blend deployments to double in the second quarter, which combined with the gas-driven decline in sand systems, flat contribution from ancillary services, an increase in top bill systems, and SG&A between $6.5 to $7 million drives our expectation for total company adjusted EBITDA to be flat sequentially in the second quarter. Shifting to our capital outlook, we still expect our 2023 capital program of $65 to $75 million to be weighted towards the first half of the year. Due to delayed deliveries and cash payments in the first quarter, we expect second quarter capital expenditures to increase sequentially, to a range of $20 to $25 million. As we finalize the building out of our top filled fleet, we expect our capital spending rate to decrease significantly as we shift towards a much lower maintenance capital mode. Initial expectations for third and fourth quarter capital expenditures are between $10 and $15 million in each quarter. The reduction in growth capital spending is expected to yield significant cash flow later this year. In the first quarter, our dividend distribution coverage was over four times, which was up over 40% from a year ago. Continuing new technology deployments and stable maintenance capital expenditures should result in a continued improvement in our dividend coverage on a distributable cash flow basis throughout 2023. We are encouraged by the growing momentum in our free cash flow conversion from our growth investments thus far, and we'll continue to focus on executing the remaining $36 million under our current share repurchase program on an opportunistic basis. Moving forward, we will continue to evaluate further opportunities for using excess cash, which align with our long-term framework of returning at least 50% of cash to shareholders through dividends and share repurchases. We have invested in our business over the last few years to drive growth and return meaningful cash flow to shareholders. Our liquidity remains strong and supports ongoing investment in our business. I want to reiterate that our focus in deploying better, safer, more automated, and lower cost technologies to the industry positions us well for this long-term growth. Our goal at Solaris has been and continues to be providing innovative solutions that ultimately lower the total cost and footprint of oil and gas development. Despite temporary weakness in gas-directed basin activity, we feel confident that 2023 will continue to be a relatively tight supply and demand environment, and that our earnings power will continue to grow. With that, we'd be happy to take your questions.
spk06: 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're using a speakerphone, please pick up your handset before pressing the keys. And to withdraw your question, please press star then two. And at this time, we'll pause momentarily to assemble our roster. And the first question will come from Luke Lamone with Piper Sandler. Please go ahead.
spk05: Hey, good morning. Good morning, Luke. Hey, morning. With your capex guidance flat, it looks like the top fill system upgrades are on track. And does the target still have about, you know, 50 of these fully utilized by year end? And then on the auto blend side, I think you said you have five or six right now. And I missed the number for the deployments in 2Q. Could you give me that again and then maybe talk about the future deployment for all the systems past 2Q?
spk02: Yeah, thanks, Luke. I think our view on the opportunity for the top fills continues to remain at that level you articulated, and our capital program is aligned with that. We're seeing significant efficiencies on the trucking side. Every time we put a new one out, we're seeing truck unloading times decline and truck turns increasing, so the trucking efficiency is really significant there, and As operators continue to find and look for ways to drive down costs, we view this as a great opportunity paired in with our highly reliable sand systems. On the blender side, most of our capital, if not all of our capital this year, growth capital is directed towards the bucket elevators. But what we have seen is an increase in uptake. on the blenders that we do have in the fleet. We see that across multiple customers, across multiple basins. So that's a really exciting opportunity for us to get some higher efficiency or higher just utilization of those assets. And again, another example of every time we put one out, there's lots of learnings and the reliability of those units continues to improve. And just the inherent design of the equipment, again, is fantastic. driving lower rates of NPT on location, as Bill alluded to in his comments around just eliminating multiple points of movement of sand and water and chemicals in traditional blenders, highly reliable with built-in redundancies. So a great opportunity on that product. We're going to be cautious as far as additional capital being directed to those units. We've got capacity in the fleet today, but really excited about the momentum that we see in those.
spk05: Okay. And did you say more were being deployed in 2Q on the auto blend side?
spk02: Yeah, so I think, you know, historically, over the last year, we've oscillated between two and three of the units deployed, and today we're seeing effectively double that. So, yes, we do have higher deployments of the blenders in the second quarter.
spk06: Okay. All right. Thanks, Kyle. The next question will come from Steven Gingaro with CIFL. Please go ahead.
