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Good day, and welcome to the Solaris First Quarter 2023 Earnings Teleconference and Webcast. All participants will be in a listen-only mode. [Operator Instructions] I would now like to turn the conference over to Ms. Emily Boltryk. Please go ahead, ma'am.

Good morning, and welcome to the Solaris first quarter 2023 earnings conference call. I am joined today by our Chairman and CEO, Bill

Thank you, Emily, and thank you, everyone, for joining us this morning. The Solaris 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 return framework. Our profitability growth was driven by continued deployments of both our top fill and AutoBlend systems and slightly higher pricing that went into the effect at the start of the year. The continued deployment of top fill and AutoBlend units helped us maintain flat sand system activity sequentially as gas basin 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' costs and drive improved well site efficiency, which resulted in the adoption of incremental eight fully utilized top fill systems in the first quarter. We expect 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 Solaris. We launched this new offering just one year ago. And since then, we have grown from a couple of systems to over 40 in the field today. In the first quarter of 2022, only about 1% of our sand systems were working with a top fill kit. 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 sand 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. Our top fill 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 Solaris is well positioned to meet these needs with a growing offering per well pad. Our AutoBlend electric lending system is another technology that complements our traditional offering and further develops our strategy to help operators increase efficiency. While we've consistently had two to three blenders in operation over the last year, we've increased deployments toward the end of the first quarter and are currently running closer to five to six. We expect this should benefit second quarter results and are encouraged by further benefit store earnings with a growing backlog of demand. Our AutoBlend electric lender extends our traditional equipment from a storage solution to a high-graded delivery system and replaces traditional blenders. The automated all electric design eliminates many of the traditional sand delivery and 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 costs, freed up head count on location and higher uptime. While the average frac job uses one traditional blender at a time typically one or more backup blenders are required to keep operations running. Solaris' AutoBlend solution is designed with redundancy through the integration of three mixing tubs directly below our sand silos, effectively representing three blenders in one. Our system also removes several moving parts, including sand screws and delivery belts, which drive higher reliability and uptime performance. As deployments of both our new technologies increased during the second quarter, we continue to expect higher earnings and return opportunity per well site for Solaris. On well sites that use our top fill system and/or AutoBlend, we would have approximately 2x to 3x the capital deployed per frac crew and would expect 2x to 3x the contribution margin compared to a single six-pack system per crew. Additionally, because both AutoBlend and our top fill systems can only be used in conjunction with Solaris sand systems, we are already seeing meaningful pull-through sand system activity and revenue when deployed with customers who are not already using our sand system. Our expectation for this technology-led earnings and cash flow contribution for our expanded offering, combined with our outlook for declining growth capital expenditures later this year drove us to reevaluate the best uses of our excess cash. Early in '23, weakness in the global markets driven by financial sector volatility and recession peers drove a meaningful dislocation in our stock price relative to what we believe the intrinsic value of the stock to be. We've consistently returned 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. We increased our base dividend by 5% to $0.11 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 1.6 million shares for just over $14 million in the first quarter, which represents approximately 3.5% 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 Solaris employees. We have $36 million remaining under our current share repurchase program, and we'll continue to be active and opportunistic buyers of Solaris 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 in a flux through at least in 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 our last mile trucking and equipment transportation. In addition, we saw some softness in gas tracted activity driven by low gas prices. Decline in revenue, EBITDA grew almost 10% sequentially as we saw strong incremental margin and contribution from additional top fill deployments and improved pricing across our base rental offering. During the quarter, we deployed eight additional top fill systems on a fully utilized basis, which also contributed to pull through sand silo work and incremental gross profit per sand system equivalent. We held our fully utilized sand 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 our tax receivable agreement. After total capital expenditures of approximately $19 million, 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 to 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 in 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 sand silo systems on a monthly basis, thus making our fully utilized system count a key metric. As we have expanded our offerings beyond equipment rental to include trucking services, the nature of our revenue and margin profiles has involved creating the need for explanation beyond just system count. Our 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 sites can drive disproportionate changes in revenue and margin. For example, ancillary services, which mostly consists of 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 2022. The primary driver of this sequential change was fewer tonnes 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 to deploy five additional top fill units on a fully utilized basis in the second quarter. On the sand systems side, as we continue to see high reliability and performance of our equipment, we have seen operators take cost-saving measures as some customers have recently swapped out their nine- and 12-pack sand silo configurations for six-pack configurations or reduce their use of extra sand systems for forward staging on subsequent pads. While we have seen some customers successfully reallocate frac fleets from gas-directed basins, 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 comp to be down between 10% and 15% in the second quarter sequentially. We expect our AutoBlend deployments to double in the second quarter, which combined with the gas-driven decline in sand systems, flat contribution from the ancillary services, an increase in top fill systems and SG&A between $6.5 million to $7 million drives our expectation for total company adjusted EBITDA to be flat sequentially 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 fill fleet, we expect our capital spending rate to decrease significantly as we shift towards a much lower maintenance capital mode. Initial expectations for the third and fourth quarter capital expenditures are between $10 million 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 4x, which was up over 40% from a year ago. Continuing new technology deployments 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 we'll 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 in deploying better, safer, more automated and lower-cost technologies to the industry positions us well for this long-term growth. Our goal in Solaris has been and continues to be providing innovative solutions that ultimately lower the total cost and footprint of 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.

