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Good morning, and welcome to the Solaris Oilfield Infrastructure Second Quarter 2023 Earnings Call. [Operator Instructions] Please note this event is being recorded. I would like now to turn the conference over to Yvonne Fletcher, Senior Vice President of Finance and Investor Relations. Please go ahead.

Good morning, and welcome to the Solaris Second Quarter 2023 Earnings Conference Call. I'm joined today by our Chairman and CEO, Bill

Thank you, Yvonne, and thank you, everyone, for joining us this morning. I'm pleased to share another strong quarter of profitability growth as we continue to see success from our top fill and AutoBlend technologies. We grew quarterly adjusted EBITDA by 7% sequentially and 27% from the second quarter of 2022 to nearly $27 million. We generated free cash flow of $7 million, and we returned $16 million to shareholders through dividends and share repurchases under our enhanced shareholder return framework. Industry frac crews were down sequentially in the second quarter as the impact of soft natural gas prices became evident in completions activity. We saw the impact of lower completion activity in our sand system count, but we're able to offset that with earnings contribution from our top fill and AutoBlend systems, which were both up over the last quarter as well as from increased contribution from ancillary trucking services. Over the last 18 months, we have made strategic investments in new technologies with the goal of enhancing both our earnings power and addressable market potential. Our goal with these investments is to provide incremental value to our customers that complement our core sand storage offering. As a result, this allows us to expand our footprint and customer list in the Lower 48 and drive higher earnings and cash flow per frac crew we service. Our results this quarter continue to highlight the returns on this strategy. Prior to developing these new technologies, on average, we deployed one 6-pack sand system to every frac crew we covered. Today, with our expanded offering, we are deploying 50% more systems, including top fill and AutoBlend units on our covered frac fleets. We expect that further new equipment deployments in the third quarter will help drive incremental EBITDA contribution, resulting in growing earnings per frac fleet regardless of what happens with industry frac activity. Our technology has been a major driver of the success. Today, we have nearly 50 units in the field compared to only a couple of units a year ago. Our top fuel system provides a powerful combination of our reliable and industry-leading sand handling equipment with the flexibility to use both high-capacity belly dumps, while preserving pneumatic trucking as a backup. This flexibility reduces the total delivered cost of sand for our customers by reducing the number of truckloads required through higher payloads, turning trucks more quickly and industry-leading flexibility with multiple unloading options. Our top filling units have become industry leading in a short period as we are the largest provider of building up dump compatible sand storage on the market today. Our AutoBlend electric blending system is another technology that complements our expanded offering and further develops our strategy to help operators increase efficiency. Our customers continue to see the benefit from increased automation, smaller footprint, built-in redundancy, enhanced safety and all electric design when compared to the downtime and costs associated with traditional and even some newer electric blenders. In the second quarter, we more than doubled our average AutoBlend deployments, which helped drive improved cost management and profitability during the quarter. We are encouraged by a strong backlog of demand and expect another quarter of improved profitability in this offering in the third quarter. Longer term, we also continue to believe the strong backlog of demand for electric frac fleets coming into the market this year and next provide an opportunity for continued AutoBlend adoption. More recently, we have successfully integrated our AutoBlend, top fill and sand systems on several well sites with the same power sources our customers are using to supply their frac operations, including grid power, turbines and natural gas powered engines. Our systems have been 100% electric since inception, which has become even more relevant today as operators are pushing toward electrification of oil and gas development to lower cost and improve their emissions footprint. All of our systems are designed to be able to plug into virtually any of our customers' on-site power sources with no modifications required. In some cases, this has already given us a competitive advantage where an operator required equipment on-site to be plug-in capable. We believe the trend of operators asking for or requiring all electric equipment will continue to grow, especially as the demand for e-fleets grows. This presents a unique opportunity for continued adoption of both our current and new technologies. As we head toward the back half of the year, we expect our capital spending rate to slow down as we complete our budgeted capital program for new technology units. We will continue to reassess the market for signs of additional demand for more units, but at this time, our capital guidance remains unchanged. With the enhanced earning power of Solaris, we believe we will begin generating meaningful cash flow again as this growth capital slows. We began to see this during the second quarter as free cash flow inflected to a positive $7 million. We expect free cash flow to accelerate in the back half of this year. Generating and providing shareholder returns has always been at paramount to Solaris' strategy. We initiated a regular quarterly dividend in 2018 and have paid 19 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. We increased our base dividend by 5% to $0.11 per share, which represents the second dividend raise in our company's history and initiated a $50 million share repurchase authorization. Since then, we've repurchased approximately three million shares or 6.5% of the company's fully diluted ownership for $26 million. On a cumulative basis in 2018, we returned nearly $150 million to shareholders, which includes the repurchase of approximately 12% of the total outstanding shares. I'd like to summarize the highlights of our results so far in 2023 are showing success in our strategy of growing our earnings and return per frac crew we service. We expect our profitability to trend higher as we expand our offering per well pad. Free cash flow is expected to be strong moving forward, driven by an expanding margin for frac crew and the completion of this year's growth capital program. Although operator activities expect to flatten out in the second half of this year, the longer-term commodity outlook remains healthy. We will continue to be focused on delivering strong operational execution, growing our earnings power and executing on our shareholder return framework through a consistent dividend and opportunistic share repurchases. With that, I will 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 