Q3 2024 Solaris Energy Infrastructure Inc Earnings Call
Good morning and welcome to the Solaris 3rd quarter 2024 earnings conference call.
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Speaker Change: I would now like to turn the conference over to Yvonne Fletcher, Senior Vice President of Finance and Investor Relations.
Please go ahead.
Yvonne Fletcher: Thank you, Operator. Good morning and welcome to the Solaris Third Quarter 2024 Earnings Conference Call. Joining us today are 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 outlined those risks.
Yvonne Fletcher: 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 GAP.
Yvonne Fletcher: Reconciliations to Comparable Gap Measures are available in our earnings release, which is posted on the news section on our website. I'll now turn the call over to our Chairman and CEO, Bill Zartler.
Bill Zartler: Thank you, Yvonne, and thank you everyone for joining us this morning. The Solaris team had a great third quarter. The highlights include the following. We announced and closed on the transformative acquisition of Mobile Energy Rentals, a distributed power business, which we supported with new financings to fund the growth and integration of their team into the organization.
Bill Zartler: We renamed the company Solaris Energy Infrastructure, which we believe more accurately reflects our broader solution offering that now includes providing power as a service to companies both inside and outside the energy industry.
We delivered strong service quality and performance to our customers across both our legacy business and our newly acquired business.
Bill Zartler: In our Solaris Logistics segment, which is our legacy business, we continue to generate free cash flow and maintain multiple Solaris systems on over 60% of our customer locations during the quarter, primarily driven by the continued success of our non-pop fill product.
Bill Zartler: In our newly established Solaris Power Solutions segment, which represented the acquired MER business, we are currently running more than 220 megawatts of power and have signed new customer contracts for more than 80% of our pro forma capacity under agreements for two to four years.
Bill Zartler: with a line of sight to having all of our order capacity fully contracted. These accomplishments helped to drive our third quarter results of $75 million in revenue and $22 million in adjusted EBITDA, which includes only a 20-day stub period in September from the Power Solutions business.
Bill Zartler: We also returned $5 million to shareholders in dividends during the quarter, and yesterday announced a fourth quarter dividend of $0.12 per share, which will result in approximately $190 million returned to shareholders through dividends and share repurchases since 2018.
Bill Zartler: I'd like to provide an update on the progress within our new power business. It has been less than two months since we closed on our acquisition of mobile energy rentals and both the integration and the commercial opportunity set are advancing rapidly.
Bill Zartler: The Power Solutions team has been a great addition to Solaris. They're innovative problem solvers focused on safety, customer service through performance, and entrepreneurship. This aligns well with our company values and culture.
Bill Zartler: We have identified attractive opportunities to grow our power solutions business organically and through acquisitions. These opportunities include expansion of our fleet of turbines, additional sport equipment such as switchgear, transformers, cables, and other items needed to deliver a valuable high-quality and reliable power solution to our customers.
Bill Zartler: Since the acquisition announcement, we have observed an acceleration in demand for rapid deploy configurable power as wait times to obtain grid connectivity continue to extend.
Bill Zartler: Today, Solaris Power Solutions customers include a large hyperscale data center and various upstream and midstream energy companies.
Bill Zartler: requiring power for various applications, including production, processing, and transportation projects.
Bill Zartler: Data center power demand is being propelled by rapid growth for artificial intelligence computing applications.
Bill Zartler: Timely access to reliable power is critical for data centers given the competitive landscape and high capital investment in computing infrastructure. Our customers appreciate our swift deployment of dependable power solutions, enabling them to maximize their investments.
Bill Zartler: For our energy customers, power demand is motivated by production and processing operations, which are less correlated to short-term commodity prices.
Bill Zartler: In certain geographies, such as West Texas and New Mexico, where grid infrastructure may not be available or reliable, our customers generally have access to low-cost natural gas, which can significantly decrease the cost of generating their own behind-the-meter power.
Bill Zartler: An attractive feature of our mobile turbine offering is our ability to produce power in dense power blocks utilizing stranded gas as fuel.
Bill Zartler: As delays for grid connectivity continue to extend, we're working with our customers to solve their longer-term power needs beyond a short- to medium-term bridge.