spk03: Hi. Thanks. Good morning, everybody. So first, can you talk about being down 10% to 15% in the second quarter? Can you talk about the allocation of your systems between oil and gas right now, roughly, and how much of that decline is driven by the gas markets?
spk02: Yes, we've been pretty consistent with where rig activities slash overall frack fleets have been for a number of years here. We moved into the Rockies. in a more significant way last year. But broadly speaking, you know, our crew count looks not all that dissimilar to how the rig count is distributed. So we certainly have gas basin exposure. You know, again, when we look at our overall market share relative to, say, a frack company, you know, we are significantly larger just in the overall market share. So we certainly have exposure to all commodities. And when we look at that drop-off in just fully utilized systems, again, we tried to make the point that the business is evolving and sort of the myopic view of fully utilized systems is the way to view this business is evolving. We've got contribution from additional equipment like blenders and top bills as well as the last mile offering. And so the mix of the drop-off, I think, is I'd just call it roughly half gas-related and half related to customers having efficiency in terms of not necessarily requiring the redundant 9 and 12 packs. And, you know, we've had episodic deployments of these 9s and 12 packs over the last, I don't know, six years since we started doing it. And in periods of relative tightness on, say, sand, we see uptakes in it. And also, it's a function of where people are sourcing sand from. So the farther they've got a haul of sand, the more volatility there, the more pressure they can see on location if they don't have adequate storage. So that's just kind of a moving target for us. We don't really ever underwrite, if you will, growth in the 9s and 12s. And when they're there, it's incremental growth. Contribution for us, we've got the capacity based on the size of the fleet, so it's great incremental earnings, but it's not necessarily indicative of any share losses.
spk04: I think I'd add to that. So we may see fully utilized systems in that metric drop, but the gross margin per system will be going up as well because what we're dropping is systems that are lower cost adders or what Kyle refers to as pre-fill or leapfrog sets. because of the reliability of the system, it's just not needed when the sand market is not as tight as it has been.
spk03: Great, thanks. You gave a lot of good calls on the call and on your responses. The other follow-up was on the auto blend side. I believe those are not counted as additional units. Those are part of existing units. I just wanted to confirm that and then also just ask you about You mentioned the market share potential pull-through opportunities. I think that's a big part of the potential growth going forward. Do you have any kind of examples or specific instances you can just give us or areas where you're starting to see that market share pull-through because of the better offers you provide now?
spk02: Yeah, a little muffled, but I think I'll try to get as much of it as I can. When we look at the system count drop, when we talk about the 10 to 15, that's purely sand systems. If we talk about equipment being deployed broadly, that reduction is far lower because you've got additional top fill going on, and as we just referred to, we've got more blenders working. So overall capital equipment being deployed by the company is is probably flat to up. And then on the second point, as far as market share pull-through, it's significant in customers that we've targeted for a long time. And when I say that, these are majors with consistent long-term programs. So yeah, that's the kind of pull-through that we're seeing, which is really exciting for us. These are big targets we've had for a long time that really wanted to see the top fill unit out there. So that's That's how we're seeing the pull through.
spk04: Yeah, on the blender, maybe I'll add. The blender is not necessarily the leader into attracting new customers quite the way the top fill is. But we're seeing adoption by several of our good customers because of the reliability that they have seen using the system. And therefore, when we put that out there, we're putting out a set of water silos, a set of blender. In many cases, the chemical silos are out there with it, along with either six or more sand silos. And so that complete kit, we are seeing a significant step up in adoption of that.
spk03: Thank you, and I apologize for the background noise. I'm traveling, but thank you. Thank you, Stephen.
spk06: Again, if you have a question, please press star, then 1. Our next question will come from John Daniel with Daniel Energy Partners. Please go ahead.
spk01: Hey, good morning. Thank you for including me. Bill and Kyle, I'm just curious right now, as you're visiting with customers, how much of the discussion is on price versus efficiency and product performance?
spk02: I would say in almost all circumstances, it's in the latter. Yeah. I think when we look at pricing, while we did have a price increase in the first quarter relative to market, when we look at, say, last year, we were not up nearly as much. So I think in the grand scheme of things, we're still a very low percentage of the total drilling and completion costs. We've described our businesses and our offering as a little bit of an insurance policy. If you run out of sand or you've got a system that's not reliable, you shut everything down. Price is always kind of top of mind when you're dealing with, you know, various groups within companies such as supply chain. But I think what we try to harp on is the overall efficiency and the reliability that is so critical to them completing wells on time and on budget.