second quarter results. We generated over $77 million of revenue; adjusted EBITDA of nearly $27 million, a 7% sequential increase and returned approximately $16 million to shareholders. Revenue in the second quarter declined 7% sequentially, primarily due to softness in completions activity across several basins as the industry frac crew count began to be impacted by the rig count decline we saw earlier in 2023. Lower margin ancillary services revenue declined sequentially, which was modestly offset by a full quarter benefit of higher rental pricing across our sand storage offering. EBITDA grew 7% sequentially as we saw strong incremental margin and contribution from additional top fill and AutoBlend deployments and improved cost management across our ancillary services, which drove higher margins from that offering. The additional top fill and AutoBlend deployments contributed to pull-through sand silo work and incremental gross profit per sand system equivalent despite softness in the broader completion market. Before I give some color on the drivers of Solaris' activity in the quarter, I would like to provide context to the evolving and expanding nature of our equipment offering and our earnings per well pad. Historically, we earned the majority of our revenue and earnings from our sand system offering. So we focused on fully utilized sand systems as our key metric. As we have expanded our rental offering to include top fills and AutoBlend systems, we feel that a fully utilized total system count is a more relevant measure of our activity, particularly as each offering offers a similar earnings contribution margin. During the second quarter, our total fully utilized system count was 108 systems, which was down 8% sequentially as the decline in frac activity was partially offset by incremental deployments of both top fill and AutoBlend systems. Excluding the contribution from ancillary trucking services, our contribution margin per fully utilized system was up 11% sequentially to slightly over $1 million per system on an annualized basis as we benefited from a combination of mix and a full quarter of the pricing increases implemented during the first quarter. Absent any significant customer mix changes, we expect contribution margin per fully utilized system to remain flat over the remainder of the year as we expect pricing to remain flat. Excluding the contribution from ancillary trucking services, our contribution margin per fully utilized frac crew also increased by 19% sequentially to approximately $1.6 million on an annualized basis. The primary driver of this growth per well site is a result of having multiple Solaris systems on a single site. During the second quarter, 44% of the well sites we operated on had multiple Solaris systems in the form of sand systems plus either a top fill or AutoBlend system. This compares to the first quarter were approximately 29% of the frac crews we followed had multiple Solaris systems. We expect contribution margin per fully covered frac crew to increase in the remainder of the year as we expect to increase top fill and AutoBlend deployments despite the movements in underlying frac activity. During the second quarter, ancillary services of approximately $3 million contributed approximately 10% of total gross profit and was up over 100% from first quarter of 2023. The primary driver of the improvement in ancillary services margin in the second quarter was improved cost management and a more favorable job mix in our last mile sand hauling offering as tons hauled remain relatively flat. As a reminder, our trucking services, which include last mile sand hauling and Solaris equipment transportation can be harder to predict and due to their high revenue, low-margin pass-through characteristics, basic changes in trucking activity such as longer distances between mines and well sites can drive disproportionate changes in revenue and margin. For example, ancillary services comprised 10% of total gross profit in the second quarter of 2023 compared to 5% of gross profit in the first quarter of 2023 and 24% in the second quarter of 2022. In the third quarter of 2023, we expect lower tons transported in our last mile sand hauling offering to drive total dollar contribution from ancillary services closer to first quarter levels at around $1.5 million. To recap our third quarter outlook. We continue to see demand backlog for our new technology offerings, which should drive incremental share and cash flow. As a result, we expect our total system count in the third quarter to be up by a few systems sequentially after netting the impact of flattening industry completions activity with continued increases in the deployments of our top fill and AutoBlend systems. We expect profit per system to be flat in the third quarter, but these increased deployments should drive continued improvement in contribution margin per frac crew when excluding the impact of ancillary services. SG&A in the second quarter was $6.8 million, and we expect it to remain flat in the third quarter. We expect third quarter adjusted EBITDA to be roughly in line with the second quarter of 2023. The third quarter should see increasing contribution margin for frac crew but is expected to be offset by fewer frac crews and lower ancillary services contribution. This estimate is close to where Street estimates already are. For our capital expenditure outlook, following the initial build-out of our top fill fleet, we expect our capital spending rate to decrease significantly, which should yield significant cash flow over the coming quarters. For the third quarter, we expect capital expenditures to be approximately $15 million. We continue to expect full year 2023 capital expenditures to be between $65 million to $75 million. Turning to cash and shareholder returns. Operating cash flow during the quarter was approximately $28 million and reflected a $3 million source of cash from working capital. After total capital expenditures of approximately $21 million, free cash flow was positive $7 million in the quarter. We ended the quarter with approximately $9 million in cash and $43 million borrowed under our credit facility, resulting in approximately $41 million of liquidity. Our year-to-date operating cash flow of $45 million covered our year-to-date dividends of $10 million and the majority of our $40 million capital expenditures. 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 6 months as a result of our confidence in the continued free cash flow generation that we expect to increase significantly in the second half of 2023. Therefore, we anticipate these borrowings on our credit facility to be temporary. In conclusion, the investments we've made in our business over the last few years are driving earnings growth and enabling us to return meaningful cash to shareholders. Our customers value technologies that are safer, automated and help lower costs, and that is what we are focused on providing. Therefore, we expect to continue our new technology deployments, which will help us continue to improve our earnings power and cash generation, and we look forward to sharing our progress with you over the coming quarters. With that, we'd be happy to take your questions.

