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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.

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

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.

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.

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.

We will now begin the question-and-answer session. [Operator Instructions] 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. If I look to share and just kind of do the simple system per frac fleet followed, this has increased kind of from $1.4 million to $1.5 million to $1.6 million. Bill, you talked about you have capacity to follow 100 fleets with upgraded systems. And this question might be a bit tough since there are a number of variables. But where do you think system per frac fleet followed could kind of head over the maybe next 12 months to year-end '24 as you have systems that can be deployed?

I think -- it depends on the denominator here. So if we can put all 100 to work, it's $1.6 million plus the lenders. If in fact we're seeing frac rebound by 15% -- 10%, 15%, 20% next year and you've got 80, 85 systems, I think we'll have higher utilization out of the top fills than for systems count, so that you'll see that closer to $1.7 million, $1.8 million, if I do the division right. So I think it sort of trends on really how many we put to work. We're slowing down the spending on top fills, so that's limited to the 58 we've got in the -- that will be manufactured by the end of the year at this point.

Okay. And then Bill I think you said --

Does that make sense?

Yes, yes, that makes sense. Yes. I mean, multiple variables here. I think you said you added six top fill systems. You were running 33 in 3Q, 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 at kind of September 30th.

Just under 55, so maybe 53 at the end of September. And, yes, we're wrapping up the manufacturing plant here in the fourth quarter. In the third quarter, there were a fair number of systems that did come in for upgrades. And just the context here, and we had it in the prepared remarks, this business, this offering is very nascent. But yes, we've really manufactured at a rapid rate to meet market demand. And like any other new product, there is certain components that, as we run the system off the field, we've realized there's some upgrade opportunities to enhance reliability, throughput, et cetera. So we're 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 position where the availability of those systems will be higher, allowing us to drive that 33 fully utilized number.

Yes. And remember, 33 is a fully utilized number on a trailing basis. So as we've been making and releasing them, we're catching up to that.

Okay. Got it. And then maybe just one more. I think the CapEx for '24 was a good bit lower than probably anyone anticipated, as you've kind of got the fleet prepared for '24 and '23, that aside from probably more dividend increases, what are the other kind of plans for cash flow guide?

Yes. I mean, as we announced yesterday, very excited to continue to show per share dividend growth. We've got, I think, $37 million of debt on the balance sheet as of the end of the quarter. We'll continue to use free cash flow to trim that balance down. And then, obviously, opportunistic buybacks worked well in the first half of 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 a significant amount of cash on the balance sheet, which allowed us to really hit the ground hard in terms of developing and manufacturing the top fills. Reloading the balance sheet we think is prudent, whether it's organic or inorganic opportunities that come across the transit.

Yes. Look, our R&D effort is ongoing, and we're continuing to evaluate stuff. And I think at times, we'll seize the opportunity when we find a product line that really seems to work like this, and we'll continue to try to innovate and find better ways to improve our customers' operations.

Okay. Perfect. Thanks for the time.

Thanks, Luke.

Our next question will come from Stephen Gengaro with Stifel. You may now go ahead.

Thanks. Good morning, everybody. I think the first question, and you talked a little bit, Kyle, about the fourth quarter. What do you -- you guys, I think, tend to get a little bit of an early look into frac fleet going back to work. What are you seeing just kind of in the market right now as far as pressure pumping activity potentially increasing. I mean, we've heard some frac guys talk about a little bit of -- maybe even a little bit improvement in the fourth quarter and kind of recovery in '24. What are you guys seeing like over the next few months as far as deployments? I know you've built some seasonality into your guidance, but as far as actual assets going back to work, what do you -- what can you add?

Yes. Obviously, commodity prices have been very supportive on a relative basis. So that's certainly making everybody feel pretty positive. On the frac side, obviously, there's been tremendous consolidation. And I think as you're starting to see some earnings come out, there are sort of the 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 sort of differentiation there. One of the themes that we continue to see is just pure efficiencies, so people doing more less. So that theme, I think, ultimately has a little bit of downward pressure on the total demand for capital equipment, not necessarily throughput. So we're not forecasting any sort of significant increase in '24. We do 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, is an ability to grow in a market that just doesn't have a ton of organic growth from capital equipment. We've been able to capture more tower accounts, more share through the new technology. And one of the things that's happened over the last 12 months in our business is our last mile business has declined just from an overall volume standpoint. So that's a pretty big piece of leverage or torque that we do have. We don't see it increasing here in the fourth quarter significantly. But as we look back 12 months ago, that was a pretty significant driver in our business that's not here today. To grow there doesn't require capital for the business outside of working capital, get the team in place to make that happen, and they've been very successful in providing high quality service to our customers. So that's an opportunity we're excited about as well.

