Q3 2023 Solaris Oilfield Infrastructure Inc Earnings Call
Good morning, and welcome to the Soliris oilfield infrastructure third quarter 'twenty 'twenty earnings Conference call.
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I will now turn the conference over to unleash Vulture director of Finance and Investor Relations. Please go ahead.
Good morning, and welcome to the Solaris third quarter 2023 earnings conference call. Joining us today are chairman and CEO Bill <unk>, our president and CFO, Kyle Ramachandran, and our senior Vice President Finance and Investor Relations you bonds mature.
Before we begin I'd like to remind you of our standard cautionary remarks regarding 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.
These 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.
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 in the news section on our website.
I'll now turn the call over to our chairman and CEO Bill sorry.
Thank you Emily and thank you everyone for joining us this morning.
Soliris team executed strongly and safely during the third quarter with total solar system count flat sequentially. Despite a bottoming of market activity we.
We generated over 23 million and adjusted EBITDA in the third quarter and our capital spending rate declined 20% sequentially $17 billion, resulting in another quarter of positive free cash flow.
We returned $5 million to shareholders through dividends under our enhanced shareholder return framework, working our 20th consecutive quarter of dividend payments and over $150 million returned to shareholders since 2018.
I'm also pleased to share that yesterday, our board approved a dividend of 12 <unk> per share representing a 9% increase in our 20 <unk> consecutive dividend.
Turning to the third quarter highlights we maintained flat activity at 108 fully utilized systems during the quarter as the drop in Frac crews. We followed was offset by the deployment of our top health systems.
Our fully utilized tocqueville systems increased by six systems to 33, a year over year increase of more than 250 per cent. We followed an average of 67 frac crews during the third quarter, which was down 8% compared to the second quarter and was lower than we anticipated with deliberate third quarter guidance, we believe.
<unk> activity bottomed in the third quarter and while current activity is modestly improve we expect average fourth quarter activity levels to be roughly flat sequentially. It could be down slightly depending on the impact from seasonality.
As we look into 2024, we expect activity to improve from current levels and we plan to be ready for it.
Independent of overall activity levels operators will continue to push for increased efficiencies and reduced per well drilling and completions cost soliris is an innovative culture and that has allowed us to meet that play a role in driving several of these efficiencies for our customers.
Our current maintenance and upgrade program is a large part of that during the third quarter. We took advantage of the market softness do proactive maintenance on our fleet, which did result in some extra costs during the quarter.
This maintenance involved upgrades and standardization of equipment to ensure Solaris is prepared to respond quickly to anticipated activity improvement with the highest level of system reliability and functionality.
This proactive maintenance program is currently tapering and we expect to enter 2024.
Let me just service roughly 100, Frac fleets were upgraded sand systems of which 60% could have multiple solar systems and.
And should the market demand that we have additional 40 systems that could receive similar upgrades and to be deployed with customers.
The continued performance of our new technology was the highlight of the third quarter. We deployed six additional full year livestock health systems with Euro blood utilization flat, which means nearly 55% of the frac crews we followed.
Two different solar systems on them. This was up from over 40% during the second quarter.
Our top film aside as established Soliris is the largest provider of belly dump compatible well site sand storage in the lower 48, using our powerful system, our customers benefit from higher truck payloads and faster unloading times, resulting in fewer trucks and drivers needed to supply well site and ultimately lower costs.
Our system is not only unique in its redundancy, but can also be supported by multiple electric power sources.
While our top fill Newbuild program is wrapping up in the fourth quarter, we continue to see opportunities to deploy more systems.
We expect to end the year with roughly 58 top health systems in the fleet. We had 33 fully utilized in the third quarter, which was below our deployment as number of units went through our upgrades and maintenance program.
This leaves us with room to increase utilization as we continue to see interest for these units from both new and existing customers across multiple basins.
We expect our fully utilized hospital system activity to improve over the next few quarters as more units become available.
As our growth capital spending for thoughtful yet slows down in the fourth quarter. Our total capital expenditures will decrease as a result of this we expect to generate significantly more free cash flow during the fourth quarter and throughout 2024.
As we've said before generating and providing shareholder returns have always been paramount to Soliris strategy.
We initiated a regular quarterly dividend in 2018, and including our dividend announced yesterday, we have paid 21 consecutive dividend since that earlier.
Earlier this year, we committed to our long term framework for enhancing our existing shareholder returns program are returning at least 50% of free cash flow through dividends and share repurchases.