[Operator Instructions]. Our first question comes from Luke Lemoine of Piper Sandler.

A little change in the asset count methodology, and you previously talked about a well site with top fill and AutoBlend would be about $2 million to $3 million in GP per year. When we think about the new account, is it better to look at the value that can be derived or frac fleet followed its potential here still $2 million to $3 million per year if you look at it like that. And Kyle, I believe you said kind of using that metric, you're at $1.6 million per frac fleet followed annualized in 2Q?

Yes, that's exactly right, Luke. We think providing this full system count gives visibility into the sort of roughly $1 million annualized EBITDA per system. And then we're also providing what that looks like on a fully covered basis from a frac fleet standpoint. But yes, the $2 million to $3 million of earnings per frac fleet is still the way we're thinking about it. We're just trying to provide a little bit more context to you all and investors as to what that makeup looks like.

The next question comes from Stephen Gengaro of Stifel.

Two for me. First, Kyle, thanks for all the detail. That was very useful. The -- one of the things that we normally would do when we kind of back into your fleet count off of an assumed market share and our expectations for frac fleets, right? You've got about one third of the market usually. As we think about your market share as far as fleets served right now, has there been any movement in that from your perspective?

Yes, I'll kick it off, but Bill, you should finally chime in on it. Certainly, the new technologies have driven market share. It's targeted to certain majors that we've been chasing for a long time and without some of these new technologies, we wouldn't be there. From a capability standpoint, when I say that, that really around the bucket elevator. But then also the other piece that we alluded to in the call is around the electrification and we've got customers that are really pushing hard on that. And obviously demanding that service from the pressure pumpers and we're a plug-and-play solution for that, both with -- or with the bucket elevator, the sand system as well as the blender. And that's a real edge and differentiator for us. And that's driven incremental market share. And then the second piece to that, I would say, is just regionally, the Rockies Basin continues to be a growth area for us, which is just historically been underserved due to the use of belly dump trucking up in that market. And so those two pieces really have significantly given us opportunities to work for new customers. And as we look at the backlog, that continues to grow.

I think you hit it all, Kyle.

Great. And then just the second one, as we think about the deployment of more systems on a per frac fleet basis, and you've talked about the sharp rise you saw 2Q versus 1Q. Is there -- I mean I guess the question gets to like, as you talk to more customers about this, is there a stickiness where the customers who are using it want it across the spectrum? And I'm trying to think about how that impacts adoption.

