Q2 2022 Solaris Oilfield Infrastructure Inc Earnings Call

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Good morning and welcome to the Solaris second quarter 2022 earnings conference call.

All participants will be in listen only mode. Should you need assistance, please signal a comfort specialist by pressing star than zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star than one on your telephone keypad. To withdraw your question, please press star than two. Please note, this event is being recorded. I would now like to turn a comfort over to your Von Fletcher, Senior Vice President.

finance and investor relations.

and investor relations. Please go ahead.

Good morning and welcome to the Solaris second quarter 2022 earnings conference call. I'm 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. Is these information to me, 9WAY, or money you could do with your top- clutch reserves?

The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAP.

Reconciliation to comparable GAAP measures are available in our earnings release, which is posted on our website at SalarisOilField.com under the news section.

I'll now turn the call over to our Chairman and CEO , Bill Darler. Thank you Yvonne and thank you everyone for joining us this morning.

Our second quarter financial results demonstrate the early innings for a more robust opportunity set for Salaris than we've seen in the past. Over the last few market ups and downs, our total addressable market was generally limited to having a set of six sand silos paired with a frat crew and a relatively small last mile service offering. And a relatively small last mile service offering.

In the last few years, including through the downturn, Solaris expanded its engineering software and manufacturing teams and has been hard at work designing and building new technologies that complement and build upon our core offering.

Today our total addressable market has grown significantly as we roll out additional offerings.

Although we are still tied to the number of fruit, fruit, scythe, and operation, our opportunity on those sites has grown significantly.

Today's offering includes top fill solutions, the AutoBlend unit, water and chemical silos, and a more sophisticated last mile offering that expands our potential earnings footprint per well site.

These growth opportunities were born out of our internal innovation and our culture of continuous improvement that are core values for Solaris. Teacher Javelin

We've always believed that the entire raw material supply or low pressure side of the well site holds tremendous opportunity for efficiency improvements, just as the sand storage handling did. Our vision was to design a low pressure side of the well site that integrated the sand, water, and chemical storage and handling into one all-electric automated operating platform with minimal headcount required to operate multiple built-in redundancies for the highest reliability and the smallest footprint possible.

This vision required capital investment that will begin making in 2020, despite the downturn and accelerated this year as these offerings have had great traction and commercial success. They're now resulting in higher revenue and profit for rightfully and return opportunity for Solaris. Stunden

Our number of full ULI San systems is a proxy for the number of frat crews we follow and is still a good measure of part of our success. We believe our 12% sequential San silo system grows in the second quarter exceeded the underlying activity growth in frat crews as a new technology deployments helped us expand our customer list.

The efficiency our technology enables has always been important, but has become even more critical at a time when access to incremental for our crews, workers and consumables needed to drill and complete wells is challenged.

Our new top fill technology enhances these efficiency benefits by maximizing payload and minimizing unload times of trucks hauling sand to the well site. The combination of increased payload and faster unloading times allows the drivers to achieve more turns which reduces the overall number of trucks and drivers required to supply sand to a well site.

We estimate the number of required truck trips can be reduced by up to 20% by using our top-fill technology. Fewer trips and fewer drivers help lower overall trucking costs as well as alleviate the worker availability bottleneck that continue to be a challenge for the industry. Fewer truck trips and people on the well sites also means improved safety in a lower carbon footprint. Customers also maintain the option to unload pneumatically which helps to ensure reliability and uptime performance.

The value our customer sees in these efficiency gains is evident in a growing backlog we're experiencing for our new top fill technology. You know, the ever customer that has a top fill today has indicated plans to continue to use the system and in many cases some of our top fills have allowed us to add incremental silo work for new customers. temperature.

in addition to their current system activity. This brings incremental return on a pull-through basis. Based on these early results, we have a growing backlog and demand for the units, giving us line of sight into additional deployments over the coming quarters.

During the second quarter, our last mile services offering delivered a record amount of sand to well sites throughout the lower 48, which was an additional contributor to overall profit per system.

As we've rolled out the top fill equipment, we've used them in many of our integrated last mile jobs and have been able to further enhance our margins. We strategically built our last mile service offering over the last few years by investing in an experienced team, investing in software and integrating our top fill equipment. We've been able to invest in software and integrating our top fill equipment.