spk01: Okay. I just want to confirm. I mean, you hear a lot of chatter about other OFS product lines with pricing and RFPs, and you just frankly don't really hear it much about with your business. So I was just confirming. A little bit of a nuanced question, Kyle, but for the – can you speak to the insurance market and just kind of what's happening to premiums and ability to get coverage? And the reason for the question is, you know, you just, you go, you know, this, you drive around West Texas, you see, you see so many mom and pop little trucking companies hauling stuff. And I'm just curious what the risk is to the customer for using those types of drivers and just what you're seeing.
spk04: Well, I'll answer it, John. I mean, I think we have seen premiums go up. We have a pretty good safety record. That's something that we strive to push down through the organization at every level, and that certainly helps with insurance renewals. We just went through it. I think we were up 15%, 10%, 15% insurance costs, which is embedded in the G&A number. So we're seeing it. In terms of how the trucking firms go, And remember, we outsource most of that, and that is critical to when we get into our last mile or the heavy haul of our equipment. We spend a lot of time making sure that the carriers we use are, you know, selected, and we have long-term relationships with many of them that go back years, ensuring that we are safe and they do have insurance for hauling our things around. Okay. Got it. Thanks, guys.
spk06: Our next question is a follow-up from Mr. Steven Gingaro with Seeple. Please go ahead.
spk03: Thank you. So you guys tend to have sort of a little better forward visibility, I think, than some others based on sort of the timing of getting systems in place. Are you seeing anything that suggests sort of a continued drift lower and or stability in activity? Because it feels like the pressure pumpers are all talking about being effectively flat, especially in the oil basins. I'm just curious what your sort of line of sight is and any insights you have there.
spk02: Well, I think at a high level, operators are going to be very disciplined as far as capital spending goes. I think broadly speaking, we see continued incremental efficiencies on overall frac stages completed per day or lateral feet completed per day as all parts of the supply chain and all parts of the sort of well-suited equipment get more and more reliable. So I think a headwind that the entire industry faces is just fewer pieces of capital equipment required. And, you know, people can talk about being sold out, and that can mean a lot of different things in terms of how many pieces of equipment they're allocating to a particular crew. So I don't see anyone or we don't see budgets moving and we do see efficiency. So I think in general, if you've got an E&P that's got, say, six frack crews running today, the notion that they may have five in the third or fourth quarter is certainly possible. efficiencies more than anything. So while we do see some stability here, we certainly are looking at the gas tape, and that's under severe pressure here in the short to medium term. We think that abates over time as LNG and other demand pulls create a more supportive environment for the commodity. But continued efficiencies are here to stay, and we think we're a big part of that.
spk03: And then just one more, if you don't mind, when you think about the asset deployments that you laid out on the prepared remarks, do you have homes for them? Or are they being asked for by customers? Or do you just know from the market and the customer conversations that there's demand for them to work?
spk02: Yeah, I mean, we are very frequently rolling forward the manufacturing schedule as well as the backlog demand schedule. So it's a constant process. balance between what's coming off the line and what particular customers are looking at from their pad completions. You may see something get pulled forward or pushed back depending on where people are and on particular pads and frackers. But, yeah, it's a constant shuffle that we are working on.
spk04: But incrementally we continue to get them deployed. at the pace at which we're watching. And we watch that very closely. With the control of our own manufacturing, it makes that balance a lot easier.
spk03: Thanks. I appreciate it.
spk06: This concludes our question and answer session. I would like to turn the conference back over to Mr. Bill Zartler for any closing remarks. Please go ahead, sir.
spk04: Thank you, Chuck. I'd like to conclude our call by thanking all of our employees, customers, and suppliers for their continued support of Solaris. We're off to a great start this year and look forward to continuing to make an impact on operators' well site efficiency and productivity, as well as continuing to execute on our enhanced shareholder return program. Thank you all, and we look forward to sharing our progress with you in a few months. Stay safe.
spk06: The conference is now concluded. Thank you for attending today's presentation you may now disconnect.
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