As part of this enhanced returns framework, we've raised our dividend twice 12 from 10, and a half cents, reflecting a 14% year over year increase.
Part of this program was the initiation of a $50 million share repurchase authorization of which we have repurchased $26 million worth or approximately 3 million shares to date.
I'd like to summarize by highlighting that our results. So far in 'twenty three are showing success and our differentiated strategy of growing our earnings and return per Frac crew, we service, while we pulled forward our upgrade and maintenance program in the third quarter. We expect these temporarily higher costs to somewhat mitigate or excited about the healthy outlook continued to deploy incremental.
Went to the market.
We expect our profitability and free cash flow to trend higher as we expand our offerings per well pad and benefit from our equipment upgrades with that I'll turn it over to Don for a more detailed financial review.
Thanks, Bill and good.
Good morning, everyone I'll recap, our third quarter financial result, we.
We generated nearly $70 million of revenue and adjusted EBITDA of over $23 million and free cash flow after asset sales $6 million, we returned $5 million to shareholders and used excess cash to reduce our revolving credit facility borrowings by $6 million.
You in the third quarter declined 10% sequentially due to a decline in lower margin ancillary services activity as we saw some re bundling of last mile services high pressure cars.
System revenue was essentially flat from the second quarter.
Additional top health system deployment, offset the headwinds in completions activity and an outsized decline I'm certain.
<unk> customers.
As a result, our total fully utilized system count was 180 systems, which was flat from the second quarter.
The softness in Frac activity drove an 8% decrease in the average number of Frac crews be followed compared to our guidance for a 5% decline, which was offset by a 22% increase.
For comparative purposes, the average lower 48 rig count was down roughly 10% sequentially.
Adjusted EBITDA declined 13% sequentially contribution from ancillary services declined and we incurred additional costs to enhance maintain our systems.
Excluding the impact of lower ancillary services contribution.
But EBITDA declined 6%.
I'll described earlier, we took advantage of a temporary market softness to complete system upgrades and maintenance.
Great and maintenance efforts give us capacity to meet anticipated incremental demand the highest level of service quality.
On a per Frac crew, followed basis contribution margin, excluding ancillary trucking services was essentially flat sequentially at approximately $1 $6 million on an annualized basis and has grown over 40% year over year as we have significantly expanded our present capital invested our frac crew we are on.
We believe our pro Frac crew profitability should benefit from additional deployment of top health systems moving forward as the last of the Newbuild and the system is rolling off reefer become available.
Our contribution margin per fully utilized system when excluding ancillary trucking services was down 7% sequentially to approximately $1 million per system on an annualized basis.
Driven primarily by the higher cost referenced previously.
During the third quarter ancillary services margin of approximately $1 million was down sequentially and contributed approximately 4% of total gross profit.
The decline in ancillary services margin in the third quarter was driven by a 35% decline in tons hauled due to lower underlying frac activity are less favorable job mix and an increase in mobilization to support maintenance and enhancement.
Turning to cash and shareholder return.
Operating cash flow during the quarter was $21 million and a $1 million use of cash from working capital. After total capital expenditures of $17 million and $2 million about sale free cash flow after asset sales was positive $6 million in the quarter.
We used excess cash to pay down $6 million on our revolving credit facility.
We ended the quarter with $3 million in cash and $37 million borrowed under our credit facility after repaying the $6 million on our revolver.
Including availability under our revolver. We ended the third quarter was approximately $41 million doesn't available liquidity.
Our year to date operating cash flow after asset sales.
$66 million and covered our year to date dividends of $15 million by more than four times. In addition to the regular dividend operating cash flow also covered the majority of our $55 million and capital expenditures after asset sales.
We borrowed on our facility during the first half of 2023, primarily to fund $26 million of opportunistic share repurchases and remaining capital expenditures not covered by operating cash flow.
The accelerated return of cash to shareholders in the first six months of the year was a result of our confidence in the continued free cash flow generation that we expect to increase significantly in the fourth quarter and into 2024.
We expect to continue using excess cash towards strengthening our balance sheet and shareholder returns.
With that I'll now turn the call over to Kyle to discuss our outlook.
Thank you Bob and good morning, everyone I'll start today by sharing our fourth quarter guidance and give a preliminary outlook on 2024.
We continue to see strong demand for our new technology offerings, and a path to increasing equipment margins our activity levels have modestly improved from what we believed was the market's bottomed in the third quarter. We expect our total system count in the fourth quarter to be flat sequentially. It could be down slightly depending on the impact from seasonality.
