Solaris Oilfield Infrastructure, Inc. (NYSE:SOI) Q3 2023 Earnings Call Transcript

Solaris Oilfield Infrastructure, Inc. (NYSE:SOI) Q3 2023 Earnings Call Transcript October 27, 2023

Operator: Good morning and welcome to the Solaris Oilfield Infrastructure Third Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Emily Boltryk, Director of Finance and Investor Relations. Please go ahead.

Emily Boltryk: Good morning and welcome to the Solaris Third Quarter 2023 Earnings Conference Call. Joining us today are our Chairman and CEO, Bill Zartler; 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 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 Zartler.

William Zartler: Thank you, Emily, and thank you, everyone, for joining us this morning. The Solaris team executed strongly and safely during the third quarter with total Solaris system count flat sequentially despite a bottoming of market activity. We generated over $23 million in adjusted EBITDA in the third quarter, and our capital spending rate declined 20% sequentially to $17 million, resulting in another quarter of positive free cash flow. We returned $5 million to shareholders through dividends under our enhanced shareholder return framework, marking 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 $0.12 per share, representing a 9% increase in our 21st 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 fill systems. Our fully utilized top fill systems increased by six systems to 33, a year-over-year increase of more than 250%. 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 when delivering third quarter guidance. We believe industry activity bottomed in the third quarter and while current activity has modestly improved, we expect average fourth quarter activity levels to be roughly flat sequentially and 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 reduce per well drilling and completions cost. Solaris has an innovative culture that has allowed us to meet and 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 to 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 with the ability to service roughly 100 frac fleets with our upgraded sand systems, of which 60% could have multiple Solaris systems. And should the market demand it, we have additional 40 systems that could receive similar upgrades and be deployed with customers. The continued performance of our new technology was a highlight of the third quarter. We deployed six additional fully utilized top fill systems with the AutoBlend utilization flat, which means nearly 55% of the frac crews we followed have at least two different Solaris systems on them. This was up from over 40% during the second quarter. Our top fill design has established Solaris as the largest provider of belly dump compatible well site sand storage in the Lower-48.

Using our top fill system, our customers benefit from higher truck payloads and faster unloading times, resulting in fewer trucks and drivers needed to supply well sites and ultimately lower cost. 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 fill systems in the fleet. We had 33 fully utilized in the third quarter, which was below our deployable capacity as a number of units went through our upgrade 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 top fill system activity to improve over the next few quarters as more units become available. As our growth capital spending for top fill units 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 Solaris' strategy. We initiated a regular quarterly dividend in 2018, and including our dividend announced yesterday, we have paid 21 consecutive dividends since then. Earlier this year, we committed to a long-term framework for enhancing our existing shareholder returns program by returning at least 50% of free cash flow through dividends and share repurchases.

As part of this enhanced returns framework, we raised our dividend twice to $0.12 from $0.105, reflecting a 14% year-over-year increase. The second component 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 '23 are showing success in our differentiated strategy of growing our earnings and return for frac crew we service. While we pull forward our upgrade and maintenance program in the third quarter, we expect these temporarily higher costs to somewhat mitigate and are excited about the healthy outlook to continue to deploy incremental equipment 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 Yvonne for a more detailed financial review.

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Yvonne Fletcher: Thanks, Bill, and good morning, everyone. I'll recap our third quarter financial results. We generated nearly $70 million of revenue, adjusted EBITDA of over $23 million, and free cash flow after asset sales of $6 million. We returned $5 million to shareholders and used excess cash to reduce our revolving credit facility borrowings by $6 million. Revenue in the third quarter declined 10% sequentially due to a decline in lower-margin ancillary services activity, as we saw some rebundling of last mile services by pressure pumpers. System revenue was essentially flat from the second quarter as additional top fill system deployments offset the headwinds in completions activity and an outsized decline from certain spot exposed customers.

As a result, our total fully utilized system count was 108 systems, which was flat from the second quarter. The softness in frac activity drove an 8% decrease in the average number of frac crews we followed compared to our guidance for a 5% decline, which was offset by a 22% increase in top fill deployments. For comparative purposes, the average Lower-48 rig count was down roughly 10% sequentially. Adjusted EBITDA declined 13% sequentially as contribution from ancillary services declined, and we incurred additional costs to enhance and maintain our systems. Excluding the impact of lower ancillary services contribution, adjusted EBITDA declined 6%. As Bill described earlier, we took advantage of the temporary market softness to complete system upgrades and maintenance.

The upgrade and maintenance efforts give us capacity to meet anticipated incremental demand at the highest level of service quality. On a per frac crew followed basis, our 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 equipment presence and capital investment per frac crew we are on. We believe our per frac crew profitability should benefit from additional deployments of top fill systems moving forward, as the last of the newbuilds and the systems rolling off refurb become available. Our contribution margin for 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, a less favorable drop mix, and an increase in equipment mobilizations to support maintenance and enhancements. Turning to cash and shareholder returns. Operating cash flow during the quarter was $21 million and reflected a $1 million use of cash from working capital. After total capital expenditures of $17 million and $2 million of asset sales, free cash flow after asset sales was a 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 a revolver. Including availability under our revolver, we ended the third quarter with approximately $41 million of available liquidity. Our year-to-date operating cash flow after asset sales was $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 in 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.

Kyle Ramachandran: Thanks, Yvonne, 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 believe was the market's bottom in the third quarter. We expect our total system count in the fourth quarter to be flat sequentially and 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 could 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. For our capital expenditure outlook, following the initial build-out of our top fill 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 million 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 in 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 our dividend, opportunistically look to repurchase shares, and strengthen the balance sheet. Our initial expectation for capital expenditures in 2024 is between $15 million 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 our 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 are focused on. With that, we'd be happy to take your questions.

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