Bill Zartler: Our customers are assessing how behind-the-meter solutions combined with the grid power over the longer term can provide baseload power flexibility, enhanced backup in case of grid disruption, options for efficient operational expansion, and managed load variability.
Bill Zartler: Additionally, because our equipment is located on or close to the demand center and uses local fuel, we can generally be cost competitive on a relative basis with line power.
Bill Zartler: Over time, we believe our value proposition for behind-the-meter power may find more appeal as capital investments required to augment interruptible sources of generation and upgrade transmission infrastructure by upward pressure on power prices exasperate the interconnection delays.
Bill Zartler: We believe this transition from short-term bridge power to medium to long-term power is already underway and likely to continue.
Bill Zartler: This transition is demonstrated by our recent success in contracting our fleet. We have committed to new orders that will grow the power generation fleet size from approximately 150 megawatts at acquisition closing to an expected 535 megawatts by the end of the third quarter of 2025.
Bill Zartler: At acquisition closing, almost all of the power solution segment capacity was operating under short-term agreements, and our commitment to fleet expansion was predicated upon advanced customer interactions.
Bill Zartler: In the two months since closing, we have converted those engagements into contracts for approximately 450 megawatts, or more than 80% of our ordered fleet capacity. These contracts have tenors that range from two to four years.
Bill Zartler: We also have visibility to the full effective utilization of our ordered fleet based on advanced discussions with our customers and prospects. Our clients value our team's ability to execute, and they've indicated interest in expansion beyond our currently planned capacity.
Bill Zartler: We are carefully assessing our plan capacity alongside the range of market opportunities.
Bill Zartler: Turning to our Solaris Logistics Solutions segment, the U.S. drilling and completions levels remained choppy in the third quarter, but activity on average was roughly in line with our expectations of flat compared to the second quarter of 2024.
Bill Zartler: Our dual logistic solution activity generally followed the industry as we averaged 91 fully utilized systems roughly flat with the second quarter.
Bill Zartler: We followed 56 completions crews on a fully utilized basis in the third quarter, which was flat sequentially, and we maintained multiple systems on over 60% of those locations.
Bill Zartler: That 60% is also double where we were in early 2023, highlighting the success of our strategic investment in building and deploying a fleet of top-of-the-line equipment that drives efficiencies for our customers, as well as increased earnings opportunities per location for Solaris.
Bill Zartler: As we look at the fourth quarter of 2024, we expect to see some seasonal impact from E&P budget exhaustion.
Bill Zartler: We believe this could...
Bill Zartler: drive a decline in activity as measured by fully utilized systems of roughly 10 percent. However, we have increasing visibility and growing momentum into the first quarter where we see most of this activity coming back with specific customer wins.
Bill Zartler: The Solaris Logistics segment produced $18 million of free cash flow in the third quarter. We are using that cash flow in addition to funds from our recent financing to fund the growth of our power solutions business.
Bill Zartler: As I mentioned earlier, the Solaris Board recently approved our fourth quarter dividend of $0.12 per share, and I'd like to reiterate our commitment to shareholder returns.
Bill Zartler: We continue to demonstrate strong free cash flow generation from our Logistics Solutions business and we've increased visibility to free cash flow generation from our recently signed PowerSolutions contracts. This should lead to a significant inflection in free cash flow during the second half of 2025 following the completion of our current growth capital plans.
Bill Zartler: The end market diversification and enhanced growth profile of our pro forma earnings and cash flow stream combined with the multi-year tenors of the power contracts we are signing are expected to provide support for our shareholder returns program even as we continue to invest to grow our power fleet's capacity.
Bill Zartler: We will continue to focus on executing the right organic and inorganic opportunities that enhance our return on capital, helping us maximize total shareholder returns, strengthen our balance sheet, and bolster liquidity.
Speaker Change: With that, I will turn it over to Kyle for a more detailed financial review.
Kyle Ramachandran: Thanks Bill and good morning everyone. I'll start by recapping our third quarter financial and operational results. We will also provide a financing and guidance update.