Absent any significant customer mix changes, we expect fourth quarter contribution margin per fully utilized system to be flat.
Excluding the contribution from ancillary trucking services.
As our maintenance spending begins to normalize we should see a decrease in cost per system, which can potentially be offset by the impact of seasonality.
We expect contribution from ancillary trucking services to be flat to modestly down sequentially, assuming some seasonal impacts on flat activity levels.
SG&A in the fourth quarter is expected to be around $6 $8 million.
Our capital expenditures outlook. Following the initial build out of our top film fleet, our capital spending rate has decreased significantly, which we expect will yield significant cash flow over the coming quarters for the fourth quarter, we expect capital expenditures to decrease roughly 40% sequentially to approximately $10 million, resulting in.
Full year 2023 capital expenditures to now be around $67 million, which is at the low end of our previously guided range of between 65 and $75 million.
In addition to the $2 million in asset sale proceeds we received in the third quarter, we have an agreement in place to sell additional assets no longer use for $3 million.
To summarize our fourth quarter outlook, we expect free cash flow to be up significantly adjusted EBITDA is expected to be roughly flat net of capex of approximately $10 million free cash flow excluding changes in working capital should be approximately $13 million in the quarter. We expect to use this cash to continue to.
Pay a dividend.
Opportunistically look to repurchase shares and strengthened the balance sheet.
Our initial expectation for capital expenditures in 2024 is between 15 and $20 million, which reflects more than a 70% decrease from our capital spending in 2023.
This range includes some level of continued growth capital spending as we remain committed to getting in front of operators with solutions that address the changing nature of Frac operations, while also maintaining a disciplined approach.
The strategic investments we've made in their business in the last few years have been instrumental in fueling earnings growth, allowing us to grow cash returns to our shareholders our customers place a high premium on technologies that enhance safety automation and cost efficiency and these are the areas. We're focused on with that we'd be happy to take your questions.
Yes.
We will now begin the question and answer session.
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At this time, we will pause momentarily to assemble our roster.
Our first question will come from Luke Lemoine with Piper Sandler you May now go ahead.
Hey, good morning.
You guys have had really good tech adoption, even in a falling market this year.
Look this year and just kind of do that simple.
System per Frac fleet. Following this has increased from one four to $1 five to 1.6 Bill you talked about you have capacity to call. It 100 fleets with upgraded systems.
And this question might be that tough since there are a number of variables.
Where do you think system per Frac fleet, followed kind of headwind that you know maybe next 12 months to year end 'twenty four.
As you have systems that can be deployed.
But I think.
It depends on the denominator here. So if we can put 100 to work its 1.6 plus the blenders.
If in fact, we're seeing Frac rebound by 15, 10 15, 20% next year and you've got 80 85 systems I think the we will have higher utilization out of the top sell somebody floor full systems counts, so that youll see that closer to 1718, if I do the division right. So I think it's sort of trends going on really how many of them.
The work were slowing down spending on top fill so that you know that's limited to the 58, we've got in the well.
That'll be manufactured by the end of the year at this point.
Okay.
I think he said yeah, yeah that makes sense yeah.
Gerbils here.
I think you said you added six Tuttle systems, and you were running 33 and <unk>, but I think that was just running 33, you had more because you talked about being at 58 by year end. How many do you currently have on how that kind of September 30th.
Just under 55, so maybe 53 at the end of September and we're wrapping up the manufacturing plant.
During the fourth quarter.
In the third quarter, there were a fair number of systems that did come in for some upgrades.
Just the context here and we had it in the prepared remarks this business.
<unk> offering.
Yeah, it's very nascent, but yet we've really manufactured at a rapid rate to meet market demand and.
Like any other new product there are certain components that as we run the system out in the field. We've we've realized there are some upgrade opportunities to enhance reliability.
Throughput et cetera, so we've kind of working through that in the third quarter and a little bit in the fourth quarter such that by the end of this year, we feel like we'll be in a doozy.
And where the availability of the systems will be higher, allowing us to drive that 33 fully utilized now for <unk>.
And then you've got to remember the 33 fully utilized number on a trailing basis, so as we've been making and releasing that we're catching up to that.
Okay got it and then maybe just one more I think the Capex for 'twenty four was you know a good bit lower than.
Probably anyone anticipated as you call them.
You've kind of got the fleet prepared for for 'twenty, four and 'twenty three aside from you know probably more dividend increases you know what.
