Q1 2023 Solaris Oilfield Infrastructure Inc. Earnings Call
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 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.
Touchtone phone and to withdraw your question. Please press Star then two I would now like to turn the conference over to MS. Emily Bolt trick. Please go ahead ma'am.
Good morning, and welcome to the Solaris first quarter 2023 earnings Conference call I'm joined today by our chairman and CEO bills aren't blur, 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 outline those risks.
I would also like to point out that our earnings release and today's conference call will contain discussion of non-GAAP financial measures, which we believe can be useful in evaluating our performance the.
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 Solaris oilfield Dot com under the news section.
I'll now turn the call over to our chairman and CEO bills aren't there.
Thank you Emily and thank you everyone for joining us this morning.
Soliris 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.
Our return framework.
Profitability growth was driven by continued deployment. So both are top fill and oral blend systems and slightly higher pricing that went into the fact that the start of the year.
Continued deployment of Tocqueville, an autobahn units helped us maintained flat sand system activity sequentially as gas basically weakness drove frac fleet, Reallocations and increased white space and Frac calendars.
Our continued field execution and new technology deployments are helping to lower our customers cost and drive improved well site efficiency, which resulted in the adoption of incremental eight fully utilized hospital systems in the first quarter.
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 Soliris. 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 and the first quarter of 2022, only about 1% of our sand systems, where we're.
Working with a top tier okay 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 San 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 frac.
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 or Taco 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 soliris 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 develop our strategy to help operators to increase efficiency. While we've consistently had two to three blenders and operation over the last year, we've increased deployments towards the end of the first quarter and are currently running closer to five to six <unk>.
This should benefit second quarter results and are encouraged by further benefits to earnings with a growing backlog of demand.
Our auto blend electric blender extends our traditional equipment from a storage solution to a high rated delivery system and replaces traditional blenders.
The automated all electric design eliminates many of the traditional sand delivery in 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 cost freed up head count on location and higher uptime.
Well the average Frac job uses one traditional blender at a time typically one or more backup blenders are required to keep operations running.
Soliris is auto blend solution is designed with redundancy through the integration of three mixing tubs directly below our sand silos affectively, representing three blenders in one.
Our system also removes several moving parts, including fans crews 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 Soliris.
Well, so I'd say use our top till system, and where 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.
Our expectation for this technology, let earnings and cash flow contribution for our expanded offering combined with our outlook for declining gross capital expenditures later this year drove us to reevaluate the best uses of our excess cash.
And twenty-three 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 return 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.
Priest, 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 one 6 million shares for just over $14 million in the first quarter, which represents approximately three 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 Soliris employees, we had $36 million remaining under our current share repurchase program and we will continue to be active and opportunistic buyers of soliris 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 an influx through at least the near term. We will remain focused on strong operational execution growing our revenue and margin opportunities per frac 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.
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 last mile trucking and equipment Transportation. In addition, we saw some softness in gastrectomy activity driven by low gas prices.
The 2% decline in revenue EBITDA grew almost 10% sequentially as we saw strong incremental margin and contribution from additional top sell deployments and improved pricing across our base rental offering.
During the quarter, we deployed eight additional top sell systems on a fully utilized basis, which also contributed to poultry Sam Zell work and incremental gross profit per sand system equivalent.
We held our fully utilized 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 tax receivable agreement.
After total capital expenditures of approximately $19 million of 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 into 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 and flex 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 San silo systems on a monthly basis, that's making her fully utilized system count a key metric as we've expanded our offerings beyond the COVID-19. They rental to include trucking services. The nature of our revenue and margin profiles has evolved creating the need for explanation beyond just.
System counts are.
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 site can drive disproportionate changes in revenue and margin for example, ancillary services, which most.
Consistent 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 2020 chip.
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 it to play five additional parcel unit on a fully utilized basis in the second quarter.
I'm the same system side as we continue to see high reliability and performance of our equipment, we've seen operators take cost saving measures and some customers have recently swapped out their line and 12 packs handheld configurations for six pack configurations or reduce their use of extra sand systems for Ford staging on subsequent pads.
Yeah.