[Operator Instructions] And the first question will come from Luke Lemoine with Piper Sandler.

With your CapEx guidance flat, it looks like the top fill system upgrades are on track. And is the target still have about 50 of these fully utilized by year-end? And then on the AutoBlend side, I think you said you have five or six right now, and I missed the number for the deployments in 2Q. Could you give me that again? And then maybe talk about the future deployment for AutoBlend systems past 2Q?

Yes, Luke. I think our view on the opportunity for the top fill continues to remain at that level. We articulated our capital program is aligned with that. We're seeing significant efficiencies on the trucking side. Every time we put a new one out, we're seeing truck unloading times decline and truck turn times, our truck turns increasing. So the trucking efficiency is really significant there. And as operators continue to find and look for ways to drive down costs, we view this as a great opportunity paired in with our highly reliable sand systems. On the blender side, most of our capital, if not all of our capital this year is directed towards -- growth capital is directed towards the Bakken elevators. But what we have seen is an increase in uptake on 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 -- higher just utilization of those assets. And again, another example of every time we pull it out, there's lots of learnings and the reliability of those units continues to improve. And just the inherent design of the equipment, again, is driving lower rates of NPT on location, as Bill alluded to in his comments around just eliminating multiple points of movement of sand and water chemicals and traditional blenders, highly reliable with built-in redundancies. So a great opportunity on that product. We're going to be cautious as far as additional capital being directed to those units. We've got capacity in the fleet today, but really excited about the momentum that we see in those.

Okay. And did you say more are being deployed in 2Q on the AutoBlend side?

Yes. So I think historically, over the last year, we've affiliated 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.

The next question will come from Stephen Gengaro with Stifel.

So first, can you talk about being down 10% to 15% in the second quarter? Could you talk about the allocation of your systems between oil and gas right now, roughly? And how much of that decline is driven by the gas market?

Sure. We've been pretty consistent with where rig activity/overall frac fleets have been for a number of years here. We moved into the Rockies in a more significant way last year. But broadly speaking, our crew count looks not all that dissimilar to how the rig count is distributed. So we certainly have gas basin 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 had that drop off and just fully utilized systems, again, we tried to make the point that the business is evolving in sort of the myopic view of fully utilized systems as the way to view this business is evolving. We've got contribution from additional equipment like blenders and top fill as well as the last mile offering. And so the mix of the drop-off, I think is, I'd 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 we've had episodic deployments of 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, say, sand, we see uptakes in it. And also, it's a function of where people are sourcing sand from. So the further they've got to haul of 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 9s and 12s. And when they're there, there's incremental contribution for us. We've got the capacity based on the size of the fleet. So it's great incremental earnings, but it's not necessarily indicative of any share losses.

I think I'd add to that. So we may see fully utilized systems in that metric, but the gross margin per system will be going up as well because what we're dropping is systems that are lower cost adders or what Kyle refers to as prefill or 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.