We were also able to win work with new high quality customers and with the ramp in our top fill deployments, we've also started to benefit from an increasing number of belly dump tons contributing to our profit mix. We see continued momentum with our integrated last mile service offering as our team continues to execute as our new top fill equipment gets rolled out. It's only getting started in terms of deployments to help drive incremental market share wins in the coming quarters.

Our AutoBlend unit also provides incremental efficiencies on well sites, and this benefit is also evident in the increased demand we've seen. Our Blender revenue days were up over 50% in the second quarter, and some of our deployments have been consistently with the same customer. The AutoBlend's increased automation, smaller footprint, built-in redundancy, enhanced safety, and all-electric design all contribute to a significant reduction in downtime caused by traditional blenders resulting in an increase in pumping hours for our customers.

This translates to more wells per frat crew, which alleviates a major industry pinch point on pumping equipment and labor availability, and ultimately results in lower operating costs for our customers.

Like the rest of the Solaris offering, AutoBlend is all electric and can be integrated with power sources that are used by electric flat fleets today, thus reducing or completely eliminating fuel requirements for Solaris equipment.

Well, the industry is remaining disciplined and as far away from a full scale new build cycle, we believe the new electric front fleets coming into the market in 2023 provide a strong opportunity for continued auto blend deployment in addition to the adoption for conventional fleets.

Last quarter, we spoke about how we frame the potential return opportunity on a per-fract crew basis relative to the investments we're making in new technologies, particularly the top fill and auto blend units. We believe that for every well site where we deploy a top fill, our last mile services, our fluid silos and our auto blend unit, we deploy two to three times the investment and expect two to three times the return or contribution margin per frat crew compared to a single six-packed sand system.

We're already seeing these incremental returns on well sites to incorporate our new offerings.

It's also important to reiterate that each of these new service offerings is designed work in conjunction with the Solaris San Siala system. As these new technologies deploy and pull through additional San Siala units, we believe our activity growth can outpace the industry front-through deployments. For example, there are customers in basins that Solaris has not historically had a large presence with. We believe that our new technology will allow us to essentially grow into new or underrepresented markets such as the Rockies and Bucket.

And with a return opportunity of two to three times versus a standalone silo system, we'd also expect to see our overall profit per system expand over time, as well as customer-invasive additions.

Because we have a culture of innovation and continuous improvement, we're continuing to work on additional efficiency enhancements for customers to further grow our addressable market. One additional example of this is the modifications we made to our equipment to enable handling of wet sand. While it's still early to know what the ultimate demand will be for wet sand, several operators have spoken about it in the context of mobile or on-site mines. Wet sand typically contains 4 to 6% water content.

but historically has been hauled by boxes or bottom drop trailers. While the weight of the water results in smaller volume of sand that can be transported per truck load, the total delivered cost of the sand is significantly cheaper by reducing trucking distances with more proximal mine locations and eliminating capital and operating costs hard to drive the sand.

We recently tested the ability of our full offering to handle wet sand, including modified sand silos, fluid silos, top fills, and auto blend. We're pleased with the initial results and we'll continue to run these trials. The early trials indicate that we would require relatively minor modifications to retrofit sand systems for this capability and our monitoring market demand, which would justify this incremental deployment of capital. While Solaris sand systems are already offered many efficiency benefits today, we believe this enhancement could result in new customers or incremental work with existing customers.

about our incremental market growth opportunities.

We look forward to understanding the initial prospects for growth in 2023 as we continue to invest in forward thinking solutions while continuing to pay our dividend and maintain our strong liquidity. With that, I will turn it over to Kyle for a detailed review of our financial results and guidance.

Thanks Bill and good morning everyone. As Bill Allen, the FLAIRS team produced impressive results for the second quarter. And we believe they demonstrate a differentiated opportunity for FLAIRS and what appears to be shaping up to be a strong, multi-year cycle for the industry.

We generated nearly $87 million of revenue and adjusted EBITDA of over $21 million.

We average 84 fully utilized systems, which represents a 12% sequential increase from the first quarter.

We believe this growth exceeded that of the industry for accurate count driven by incremental demand for our new technologies and our integrated last mile for just six offerings. Until we move forward, just six offerings.

Our growth profit margin for full utilized system was at 18% sequentially in the second quarter. The strong incremental margin increase was driven by a combination of improved last mile profitability, fixed cost absorption due to activity growth, and contribution from our new technologies, is redeployed more top fill and all of our units.