The other kind of plans for free cash flow.
Yeah I mean.
As we announced yesterday you know very excited to continue to show per share dividend growth.
We've got I think $37 million of debt on the balance sheet as at the end of the quarter. We will continue to use free cash flow to trim that balance down and then obviously opportunistic buybacks worked well in the first half the year and we'll continue to evaluate those opportunities there's a lot of.
Opportunity to reload the balance sheet. Obviously, we came into this program with the significant cash on the balance sheet, which allowed us to really hit the ground hard in terms of developing and manufacturing the top dose.
Reloading the balance sheet, we think is prudent.
It's organic or inorganic opportunities that come across the transom.
Look our R&D effort is ongoing and we're continually evaluating stuff and I think at times more well, we will seize the opportunity when we find the product line that really seems to work like this.
We'll continue to try to innovate and find better ways to improve our customers' operations.
Okay perfect.
For the time.
Thanks Luke.
Our next question will come from Steven <unk> with Stifel. You May now go ahead.
Hi, Thanks, good morning, everybody.
I think the first question and you talked a little bit call about about the fourth quarter. What are you you guys.
Thank tend to get a little bit of an early look at frac fleets going back to work. What are you seeing just kind of in the market right now as far as.
Pressure pumping activity potentially increasing them, we've heard some frac guys talk about a little bit or maybe even a little bit improvement in the fourth quarter and kind of recovering at 24, where do you guys see in like over the next few months as far as deployments.
No you've built some seasonality into your guidance, but as far as actual assets going back to work what are you what can you add.
Obviously commodity prices have been very supportive.
Relative basis, so that's certainly making everybody feel pretty positive.
On the Frac side, obviously, theres been tremendous consolidation and.
And I think as Youre, starting to see some earnings come out that there are sort of a bifurcation developing in the space.
So those that maybe had a lower activity third quarter may have opportunities to pick up some of the spot work, but we're definitely seeing it sort of differentiation there.
One of the themes that we continue to see its just pure efficiencies.
So people doing more with less so.
That theme that I think ultimately has a little bit of downward pressure on the total demand for capital equipment not necessarily <unk>.
Throughput so we're not forecasting any sort of significant increase in 'twenty four or would you think it is modest from an overall activity standpoint.
But we're cautious as to the overall market outlook, what we've been able to demonstrate I think.
It's an ability to grow in a market that just doesn't have a ton of them.
Organic growth from capital equipment, we've been able to capture more calorie counts more share.
Through the new technology, and you know one of the things that's happened.
Over the last 12 months of our business is our last mile business has declined just from an overall volume standpoint, so that's a pretty big piece of leverage our torque that we do have.
We don't see it increasing here in the fourth quarter significantly, but if we look back 12 months ago that was a pretty significant driver of our business. That's not here today to grow there doesn't require capital for the business outside of working capital that the team in place to make that happen and they've bid.
Very successful in providing high quality service to our customers. So that's an opportunity we're excited about as well.
Thanks.
If I sort of dissect it into Frac fleets followed.
And.
Sort of a total fully utilized systems because of the penetration of the new technologies.
Are you thinking in the fourth quarter, because what I was thinking was you you would have some increased penetration of the auto blending the top drills, but your guidance would suggest in the Frac fleets, followed actually comes down again, which seems counterintuitive to what I'm hearing as far as a little more frac activity, that's what I'm trying to triangulate yeah.
I think you you you you know you hit on that.
Yeah.
But the guidance implies.
That slight modest activity reduction, but offset by video technologies.
Yeah.
Okay, alright, good and we can sort of trend from there.
And then there's just the <unk>.
Follow up when we think about and this kind of gets funky in any bonds at a good job I think of a breaking this out for us, but when you think about if you strip out ancillary services.
Underlying pricing trends for for the <unk>.
Well site storage systems, and Autobahn should we think about them as being pretty stable into next year.
Yeah, I mean, we're just kicking off for next year discussions with customers. So look forward to talking about that.
Probably next quarter, but as we mentioned in the prepared remarks, we are deploying significant opex and capex in the systems to bring them up to the next level of standard. So I think that message is resonating with customers, but obviously those correct. Those discussions are very fluid.
Great.
Hum.
I think that is all for me. Thank you.
Okay.
Our next question will come from John Daniel with Daniel Energy Partners.
You May now go ahead.
Thank you and good morning, just one for me Bill you touched briefly on R&D in response to Luke's question.