Great. We did a lot of good color on the call in -- on your responses. The other follow-up was on the AutoBlend side, I believe those are not counted as additional units. Those are part of existing units. I just want to confirm that. And then also just to ask you about your -- you mentioned the market share potential through opportunities. I think that's a big part of the potential growth going forward. Do you have any kind of examples or specific -- if you could just give us your areas where you're starting to see that market share pull-through because of the better off, are you able to provide that?

Yes, a little muffled, but I think I'll try as much of it as I can. When we look at the system count drop, 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 fill going on. And as we just referred to, we've got more blenders working. So overall capital equipment being deployed by the Company is probably flat to up. And then on the second point, as far as market share pull-through, it's significant in customers that we've targeted for a long time. And when I say that, these are majors with consistent long-term programs. So yes, 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's how we're seeing the pull through.

Yes. On the blender, maybe I'll add. The blender 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 therefore, when we put that out there, we're putting out a 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.

Our next question will come from John Daniel with Daniel Energy Partners.

Bill and Kyle, I'm just curious right now, as you're busy 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 latter. 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, say, last year, we were not up nearly as much. So I think in the grand scheme of things, we're still a very low percentage of the total drilling and completion costs. We've described our businesses and our offering and a little bit of as an insurance policy. If you run out of sand or you've got a system that's not reliable, you shut everything down. So price is always kind of top of mind when you're dealing with various groups within companies such as supply chain, but I think what we try to harp on is the overall efficiency and the reliability that is so critical to them completing well on time and on budget.

Okay. I just want to. I mean, you hear a lot of chatter about other OFS product lines with pricing and RFPs. And you just -- you frankly don't really hear much about with your business. So I was just confirming. A little bit of a nuanced question, Kyle, but for the -- can you speak to the insurance market and just kind of what's happening to premiums and ability to get coverage? And the reason for the question is you just -- you go -- as you drive around West Texas, you see so many mom-and-pop little trucking companies hauling stuff. And I'm just curious what the risk is to that customer for using those types of drivers and just what you're seeing?

Well, I'll answer it, John. I mean, I think we have seen premiums go up. We had a pretty good safety record. That's something that we strive to push down through our organization at every level, and that certainly helps with insurance renewals. We just went through it. I think we were up is 10%, 15% insurance costs, 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. And 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 that go back to years ensuring that we are safe and they do have insurance for hauling our things around.

Our next question is a follow-up from Mr. Stephen Gengaro with Stifel.

So you guys tend to have sort of a little better forward visibility, I think, than some others based on sort of the timing of getting systems in place. Are you seeing anything that suggests sort of a continued drift lower and/or stability in activity? Because it feels like the pressure pumpers are all talking about being effectively flat, especially in the oil basins. I'm just curious what your sort of line of sight is and 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 as all parts of the supply chain in all parts of the sort of well site 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 any more -- or we don't see budgets moving and we do see efficiencies. So I think in general, if you've got an E&P that's got, say, six frac crews running today, the notion that they may have five in the third or fourth quarter is certainly possible. And that's really a function, I think, of efficiencies more than anything. So while we do see some stability here, we certainly are looking at the gas tape, and that's under severe pressure here in the short to medium term. We think that abates over time as LNG and other demand pools create more support of environment for the commodity, but continued efficiencies are here to stay, and we think we're a big part of that.

And then just one more, if you don't mind. When you think about the asset deployments that you laid out on the prepared remarks, do you have homes for them? Or like are they being asked for by customers? Or do you just know from the market and the customer conversations that there's demand for them to work?

Yes. I mean we are 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 their pad completions. You may see something get pulled forward or pushed back depending on where people are, in particular pads and frackers. But yes, it's a constant shuffle that we are working on.

But incrementally, we continue to get them deployed at the pace at which we're watching, and we watch that very closely. With the control of our own manufacturing, it makes that balance a lot easier.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Bill

Thank you, Chuck. I'd like to conclude our call by thanking all of our employees, customers and suppliers for their continued support of Solaris. 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 sharing our progress with you in a few months. Stay safe.