Operating cashflow was approximately $16 million during the quarter working capital built by approximately $4 million to support activity growth and accelerated trucking payments associated with our integrated last mile services offer.

After total net capital expenditures of approximately $21 million, free cash flow was negative $4 million in the quarter.

We return a total of $5 million to shareholders in the second quarter in dividends, which is flat from the prior quarter.

The second quarter marked our 15th consecutive quarter of dividend payments and we are now proud to have returned over $100 million in cash to shareholders in the form of dividends and share repurchases. The next quarter marked our 15th consecutive quarter of dividend payments and we are now

We ended the quarter with approximately $15 million in cash and $50 million available under our undrawn credit facility for total liquidity of $65 million.

Turning to our third core outlook. We expect near-term industry activity ads to be challenged by shorters of people and equipment. To be challenged by shorters of people and equipment.

Given its tightness, we expect the industry Fragrant Count adds in the second half of 2022 will be challenged. However, we expect Stellaris' system activity should outperform. For the third quarter, we expect our fully utilized system count to grow between five and 10% sequentially, driven by new technology deployments that provide incremental work with both current and new customers and continue to focus on customer service. And continue to focus on customer service.

We expect continued improvement in system margin throughout the course of the year, primarily driven by contribution from our new technologies, continued execution in our last myelogistics offering, and improved system cost absorption with anticipated activity growth.

During the second quarter, we averaged two fully utilized top-fill systems and our guidance assumes we go to an average of 10 fully utilized systems in the third quarter. And we would expect to see a similar growth rate in the fourth quarter.

Third quarter gross profit margin per system is also expected to be impacted by some near-term headwinds including a catch-up in field headcount to support growth, associated labor support costs, and repairs and maintenance expenses.

None of these factors we expect gross profit margin per system to be at 5% sequentially.

SG&A expenses for the second quarter were approximately $6 million, inclusive of non-cash stock-based compensation. For the third quarter of 2022, we expect total SG&A to be similar to the second quarter at approximately $6 million.

Turning to our capital outlook, for the full year we continue to expect maintenance cap x for 2022 to be in the 10 million dollar range.

As it relates to growth capital investments, we are now narrowing our expectations for full year 2022 expenditures within a range of $50 to $60 million compared to our previous outlook of between $40 and $60 million.

as we are seeing growing demand for new technologies.

We expect total capital expenditures in the third quarter of 2022 to be similar to second quarter levels. We expect total capital expenditures in the third quarter of 2022 to be similar to second quarter levels.

As Bill spoke about earlier, we are encouraged by the incremental returns we are already seeing on our investments in our topical solution and autoblot.

While it is still too early to anticipate our growth plans for 2023, initial indications from some operators of their activity schedules and demand for our new technologies gives us confidence and continued investment in these solutions.

We will continue to monitor market demand and supply chain dynamics and will only make further investments which we expect will drive attractive returns for sellers and our shareholders.

Our distributable cash flow defined as a justh at Yvda less maintenance capital resulted in a dividend distribution coverage of about four times in the second quarter of 2022. 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 based throughout 2022. The basis throughout 2022.

We anticipate cash flow from operations, excess cash on 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 are pleased with the results we are sharing with you today and are encouraged by the growing revenue and earnings contribution we are seeing from our new technology investments.

Since our inception, we believe Solaris' differentiation comes from our drive for relentless service and leading-edge innovation, automation, and higher safety standards.

We look forward to sharing our continued progress on our new technology initiatives and how they drive incremental value for our customers by driving efficiency in the completion operation.

We will remain focused on new technology opportunities that can grow our earnings for Fragr Crew, we service, driving tremendous returns for shareholders, maintaining our dividend, and maintaining our strong bounty and the quality of position. We will remain focused on new technology and the quality of position.

With that, we would be happy to take your questions.

We will now begin the question and answer session.

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to assemble our roster.

The first question comes from Don Christ with Johnson Rice.

Please go ahead.

Morning, all hurry up, it's morning. Very dawn.

Thanks.

I wanted to start with the increase in revenue quarter over quarter. I know it can be lumpy dependent on on how many systems or or pads you're supplying with last mile logistics, but can you just talk about, you know, the significant increase quarter over quarter and maybe talk about profits? It seems like maybe labor was a little bit of a headwind against the increasing revenue per system.