Are there any interesting ideas or concepts that you guys are kicking around today and if so how quickly could you bring one of those to market.
There are always interesting ideas. It's the question is whether they are commercial or not John it yeah.
So we tend to tend to wait till we're really ready to talk about them.
Especially with the situation will have the balance sheet and the cash situation and our team and our own manufacturing. We can respond very quickly with the opportunities that work I think the top sell is a great example of that right going from each of them a year year and a half ago to having.
<unk> 35, 33, working last quarter and that's building up so I.
I think we can we could we can go quickly if we find something that makes sense.
Okay. Okay.
I look at it John is if you look at the Capex guidance of $15 million to $20 million maintenance Capex for us is typically $10 million to $15 million a year. So that's right. There is no capex and not the budget for next year.
Okay.
We have ideas that come to fruition.
How often are those ideas being brought to you by customers, saying you know we've got a problem. How do you help us fix it versus you guys identify I'm just trying to get a sense for what how much customers bring to you in terms of opportunities.
There is probably its mix I'd say, it's probably a quarter or two or third quarter to a half maybe coming from customers that other part of it coming from are pretty experienced engineering and R&D team.
Working on a couple of quarters now that more customers ideas.
Okay.
Yes.
Appreciate your time.
Yes.
Again, if you have a question please press star one or.
Our next question will come from Don Crist with Johnson Rice, you May now go ahead.
Good morning, guys.
I wanted to kind of follow up on the on the demand.
As you have deployed more kind of top fill systems. It feels like your demand is stabilized and is getting more stabilized as as people move towards more belly dump systems can can you just talk about kind of.
Customer pull through and kind of your base loaded demand now it feels like it's not really moving around with the rig count the way that it used to in the past can you just expand on that a little bit.
If I if I think I understand the question right I mean, we do have.
Customers that have adopted the top fill and I'm, a very happy and that will be a continued part of their program or at least to the future. We can see most.
Most of those customers were existing soliris customers, but several we're not that have decided that this is there a better long term solution with the combination of our ours.
Our silos and the top sell unit so.
I think the market is and you know we've seen stable by most of the majors with some that are a little lower and some are slowly increasing but you've had some pretty decent swings in the private operators and at the spot activity levels have been fairly volatile in the market over the last year and so.
I think that's driving maybe some of the swings at that Mark.
Mark less predictable.
Well I.
I guess, the Genesis of my Yeah, well, Yeah, I guess the Genesis of my question was it feels like in past quarters, you were much more influenced by rig count and Frac crew counts, but it feels like Youre a lot less impacted these days given given your increased offering.
Yeah, I think where were penetrating with more more revenue and margin per Frac fleet number followed is probably pretty close to the market within some bad.
Okay.
I appreciate the color. Thanks.
Excellent.
Our next question will be a follow up from Stephen being borrowed Stifel you.
You May now go ahead.
Thanks, just a quick one when when you think about consolidation among the piece and what we've seen recently.
Anything specifically or in general that impacts your share opportunities.
Yeah, I think just one quick comment here I'm sure Bill I have a view.
As there is continued consolidation.
Entering into a more sophisticated buying decisions if you will.
With with the larger operators and looking at many of them looking for sort of nationwide service providers I think what we've done particularly over the last 12 months has expanded our footprint in the Rockies has been an area, where we've grown significantly in the last year.
Drew consolidation I think we continue to be.
As a.
Lower 48 service provider, we're not a regional base provider for small sort of operation. So I think that in some ways paid place for a favor, but obviously one of the things you've already seen it different M&A context, there's always puts and takes.
Sometimes referred to as kept people in Doc people people like different.
Technologies, and so you have opportunities to win in those consol.
Consolidation events and sometimes it comes at a bit of.
Risk or loss, so it's somewhat difficult to handicap in every situation, but on balance I think we are established as a very well.
Our mature service provider.
ROE with with the larger operators.
Got great.
That's good color. Thank you gentlemen.
Thanks.
This.
A question and answer session I would like to turn the conference back over to bills aren't looking for any closing remarks.
Thanks Anthony.
Include our call by thanking all of our employees, our customers and suppliers for their continued support of Soliris. Our team has done a tremendous work in helping our customers realize the benefits of safer lower cost reliable automated solutions Mcbride.
I am constructive on the long term commodity and North American outlook and are confident that we will continue to deliver on our earnings growth and cash says thank you stay safe.
The conference has now concluded. Thank you for today's presentation you may now disconnect.