While we have seen some customers successfully reallocate frac fleets from gas directed basins. These known that 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 Ottawa deployments to double in the second quarter, which combined with the gas driven decline in sand systems flat contribution from ancillary services and increase on top of those systems and SG&A between six $5 million to $7 million drives our expectation for total company adjusted EBITDA to be flat sequentially.
<unk> in the second quarter.
Shifting to our capital outlook, we still expect our 2023 capital program of $65 million 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 million to $25 million.
As we finalize the building out of our top film slate, 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 deployment 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 will 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 and deploying better safer more automated and lower cost technologies to the industry positions us well for this long term ground are going to where it has been and continues to be providing innovative solutions that ultimately lower the total cost and footprint.
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.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre 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.
Uh huh.
And the first question will come from Luke Lemoine with Piper Sandler. Please go ahead.
Hey, good morning.
I'm.
With your.
With your Capex guidance flat it looks like the top till system upgrades are on track.
This is targeted still have about 50 of these full utilized by year end.
And then on the auto side I think you said you have five or six right now.
And I missed the number for the deployments into Q could you give me that again and then maybe talk about the future deployment for all the different systems passed to queue.
Yes, Thanks, Luke I think you know our view on the opportunity for the top sales continues to remain at that level. He articulated our capital program is aligned with that you know, we're seeing significant efficiencies on the trucking side.
Every every time, we put a new one out we're.
We're seeing truck and loading times decline and turn times are truck turns increasing so the trucking efficiencies really significant there and as operators continue to find and look for ways to drive down costs. We view this as a great opportunity.
And you know with our highly reliable sand systems.
On the Blender side, you know most of our capital it's not all of our capital. This year is directed toward growth capital is directed towards the bucket elevators, but what we have seen as a as an increase in uptake.
On the 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 I'm just utilization of those assets.
And again. Another example of every time, we put one out there is lots of learnings and.
The reliability of those units continues to improve.
Just the inherent design of the equipment.
<unk> is <unk>.
Driving lower rates of N P. T on location as bill alluded to in his comments around just eliminating.
The momentum that we see we see in us.
Okay and did you say more we're being deployed into Q1, the waterborne side yeah.
So I think 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.
Okay, Alright, thanks, Scott.
The next question will come from Stephen <unk> with Stifel. Please go ahead.
Hi, Thanks, good morning, everybody.
Hum.
First can you talk about the Oh.
Yeah.
In the second quarter.
Talk about.
The allocation of your systems or three oil and gas right now.
And how much of that decline.
They can buy gas market.
Yes, we can.
<unk> been pretty consistent with where rig activities fashion overall frac fleets have been for a number of years here, Yeah, we moved into the Rockies.
<unk> basically exposure.
Again, when we look at our overall market share relative to say a frac company. We are significantly larger just in the overall.
Market share. So we certainly have exposure to all commodities and when we look at that that drop off and 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 as I just call it roughly half gas related and half related to customers.
Having efficiency in terms of not necessarily requiring the redundant nine and 12 packs.
And you know we've had episodic deployments within these nine and 12 packs over the last I don't know six years since we started doing it and in periods of relative tightness on sand, we see uptake Senate.
And also it's a function of where people are sourcing sand from so the farther they've got a whole 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 ninth in clouds, and when they're there it's incremental.
Contribution for US we've got the capacity based on the size of the fleet. So its great incremental earnings, but it's not necessarily indicative of any share losses.
I would 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 what we're dropping as systems that are lower cost adders or will.
What kind of refers to as pre filter leapfrog sets.
That would have because of the reliability of the system. It's just it's not needed when the sand market is not as tight as it has been.
Yeah.
Great. Thank.
You did a lot of good call, Paul and I can respond to the other.
Well I mean on a blended side.
Those are those.
Those are not good.
And then also.
Yeah.
Your market.
Sure.
Well I think that's a big part of it.
Mhm growth going forward.
Kind of examples or specifics.
As you can just give us your or areas, where you're starting to see that marketshare pull through because of the.
Got it wrong.
You can provide that.
Yeah, I mean, a little muffled, but I think I'll try and get as much of it as I can.