Thanks. Are you -- if I sort of dissect it into frac fleet followed and sort of total fully utilized systems because of the penetration of the new technologies, are you thinking that in the fourth quarter -- because what I was thinking was you would have some increased penetration of the AutoBlend in top fills, but your guidance would suggest that 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.

Yes. I think you hit on that. So the guidance implies a slight modest activity reduction, but offset by the new technologies as we continue to show.

Okay. All right. Good. And we can sort of trend from there. And then just the follow-up, when we think about -- and this kind of gets funky and Yvonne did a good job, I think, of breaking this out for us. But when you think about -- you strip out ancillary services, underlying pricing trends for the well site storage systems and AutoBlend, should we think about them as being pretty stable into next year?

Yes. I mean, we're just kicking off sort of next year discussions with customers. So we look forward to talking about that probably next quarter. But as we mentioned in the prepared remarks, we are deploying significant OpEx and CapEx into the systems to bring them up to the next level of standard. So I think that message is resonating with customers. But obviously, those discussions are very fluid.

Great. I think that is all for me. Thank you.

Our next question will come from John Daniel with Daniel Energy Partners. You may now go ahead.

Thank you, 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. The question is whether that's commercial or not, John. And we tend to wait until we're really ready to talk about them. Especially with the situation we'll have the balance sheet in and the cash situation and our team and our own manufacturing, we can respond very quickly with opportunities that work. I think the top fill is a great example of that being going from two of them a year, 1.5 years ago to having 35 -- 33 working last quarter and that's moving up. So I think we can go quickly if we find something that makes sense.

Maybe a different way to look at it, John, is, if you look at the CapEx guidance, the $15 million to $20 million maintenance CapEx for us typically $10 million to $15 million a year. So that is the real CapEx in the budget for next year.

Okay. And as you have ideas that come to fruition, how often are those ideas being brought to you by a customer saying, we've got a problem, 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.

It probably is mixed. I'd say it's probably 1/4 to 1/3 -- 1/4 to 1/2 may be coming from customers. The other quarter comes from our pretty experienced engineering and R&D team. And I know we're working on a couple of problems now that were customers' ideas.

Okay, thank you. I appreciate your time.

[Operator Instructions] 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 demand. As you have deployed more kind of top fill systems, it feels like your demand is stabilized and is getting more stabilized as people move towards more belly dump systems. 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 think I understand your question right, I mean, we do have customers that have adopted the top fill and are very happy and that will be a continued part of their program for at least the future we can see. Most of those customers were existing Solaris customers, but several were not that have decided that this is the better long-term solution with the combination of our silos and the top fill unit. So I think the market is in -- 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 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 that are less predictable.

Well, yes, 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 you're a lot less impacted these days given your increased offering.

Yes, I think we are penetrating with more revenue and margin per frac fleet. Number followed is probably pretty close to the market within some band.

Okay, I appreciate the color, thanks.

Thanks, Don.

Our next question will be a follow-up from Stephen Gengaro with Stifel. You may now go ahead.

Thanks. Just a quick one. When you think about consolidation among the E&Ps and what we've seen recently, anything specifically or in general that impacts your share opportunities?

Yes. I think just one quick comment here, and I'm sure Bill will have a view. As there's continued consolidation, you're entering into a more sophisticated buying decision, if you will, with the larger operators. And many of them looking for sort of nationwide service providers. I think what we've done, particularly over the last 12 months, is expanded our footprint. Rockies has been an area where we've grown significantly in the last year. So through consolidation, I think we continue to be seen as a Lower-48 service provider. We're not a regional-based provider for a small sort of operation. So I think that, in some ways, plays for a favorite. But obviously, one of the things we've seen in different M&A context, there's always puts and takes. And sometimes referred to as cat people and dog people, people like different technologies, and so you have opportunities to win in those 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 a mature service provider that can grow with the larger operators.

Got it. Great. That's good color. Thank you gentlemen.

Thanks.

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

Thanks, Anthony. I'd like to conclude our call by thanking all of our employees, our customers and suppliers for their continued support of Solaris. Our team has done a tremendous work in helping our customers realize the benefits of safer, lower cost, reliable automated solutions we provide. We remain 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 strategy. Thank you. Stay safe.