Q3 2022 Solaris Oilfield Infrastructure Inc Earnings Call

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Good morning, and welcome to the Sars oilfield infrastructure third quarter 2022 earnings conference call.

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I would now like to turn the conference over to Yvonne Fletcher. Please go ahead.

Good morning, and welcome to the Solaris third quarter 2022 earnings Conference call I'm joined today by our chairman and CEO those are alert 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 may 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.

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 Solaris oilfield Dot com under the news section.

Now I'll turn the call over to our chairman and CEO Phil Harbert.

Thank you Bob 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 are fully utilized system count increased roughly 12% sequentially to 94 systems and adjusted EBITDA grew over 14% to nearly $24 million we paid off.

Our 16th consecutive dividend and ended 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 outpace 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 those solutions the auto blend unit water and chemical silos and a more sophisticated last mile service offering.

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.

Through our capital solutions, we have added new customers that have historically used boxes or other bottom dropped solutions and through our Autobahn 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 frac fleets coming to market.

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During the third quarter approximately half of our net growth in total systems deployed was pulled through share driven by delivery of additional tocqueville units are topped off system provides a powerful combination of our reliable and industry, leading sand handling equipment with flexibility still to use both high capacity belly dump and pneumatic trucking.

Using belly dump trucks, we can increase per truck payload, which drives a significant reduction in total truck miles per job trucking efficiency has 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 sought pure 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 in on well sites.

Some of the growth in the third quarter also came from customers, who let us into the Rockies and Bakken, where soliris, it's historically had smaller presence.

The value proposition of using bottomed up trucks and 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 truck 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 topical technology and don't existing basins that we operate in as well as historically untapped areas like the Rockies were.

We mentioned on our last call that nearly every customer that has a thoughtful 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 tocqueville units. Following initial trials with plans to continue to grow unit count based on the stickiness of current customers and a growing backlog a demand for these units. We believe additional investment in this technology is attractive.

During the quarter, we added approximately seven fully utilized hospital units for a total of nine fully utilize tocqueville systems over the quarter, we expect to deploy additional units at a similar pace over the coming quarters, well, there's always evolving our near term backlog indicates that one out of every three tocqueville units will drive pull through.

San systems that are currently not in use.

For the fourth quarter 2022, we expect continued pull through demand for sand systems, which can be offset by a frac 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 tacos and auto glass. 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 them all 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 lenders. We also continue to believe the new electric Frac fleets.

Going into the market in 2023 provide an opportunity for continued auto blended 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 Soliris 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 result.

What's in guidance.

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 Frac 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 our fully utilized system was flat sequentially in the third quarter. The strong incremental margin contribution from our top fill in San system deployments was offset by a combination of lower last mile profitability higher system support cost and startup costs associated with ramping new product deployments and activity underrepresented basis.

As we rolled out the types of equipment, we've used them in many of our integrated last mile jobs, and they've 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 frac 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 <unk>.

Third quarter in dividend, 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 in excess cash on our balance sheet. The intent of this borrowing on our credit facilities to fund our working capital and growth needs as we continued 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 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 deployment that can potentially offset this seasonality for flat thin system count in the fourth quarter.

On a profitability basis, we expect potential seasonality continued system and start up costs and a reduction in last night 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 frac 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 deployment and strong indicators for incremental demand. We are initiating 2023, capex guidance of $75 million of which $10 million to $15 million will be direct.

Towards maintenance capital as our fleet continues to grow in size and capabilities. Our 'twenty 'twenty three capital program will be weighted towards the first time for 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 supplier stock we use distributable cash flow defined as adjusted EBITDA less 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 <unk>.

Look 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 'twenty, two and into 'twenty two 'twenty three.

In summary, we are encouraged by the growing revenue and earnings contribution we're seeing from our new technology investments year to date as our business expands our team remains committed to driving the highest.

Quality and 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 focus 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.

Thank you.

I will begin our question and answer session to ask a question you May Press Star then one on your Touchtone stuff.

If youre using a speakerphone please pick up your handset before pressing the keys.

To withdraw your question. Please press Star then two.

And at this time, we will pause momentarily to assemble our losses.

Yeah.

And the first question will come from Luke Mamone from Piper Sandler. Please go ahead.

Hey, good morning, Bill Kyle a bond.

Good morning, Luke on the warning.

The incremental 'twenty three capex, you've noted how youre seeing increased incremental demand for <unk>.

Parcel deployments and maybe auto blend as well in the past you've given us the parameters on how accretive this could beat our gross profit per system.

Maybe on a more simplistic basis can you talk about how the E. R. O C. From these investments in 'twenty, three or maybe even comment on how additive it could be to 'twenty three.

Street estimates appear pretty low at this point at about a 100.

10 million or so.

Yeah look I'll take that one you know when we think about return on capital, we really target call. It two to three year payback on all the capital we put into the business that's sort of I'm, just a stand alone basis, and they're really compelling piece with the top 50 units is we're able to redeploy them, Idaho capital. So some of the sand Tyler system.

That we have today that arent working and we're able to gain market share through deployment of the top dose that becomes really compelling from an incremental <unk>. We're deploying you know roughly <unk>.

$3 million of capital, but the incremental is only call it a million or half.

Okay got it.

And then I believe you said you're at nine top till systems right now how do you with the Capex for 'twenty, three where when you see 23 anything out from a top health systems.

Yeah. The nine is it 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 those every day and the way we think about capital cost per ton sold was roughly a million and 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.

Yeah, a little bit different way of thinking about it is that we probably continue to add top holes that are at a similar pace and so you should continue to see the pull through that that call reference I have additional sand systems plus the contribution on that two to three year payback on the growth Capex in 'twenty three so I think we would agree.