Kyle Ramachandran: During the third quarter, we generated total company revenue of $75 million, adjusted EBITDA of $22 million, adjusted pro forma net income of $4 million, and adjusted pro forma earnings per share of $0.08.
Kyle Ramachandran: Our acquisition of MER closed on September 11th and our third quarter results include contribution from MER for the final 20 days of the quarter.
Bill Zartler: We established two new reporting segments, Solaris Logistics Solutions, which consists of our legacy energy business, and Solaris Power Solutions.
Bill Zartler: which consists of the acquired MER business plus contribution from our continued growth capital investment for new power related equipment as it is deployed.
Bill Zartler: I will discuss our segment profitability results, which exclude the impact of corporate SG&A and is reported separately.
Bill Zartler: Our Logistics Solutions segment generated revenue of $70 million and segment adjusted EBITDA of $24 million.
Bill Zartler: Revenue is down 5% sequentially due to lower last mile trucking volumes in our ancillary service offering and a slight decline in activity to 91 fully utilized systems deployed from 92 fully utilized systems deployed in the second quarter.
Bill Zartler: Logistics segment adjusted EBITDA declined 6% relatively in line with the revenue decline.
Speaker Change: As Bill mentioned, we expect activity in this segment, as measured by fully utilized systems, to decline roughly 10% in the fourth quarter of 2024 as a result of typical seasonality.
Bill Zartler: We expect some temporary decremental impact on our per-system profitability levels due to cost absorption as we expect to hold on to some costs in anticipation of most of this activity coming back in the first quarter.
Bill Zartler: Turning to our Power Solutions segment.
Bill Zartler: Over the last 20 days of the third quarter, our solutions generated approximately $5 million in revenue and $3 million in segment-adjusted EBITDA.
Bill Zartler: These results were in line with the expectations we shared at the acquisition announcement in July, considering annual run rate EBITDA of $50 million based on contracts in place at that time.
Speaker Change: As Bill shared, we've made tremendous progress in contracting our ordered power fleet equipment, with more than 80% of our expected capacity pro forma for all equipment deliveries now contracted with identified growth opportunities that could result in our capacity being fully committed.
Speaker Change: During the quarter, we were able to procure an additional 57 megawatts of mobile gas turbines.
Speaker Change: In addition, we were able to pull forward equipment deliveries for previously ordered equipment so that we could service near-term customer needs.
Speaker Change: Our team's ability to problem-solve continues to differentiate our offering.
Speaker Change: As a result of these fleet updates, we expect to deploy an average of at least 240 megawatts on contracted revenue during the fourth quarter, compared to approximately 156 megawatts in the third quarter.
Speaker Change: Our contract profile provides significant visibility into 2025s. For Q1, we expect an average of at least 300 megawatts contracted and generating revenue. We expect the remaining bookings for megawatts generating revenue to be more evenly split between the second and third quarters of 2025s.
Speaker Change: Turning to guidance on corporate items for the fourth quarter of 2024, we expect total SG&A of approximately $9.5 million.
Speaker Change: We provided new detail of our segment level adjusted EBITDA and our earnings release, and the corporate adjusted EBITDA reflects corporate level SG&A and other expenses or income, less stock base compensation, and other non-recurring items.
Bill Zartler: For modeling purposes, total SG&A guidance, less stock compensation should get you close to that segment level impact.
Speaker Change: Netting these impacts to the total company adjusted EBITDA levels should result in fourth quarter 2024 adjusted EBITDA of between 33 and 36 million dollars.
Bill Zartler: For the first quarter of 2025, our ability to deploy megawatts in our power business quicker than we originally forecast, combined with the visibility from our recently signed power contracts, should drive a total adjusted EBITDA in excess of $40 million.
Bill Zartler: Below the operating line, we expect interest expense to be approximately $9 million for the fourth quarter. We expect the total pro forma tax rate to be approximately 26% and the pro forma dilutive share count to be approximately 61 million shares.
Bill Zartler: Turning to an update on our balance sheet, cash, and liquidity picture. In conjunction with the transaction, we close on a $325 million senior secured term loan. And shortly after the quarter ended, we finalized our new senior secured credit facility that provides additional liquidity of up to $75 million.