I think it does, Steve. I'll answer this one. It does. But the difference between running a pneumatic truck versus running a belly dump truck is very dependent on how far you're going with that load, what the local rules are on loads. And so for instance, in Wyoming, you're running 60,000 to 70,000 pounds of truck of sand and so Nomadic is not going to haul that. So there are some regional specifics around how that adoption. I mean our goal is to once the customer uses it, that the reliability and all the ancillary benefits that come along with the systems in terms of data, technology, using the blender with the way it actually can help the reliability as well as cleaning up sand in the process leads to a very consistent use of the product by our customers for a long period of time and hopefully very sticky.

We've got multi-basin customers that are using the new technologies across multiple basins.

Okay. That makes sense. And then just one final one. You mentioned kind of what you saw was -- it feels like stability in price for the, I guess, maybe it's the wrong word, but sort of standard sand silo system. Is that -- I imagine that's just based on conversations with customers and what you're seeing or just kind of a back of that, we've also started to hear that maybe there's a little bit of a pickup in 4Q just as some of their consumable costs have come down. What are you guys seeing from that perspective? You usually have a good insight into activity changes before some of the others do.

Well, I think that's right. I mean I do think you're going to see it. It feels like if we look at the profile of the second quarter are kind of low was May. June picked up a hair. I think July feels sort of in that same level, and we'll see how the rest of the quarter shapes up. I think it's trending flat to slightly down with some talk of momentum. It's really too early to completely predict the fourth quarter. But we do see, in general, especially if commodity prices remain where they are, that there's a bit of optimism and maybe some early spending for their '24 program and getting ahead of the game, especially when it comes to locking in some lower cost operations. In terms of our costs and the way we tend to work with our customers, we're less volatile on pricing than most other services. We tend to not to raise them overly in the good times but not give them up too much in the downtime. So that pricing level with us is relatively muted compared to other aspects of the industry.

[Operator Instructions] Our next question comes from Sean Mitchell of Daniel Energy Partners.

Can you guys hear me?

Perfectly, Sean.

I kind of want to hit on this last question that was asked a little bit more if you can. Just we've heard several anecdotes not leading into the quarter, but also on some of the calls recently about a frac activity slowdown in Q3, but then accelerates in Q4. Just want to see if there's any additional color you can provide on that? And then number two, maybe just from what you have left to deliver in terms of systems or capital spend, any bottlenecks on the supply chain side that may be coming up?

I'll answer your second question first. No, we have planned for the capital program all year, and we spread it out a bit, and we had it originally a little more flat and loaded, but we have spread out the build through the second half of the year. So that's on track. Our utilization isn't where we'd like it to be on the new technology because we have had -- as we launched this very quickly, we've had some generations, the early ones that are in refurbishment, we've identified key issues with them and things that we can improve. And so we've got notionally 8 to 10 in refurbishment with low capital refurbishment, but I think as our customers see it evolve, the versions that are running today and coming off the line and are refurbished are different than the ones a year ago that they're much improved. So -- and we have not had significant supply chain. We've been able to be ahead of that for the most part for our plan for this year. With respect to the market, it feels like it's flat to drifting down a bit in the third quarter. I think the momentum is -- I think the nuance around as things pick up in September or is it in October, November, December, it's hard to say from this point. There does feel like there's additional talk on momentum to pick things back up as the year progresses. Where that falls over the course of the next three or four months is very hard to predict.

Yes. A different way of saying that, Sean, is that once we get through these upgrades and improvements in some of the early bucket elevators that if we -- but our system count would have been higher if we were able to put those out in the field because the backlog is -- for demand is definitely there. So that is an opportunity for us in the back half of the year.

We have reached the end of the question-and-answer session. I would like now to turn the call back over to Mr. Bill

Thank you, Alan. I'd like to conclude our call by thanking all of our employees, customers and suppliers for their continued support in Solaris. Our team has done a tremendous job in helping our customers realize the benefits of safer, lower cost and automated solutions we provide. And I'm impressed with how our internal manufacturing and operations group have been able to keep up with the incremental new technology deployment to support this backlog of demand. We remain constructive on the long-term commodity outlook and are confident that we'll continue to deliver on our earnings and cash flow growth and our cash return strategy. Thank you all. Stay safe.