With you that the street seems a little low right now.

Okay.

Third yeah.

About one out of every three that's going to work. So the one each one gets an incremental capital returned one out of three to one out of a half is actually pulling through in incremental sand silos that that would not be used that's actually idle capital. So that you will get actually increased returns on that portion.

Yeah.

Okay got it Super helpful. Thanks, a bunch.

Sure.

And the next question will be from Steven <unk> with Stifel. Please go ahead.

Thanks, Good morning, everybody.

So just a follow up on <unk> question, a little bit when when we've sort of traditionally done our soliris model and we've sort of looked at our expectations for Frac fleets and assume you guys had about a third of the market.

Should we be changing that approach.

It appears as if we are gaining market share when you look at that metric. So yes, I think incrementally with the Tocqueville 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 going to work on those particular pads, but and.

Many cases somewhere between a third and a half are actually pulling through new silos for new market.

Okay, Great no that's.

Helpful and then.

When we when we think about.

Your free cash flow generation next year.

It sounds like based on your comments in response to a prior question.

You do you think the beat 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 Capex youre talking about yeah.

Yeah, absolutely and and you know we will manage the capex going into the year right now our expectations is that we have plenty of demand I'm going into next year and we will plan on building. It if things change we can rapidly slow that down if needed but right now it feels like those top 50 units will go to work B.

Coupled with existing silos as well as bring new market new to work, but even on top of that there is additional significant free cash flow generated beyond the capex required.

Great. Thank you and if I could slip in one more just from your from your perspective of the market. I mean, you guys have a I think you generally get an early insight into interactivity and you kind of commented on the fourth quarter. It feels like you know there is 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 'twenty three completion activity plays out at this point.

Yeah.

You can't predict that I think we view it as continuing to be steady to up a little bit you know if 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.

Okay, great. Thank you for the detail.

The next question comes from David Smith from Heikkinen Energy Advisors. Please go ahead.

Yeah.

Hey, good morning, and thank you for taking my question.

Yes.

Yeah.

Correct me, if I'm wrong, but you have an increased pricing that much this year versus the box right I mean, certainly nothing comparable to that.

This was seen across most of the other assets like our rigs and Frac spreads. So I'm curious if you can talk about how you view the potential to improve.

And going and going into 'twenty three.

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 in 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 for 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 there is a there is not a peer price increase there are true investments, we're making into the existing fleet.

See that in some of the maintenance capital numbers as well as on our growth capital basis in terms of adding new capacity or are.

Modifying our capacity by using a bunch of others.

So I mean that is our expectation going into next year and.

Stay tuned for more details as to what that looks like.

I appreciate it and a quick follow up if I may.

If I just look at the implied growth Capex for Q4 and 23.

60% of that where we're top call systems, and I'm guessing that it might be more than 60%.

That kind of points to 30 or more pop sell systems.

Yeah. It's it's one out of three new top school system supports and incremental.

Yep.

Proppant are assessed them being deployed.

It is.

Just kind of is that the right way to think of it that it's just that that growth capex alone is probably pointing to 10 or more systems being.

Being added Yep.

Beyond whatever.

<unk> growth activity next year my support.

Youre spot on David.

I appreciate it thank you al.

Yes.

The next question will be from Samantha Hoh from Evercore ISI. Please go ahead.

Hey, guys congrats on the really impressive grant.

Oh, you know license count.

Maybe just staying on that same line of discussion.

Wonder if you could talk about.

That's the pull through from the at the top quintile, and placing kind of legacy technology.

Can you kind of talk about just what type of customer mix or technology next yeah, youre, gaining traction with willing or able to displace a yeah. You know what do you think he bought a poll to that.

Well Eli system.

Well I think we we we hit on a bit in the and the then the discussion around the market. 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 are in those markets those markets themselves have grown a little bit.

But we have displaced other technologies and legacy type of 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 in the Midland and Delaware basin as well.

Using relatively short hauls, but being able to put a higher payload per truck then you wouldn't either a box or a pneumatic truck.

Uh huh okay.

No go ahead.

It works when you have a customer that you're only taking your your top.

Pop health.

Technology did you have to I mean, I can see how like if you have it.

You all have any providing that the silos.

Uh Huh headcounts team to take on this incremental service, but when you don't have that you know that that dual a blended type of bundling them. How does that work in terms of like the number of people you need to support.

Right.

The top focus as well.

The Taco 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 so that's either a siloed. It's it's a it's a top tier unit, where the 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 talk to a unit with a new customer.

Okay got it Oh.

Okay now that's great congratulations guys. Thanks.

And once again, if you have a question. Please press Star then one.

The next question is from Sean Mitchell with Daniel Energy Partners. Please go ahead.

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 are the majority of that for top health systems versus blenders outside of the maintenance number and then number two is there anything in the supply.

Hi chain I mean, theres 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 health systems.

Filled the top health systems.

On the current pace you're building today.

Yes, Sean I think the majority of the growth pieces going to top fill so you've got that right and then as far as supply chain goes and we went from building you know call. It two Santos isn't a month to eight 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 in their stocking inventory to some extent and we're negotiating a you know me.

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.

They're certainly possible, but we've been very diligent and enhance our team internally to address those specific areas.

That's great. Thanks for the color and congrats on the incremental demand for the top health systems. It sounds great. Thanks.

Thanks, Sean Thanks, Sean.

Ladies and gentlemen, we have reached the end of the question and answer session I'd now like to turn the call back over to Mr. Bill <unk> for any final closing remarks.

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.

Thank you Sir the conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Yeah.

Yeah.

Okay.

Yeah.

Okay.

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