When we look at the system count dropped when we talked 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 those going out here as we just referred to we've got more blenders working so overall capital equipment being deployed by the company is probably you know.
Flat to up.
And then on the second point as far as market share pull through its significant and customers that we've targeted for a long time and when I say that is these are majors with consistent long term programs.
Yeah, but 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 that's that's how we're seeing the pull through on.
On the Blender, maybe I'll add.
Lender 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 I remember when we put that out there we're putting out set of water silos instead 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.
Thank you and I apologize for the background noise I'm traveling but thank you.
Thank you Steven.
Again, if you have a question. Please press Star then one our next question will come from John Daniel with Daniel Energy Partners. Please go ahead.
Hi, 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.
I would say in almost all circumstances, it's in the ladder.
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 and say last year, we were not up nearly as much. So I think in the Grand scheme of things were still a very low percentage of the total drilling and completion costs.
We've described our businesses and our offering is a little bit of it as an insurance policy.
If you run out of sand or you've got a system, that's not reliable shut everything down. So price is always kind of top of mind when youre dealing with various groups within companies such as supply chain.
But I think what we tried to harp on is the overall efficiency and the reliability.
That is so critical to them completing wells on time and on budget.
Okay I just wanted to run I mean, you hear a lot of chatter about other office product lines on pricing in Rfps and you're just frankly don't really hear much about with your business I was just confirming.
I'm a little bit of a nuance question, Kyle but for the can you speak to the insurance market and just how what's happening to premiums and ability to get coverage.
And the reason for the question as you know you. Just you go you know there's should drive round West, Texas since as you see so many mom and pop little trucking companies hauling stuff and I'm just curious.
We're using those types of drivers and just what you're seeing.
Well I will Oh answer John I mean, I think we have seen premiums go up we had pretty good safety record and that's something that we strive to pushed down through the organization at every level and that certainly helps with insurance renewals. We just went through and I think we were up.
Teen 10, 15%, our insurance cost, 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 I'm right that is critical to when we get into our last mile or the heavy haul of our equipment. We spent a lot of time, making sure that the carriers. We use are selected and we have long term relationships with many of them go back years, ensuring that we we are safe and.
They do have insurance for all of our things around.
Okay.
Got it thanks guys.
Our next question is a follow up from Mr. Steven didn't borrow with Stifel. Please go ahead.
Thank you.
So they tend to have sort of a little better forward visibility.
Some others based on sort of the timing of it.
Getting systems in place.
Everything that suggests sort of a continued drift lower <unk> stability and activity because it feels like the push bumpers are all talking about being effectively flat, especially in the oil basins.
Curious what you were sort of a line of sight isn't any any insights you have there.
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.
All parts of the supply chain and in all parts of the sort of Huawei 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 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 budget smoothing and we do see efficiency. So I think in general if you've got an E&P. That's got a six frac crews running today the notion that they may have five in the third or fourth quarter is certainly possible and thats really a function I think of efficiencies more than anything.
So while we do see some stability here.
Certainly I'm looking at you know the gas tape and that's under severe pressure here in the short to medium term, we think that abates overtime.
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 are a big part of that.
And then just one more if you don't mind would you think about the asset.
Laid out on the prepared remarks.
You have homes for them or are they being asked for by customers.
Or do you just know from our market and the customer conversations that there's demand for them to work.
Yes, I mean, we are young very frequently rolling forward, the manufacturing schedule as well as the backlog demand schedule. So it's a constant balance between what's coming off the line and what particular customers are looking at from there.
<unk> completions, you may see something get pulled forward or pushed back depending on where people are and on particular pads in frac crews, but yeah. It's it's a constant.
Constance shuffle that we are working on but incrementally we continue to get them.
That's the pace at which we're watching it and we watch that very closely with the control of our own manufacturing it makes that that balance a lot easier.
Thanks I appreciate it.
Hum.
This concludes our question and answer session I would like to turn the conference back over to Mr. Bill <unk> for any closing remarks. Please go ahead Sir.
Thank you Chuck I'd like to conclude our call by thanking all of our employees customers and suppliers for their continued support of Soliris, 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 share.
Our progress with you in a few months stay safe.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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