Yeah, I'd say done between last mile as well as the new technology. The average revenue per piece of capital equipment does go up significantly. So on the new technologies, the commercial model at this stage is a rental plus throughput model. So we're getting, we're generating revenue based on the actual tonnage pump. And in general, that's going to increase over time as we're seeing more and more efficiencies. And just as a total overall magnitude is.

It's a larger dollar. So we are seeing revenue growth which is driving, I would say, lower percentage margin over time when we compare to say the 2018-2019 timeframe when we were primarily just a rental business. So I would say as we look forward we're going to see revenue continue to grow and margins, you know.

probably on a percentage basis to decline, but the way we...

You know, look at the return on capital is really dollars of contribution. And what's critical here is we're seeing expansion in our contribution margin per frack crew that we're covering. And that's really the message here is we are growing our cash flow per frack crew meaningfully through further integration of last mile. There's significant value out there as well as the new technologies. So that's how we're kind of...

Thinking about the evolution here and it will continue to grow and morph over time as we have more capital going out

I appreciate that color. I know it's difficult to predict quarter of a quarter, but one more for me, as you. I know it's difficult to predict a quarter, but one more for me, as you.

built more top load and blender systems. Can you talk about any efficiencies that you've gained? I know you refine the design of it over the last few quarters, and it seems like it's kind of streamlined now. Can you talk about how many years?

Producing per quarter or any kind of metric that you want to put on that, and if you're getting more efficient there.

We are continuing to make them in our manufacturing is very efficient and we've got as for subassemblies. I think we've got 14 in the fleet right now and growing so that was, only a few quarter ago. So we're making them pretty effectively efficiently and we're deploying them as we mentioned. We've got a great backlog and we'll keep making them as long as we've got that and we see the incremental contribution margin. This is how I said I mean we really focus on what's the dollar return on that capital plus the dollar return on the course.

running and they're continuing to grow. It's not quite as straightforward to drop that kit in as you would adding a top fill on the front of the silo set. But it's working and we're seeing tremendous reliability improvements under current funders and that really is encouraging for our customers.

I appreciate all the color. I'll turn it back.

Thanks, Scott.

Again, if you have a question, please press star then one.

The next question comes from John Daniel with Simmons. Please go ahead.

Wow, thanks. You got a new job, John .

Maybe it pays better. Okay, look, this is kind of a softball, not meant to be, but just looking at the growth and, you know, Q2 top line really impressive, and then the growth in the top field systems.

And knowing, of course, that you're not going to give formal guidance for 23, but it really feels like, you know, if let's just humor, let's say we think the frack market's up 10% next year's makeup a number for, you know, just her purpose of the discussion. You guys should be out performing this by it.

a good factor. I mean, am I off base on this? It just seems like you guys are set up well here. No, no, I think if you flash back to our market, our penetration a year ago with six packs on every well side occasion, 12 pack, and you start adding top fills on a significant portion of those and blenders, you really are looking at an incremental two to three times per frat crew gross margin. So, thank you.

Yeah, it's impressive as you guys are designing this stuff the blenders the top fuel systems now I mean how much time is your engineering department allocating to that next opportunity? Or is right now the focus on just continuing to grow these two opportunities That's a great question and we challenge ourselves every day to figure out our handoff We've built up our operations team to to take on The more sustaining engineering and improvements of a product so we sort we have our engineering group roughly divided up into

new product design development launch and sustaining engineering. And for evolution of the current products and once they become current products focused on that. So we are in that handoff process right now. We've added to our field operations team to be able to handle these slightly more complicated products and slightly more complicated pieces of kit so that we can refocus our core expert engineering on new product development and turn this over and this field engineering.

Okay, so under watch. Well that's really all I had. Thank you for including me this morning.

Thanks, John .

This concludes our question and answer session. I would like to turn the conference back over to Bill Zartler for any closing remarks.

Thank you, Andrew. And thank you, everyone, for joining us today. And thank you to the Salaris employees for their continued hard work and making sure that we continue to provide our customers with innovative, reliable solutions that make our industry better. We'd also like to thank our customers for trusting our innovation and helping us continually refine it and make it better. We look forward to further sharing updates as these motionistives take hold over the next quarter to thank you all, Steve, safe and ever, great day. Thank you all, Steve, safe and ever, great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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